Tag: Inflation Reduction Act

Renewable Energy Tax Credit Transfer Guidance Provides Both Clarity And Pitfalls

Highlights

The renewable tax credit transfer market will accelerate with new government guidance; public hearing and comments deadlines are scheduled for August

Risk allocation puts the usual premium on sponsors with a balance sheet and/or recapture insurance coverage

While the guidelines provide clear rules and examples, many foot faults are present

On June 14, 2023, the Treasury Department and Internal Revenue Service issued long-awaited guidance on the transferability of certain renewable energy-related federal tax credits. The guidance takes the form of a notice of proposed rulemaking, proposed regulations, and an online Q&A, with a public hearing to follow in August.

Under new Code Section 6418, eligible taxpayers can elect to transfer all or any specified portion of eligible tax credits to one or more unrelated buyers for cash consideration. While the tax credits can be sold to more than one buyer, subsequent transfers by the buyer are prohibited.

This alert highlights several practical issues raised by the guidance, which should allow participants waiting for more clarity to proceed.

Individual Buyers Left Out

  • The guidance applies the Code Section 49 at risk rules and Section 50(b) tax-exempt use rules, generally restricting sellers in calculating the amount of tax credits for sale, and Code Section 469 passive activity rules, generally restricting buyer’s use of such tax credits, in various contexts. On the buyer side, these rules appear to be more restrictive than the limitations that would apply to identical tax credits in an allocation, rather than sale, context. Suffice to say, this will prohibit individuals from taking part in the transfer market for practical purposes outside of fact patterns of very limited application.
  • While this result may not be surprising since such rules currently severely restrict individuals from participating in traditional federal tax credit equity structures, there was some hope for a different outcome due to the stated policy goal of increasing renewable energy investment (not to mention the Inflation Reduction Act’s general departure from decades of case law precedent and IRS enforcement action prohibiting sales of federal tax credits with the enactment of Section 6418).

Lessees Cannot Sell the Tax Credits

  • A lessee cannot transfer the credit. With the prevalence of the master lease (inverted lease) structure in tax equity transactions, this prohibition created an unexpected roadblock for deal participants who have been structuring tax equity transactions with backstop type sale provisions for almost a year now. This presents developers, at least in the inverted lease context, with a choice of utilizing a traditional tax equity structure for the purpose of obtaining a tax-free step up in basis to fair market value, or forgoing the step up for less financing but also less structure complexity. The standard partnership flip project sale into a tax equity type of holding company structure could still remain a viable alternative.
  • As the transfer is generally made on a property-by-property basis by election, creative structuring, in theory, could allow for a lessor to retain certain property and sell the related tax credits (e.g., on portfolios with more than one solar installation/project, or even with large projects that go online on a block-by-block basis assuming the “energy project” election is not made – a term that future guidance will need to provide more clarity on).
  • However, this seems to be an ivory tower conclusion currently, and the practical reality is that too many unknown issues could be raised by such out of the box structuring, including the fact that conservative institutional investors may refuse to participate in such a structure until clear objective guidance is published addressing the same.

Bonus Credits Cannot Be Sold Separately

  • Bonus credits cannot be sold separately from the underlying base credit. This is more problematic for certain adders – for example, the energy community adder rules are now out and amount to simply checking a location on a website. Others (e.g., the low-income community or domestic content adder) require more extensive and subjective application and qualification procedures which makes when and how such adders can be transferred difficult to ascertain. Projects hoping to transfer such credits may need to be creative in compensating buyers for such uncertainty and qualification risk. Tax equity transactions that closed prior to the guidance’s issuance may also need to be revisited, as provisions in such transaction documents commonly attempted to bifurcate the bonus credit away from the base credit in order to allow the sponsor to separately sell such adders.

Buyers Bear Recapture Risk and Due Diligence Emphasis

  • While the Joint Committee on Taxation Bluebook indicated the buyer is responsible for recapture, industry participants were still hoping such risk would remain with the seller. Outside of the limited situation of indirect partnership dispositions (which still results in a recapture event to the transferring partner if triggered), the recapture risk is borne by the buyer, using the rationale that the buyer is the “taxpayer” for purposes of the transferred tax credits. While this is familiar territory for tax equity investors, whose allocated tax credits would be reduced in a recapture scenario, tax credit purchase transactions are now burdened with what amounts to the standard tax equity type of due diligence, including negotiation of transaction documents outside of a basic purchase agreement.
  • The guidance provides that indemnity protections between the seller and buyer are permitted. Tax equity transactions historically have had robust indemnification provisions, which should remain the case even more so in purchase/sale transactions. Tax equity investors traditionally bear “structure risk” dealing with whether the investor is a partner for tax purposes – such risk is eliminated in the purchase scenario as the purchasing investor no longer needs to be a partner (subject to the caveat of a buyer partnership discussed below).
  • If the buyer claims a larger credit amount than the seller could have, such “excessive credit transfer” will subject the buyer to a 20 percent penalty on the excess amount (in addition to the regular tax owed). All buyers are aggregated and treated as one for this purpose – if the seller retains any tax credits, the disallowance is first applied to the seller’s retained tax credits. A facts and circumstances reasonable cause exception to avoid this penalty is provided, further emphasizing the need for robust due diligence.
  • Specific non-exclusive examples that may demonstrate reasonable cause include reviewing the seller’s records with respect to determining the tax credit amount, and reasonable reliance on third-party expert reports and representations from the seller. While not unique to this new tax credit transfer regime, the subjective and circular nature of such a standard is complex – for example, when is it not “reasonable” for buyers or other professionals to rely on other board certified and licensed professionals, such as an appraiser or independent engineer with specialized knowledge?
  • Buyers thus need to remain vigilant about potential recapture causing events. For example, tax equity investors will not generally allow project level debt on investment tax credit transactions without some sort of lender forbearance agreement that provides that the lender will not cause a tax credit recapture event (such as foreclosing and taking direct ownership of the project). Buyers remain responsible for such a direct project level recapture event, which again aligns the tax credit transfer regime with tax equity due diligence and third-party negotiation requirements. The guidance is more lenient for the common back-leverage debt scenario.
  • While similar interparty agreements between back leverage lenders and the tax equity investor are required for non-project level debt facilities to address tax credit recapture among other issues, the guidance provides that a partner disposing of its indirect interest in the project (e.g., the lender foreclosing and taking ownership of a partner’s partnership interest) will remain subject to the recapture liability rather than the buyer provided that other tax-exempt use rules are not otherwise implicated. However, the need to negotiate such lender related agreements is still implicated as not all recapture risk in even this scenario was eliminated to the buyer.
  • While the recapture risk could place a premium on production tax credit deals (that are technically not subject to recapture or subjective basis risk), the burdensome process of needing to buy such tax credits on a yearly basis in line with sales of output may make such transactions more tedious.
  • The insurance industry already has products in place to alleviate buyer concerns, but this is just another transaction cost in what may be a tight pricing market. Not unlike tax equity transactions, sponsor sellers with a balance sheet to backstop indemnities may be able to demand a pricing premium; other sponsors may need to compensate buyers with lower credit pricing to reward such risk and or/to allow the purchase of recapture insurance. While this seems logical, the guidance also includes anti-abuse type rules whereby low credit pricing could be questioned in terms of whether some sort of impermissible transfer by way of other than cash occurred (e.g., a barter for some sort of other service). What the IRS subjectively views as “below market” pricing could trigger some sort of audit review based on this factor alone which further stresses the importance of appropriate due diligence.

Partnerships and Syndications

  • The guidance provides very clear rules with helpful examples, which should allow partnership sellers and buyers to proceed with very objective parameters. For example, the rules allow a partnership seller to specify which partner’s otherwise allocable share of tax credits is being sold and how to then allocate the tax-exempt income generated. The cash generated from sales can be used or distributed however the partnership chooses.
  • Similar objective rules and examples are provided for a buyer partnership. Subsequent direct and indirect allocations of a purchased tax credit do not violate the one-time transfer prohibition. Purchased tax credits are treated as “extraordinary items” that must be allocated among the partners of the buyer partnership as of the time of the transfer, which is generally deemed to occur on the first date a cash payment is made. Thus, all partners need to be in the partnership on such date to avoid an issue. Purchased tax credits are then allocated to the partners in accordance with their share of the nondeductible expenditures used to fund the purchase price.
  • What level of end-user comfort is needed in such a syndicated buyer partnership is an open question. While the rules provide objective guidelines in terms of when and how such purchased credits are allocated, subjective questions that are present in (and focused on) traditional tax equity partnerships are implicated. For example, could a syndication partnership set up for the business purpose of what amounts to selling the tax credits somehow run afoul of the subjective business purpose and disguised sale rules in tax credit case precedent, such as the Virginia Historic Tax Credit Fund state tax credit line of precedent? Will the market require a robust tax opinion in such scenario, thereby driving up transaction costs?
  • An example in the proposed regulations speaks to this sort of partnership formed for the specific purpose of buying tax credits, but leaves out of the fact pattern a syndicator partner. The example itself should go a long way towards blessing such arrangements, but the IRS taking a contrary position when dealing with such issues would not be a new situation. For example, the IRS challenged allocations of federal historic tax credits as prohibited sales of federal tax credits to the point of freezing the entire tax equity market with its positions in Historic Boardwalk Hall, which was only rectified with the release of a subsequent safe harbor revenue procedure.
  • Moreover, the guidance provides that tax credit brokers are allowed to participate in the market so long as the tax credits are not transferred to such brokers as an initial first step in the transfer process (as the subsequent transfer to an end user would violate the one-time transfer rule). Specifically, at no point can the federal “income tax ownership” be transferred to a broker. It is an open question if further distinction will be made at where this ownership line should be drawn. For example, can a third party enter into a purchase agreement with a seller and then transfer such rights prior to the transfer election being made? Does it matter under such analysis if 1) purchase price installments have been paid (which implicates rules in the buyer partnership context as noted above) and/or 2) the tax credit generating eligible property has been placed in service (which is when the investment tax credit vests for an allocated tax credit analysis; a production tax credit generally arises as electricity or the applicable source is sold)?
  • Indirectly implicated is what effect the new transfer rules will have on established case law precedent and IRS enforcement action in traditional tax equity structures. The Inflation Reduction Act and guidance dances around certain of these issues by creating a fiction where the buyer is treated as the “taxpayer” – this avoids the issue of turning a federal tax credit into “property” that can be sold similar to a certificated state tax credit. This also provides a more logical explanation as to why the buyer of these federal tax credits does not need to report any price discount as income when utilized, unlike the well-established federal tax treatment of certificated state tax credits that provides the exact opposite (e.g., a buyer of a certificated state tax credit at $0.90 has to report $0.10 of income on use of such tax credit).

Other Administrative and Foot-Fault Issues

  • The purchase price can only be paid in cash during the period commencing with the beginning of the seller’s tax year during which the applicable tax credit is generated and ending on the due date for filing the seller’s tax return with extensions. Thus, such period could be as long as 21.5 months or more (e.g., a calendar year partnership seller extending its return to Sept. 15). Tax equity transactions generally have pricing timing adjusters for failure to meet placement in service deadlines. Such mechanism will not work if advanced payments were made and then the project’s projected placement in service year changes. Tax credit purchase agreements executed prior to the June 14 guidance may require amendments or complete unwinds to line up with the rules to avoid foot faults (e.g., purchase agreements executed in 2022 where a portion of the purchase price was paid in 2022 for anticipated 2023 tax credits would not fall within the “paid in cash” safe harbor period). Advanced commitments, so long as cash is not transferred outside of the period outlined above, are permitted.
  • The typical solar equity contribution schedule of 20 percent at a project’s mechanical completion makes purchase price schedules approximating the same a reasonable adjustment for most investment tax credit energy deals in terms of the timing of financing. In addition, the advance commitment blessing of the guidance will give lender parties the comfort necessary similar to having executed tax equity documents in place. Thus, typical project construction financing mechanisms should be similar in the tax equity versus purchase agreement scenario, with projects that allow for a more delayed funding mechanism possibly obtaining a tax credit pricing premium. Production tax credit deals, for which tax credits can only be paid for on a yearly basis within the cash paid safe harbor timing window, may have more significant project financing hurdles without further tax credit transfer rule modifications.
  • Sellers can only make the transfer election on an original return, which includes extensions. Buyers, by contrast, may claim the purchased tax credit on an amended return.
  • Buyers need to be aware that usage of the purchased tax credits is tied to the tax year of the seller. For example, a fiscal year seller could cause the tax credits to be available a year later than an uninformed buyer anticipated, regardless of when the tax credit was generated using a traditional placement in service analysis. For example, a solar project placed in service during November 2023 by an August fiscal year seller would generate credits first able to be used in a calendar year buyer’s 2024, instead of 2023, tax year. A buyer can use the tax credits it intends to purchase against its estimated tax liability.
  • The pre-registration requirements, which are expansive and open-ended, are also tied to the taxable year the tax credits are generated and generally must be made on a property-by-property basis. For example, 50 rooftop installations could require 50 separate registration numbers outside of the “energy project” election. When such registration information needs updated is also not entirely clear – for example, a project is often sold into a tax equity partnership syndication structure on or before mechanical completion. Needing to update registration information could delay transactions and implicates unknown audit risk.

While these rules provide much-needed clarity, failure to adhere may be catastrophic and will require sellers and buyers to put proper administrative procedures in place to avoid foot faults. The new transfer regime will expand the market to new buyers who may have viewed tax equity as either too complex or had other reasons to avoid these transactions, such as the accounting treatment of energy tax credit structures. However, it would be prudent for such buyers to approach such transactions with eyes wide open.

© 2023 BARNES & THORNBURG LLP

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Renewable Energy Tax Credits under the Inflation Reduction Act: Opportunities for Exempt Organizations

The Inflation Reduction Act of 2022 (the “IRA” or “Act”) added and modified several renewable energy tax provisions under the Internal Revenue Code of 1986, as amended (the “IRC”).[1] These changes provide many opportunities for exempt organizations, investors, and developers in clean energy projects to lower their costs by monetizing previously unavailable tax credits and thereby increase their business. Among them:

  • Solar facilities are now eligible for the Section 45 Production Tax Credit
  • An Investment Tax Credit for stand-alone energy storage technology with a minimum capacity of 5 kWh
  • A new two-tier credit system consisting of a base credit and an additional bonus credit for eligible projects that satisfy new prevailing wage and apprenticeship requirements
  • New “domestic content,” “energy community,” and “low-income community” bonus credits
  • New “technology neutral” tax credits
  • New ways to monetize tax credits

There has been significant interest in the energy credits by tax exempt organizations, in particular by universities and hospitals. Indeed, these organizations have been looking to minimize their greenhouse gas impact or carbon footprint with the goal of achieving clean energy even prior to the enactment of the IRA. The direct pay option which is now available under the IRA has accelerated the interest in clean energy. Commentators also note that private foundations have been interested in addressing climate change and taking advantage of these newly enacted credits to help spread the use of clean technologies.

Section 6417, discussed below, could be a “game changer” in this regard. Even though certain of the credits have been in existence, unless tax exempts have had a significant amount of unrelated business income tax (“UBIT”), they previously could not avail themselves of the credits prior to the enactment of Section 6417 which provides the direct payment alternative.

The below will outline the new and modified renewable energy tax credits under the IRA, and summarize recent guidance issued by the Treasury Department.

CHANGES TO EXISTING TAX CREDITS

Section 45 Production Tax Credit

Before the enactment of the IRA, the Section 45 Production Tax Credit (“PTC”) was available to electricity produced from certain renewable resources, including wind, biomass, geothermal, hydropower, municipal solid waste, and marine and hydrokinetic energy. Under the Act, solar facilities and are now also eligible for the PTC. In order to qualify for the PTC, eligible facilities must be placed in service and start construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

Section 48 Investment Tax Credit[2]

Prior to the Act, the Section 48 Investment Tax Credit (“ITC”) was not available to stand-alone energy storage projects. The IRA created an ITC for stand-alone energy storage technology with a minimum capacity of 5 kWh. The term “energy storage technology” includes any technology that receives, stores, and delivers energy for conversion to electricity, or to most technology that thermally stores energy.

Like the PTC, under the Act, eligible facilities can qualify for the ITC as long as they are placed in service and begin construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

STRUCTURAL CHANGES TO THE TAX CREDIT SYSTEM

The IRA created a new two-tier credit system consisting of a base credit and an additional bonus credit that is only available for eligible projects that satisfy the new prevailing wage and apprenticeship requirements (discussed below). The new ITC base rate will be 6 percent, and the bonus rate will increase it to 30 percent. The new PTC base rate will be 0.3 cents/kwh and the bonus rate will increase it to 1.5 cents/kwh.

Prevailing Wage Requirement

Taxpayers must pay laborers, mechanics, contractors, and subcontractors a prevailing wage during the construction of the project and with respect to subsequent alterations or repairs of the project following its placement in service. The prevailing wage is based on the pay rates published by the Department of Labor (“DOL”) for the geographic areas and type of job or labor classification. If relevant pay rates are not published, the taxpayer must request a wage determination or wage rate from the DOL.[3]

Apprenticeship Requirement

Taxpayers must also ensure that, with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. The “applicable percentage” is: (i) 10 percent for projects beginning construction before 2023, (ii) 12.5 percent for projects beginning construction during 2023, and (iii) 15 percent for projects beginning construction thereafter. Each contractor and subcontractor who employs four or more individuals to perform construction on an applicable project must employ at least one qualified apprentice. A “qualified apprentice” is an individual who is employed by the taxpayer or any contractor or subcontractor and who is participating in a registered apprenticeship program.

If a taxpayer fails to satisfy the apprenticeship requirement during a particular year, the taxpayer may correct the failure by paying a penalty to the IRS equal to $50 ($500 if the apprenticeship requirement was intentionally disregarded) multiplied by the total number of labor hours that did not satisfy the apprenticeship requirement. However, the IRA also includes a “good faith effort” exception if the taxpayer requests qualified apprenticeships from a registered apprenticeship program and either the request is denied, or the program fails to respond within five business days after receiving the request.

ADDITIONAL BONUS CREDITS

The IRA established the “domestic content,” “energy community,” and “low-income community” bonus credits.

Domestic Content

Projects qualifying for certain PTC and ITC credits could qualify for a 10 percent increase to the base and bonus credits if they satisfy the IRA’s new “domestic content” requirements. To qualify for this bonus credit, all steel, iron, and manufactured products that are components of the completed facility are to be produced in the United States.

Energy Community

Facilities located in an “energy community” will also qualify for a 10 percent increase to the base and bonus credits. An “energy community” includes brownfield sites, certain areas with significant employment related to, or local tax revenues generated by, coal, oil, or natural gas, and where there is high unemployment, or a census tract where a coal mine has recently closed or a coal-fired electric plant was retired or removed.

NEW “TECHNOLOGY NEUTRAL” TAX CREDITS

The IRA added new tax credits that apply to qualified facilities placed into service after December 31, 2024, and which yield zero greenhouse gas emissions. The Section 45Y Clean Electricity Production Credit (“CEPTC”) and the Section 48E Clean Electricity Investment Credit (“CEITC”) will replace the PTC and ITC, respectively, and are intended to be technology neutral. The credit amounts for the CEPTC and CEITC are calculated similarly to the PTC and ITC and are subject to similar prevailing wage and apprenticeship bonus requirements.

NEW WAYS TO MONETIZE TAX CREDITS UNDER THE IRA

The Act established the following two novel methods to monetize energy tax credits.

Direct Pay Available to Tax Exempt Organizations

For tax years beginning after December 31, 2022, and before January 1, 2033, certain “applicable entities” can make an election to receive a cash payment equal to the value of otherwise allowable tax credits. This option allows for the applicable entities to utilize and monetize the tax credits via a refund, even though the entities generally do not incur tax liabilities. The term “applicable entities” includes tax-exempt organizations, state and local governments, tribal governments, and the Tennessee Valley Authority.

The direct pay option is also available to taxpayers claiming the Sections 45V, 45Q, and 45X credits even if they do not meet the definition of an “applicable entity.”

Third-Party Sales

For tax years beginning after December 31, 2022, taxpayers (“transferee”) that do not meet the definition of an “applicable entity” may transfer all or a part of their eligible credits to an unrelated taxpayer (“transferor”) in exchange for cash. The cash consideration is not includible in the income of the transferor and is not deductible by the transferee. Credits may not be transferred more than once. In the case of any transfer election, the transferee taxpayer will be treated as the taxpayer for all purposes under the IRC with respect to such credit. With respect to a project held by a partnership, only the partnership itself (and not its partners) can elect to transfer the eligible credits. (Emphasis added.) Then it is likely to be treated as unrelated trade or business.

All of the tax credits eligible for the direct pay option, except for the Section 45W Clean Commercial Vehicles Credit, are also eligible for sale to a third-party.

NOTICES 2023-17 AND 2023-18

On February 13, 2023, the IRS issued Notices 2023-17 and 2023-18 which provide guidance on the administration of two allocation-based renewables tax credit programs under Sections 48(e) and 48C, respectively.

Notice 2023-17

The Act amended Section 48(e) to provide an increase in the ITC for qualified solar and wind facilities which are deployed in specified low-income communities or residential developments. To receive these increased credit amounts, a taxpayer must receive an allocation of “environmental justice solar and wind capacity limitation” (“Capacity Limitation”). A “qualified solar and wind facility” is any facility that (1) generates electricity solely from a wind facility, solar energy property, or small wind energy property; (2) has a maximum net output of less than five megawatts (as measured in alternating current); and (3) is described in at least one of the four categories described in the chart below.

Notice 2023-17 established the Low-Income Communities Bonus Credit Program under Section 48(e) and provided guidance on the procedures and information required to apply for an allocation of Capacity Limitation. For each of 2023 and 2024, the annual capacity limitation is 1.8 gigawatts of direct current capacity, which will be allocated among four categories of projects as follows:

Category

Required Facility Location

Category

Required Facility Location

Capacity Limitation Allocation (MW)

Bonus Percentage

1

Low-Income Community

700 MW

10%

2

Indian Land

200 MW

10%

3

Qualified Low-Income Residential Building Project

200 MW

10%

4

Qualified Low-Income Economic Benefit Project

700 MW

10%

A taxpayer must submit an application to the IRS in order to receive a Capacity Limitation allocation. Details regarding the application process are forthcoming, however, Notice 2023-17 states that applications will be accepted in a phased approach during a 60-day application window for calendar year 2023. Applications will be accepted for Category 3 and 4 projects beginning in the third quarter of 2023, and Category 1 and 2 project applications will be accepted thereafter.

The Department of Energy (“DOE”) will review applications for statutory eligibility and any other criteria provided by the IRS. On this basis, the DOE will provide recommendations to the IRS regarding the selection of applicants for an allocation of Capacity Limitation. If the selected applications exceed the capacity limitations for a given category, the DOE will use a lottery system or some other process to allocate Capacity Limitations. If accepted, the IRS will notify the applicant of its decision and specify the amount of Capacity Limitation allocated. Within four years of receiving such notification applicants must place the eligible property in service to claim the increased credit rate.

Notice 2023-18

The Act extended the Section 48C Advanced Energy Project Credit (“48C Credit” or “AEPC”), which was originally enacted as part of the American Recovery and Reinvestment Act of 2009. Section 48C provides a credit for investments in projects that fall into one of the following three general categories: (i) clean energy manufacturing and recycling projects, (ii) greenhouse gas emission reduction projects, and (iii) critical materials projects. The AEPC is subject to an aggregate cap of $10 billion, at least $4 billion of which will be allocated to census tracts (or tracts adjacent to census tracts) in which coal mines have been closed after 1999 or coal-fired generation facilities have been retired after 2009.

Notice 2023-18 provides guidance on the process and timeline for applying for an allocation of 48C Credits. The first allocation round of $4 billion began on May 31, 2023. Outlined below is an overview of the application, review, and approval process for the first allocation round of 48C credits:

The applicant submits a “concept paper” to the DOE between May 31, 2023, and July 31, 2023.

After reviewing the concept paper, the DOE will issue a letter to the applicant either encouraging or discouraging the submission of an application. All applicants that submit a concept paper during the above period may submit an application irrespective of the DOE’s response.

The applicant submits an application to the DOE for review. If the applicant intends to apply for a bonus credit because it will satisfy the prevailing wage and apprenticeship requirements, it must confirm this in the application.

The DOE then makes a recommendation as to whether to accept or reject the application and provides a ranking of the applications.

Based on the DOE’s recommendations and rankings, the IRS will make a decision regarding the acceptance or rejection of the application and notify the applicant of its decision.

Within two years after receiving an allocation from the IRS, the applicant must provide evidence to the DOE that the certification requirements have been met.

The DOE notifies the applicant and the IRS that it has received the applicant’s notification that the certification requirements have been met.

The IRS will provide a letter to the applicant certifying the project (“Allocation Letter”).

Within two years after receiving the Allocation Letter, the applicant must notify the DOE that the project has been placed in service. The applicant may claim the 48C Credit in the year in which the property is placed in service.

Additional guidance from the Treasury Department and IRS is expected to be released throughout the year.

FOOTNOTES

[1] Unless otherwise stated, all “Section” references are to the IRC.

[2] For any investment tax credit under Section 50(b)(3), an exempt organization could only avail itself of such credit to the extent the property in question was used in unrelated business income. So in effect, prior to the enactment of IRA, any property that was used consistent with the tax exempt organization’s mission presented an obstacle which Section 6417 expressly overrides. Section 50(b)(3).

[3] If a taxpayer fails to meet the prevailing wage requirement during a particular year, the taxpayer may cure the failure by paying each worker the difference between actual wages paid and the prevailing wage, plus interest and a penalty of $5,000. If a taxpayer’s failure to pay prevailing wages was due to “intentional disregard,” then the taxpayer must pay each worker three times the difference and pay the IRS a $10,000 penalty per worker.

© 2023 Blank Rome LLP

For more tax news, click here to visit the National Law Review.

Inflation’s Effect on Taxes – The Good and the Bad

Many federal tax provisions are adjusted for inflation annually, but not all. Rising inflation may result in lower tax bills for many taxpayers in 2023. Unfortunately, the impacts of inflation on taxpayers will not lower their 2022 tax bills even though inflation is at the highest level in the past 40 years.

The standard deduction is indexed for inflation. In 2023, for married couples filing joint tax returns, the standard deduction increased by $1,800 to $27,700; and for single taxpayers the standard deduction increased by $900 to $13,850.

The tax rates for individual tax filers have not changed (with the highest tax rate remaining at 37%), but the income levels have increased between the brackets. For example, in 2023, the 32% tax bracket starts at $364,200 for married couples filing jointly (up from $340,100 in 2022); and the 35% bracket for married couples filing jointly starts at $462,500 (up from $331,900 in 2022).

Estates of decedents who die in 2023 will have an estate tax exemption of $12,920,000 (up from $12,060,000 in 2022). The gift tax exclusions also increased to the same amounts and the annual gift exclusion increased to $17,000 per donee, which allows a married couple to gift $34,000 using their annual exclusion with no limit on the number of donees.

Social security recipients will enjoy an 8.7% increase in their monthly benefits in 2023 compared to 2022.

Other increases, as a result of rising inflation, include higher maximum contributions to retirement plans, health savings accounts and flexible spending accounts.

Inflation will impact taxpayers, employees and employers negatively as well. Employees, employers and self-employed individuals will be subject to social security taxes on earnings of $160,200 (up from $147,000 in 2022).

The limitation on itemized deduction for state and local tax has not increased, although state and local taxes have generally increased and the personal exemption continues to remain at zero. Finally, there has been no reduction in the long-term capital gains tax rate or increase in the deduction for capital losses which remains limited to $3,000 per year in excess of capital gains.

Article By Edwin I. Josephson of Chuhak & Tecson, P.C.

For more tax legal news, click here to visit the National Law Review.

© 2023 Chuhak & Tecson P.C.

Environmental Justice Update: EPA Announces $100 Million in EJ Grants to Local Groups and Issues Guidance Outlining Potential Federal ‘Cumulative Impact’ Claims

“Environmental justice” (EJ) continues as the primary leitmotif of Biden Administration environmental policy in the first weeks of 2023.

Below, we unpack two recently announced EJ efforts: a grant program for groups in environmentally overburdened communities and guidance on legal resources to address “cumulative impacts” issued by the US Environmental Protection Agency’s (EPA) Office of Legal Counsel and outline what these mean for the regulated community taken together in the context of other recent EJ developments.

EPA Announces $100 Million in Grants to Community Groups

This week, EPA announced the availability of approximately $100 million in grants for projects that “advance EJ in underserved and overburdened communities.” The grant programs are part of funding allocated by the Inflation Reduction Act programs discussed here.

Summaries of the two programs:

  • The Environmental Justice Collaborative Problem-Solving Program (EJCPS) Cooperative Agreement Program. The EJCPS program provides $30 million in funding directly to community-based non-profit organizations for projects focused on addressing local environmental or public health issues in their communities. Five million of the funding is reserved for small community-based nonprofit organizations with five or fewer full-time employees. EPA anticipates funding approximately 50 awards of $500,000 and 30 awards of $150,000.

  • Environmental Justice Government-to-Government (EJG2G) Program. EJG2G will provide an estimated $70 million in funding for state, tribal, and local projects completed in conjunction with community-based organizations. In total the agency anticipates funding approximately 70 projects of up to $1 million each for a 3-year project.

Interested applicants must submit proposal packages on or before April 10, 2023, for projects to begin on October 1, 2023.

EPA’s efforts to fund local groups are part of its broader strategic goal of enhancing equitable apportionment of resources and the benefits of environmental policies. EPA’s Equity Action Plan, discussed here, prioritizes building capacity in environmentally underserved communities to lead projects. Projects like these would lead to increased community engagement, which in turn could lead to more equitable outcomes in the environmental space. The strategy of building up local capacity to engage on environmental issues, mirrors private-sector efforts like Bloomberg Philanthropies $85 million “Beyond Petrochemicals” campaign, discussed here.

Federal Cumulative Impact Guidance

EPA’s Office of General Counsel released its Cumulative Impacts Addendum this week. This addendum builds on EPA’s Legal Tools to Advance Environmental Justice, which was released in May 2022. Taken together, these encyclopedia-like documents were created with the purpose of “identifying and making appropriate use of every authority and tool available to EPA under the law to incorporate environmental and climate justice considerations in our work,” in the words of EPA Administrator Michael Regan. The addendum itself indicates that it “is not intended to prescribe when and how [EPA] should undertake specific actions, nor does it provide methodologies for how to conduct a cumulative impacts assessment.” (Note: EPA’s Office of Research and Development has advanced a definition of “cumulative impacts,” summarized here, and is researching methodologies to deploy the concept.)

Structurally, the addendum breaks EPA’s authorities to address cumulative impacts into six subject-matter focused chapters:

  • Clean Air Act Programs

  • Water Programs

  • Waste Management and Emergency Response Programs (i.e. Resource Conservation and Recovery Act; Oil Pollution Act; the Emergency Planning and Community Right-to-Know Act; and the Comprehensive Environmental Response, Compensation, and Liability Act)

  • Pesticides and Toxics Programs (i.e. Federal Insecticide, Fungicide, and Rodenticide Act; the Federal Food, Drug, and Cosmetic Act; and the Toxic Substances Control Act); and

  • Environmental Review Programs (i.e. National Environmental Policy Act and Clean Air Act Section 309 Reviews).

EPA’s intent with the addendum was to outline legal resources for federal, state, and local regulators to consult situationally outlining potential tools that could be used to address cumulative impacts. These legal tools, used in conjunction with EJ-focused screening tools like EJSCREEN (discussed here) and newly developed and (increasingly available) data (see our discussions here and here), are part of EPA’s high prioritization of EJ issues.

Takeaways for the Regulated Community

We offer two takeaways from these developments:

First, EPA’s commitment to a “whole of government” approach to address EJ issues continues unabated. Over time, the Biden Administration has exhibited a willingness to allocate money to address EJ issues; reorient EPA and DOJ to better address them; develop new tools; and indeed, build capacity to engage local communities in an effort to benefit more Americans regardless of their race, language or socioeconomic status.

Second, taken collectively, these efforts will necessitate changes in process for regulated entities because governmental and community engagement in the EJ space is altering the policymaking process at a rapid rate. Relevant here, we expect that a secondary effect of EPA and private parties “building capacity” in local communities will be an increase in community involvement — and potentially opposition — to businesses operating in their communities. These groups are likely to deploy all available resources — including those outlined in the addendum — to address their concerns.

© 2023 ArentFox Schiff LLP
For more Environmental Policy Legal News, click here to visit the National Law Review.

Top Legal News of 2022: A Review of the Most Notable and Newsworthy Thought Leadership from the National Law Review’s Contributors

Happy New Year from the National Law Review! We hope that the holiday season has been restful and rejuvenating for you and your family. Here at the NLR, we are wrapping up the second season of our legal news podcast, Legal News Reach. Check out episode seven here: Creating A Diverse, Equitable and Inclusive Work Environment with Stacey Sublett Halliday of Beveridge & Diamond! A few weeks ago, we also announced the winners of our 2022 Go-To Thought Leadership Awards! Each year, around 75 recipients are selected for their timely and high-quality contributions to the National Law Review. This year’s slate of winners was particularly competitive – to see the full list, check out our 2022 National Law Review Thought Leadership Awards page.

As we look forward to a bright and busy 2023 for the legal industry, it is more prudent than ever to review the previous year and all that came with it. 2022 was a chaotic and monumental year for not only the legal profession, but for the world at large. The invasion of Ukraine, global supply chain issues, and the ongoing coronavirus pandemic were only some of the many challenges all industries and sectors faced. In the United States, companies and employers dealt with enormous changes at every level, including but not limited to the reversal of Roe v. Wade, shifting attitudes toward cannabis legalization, and ever-changing standards for COVID-19 vaccinations.

Read on below for some thought leadership highlights from this past year, and for a reminder of all that we’ve passed through in 2022:

January

Most prominently in 2022, the US Supreme Court handed down substantial rulings for coronavirus vaccine mandates, which affected not only healthcare workers but all employers across the country. With a 6-3 majority, SCOTUS stayed the Biden Administration’s OSHA Emergency Temporary Standard that applied to all private employers, but simultaneously ruled in a 5-4 majority that issued a 5–4 unsigned majority that vaccine mandates for medical facilities and medical workers can remain.

January also saw noteworthy changes to labor law in the United States, inviting a handful of significant standard changes for all employers. At the end of 2021 and early in 2022, the NLRB considered cases that altered the standard for determining independent contractor status, as well as the standard that established whether a facially neutral work rule violates Section 8(a)(1) of the National Labor Relations Act. These changes also paved the way for briefings on determining appropriate bargaining units.

Read January 2022’s thought leadership focusing on Labor and Employment law and the related Supreme Court rulings  below for more information:

Supreme Court Stays Private Vaccine Mandate; Upholds Requirement for Certain Healthcare Workers

On Again, Off Again Vaccine Mandates: What Should Employers Do Now?

NLRB Rings in the New Year by Inviting Briefing on Multiple, Far-Reaching Standards Impacting Employers

February

On February 24, 2022, Russia launched a large-scale ground invasion of Ukraine, leading to considerable damage and loss of life and throwing the geopolitical landscape into chaos. Both in February and in the months since, the Russia-Ukraine war has placed an extraordinary  strain on the global supply chain and businesses around the world, as the European Union, the United Kingdom, and the United States have continued to enforce sanctions and trade regulations. Companies must be careful to comply with these orders as the political landscape continues to change and learn how to juggle the dual headaches of the lingering COVID crisis and evolving Ukrainian war

Domestically, President Biden nominated Ketanji Brown Jackson to the US Supreme Court. Succeeding Justice Stephen Breyer, Judge Jackson graduated magna cum laude from Harvard University in 1992 and cum laude from Harvard Law in 1996 and has since served as a judge on the U.S. Court of Appeals for the District of Columbia Circuit. She is the first African American woman to serve on the United States’ highest court of law.

Read select thought leadership articles below for more information:

President Biden Nominates D.C. Circuit Judge Ketanji Brown Jackson to U.S. Supreme Court

Russian Invasion of Ukraine Triggers Global Sanctions: What Businesses Need to Know

Consequences from the Ukrainian Conflict

March

March of 2022 saw the long term  impacts from the military conflict in Ukraine emerge locally and around the world. Sanctions continued to affect businesses, leading to global supply chain slowdowns and difficulties in manufacturing and shipping and new immigration changes and challenges. In the US, the Securities and Exchange Commission “SEC” issued new and noteworthy regulations regarding Environmental, Social & Corporate Governance “ESG” and climate change disclosures for public companies. The Supreme Court also heard oral argument for a large slate of cases, perhaps most notably in ZF Auto. US v. Luxshare, Ltd. and AlixPartners v. The Fund for Prot. of Inv. Rights in Foreign States, which interpreted provisions of Title 28 of the US Code’s (“Section 1782”) reach in seeking US-style discovery from a interested party to a foreign proceeding and whether or not ection 1782 can be used to obtain key information for private international arbitrations.

Read key thought leadership articles published in March for more details:

SEC Issues Long-Awaited Proposed Rule on Climate Disclosures

U.S. Supreme Court Hears Oral Argument on Circuit Split Over Scope of 28 U.S.C. § 1782 for Obtaining Discovery in International Arbitrations

The Effects of the Military Conflict in Ukraine on Supply Contracts

April

In April of 2022, the Biden Administration made notable changes to the National Environmental Policy Act, better known as NEPA, which had been substantially altered under the Trump Administration. A number of key provisions were returned to their pre-Trump state in order to better center the administration’s larger focus on environmental justice. Also of note, a US court for the first time contested the Center for Disease Control’s  “CDC’s” travel mask mandate, on the grounds that it exceeded the CDC’s Statutory Authority under the Administrative Procedure Act “the federal APA”. This ultimately led to a vacating of the COVID travel mask mandate on a nationwide basis.

Elon Musk announced his intention to purchase Twitter in April of 2022, as well. Twitter ultimately adopted a shareholder rights plan, known as a poison pill, in hopes of preventingMusk’s hostile takeover. Poison pills are widely regarded as the an effective but a draconian anti-takeover defense available.

Read select  thought leadership articles below for more information:

Biden Administration Walks Back Key Trump Era NEPA Regulation Changes

Twitter Board of Directors Adopts a Poison Pill

Administrative Law Takeaways from the Federal Travel Mask Mandate Decision

May

On May 17th, the first case of Monkeypox in the United States was reported in Massachusetts. In response, the Environmental Protection Agency “EPA” and the federal government implemented a number of policy changes in hopes of preventing a wider spread, including the speedy authorization of anti-Monkeypox claims for certain registered pesticides and disinfectant products.

The SEC and administrative law at large received a considerable blow after the Fifth Circuit’s ruling in Jarkesy v. SEC. The Fifth Circuit Court held that the SEC in-house courts violated a series of constitutional protections, which may result in far-reaching impacts for how administrative bodies are used to regulate in the future. Additionally in May, the Senate confirmed Commissioner Alvaro Bedoya for the Federal Trade Commission “FTC”, shifting the balance of power back at the Commission in favor of the Democratic Party.

Read the following highlighted thought leadership articles published in May  for more information:

EPA Authorizes Anti-Monkeypox Claims for Pre-Designated Disinfectant Products

Fifth Circuit Holds That SEC Administrative Law Courts Are Unconstitutional

Big News at The FTC: Democrats Finally Get the Majority Back

June

In June of 2022, the Supreme Court released its decision in Dobbs v. Jackson, reversing Roe v. Wade’s 50-year precedent of ensuring abortion as a  protected right. Dobb’s is a  momentous decision and has resulted in a myriad of complex issues for employers, healthcare providers and individuals, including the updating of employee policies, healthcare provisions, ethical and criminal considerations for healthcare providers and the protection of personal data, and ultimately represents a massive shift away from women’s bodily autonomy in the United States. And the partial advance leak of the Dobb’s ruling, added to the myriad of concerns about the stability and public perception of the Supreme Court.

Other notable litigation and legislation in June included the passing of the Uyghur Forced Labor Prevention Act, subjecting the importers of raw materials from China to new enforcement provisions. The Supreme Court also ruled in West Virginia v. EPA, limiting the SEC’s ability to enforce ESG requirements on public companies. The West Virginia v. EPA ruling  presents a considerable obstacle for the Biden Administration’s ongoing climate goals.

Read select legal news  articles below for more information:

Employment Law This Week: SCOTUS Overturns Roe v. Wade – What Employers Should Consider [VIDEO]

Uyghur Forced Labor Prevention Act Enforcement Starts on Imports from China and on Imports with China Origin Inputs

Implications of West Virginia v. EPA on Proposed SEC Climate Rules

July

July of 2022 saw a great deal of changes for the Equal Opportunity Commission’s “EEOC’s” COVID testing guidance for employers. The largest change is determining if testing is needed to prevent workplace transmission and interpreting the business necessity standard under the American with Disabilities Act “ADA”.. The labor law landscape around the country also saw an increased focus on pay transparency laws – most notably, New York state passed a bill requiring employers to post salary or wage ranges on all job listings. Notably, this law is quite similar to one already in effect in New York City and Washington state, Colorado, and Jersey City.

Beginning most prominently in July, the cryptocurrency world also found itself under increased scrutiny by the federal government. Of note this month, the SEC filed a complaint against certain Coinbase employees, alleging insider trading and claiming that these employees had tipped off others regarding Coinbase’s listing announcements. This move was one of the more aggressive moves made by the SEC toward the digital asset industry.

Read select legal thought leadership articles published in July for more information:

EEOC Revises COVID-19 Testing Guidance for Employers

SEC v. Wahi: An Enforcement Action that Could Impact the Broader Crypto / Digital Assets Industry

Pay Transparency Laws Are All The Rage: Looks Like New York State Is Joining the Party

August

On August 12, 2022, the Inflation Reduction Act (“IRA”) was passed by Congress, representing enormous changes for industries across the country. Perhaps most notably, the landmark legislation contained new government incentives for the clean energy sector, creating tax incentives for renewable energy projects that previously did not exist. The Act also included 15% alternative minimum corporate tax and a 1% excise tax on stock buybacks to raise government revenue.

The Inflation Reduction Act also provided significant funding for tribal communities, including but not limited to the reduction of drug prices, the lowering of energy costs, and additional federal infrastructure investments. While the funding is not as significant as COVID relief from previous years and there are still some remaining hurdles, the IRA provides groundbreaking new opportunities for Native communities, including those in Alaska and Hawaii.

Read the select legal articles published in August for more information:

The Inflation Reduction Act: How Do Tribal Communities Benefit?

The Inflation Reduction Act: A Tax Overview

Relief Arrives for Renewable Energy Industry – Inflation Reduction Act of 202

September

In September of 2022, Hurricane Ian made landfall in the United States, caused substaintial property damage and loss of life despite preparations ahead of time. After addressing safety concerns, policyholders began reviewing their insurance policies, collecting documentation and filing claims. In addition to filing claims for property damage, corporate policyholders also filed claims for business interruption and loss of business income.

Lawsuits opposing the remaining COVID-19 vaccine mandates also continued throughout the month of September, exceeding 1,000 complaints nationally. Previously, lawsuits had largely targeted the Biden Administration, but additional focus was also directed toward large employers with vaccine mandates.

Of global significance, Queen Elizabeth II, the UK’s longest reigning monarch, passed away at 96 years old. Her funeral was held September 19, 2022, and was a national holiday in the United Kingdom marking the last day of public mourning.

Read following key thought leadership articles on Hurrican Ian, UK Bank Holiday due to the Sovereign’s passing and Employer’s COVID Mandate headaches  for more information:

Hurricane Ian – Navigating Insurance Coverage

Bank Holiday Announced for Her Majesty Queen Elizabeth II’s State Funeral

Challenges Against Employer COVID-19 Vaccine Mandates Show No Sign of Slowing

October

October saw forward movement in environmental justice, cannabis decriminalization, and Artificial Intelligence  “AI” regulation. The EPA launched their new Office of Environmental Justice and External Civil Rights, to work with state, local, and tribal partners providing financial and technical support to underserved communities disproportionately impacted by the ill effects of climate change. The EPA’s new office has 200 staff members across 10 regions and is expected to provide a unifying focus on civil rights and environmental justice for the EPA and federal government as a whole.

President Biden’s pardon of federal marijuana charges and mandate to review the plant’s Schedule I status signaled a shift in cannabis regulation, with the president urging state officials to follow his example and consider the contrast between wealthy cannabis business owners and those imprisoned for possession in the recent past.

Later in the month, the White House Office of Science and Technology Policy addressed the swell of artificial intelligence technology with their Blueprint for an AI Bill of Rights, which provides guidelines to prevent privacy violations, implicit bias, and other forms of foreseeable harm.

Read selected thought leadership articles below for more information:

EPA Launches Their New Office: What Does the Office of Environmental Justice and External Civil Rights Mean for Companies and ESG in the United States?

“Up in Smoke?” President Biden Announces Pardons and Orders Review of Cannabis Classification

The White House’s AI Bill of Rights: Not for the Robots

November

November was dominated by a nail-biting midterm election season, a cryptocurrency catastrophe, and NDA (Non Disclosure Agreement) reform. While the midterms did not result in a Red Wave as expected, Republicans were able to regain a small majority in the House of Representatives, with the Senate remaining in Democratic control.

The digital finance world was considerably less stable, with the second largest cryptocurrency trading platform, FTX, filing for bankruptcy three days after its lawyers and compliance staff abruptly resigned. The collapse brought into stark relief the importance of solidifying the cryptocurrency custody and insurance landscape.

Also of note, President Biden signed the Speak Out Act, rendering unenforceable nondisclosure and nondisparagement agreements signed prior to incidents of sexual harassment or assault. The law’s passage offers employers the opportunity to review their states’ more robust laws in this area and ensure clauses meant to protect trade secrets and proprietary information don’t inadvertently create issues for sexual misconduct claimants.

Read select  thought leadership articles below fora deeper dive:

2022 Midterm Election Guide

The Spectacular Fall of FTX: Considerations about Crypto Custody and Insurance

Nondisclosure and Nondisparagement Agreements in Sexual Harassment and Assault Cases: Speak Out Act Heads to President’s Desk

December

In December, the Federal Trade Commission (FTC) released their hotly anticipated “Green Guides” amendment proposals, intended to combat greenwashing amidst growing demand for environmentally friendly products. The amended Guides for the Use of Environmental Marketing Claims would impose stricter standards for the use of terms such as “recyclable,” “compostable,” “organic,” and “sustainable” in advertising and on packaging.

Meanwhile, Congress narrowly avoided a railroad worker strike by passing Railway Labor Act legislation affirming all tentative agreements between rail carriers and unions. The contracts included a roughly 24% increase in wages over 4-5 years, along with an extra day of leave. Biden promised to address paid leave further in the near future.

The National Labor Relations Board (NLRB) closed out 2022 with a number of impactful decisions favoring workers. Employees have expanded remedies for National Labor Relations Act violations and protection during Section 7 questioning, while employers have the burden of proof when seeking to expand micro-units or deny union protestors.

Read select legal thought leadership pieces below for more details:

Congress Votes to Impose Bargaining Agreement to Avoid Nationwide Railroad Strike

FTC Starts Long-Awaited Green Guides Review

NLRB Issues Flurry of Blockbuster End-of-Year Decisions (With More to Come?) (US)

Thank you to our dedicated readers and as always to our highly regarded contributing authors and our talented NLR editorial staff for working day in and day out to produce one of the most well read and reputable business law publications in the US.  Have a happy 2023!

Copyright ©2023 National Law Forum, LLC

IRS and Treasury Department Release Initial Guidance for Labor Requirements under Inflation Reduction Act

On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61 (the Notice) in the Federal Register. The Notice provides guidance regarding the prevailing wage requirements (the Prevailing Wage Requirements) and the apprenticeship requirements (the Apprenticeship Requirements and, together with the Prevailing Wage Requirements, the Labor Requirements), which a taxpayer must satisfy to be eligible for increased amounts of the following clean energy tax credits under the Internal Revenue Code of 1986 (the Code), as amended by the Inflation Reduction Act of 2022 (the “IRA”):

  • the alternative fuel vehicle refueling property credit under Section 30C of the Code (the Vehicle Refueling PC);
  • the production tax credit under section 45 of the Code (the PTC);
  • the energy efficiency home credit under section 45L of the Code;
  • the carbon sequestration tax credit under section 45Q of the Code (the Section 45Q Credit);
  • the nuclear power production tax credit under section 45U of the Code;
  • the hydrogen production tax credit under section 45V of the Code (the Hydrogen PTC);
  • the clean electricity production tax credit under section 45Y of the Code (the Clean Electricity PTC);
  • the clean fuel production tax credit under section 45Z of the Code;
  • the investment tax credit under section 48 of the Code (the ITC);
  • the advanced energy project tax credit under section 48C of the Code; and
  • the clean electricity production tax credit under section 48E of the Code (the Clean Electricity ITC).[1]

We discussed the IRA, including the Labor Requirements, in a previous update.

Start of Sixty-Day Period

The IRA provides an exemption from the Labor Requirements (the Exemption) for projects and facilities otherwise eligible for the Vehicle Refueling PC, the PTC, the Section 45Q Credit, the Hydrogen PTC, the Clean Electricity PTC, the ITC, and the Clean Electricity ITC, in each case, that begin construction before the sixtieth (60th) day after guidance is released with respect to the Labor Requirements.[2] The Notice provides that it serves as the published guidance that begins such sixty (60)-day period for purposes of the Exemption.

The version of the Notice that was published in the Federal Register on November 30, 2022, provides that the sixtieth (60th) day after the date of publication is January 30, 2023. January 30, 2023, however, is the sixty-first (61st) day after November 30, 2023; January 29, 2023 is the sixtieth (60th) day. Currently, it is unclear whether the Notice erroneously designated January 30, 2023 as the sixtieth (60th) day or whether the additional day to begin construction and qualify for the Exemption was intended, possibly because January 29, 2023 falls on a Sunday. In any event, unless and until clarification is provided, we expect conservative taxpayers planning to rely on the Exemption to start construction on creditable projects and facilities before January 29, 2023, rather than before January 30, 2023.[3]

Beginning Construction for Purposes of the Exemption

The Notice describes the requirements for a project or facility to be deemed to begin construction for purposes of the Exemption. As was widely expected, for purposes of the PTC, the ITC, and the Section 45Q Credit, the Notice adopts the requirements for beginning of construction contained in previous IRS notices (the Prior Notices).[4] Under the Prior Notices, construction of a project or facility is deemed to begin when physical work of a significant nature begins (the Physical Work Test) or, under a safe harbor, when five percent or more of the total cost of the project or facility is incurred under the principles of section 461 of the Code (the Five Percent Safe Harbor). In addition, in order for a project or facility to be deemed to begin construction in a particular year, the taxpayer must demonstrate either continuous construction or continuous efforts until the project or facility is completed (the Continuity Requirement). Under a safe harbor contained in the Prior Notices, projects and facilities that are placed in service no more than four calendar years after the calendar year during which construction of the project or facility began generally are deemed to satisfy the continuous construction or continuous efforts requirement (the Continuity Safe Harbor).[5]

In the case of a project or facility otherwise eligible for the newly-created Vehicle Refueling PC, Hydrogen PTC, Clean Electricity PTC, or Clean Electricity ITC, the Notice provides that:

  • “principles similar to those under Notice 2013-29” will apply for purposes of determining whether the project or facility satisfies the Physical Work Test or the Five Percent Safe Harbor, and a taxpayer satisfying either test will be deemed to have begun construction on the project or facility;
  • “principles similar to those under” the Prior Notices will apply for purposes of determining whether the project or facility satisfies the Continuity Requirement; and
  • “principles similar to those provided under section 3 Notice 2016-31” will apply for purposes of determining whether the project or facility satisfies the Continuity Safe Harbor, with the Notice specifying that the safe harbor period is four (4) years.

Taxpayers and commentators have observed that the existing guidance in the Prior Notices is not, in all cases, a good fit for the newly-created clean energy tax credits. Additional guidance will likely be required to ensure that the principles of the Prior Notices may be applied efficiently and seamlessly to the newly-created tax credits.

Prevailing Wage Determinations

The Notice provides that, for purposes of the Prevailing Wage Requirements, prevailing wages will vary by the geographic area of the project or facility, the type of construction to be performed, and the classifications of the labor to be performed with respect to the construction, alteration, or repair work. Taxpayers may rely on wage determinations published by the Secretary of Labor on www.sam.gov to establish the relevant prevailing wages for a project or facility. If, however, the Secretary of Labor has not published a prevailing wage determination for a particular geographic area or type of project or facility on www.sam.gov, or one or more types of labor classifications that will be performed on the project or facility is not listed, the Notice provides that the taxpayer must contact the Department of Labor (the “DOL”) Wage and Hour Division via email requesting a wage determination based on various facts and circumstances, including the location of and the type of construction and labor to be performed on the project or facility in question. After review, the DOL will notify the taxpayer as to the labor classifications and wage rates to be used for the geographic area in which the facility is located and the relevant types of work.

Taxpayers and commentators have observed that the Notice provides no insight as to the DOL’s decision-making process. For instance, the Notice does not describe the criteria that the DOL will use to make a prevailing wage determination; it does not offer any type of appeal process; and, it does not indicate the DOL’s anticipated response time to taxpayers. The lack of guidance on these topics has created significant uncertainty around the Prevailing Wage Requirements, particularly given that published wage determinations are lacking for many geographical areas.

Certain Defined Terms under the Prevailing Wage Requirements

The Notice provides definitions for certain key terms that are relevant to the Prevailing Wage Requirements, including:

  • Employ. A taxpayer, contractor, or subcontractor is considered to “employ” an individual if the individual performs services for the taxpayer, contractor, or subcontractor in exchange for remuneration. Individuals otherwise classified as independent contractors for federal income tax purposes are deemed to be employed for this purpose and therefore their compensation generally would be subject to the Prevailing Wage Requirements.
  • Wages. The term “wages” includes both hourly wages and bona fide fringe benefits.
  • Construction, Alteration, or Repair. The term “construction, alteration, or repair” means all types of work (including altering, remodeling, installing, painting, decorating, and manufacturing) done on a particular project or facility. Based on this definition, it appears that off-site work, including off-site work used to satisfy the Physical Work Test or the Five Percent Safe Harbor, should not constitute “construction, alteration, or repair” and therefore should not be subject to the Prevailing Wage Requirements. It is not clear, however, whether “construction, alteration, or repair” should be read to include routine operation and maintenance (“O&M”) work on a project or facility.

The Good Faith Exception to the Apprenticeship Requirements

The IRA provides an exception to the Apprenticeship Requirements for taxpayers that make good faith attempts to satisfy the Apprenticeship Requirements but fail to do so due to certain circumstances outside of their control (the Good Faith Exception). The Notice provides that, for purposes of the Good Faith Exception, a taxpayer will be considered to have made a good faith effort to request qualified apprentices if the taxpayer (1) requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry and (2) maintains sufficient books and records establishing the taxpayer’s request of qualified apprentices from a registered apprenticeship program and the program’s denial of the request or lack of response to the request, as applicable.

Certain Defined Terms under the Apprenticeship Requirements

The Notice provides definitions for certain key terms that are relevant to the Apprenticeship Requirements, including:

  • Employ. The Notice provides the same definition for “employ” as under the Prevailing Wage Requirements.
  • Journeyworker. The term “journeyworker” means a worker who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the relevant occupation.
  • Apprentice-to-Journeyworker Ratio. The term “apprentice-to-journeyworker ratio” means a numeric ratio of apprentices to journeyworkers consistent with proper supervision, training, safety, and continuity of employment, and applicable provisions in collective bargaining agreements, except where the ratios are expressly prohibited by the collective bargaining agreements.
  • Construction, Alteration, or Repair. The Notice provides the same definition for “construction, alteration, or repair” as under the Apprenticeship Requirements. This suggests that, like the Prevailing Wage Requirements, off-site work is not subject to the Apprenticeship Requirements. In addition, the same open question regarding O&M work under the Prevailing Wage Requirements applies for purposes of the Apprenticeship Requirements as well.

Record-Keeping Requirements

The Notice requires that taxpayers maintain and preserve sufficient records in accordance with the general recordkeeping requirements under section 6001 of the Code and the accompanying Treasury Regulations to establish that the Prevailing Wage Requirements and Apprenticeship Requirements have been satisfied. This includes books of account or records for work performed by contractors or subcontractors of the taxpayer.

Other Relevant Resources

The DOL has published a series of Frequently Asked Questions with respect to the Labor Requirements on its website. In addition, the DOL has published additional resources with respect to the Apprenticeship Requirements, including Frequently Asked Questions, on its Apprenticeship USA platform. It is generally understood that, in the case of any conflict between the information on these websites and the information in the Notice, the Notice should control.

[1] The Labor Requirements also are applicable to the energy-efficient commercial buildings deduction under section 179D of the Code.

[2] The IRA provides a separate exemption from the Labor Requirements projects or facilities otherwise eligible for the ITC or the PTC with a maximum net output of less than one megawatt.

[3] Interestingly, the DOL online resources described below observe that projects and facilities that begin construction on or after January 29, 2023 are not eligible for the Exemption, which appears to recognize that January 29, 2023, and not January 30, 2023, is the sixtieth (60th) after publication of the Notice.

[4] Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-36 I.R.B. 541; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; Notice 2020-41, 2020-25 I.R.B. 954; Notice 2021-5, 2021-3 I.R.B. 479; and Notice 2021-41, 2021-29 I.R.B. 17.

[5] In response to procurement, construction, and similar delays attributable to the COVID-19 pandemic, the length of the safe harbor period was extended beyond four (4) years for projects or facilities for which construction began in 2016, 2017, 2018, 2019, or 2020, which we discussed in a previous update.

Article By Elizabeth L. McGinley, Steven J. Lorch, Don J. Lonczak, and Michael A. Recchia of Bracewell LLP

For more labor and employment legal news, click here to visit the National Law Review.

© 2022 Bracewell LLP

Tax Credits in the Inflation Reduction Act Aim to Build a More Equitable EV Market

In February of this year, it was high time for me to buy a new car. I had driven the same car since 2008, and getting this-or-that replaced was costing more and more every year. As a first-time car buyer, I had two criteria: I wanted to go fast, and I wanted the car to plug in.

Like many prospective purchasers, I started my search online and by speaking with friends and who drove electric vehicles, or EVs for short. I settled on a plug-in hybrid sedan, reasoning that a plug-in hybrid electric vehicle (PHEV) was the best of both worlds: the 20-mile electric range was perfect for my short commute and getting around Houston’s inner loop, and the 10-gallon gas tank offered freedom to roam. In the eight months since I’ve had the car, I’ve bought less than ten tanks of gas. As the price of a gallon in Texas soared to $4.69 in June, the timing of my purchase seemed miraculous.

When it was time to transact, the dealer made vague mention of rebates and tax credits, but didn’t have a comprehensive understanding of the details. Enter Texas’s Light-Duty Motor Vehicle Purchase or Lease Incentive Program (LDPLIP). Administered by the Texas Commission on Environmental Quality (TCEQ), the program grants rebates of up to $5,000 for consumers, businesses, and government entities who buy or lease new vehicles powered by compressed natural gas or liquefied petroleum gas (propane), and up to $2,500 for those who buy or lease new EVs or vehicles powered by hydrogen fuel cells.

Rebates are only available to purchasers who buy or lease from dealerships (so some of the most popular EVs in the U.S. don’t qualify). There is no vehicle price cap, nor is there an income limit for purchasers. In June of 2022, the average price for a new electric vehicle was over $66,000, according to Kelley Blue Book estimates. But the median Texan household income (in 2020 dollars) for 2016-2020 was $63,826.

According to the grant specialist to whom I initially sent my application, the TCEQ has received “a vigorous response” from applicants, however, the TCEQ is limited in the number of rebate grants that it can award: 2,000 grants for EVs or vehicles powered by hydrogen fuel cells, and 1,000 grants for vehicles powered by compressed natural gas or liquefied petroleum gas (propane).

The grant period in Texas ends on January 7, 2023, but on July 5, 2022, the TCEQ suspended acceptance of applications for EVs or vehicles powered by hydrogen fuel cells. As of the writing of this post, the total number of applications received and reservations pending on the program’s website is 2,480.

In comparison with Texas’s rebate program, the EV tax credits in the Inflation Reduction Act of 2022 demonstrate a commitment to building a more equitable EV market. While EVs may be cheaper to own than gas-powered vehicles—especially when gas prices are high—a lot of lower and middle-income families have historically been priced out of the EV market. The IRA takes several meaningful steps towards accessibility and sustainability for a more diverse swath of consumers:

  • Allows point-of-sale incentives starting in 2024. Purchasers will be able to apply the credit (up to $7,500) at the dealership, and because sticker price is such an important factor for so many purchasers, this incentive will make buying an EV more attractive up front.
  • Removes 200,000 vehicle-per-manufacturer cap. Some American manufacturers are already past the maximum. Eliminating the cap means bringing back the tax credit for many popular and affordable EVs, which should attract new buyers.
  • Creates income and purchase price limits. SUVs, vans, and pickup trucks under $80,000, and all other vehicles (e.g. sedans) under $55,000, will qualify for the EV tax credit. For new vehicles, purchaser income will be subject to an AGI cap: $150,000 for individuals and $300,000 for a joint filers.
  • Extends the tax credit to pre-owned EVs. As long as the purchase price does not exceed $25,000, purchasers of pre-owned EVs (EVs whose model year is at least two years earlier than the calendar year in which the purchase occurs) will receive a tax credit for 30% of the sale price up to $4,000. The income cap for pre-owned EVs is $75,000 for individuals and $150,000 for a joint filers.

A purchaser who qualifies under both programs can get both incentives. Comparing Texas’s state government-level incentives and those soon to be offered at the federal level reveals a few telling differences—new vs. used, income caps, purchase price caps, post-purchase rebates vs. up-front point-of-sale incentives—but the differences all fall under the same umbrella: equity. The IRA’s tax credits are designed, among other things, to make purchasing an EV more attractive to a wider audience.

Of course, the EV incentive landscape has greatly changed since the Energy Improvement and Extension Act of 2008 first granted tax credits for new, qualified EVs. The LDPLIP wasn’t approved by the TCEQ until late 2013, so the U.S. government has arguably had more time to get it right. Some might say that the fact that Texas’s program offers the purchaser of the $150,000+ PHEV the same opportunity to access grant funds as the purchaser of the $30,000 EV means that the LDPLIP is even more “equal.”

It is worth noting that the IRA also sets a handful of production and assembly requirements. For instance, to qualify for the credit, a vehicle’s final assembly must occur in North America. Further, at least 40% the value of the critical minerals contained in the vehicle’s battery must be “extracted or processed in any country with which the United States has a free trade agreement in effect” or be “recycled in North America”—and this percentage increases each year, topping out at 80% in 2027. There is also a rising requirement that 50% of the vehicle’s battery components be manufactured or assembled in North America, with the requirement set to hit 100% in 2029. It is unclear whether automotive manufacturers and the U.S. critical mineral supply chains will be able to meet these targets—and that uncertainty may cause a potential limiting effect on the options a purchaser would have for EVs that qualify for the tax credit.

Time will tell whether the intentions behind the EV tax credits in the IRA have the effect that this particular blogger and PHEV owner is hoping for. While we wait to see whether this bid at creating an equitable EV market bears fruit, we can at least admire this attempt at, as the saying goes, “giving everyone a pair of shoes that fits.”

Article By Dania Abbasi of Foley & Lardner LLP

For more energy and environment legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Reinventing the American Road Trip: What the Inflation Reduction Act Means for Electric Vehicle Infrastructure

The Inflation Reduction Act of 2022 (“IRA”) signifies a turning point in domestic efforts to tackle climate change. Within the multibillion-dollar package are robust investments in climate mitigation initiatives, such as production tax credits, investment tax credits for battery and solar cell manufacturers, tax credits for new and used electric vehicles (“EV”)1, automaker facility transition grants, and additional financing for the construction of new electric vehicle manufacturing facilities.2 One thing is abundantly clear, the IRA’s focus on stimulating domestic production of electric vehicles means that the marketplace for electric vehicles will see a dramatic change. The Biden Administration has set an ambitious target of 50% of EV sale shares in the U.S. by 2030. However, if electric vehicles are going to achieve mass market adoption, a central question remains — where is the infrastructure to support them?

Addressing gaps in EV Supply and EV Infrastructure

As it stands, the shortage of charging infrastructure is a substantial barrier in the push for mass consumer adoption of EVs.3 Experts estimate that in order to meet the Biden Administration’s EV sale target by 2030, America would require 1.2 million public EV chargers and 28 million private EV chargers by that year.4 Department of Energy data shows that approximately 50,000 EV public charging sites are currently operational in the United States.5 In comparison, gasoline fueling stations total more than 145,000.6 However, federal legislation such as the Bipartisan Infrastructure Law (“BIL”) passed earlier this year signifies a clear commitment to remedying this disparity. The BIL establishes a National Electric Vehicle Infrastructure Formula Program (“NEVI”) to provide funding to States and private entities to deploy EV-charging infrastructure and to establish an interconnected network to facilitate “data collection, access and reliability.”7 The Federal Highway Administration, the federal agency charged with implementing NEVI, proposed minimum standards and requirements that states must meet to spend NEVI funds:

  • Installation, operation and maintenance by qualified technicians of EV infrastructure

  • Interoperability of EV charging infrastructure

  • Network connectivity of EV charging infrastructure

  • Data collection pertaining to pricing, real-time availability and accessibility8

The goal of the proposed rule is to secure EV charging infrastructure that works seamlessly for industrial, commercial and consumer drivers. Combining the historic investments in clean energy and climate infrastructure in the BIL and IRA, the federal government has jumpstarted what will be a fundamental shift in how consumers use transportation. Earlier this week, the Biden Administration announced more than two-thirds of EV Infrastructure Deployment Plans from States, the District of Columbia and Puerto Rico have been approved ahead of schedule under NEVI.9 With this early approval, these states can now unlock more than $900 million in NEVI funding from FY22 and FY23 to help build EV chargers across highways throughout the country.10

Section 13404’s Alternative Fuel Refueling Property Credit

Building up the U.S. capacity to build EVs, and then ensuring people can use said vehicles more easily by shoring up EV infrastructure is a crucial facet of the Inflation Reduction Act. Section 13404 of the IRA provides an Alternative Fuel Refueling Property Credit that targets the accelerated installation of EV charging infrastructure and assets.11 Section 13404 extends existing alternative fuel vehicle refueling property credit through 2032, and significantly restructures the credit by allowing taxpayers to claim a base credit of 6% for expenses up to $100,000 (for each piece refueling property located at a given facility) so long as the property is placed in service before Jan. 1, 2033.12 However, the alternative fuel property must be manufactured for use on public streets, roads and highways, but only if they are (1) intended for general public use, or (2) intended for exclusive use by government or commercial vehicles and (3) must be located in a qualifying census tract (i.e., low-income communities or non-urban areas).13 From a job creation standpoint, the IRA also provides an alternative bonus credit for taxpayers that meet certain wage requirements during the construction phase.14

The Future of EV Infrastructure

EV stations in city streets, parking garages and gas stations will become a prominent part of the nation’s infrastructure as it moves towards a green future. The effort will require coordination among municipal, state and federal policymakers. Even more, electric utilities must ensure that local infrastructure can support the additional strain on the grid. Utilities also have a direct interest in a cleaner, efficient, and less overburdened grid. Federal tax incentives, like the IRA, and subsides from states and local ordinances are integral to the implementation and construction of these networks. The private sector has already taken steps to do its part. In a recent study conducted by consulting company AlixPartners, as of June 2022, automakers and suppliers expect to invest at least $526 billion to fund the transition from gasoline powered vehicles to EVs through 2026.15 This is double the five-year EV investment forecast of $234 billion from 2020-2024.16 Even more, according to Bloomberg, not including deals that have disclosed financials, more than $4.8 billion has already been invested in the EV charging industry this year in the form of debt financing and acquisitions.17 Driven by fast growth and robust availability of government funds, financiers and large companies seeking to acquire EV charging companies, sense immense opportunity.18

FOOTNOTES

1“Electric Vehicle” is used interchangeably with the acronym “EV” throughout this article.

2 Isaacs-Thomas, I. (2022, August 11). What the Inflation Reduction act does for green energy. PBS. https://www.pbs.org/newshour/science/what-the-inflation-reduction-act-do…

3 Consumer Reports (2022, April). Breakthrough Energy: A Nationally Representative Multi-Mode Survey. https://article.images.consumerreports.org/prod/content/dam/surveys/Cons…

4 Kampshoff, P., Kumar, A., Peloquin, S., & Sahdev, S. (2022, August 31). Building the electric-vehicle charging infrastructure America needs. McKinsey & Company. https://www.mckinsey.com/industries/public-and-social-sector/our-insight…

5 U.S Department of Energy. (2022). Alternative Fueling Station Locator. Alternative Fuels Data Center: Alternative Fueling Station Locator. https://afdc.energy.gov/stations/#/find/nearest?fuel=ELEC&ev_levels=all&…

6 American Petroleum Institute. (n.d.). Service station FAQs. Energy API. https://www.api.org/oil-and-natural-gas/consumer-information/consumer-re…

7 U.S. Department of Transportation/Federal Highway Administration. (n.d.). Bipartisan Infrastructure Law – National Electric Vehicle Infrastructure (NEVI) formula program fact sheet: Federal Highway Administration. U.S. Department of Transportation/Federal Highway Administration. https://www.fhwa.dot.gov/bipartisan-infrastructure-law/nevi_formula_prog…

8 The Office of the Federal Register of the National Archives and Records Administration and the U.S. Government Publishing Office. (2022, June 22). National Electric Vehicle Infrastructure Formula Program. Federal Register. https://www.federalregister.gov/documents/2022/06/22/2022-12704/national…

9 United States Department of Transportation. (2022, September 14). Biden-Harris Administration announces approval of First 35 state plans to build out EV charging infrastructure across 53,000 miles of Highways. United States Department of Transportation. https://highways.dot.gov/newsroom/biden-harris-administration-announces-…

10 See Id.

11 As a note, “refueling property” is property used for the storage or dispensing of clean-burning fuel or electricity into the vehicle fuel tank or battery.  Clean-burning fuels include CNG, LNG, electricity, and hydrogen.

12 Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. § 13404 (2022); See also Wells Hall III, C., Holloway, M. D., Wagner, T., & Baldwin, E. (2022, August 10). Nelson Mullins tax report–Senate passes Inflation Reduction Act. Nelson Mullins Riley & Scarborough LLP. https://www.nelsonmullins.com/idea_exchange/alerts/additional_nelson_mul…

13  Id.

14  Id.

15 AlixPartners, LLP. (2022, June 22). 2022 Alixpartners global automotive outlook. AlixPartners. https://www.alixpartners.com/media-center/press-releases/2022-alixpartne… See also Lienert, P. (2022, June 22). Electric vehicles could take 33% of global sales by 2028. Reuters. https://www.reuters.com/business/autos-transportation/electric-vehicles-…

16 Id.

17 Fisher, R. (2022, August 16). Electric car-charging investment soars driven by EV Growth, government funds. Bloomberg. https://www.bloomberg.com/news/articles/2022-08-16/car-charging-investme…

18 Id.

Article By Lawrence L. Ostema and Jeffrey E. Joseph of Nelson Mullins

For more utilities and transportation legal news, click here to visit the National Law Review.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

The Inflation Reduction Act: How Do Tribal Communities Benefit?

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”), ushering in substantial changes for tax law, climate resilience, healthcare, and more in the United States. According to the Biden administration’s press release, the new $750 billion legislation aims to lower everyday costs for families, insist that corporations pay their fair share, and combat the climate crisis. During the signing ceremony, President Biden stated, “With this law, the American people won and the special interests lost […] For a while people doubted whether any of that was going to happen, but we are in a season of substance.”

Notably, the legislation provides significant provisions for tribal communities and the Bureau of Indian Affairs. Once the funding is appropriated by Congress, it will be directed toward drought mitigation programs, fish hatcheries, modernization of electric systems, and more for Native communities, including ones in Alaska and Hawaii.

How the Inflation Reduction Act of 2022 Supports the Environment and Tribal Communities

The Inflation Reduction Act of 2022 contains an array of provisions, including the reduction of drug prices, the lowering of energy costs, and, notably, federal infrastructure investments that benefit Native communities. Andrew M. VanderJack and Laura Jones, Co-Coordinators of Van Ness Feldman’s Native Affairs Practice, highlight the most significant facets of the bill: “This legislation provides some opportunities specifically for tribes and tribal entities, including programs related to climate resiliency and adaptation, electrification, and drought relief. For example, the Emergency Drought Relief program for Tribes extends direct financial assistance to tribal governments to address drinking water shortages and to mitigate the loss of tribal trust resources.”

Pilar Thomas, Partner in Quarles & Brady’s Energy, Environment & Natural Resources Practice Group, expanded on the most significant inclusions for Tribes: “[…] the creation of a Direct Pay tax credit payment program that allows Tribes to receive a payment equal to the clean energy technology tax credits – especially for solar, wind, storage, geothermal and EV charging stations; […] direct funding for electrification and climate resiliency through DOI and USDA; […] access to the greenhouse gas reduction fund, environmental and climate justice grants; and expanded energy efficiency tax benefits and rebates for tribes and tribal members.”

“Tribal governments are also eligible to apply for other programs such as the Clean Vehicle Credit program, the Energy Efficient Commercial Buildings Deduction, and the State and Private Forestry Conservation Programs,” noted Mr. VanderJack and Ms. Jones.

How the 2022 Inflation Reduction Act Has Been Received by Tribal Communities

The 2022 Inflation Reduction Act has received a warm reception from groups such as the National Indian Health Board and Native Organizers Alliance, who laud the bill’s potential to improve environmental, medical, and economic conditions for tribal communities, some of whom still lack access to electricity or clean water. The increase in funding will allow tribes to use green energy technology to increase climate resilience and decrease individual energy costs, while reducing the effects of environmental racism with risk assessments for drinking water and climate hazards. These infrastructural changes will stimulate economic development by creating new jobs. “With critical investments in the Inflation Reduction Act, we’re making sure the federal government steps up to support Native-driven climate resilience, advance tribal energy development, and fulfill its trust responsibility to Native communities,” said Senator and Senate Committee on Indian Affairs Chairman Brian Schatz.

“This legislation will result in hundreds of millions of funding available for Tribes, and non-profits that work with tribes and tribal communities to support the clean energy transition for tribal communities, reduce energy costs for tribal members, and create jobs,” said Ms. Thomas of Quarles & Brady. “The IRA will provide a substantial down payment for every tribe to take advantage of clean energy technologies, energy efficiency and energy savings, and climate resilient solutions for their communities and tribal members individually.  The new projects, technology implementation and economic development opportunities are substantial and will create long term community and economic development sustainable improvements in tribal communities.”

Some groups feel that the new legislation does not go far enough. In an open letter to President Biden, Senate Majority Leader Chuck Schumer, and House Speaker Nancy Pelosi, Indigenous-led advocacy organization NDN Collective argued that Congress’ hesitance to fully reject fossil fuels undermines the stated goals of addressing climate change, a misstep that could disproportionately affect tribal communities at the frontlines of the environmental crisis. “We believe that moving away from investments in the fossil fuel and other extractive industries and reallocating the funding to further research and development will help us find the solutions we need for true decarbonization and large-scale equitable carbon emissions reductions,” the collective stated. “We are already aware of innovative, Indigenous-led solutions that just need the proper funding and support to be scaled and replicated.”

Challenges in Getting the 2022 Inflation Reduction Act Passed

Up to this point, the Inflation Reduction Act has faced significant challenges in Congress. The legislation is the product of extensive compromise over the Build Back Better Act within the Democratic party. The Build Back Better Bill was initially estimated to cost over $3 trillion, and ultimately, the Inflation Reduction Act was passed with a budget of $750 billion. Senator Joe Manchin of West Virginia held back his support of the bill until late July, and Republicans successfully blocked an aspect of the bill that would have capped the price of insulin for Americans with private health insurance. When presented to Congress, the vote was split by party lines with every Republican voting against the bill. Biden has criticized Republicans for this decision, saying at the signing of the Inflation Reduction Act, “every single Republican in the Congress sided with the special interests in this vote — every single one.”

Challenges for tribal governments remain as well, specifically concerning the IRA’s implementation. “Despite the incredible opportunity for tribes, major barriers remain including tribal internal capacity and capabilities, [and] federal regulatory hurdles (such as BIA leasing and easement approvals),” said Ms. Thomas.

“[…] Navigating the complexities of each program and actually obtaining funding is always the challenge,” said Mr. VanderJack and Ms. Jones of Van Ness Feldman. “Tribes and tribal entities should engage directly, whenever possible, with the grant funding agencies to make sure proposals are tailored to fit both program requirements and community needs.”

Early Assessment of How the IRA will Impact Tribal Communities

The Inflation Reduction Act, ultimately, provides meaningful resources and investments for tribal communities in a variety of ways. While the provisions are not as significant as COVID-19 relief and infrastructure funding that tribal governments have received in previous years, the new legislation is nonetheless beneficial. “While the federal grant funding is relatively small, the potential major impact is the ability to access funding through tax credit payments and rebates,” said Ms. Thomas. “This mechanism is critical as it is simplifies tribes’ access to funding (rather than, for example, seeking to obtain funding through the competitive grant programs).”

Article By Chandler Ford, Casey Karthaus, Crissonna Tennison, and Shelby Garrett of The National Law Review / The National Law Forum LLC.

For more tribal law / indigenous peoples legal news, click here to visit the National Law Review.

Copyright ©2022 National Law Forum, LLC

Relief Arrives for Renewable Energy Industry – Inflation Reduction Act of 2022

On August 12, 2022, Congress passed the Inflation Reduction Act of 2022 (“Act” or “IRA”), a $400 billion legislative package containing significant tax and other governmental incentives for the energy industry, in particular the renewable energy industry. The bill will have an immediate impact on the wind and solar industries, along with other clean energy projects and businesses.

SUMMARY

The IRA is a slimmed down substitute for the Build Back Better bill resulting from a compromise with Senator Joe Manchin (D-WV), whose support was necessary for the bill to pass the Senate.

The IRA comes as welcome news to the renewable energy industry as important tax incentives for wind, solar and other renewable energy resources are set to expire or wind down. Existing law also did not provide any federal tax incentives for the rapidly growing stand-alone energy storage and clean hydrogen industries.

The IRA fixes that, and more. The Act extends the investment tax credit (ITC) for solar, geothermal, biogas, fuel cells, waste energy recovery, combined heat and power, small wind property, and microturbine and microgrid property for projects beginning construction before January 1, 2025. It also extends the production tax credit (PTC) for wind, biomass, geothermal, solar (which previously expired at the end of 2005), landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic resources for projects beginning construction before January 1, 2025. The IRA also allows taxpayers to include their interconnection costs as part of their eligible basis for the ITC.

The Act now allows the ITC to be taken for stand-alone energy storage (previously storage was only allowed an ITC if it was part of another project, e.g., solar). Other technologies are also benefitted from the IRA, including carbon capture and sequestration (CCS) (tax credit extended and modified), clean hydrogen (a new credit of up to $3.00 per kilogram of clean hydrogen produced), nuclear power (a new credit of up to 1.5c/kWh) and biofuel (existing credit extended).

The ITC and PTC now come with strings attached. To qualify for the restored 30% ITC and the 2.6c/kWh PTC (adjusted for inflation), projects must pay prevailing wages during construction and the first five years (in the case of the ITC) and 10 years (in the case of the PTC) of operation, while also meeting registered apprenticeship requirements. Projects that fail to satisfy the prevailing wage and apprenticeship requirements will only receive an ITC of 6% or a PTC of .3c/kWh (adjusted for inflation). The prevailing wage and apprenticeship requirements apply to employees of contractors and subcontractors as well as the company. These requirements are effective for projects that begin construction 60 days after the IRS issues additional guidance on this issue. Certain exceptions apply, including for certain small (less than 1 MW) facilities.

On the flip side, the Act includes enhancements that, in the case of the ITC, can increase the credit percentage if a project satisfies certain additional criteria. Bonuses are available for projects that (1) satisfy certain U.S. domestic content requirements (10%) or (2) are located in an “energy community” (10%) or an “environmental justice” area (10% or 20%). An “energy community” is defined as a brownfield site, an area which has or had significant employment related to oil, gas, or coal activities, or a census tract or any adjoining tract in which a coal mine closed after December 31, 1999, or in which a coal-fired electric power plant was retired after December 31, 2009. An “environmental justice” area is a low-income community or Native American land (defined in the Energy Policy Act of 1992) (10%) or a low-income residential building or qualified low-income economic benefit project (20%).

The Act also creates two new methods for monetizing the ITC, PTC, and certain other credits. Tax-exempt organizations will be permitted to elect a “direct pay” option in lieu of a tax credit. In a dramatic change that may have substantial impacts on renewable project finance, the Act permits most taxpayers to transfer the ITC, PTC, and certain other tax credits for cash.

For the first time, the Act includes a tax credit, known as the Advanced Manufacturing Production Credit, for companies manufacturing clean energy equipment in the U.S. such as PV cells, PV wafers, solar grade polysilicon, solar modules, wind energy components, torque tubes, structural fasteners, electrode active materials, battery cells, battery modules, and critical minerals.

The Act also contains major tax incentives, in the form of credits and enhanced deductions to spur electric and hydrogen-fueled vehicles, alternative fuel refueling stations, nuclear power, energy efficiency, biofuels, carbon sequestration and clean hydrogen. Additional grants are available for interregional and offshore wind and electricity transmission projects, including for interconnecting offshore wind farms to the transmission grid.

Additional detail regarding these provisions follow below.

KEY ENERGY PROVISIONS OF THE INFLATION REDUCTION ACT OF 2022

Investment Tax Credit (ITC)

The ITC is extended for projects beginning construction prior to January 1, 2025. The ITC starts at a base rate of 6%. The ITC increases to 30% if a project (1) pays prevailing wages during the construction phase and for the first five years of operation and (2) meets registered apprenticeship requirements. The ITC applies to solar, fuel cells, waste energy recovery, geothermal, combined heat and power, and small wind property, and is now expanded to include stand-alone energy storage projects (including thermal energy storage), qualified biogas projects such as landfill gas, electrochromic glass, and microgrid controllers. For microturbine property the base rate is 2%, which increases to 10% if the prevailing wage and apprenticeship requirements are met.

Projects under one megawatt (AC) and projects that begin construction prior to 60 days after the Secretary of the Treasury publishes guidance on the wage and registered apprenticeship requirements do not have to meet the prevailing wage and apprenticeship requirements to qualify for the 30% ITC.

PREVAILING WAGE REQUIREMENT

The new prevailing wage requirement is intended to ensure that laborers and mechanics employed by the project company and its contractors and subcontractors for the construction, alteration or repair of qualifying projects are paid no less than prevailing rates for similar work in the locality where the facility is located. The prevailing rate will be determined by the most recent rates published by the U. S. Secretary of Labor. Prevailing wages for the area must be paid during construction and for the first five years of operation for repairs or alterations once the project is placed in service. Failure to satisfy the standard will result in a significant penalty, including an 80% reduction in the ITC (i.e., an ITC of 6%), remittance of the wage shortfall to the underpaid employee(s) and a $5,000 penalty per failure. For intentional disregard of the requirement the penalty increases to three times the wage shortfall and $10,000 penalty per employee.

The prevailing wage requirement takes effect for projects that begin construction after December 31, 2022, but not before 60 days after the Secretary publishes its guidance. Projects under 1 MW (AC) are exempt from the requirement.

APPRENTICESHIP REQUIREMENT

For projects with four or more employees, work on the project by contractors and subcontractors must be performed by qualified apprentices for the “applicable percentage” of the total number of labor hours. A qualified apprentice is an employee who participates in an apprenticeship program under the National Apprenticeship Act. The applicable percentage of labor hours phases in and is equal to 10% of the total labor hours for projects that begin construction in 2022, 12.5% for projects beginning construction in 2023, and 15% thereafter. Similar penalties to the prevailing wage penalties apply for failure to satisfy the apprenticeship requirement. A “good faith” exception applies where an employer attempts but cannot find apprentices in the project’s locality.

The apprenticeship requirement takes effect for projects that begin construction after December 31, 2022, but not before 60 days after the Secretary publishes its relevant guidance. Projects under 1 MW (AC) are exempt from the requirement.

Credit Enhancements

Domestic Content. Assuming a project meets the prevailing wage and apprenticeship requirements, a qualifying project can earn a 10% ITC bonus (i.e., bringing the ITC to 40%), if it satisfies the domestic content requirement. To satisfy the domestic content requirement a project must use 100% U.S. steel and iron, and an “adjusted percentage” of the total costs of its manufactured components with products that are mined, produced or manufactured in the U.S. The applicable percentage for projects other than for offshore wind facilities initially is set at 40%, increasing to 45% in 2025, 50% in 2026, and 55% in 2027. For offshore wind facilities the adjusted percentage initially is 20%, and phases up to 27.5% in 2025, 35% in 2026, 45% in 2027, and 55% in 2028 and after. The initial domestic content bonus for projects failing to meet the prevailing wage and apprenticeship requirement is 2%, which percentage similarly phases up.

Two exceptions exist to the domestic content requirement: (1) if the facility is less than 1 MW (AC) and (2) if satisfying the requirement will increase the overall cost of construction by more than 25 percent, or if the relevant products are not produced in the U.S. in sufficient and reasonably available quantities or quality. Under these circumstances, the unavailability of the product is counted 100% against the adjusted percentage, that is, the adjusted percentage is calculated as if 100% U.S. content was supplied for the unavailable items.

The domestic content bonus is only available for projects placed in service after December 31, 2022.

Energy Community Bonus. A project can earn an additional 10% ITC bonus if it is built in an energy community. An energy community is defined as (a) a brownfield site (as defined under CERCLA), (b) an area that has or had significant employment related to the coal, oil, or gas industry and has an unemployment rate at or above the national average, or (c) a census tract or adjoining tract in which a coal mine closed after December 31, 1999 or a coal-fired electric power plant was retired after December 31, 2009.

The Energy Community Bonus is only available for projects placed in service after January 1, 2023.

Environmental Justice. An additional 10% and, in some cases, 20% ITC bonus, is available for solar and wind projects of 5 MW AC or less where the project is located in, or services, a low-income community. The environmental justice bonus is limited to a maximum of 1.8 gigawatts of solar and wind capacity in each of calendar years 2023 and 2024, for which a project must receive an allocation from the U.S. Treasury Secretary. The 10% bonus is for projects located in a low-income community or on Native American land (defined in the Energy Policy Act of 1992). The 20% bonus is available for projects that are part of a qualified low-income residential building project or a qualified low-income economic benefit project. A qualified low-income residential project is a residential rental building that participates in a housing program such as those covered under the Violence Against Women Act of 1994, a housing assistance program administered by the Department of Agriculture under the Housing Act of 1949, a housing program administered under the Native American Housing Assistance and Self-Determination Act of 1996, or similar affordable housing programs. A qualified low-income economic benefit project is one where at least 50% of the households have income at less than 200% of the poverty line or at less than 80% of the area’s median gross income.

Storage projects installed in connection with a solar project also qualify for the environmental justice bonus, but not stand-alone storage projects. A project receiving an allocation for the environmental justice credit must be placed in service within four years of the date it receives the allocation.

Stand-Alone Storage. The Act now provides a tax credit for stand-alone energy storage projects. To qualify, the storage project must be capable of receiving, storing and delivering electrical energy and have a nameplate capacity of at least 5 kWh. Thermal storage projects and hydrogen storage projects qualify under the new provision. Like the ITC for other technologies, the base ITC for stand-alone storage is 6%, and increases to 30% for projects that satisfy the prevailing wage and apprenticeship requirements or if they are placed into service prior to 60 days after the Treasury Secretary issues guidance on prevailing wage and apprenticeship standards.

Interconnection Equipment. Qualifying projects under 5 MW (AC) now may claim an ITC on their interconnection costs. The credit applies even if the interconnection facilities are owned by the interconnecting utility, so long as they were paid for by the taxpayer. This is not a stand-alone tax credit, but rather an additional cost added to a project’s basis eligible for the ITC.

Production Tax Credit (PTC)

The Act extends the production tax credit (PTC) for projects beginning construction before January 1, 2025. The PTC is set at an initial Base Rate of .3c/kwh. Like the ITC, the credit increases to 1.5c/kwh for projects satisfying the prevailing wage and apprenticeship requirements. The 1.5 c/kWh, with the inflationary adjustment provided for the PTC, brings the PTC up to 2.6c/kWh in 2022. In addition to wind projects, the PTC is available to solar, closed-loop and open-loop biomass, geothermal, landfill gas, municipal solid waste, qualifying hydropower, and marine and hydrokinetic facilities. Thus, solar projects may now choose either the PTC or the ITC. They cannot receive both.

CREDIT ENHANCEMENTS

Like the ITC, a project can receive an enhanced PTC similar in degree to those under the ITC for satisfying the domestic content, energy community and/or environmental justice requirements. For projects meeting the prevailing wage and apprenticeship requirements the increase for each applicable bonus is generally 10% of the underlying credit and, for projects failing to satisfy those requirements, 2%.

Clean Electricity Investment Tax Credit

The Act creates a new clean electricity tax credit (ITC and PTC) that replaces the existing ITC and PTC once they phase out at the end of 2024. The successor ITC/PTC is technology neutral. Any project producing electricity can qualify for the tax credit if its greenhouse gas emissions rate is not greater than zero. The successor ITC is 30% and the PTC is 1.5c/kWh, escalated annually with inflation. The Clean Energy ITC/PTC will phase out the later of 2032 or when emission targets are achieved (i.e., the electric power sector emits 75% less carbon than 2022 levels). Once the target is reached, facilities will be able to claim a credit at 100% value in the first year, then 75%, then 50%, and then 0%.

Clean Hydrogen Production Credit

This Act for the first time provides a tax credit for qualifying clean hydrogen projects. The credit is available for clean hydrogen produced at a qualifying facility during the facility’s first 10 years of operation. The base credit amount is $0.60 per kilogram (kg) times the “applicable percentage,” adjusted annually for inflation. For projects meeting the prevailing wage and apprenticeship requirements the credit amount is five times that base amount, or $3.00/kg times the applicable percentage, adjusted annually for inflation.

The applicable percentage for hydrogen projects achieving a lifecycle greenhouse gas emissions rate of less than 0.45 kilograms of carbon dioxide equivalent (CO2e) per kg is 100%. The applicable percentage falls to 33.4% for hydrogen projects with an emissions rate between .45kg and 1.5kg, and to 25% for hydrogen projects with an emissions rate between 1.5 kg and 2.5 kg. For hydrogen projects with a lifecycle greenhouse gas emissions rate between 4 kg and 2.5 kg of CO2e per kg, the applicable percentage is 20%.

To qualify for the credit, the facility must begin construction before January 1, 2033. Facilities existing before January 1, 2023 can qualify for a credit based on the date that modifications to their facility required to produce clean hydrogen are placed into service. Taxpayers may also claim the PTC for electricity produced from renewable resources by the taxpayer if the electricity is used at a clean hydrogen facility to produce qualified clean hydrogen. The Direct Pay option, discussed below, is available for clean hydrogen projects.

Taxpayers can elect to claim the ITC in lieu of the clean hydrogen production credit. However, taxpayers claiming the clean hydrogen credit cannot also claim a tax credit for carbon capture under Section 45Q, and vice versa.

Carbon Capture and Sequestration (CCS) Credit

Under prior law, industrial carbon capture or direct air capture (DAC) facilities that began construction by December 31, 2025, could qualify for the Section 45Q tax credit for carbon oxide sequestration. This credit could be claimed for carbon oxide captured during the 12-year period following the facility being placed in service. The per metric ton tax credit for geologically sequestered carbon oxide was set to increase to $50 per ton by 2026 ($35 per ton for carbon oxide that is reused, such as for enhanced oil recovery) and adjusted for inflation thereafter.

The Act extends the deadline for construction to January 1, 2033 and increases the credit amount. The base credit amount for CCS is $17 per metric ton for carbon oxide that is captured and geologically sequestered, and $12 per metric ton for carbon oxide that is reused. For facilities that meet the prevailing wage and apprenticeship requirements during construction and for the first 12 years of operation, the credit amounts are $85 per ton and $60 per ton, respectively.

The credit amount for carbon oxide captured using DAC and geologically sequestered is also increased under the Act to a base rate of $36 per metric ton, and to $180 per metric ton for projects that meet prevailing wage and apprenticeship requirements. The rates are indexed for inflation beginning in 2026.

The Act reduces the minimum plant size required to qualify for the credit:  from 100,000 to 1,000 tons per year for DAC; from 500,000 to 18,750 metric tons per year for electric generating facilities paired with qualifying CCS equipment, and from 25,000 to 12,500 metric tons per year for any other facility. A CCS project paired with an electric generating unit will be required to capture at least 75% of unit (not facility) CO2 production.

Advanced Energy Project Credit

The Act provides a 30% credit for investments in projects that re-equip, expend, or establish certain domestic manufacturing or industrial facilities to support the production or recycling of renewable energy property. Examples of such facilities include those producing or recycling components for:

  • Energy storage systems and components;
  • Grid modernization equipment or components;
  • Equipment designed to remove, use, or sequester carbon oxide emissions;
  • Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low-emission;
  • Property designed to produce energy conservation technologies (residential, commercial and industrial);
  • Electric or fuel-cell vehicles, including for charging and refueling infrastructure;
  • Hybrid vehicles weighing less than 14,000 pounds and associated technologies, components, or materials;
  • Re-equipping industrial and manufacturing facilities to reduce their greenhouse gas emissions by at least 20%;
  • Re-equipping, expanding, or establishing an industrial facility for the processing, refining or recycling of critical materials.

Projects not satisfying the prevailing wage and apprenticeship requirements will only receive the base ITC credit of 6%.

The Act makes $10 billion available for qualifying advanced energy projects. Of that amount, at least $4 billion must be allocated to projects located in energy communities. The Treasury Secretary will establish a program to award credits to qualifying advanced energy projects. Applicants awarded credits will have two years to place the property in service. The provision goes into effect on January 1, 2023.

Advanced Manufacturing Production

The Act creates a new production tax credit that can be claimed for the domestic production and sale of qualifying solar and wind components, such as inverters, battery components and critical minerals needed to produce these components.

Credits for solar components include:

  • for thin film photovoltaic cell or crystalline photovoltaic cell, 4 cents per DC watt of capacity;
  • for photovoltaic wafers, $12 per square meter;
  • for solar grade polysilicon, $3 per kilogram;
  • for polymeric backsheet, 40 cents per square meter; and
  • for solar modules, 7 cents per DC watt of capacity.

For wind energy components, if the component is an offshore wind vessel, the credit is equal to 10% of the sales price of the vessel. Otherwise, the credits for various wind components vary as set forth below, which amount is multiplied by the total rated capacity of the completed wind turbine on a per watt basis for which the component is designed.

The applicable amounts for wind energy components are:

  • 2 cents for blades
  • 5 cents for nacelles
  • 3 cents for towers
  • 2 cents for fixed platform offshore wind foundations
  • 4 cents for floating platform offshore wind foundations
  • for torque tubes and longitudinal purlin, $0.87 per kg
  • for structural fasteners, $2.28 per kg
  • for inverters, the credit is an amount multiplied by the inverter’s AC capacity, with different types of inverters eligible for specified credit amounts ranging from 1.5 cents to 11 cents per watt
  • for electrode active materials, the credit is 10% of the production cost
  • for battery cells the credit is $35 per kilowatt hour of battery cell capacity. Battery modules qualify for a credit of $10 per kilowatt hour of capacity (or $45 in the case of a battery module which does not use battery cells).

A 10% credit is also available for the production of critical minerals. Critical minerals include aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium and yttrium.

For purposes of the credits for battery cells and modules, to qualify the capacity-to-power ratio cannot exceed 100:1. The term ‘capacity-to-power ratio’ means the ratio of the capacity of the cell or module to the maximum discharge amount of the cell or module.

The advanced manufacturing credit phases out for components sold after December 31, 2029. Components sold in 2030 are eligible for 75% of the full credit amount. Components sold in 2031 and 2032 are eligible for 50% and 25% of the full credit amount, respectively. No credit is available for components sold after December 31, 2032. The phase-out does not apply to the production of critical minerals.

DIRECT PAY

The Act contains a valuable cash payment option that allows certain organizations to treat certain tax credit amounts including, among others, the ITC, PTC, clean hydrogen, and carbon capture credits, as payments of tax and then receive a refund for that tax that is deemed paid. Under the so-called “direct pay” option, in lieu of receiving a tax credit, an eligible entity will be treated as if it had paid taxes in the amount of the credit, for which it can then receive a cash refund. Entities eligible for the direct pay option include tax-exempt organizations, state and local governments, Indian tribes (as defined in the Act), the Tennessee Valley Authority, and any Alaska Native Corporation. The direct pay option is subject to an annual election and must be claimed by a partnership or S corporation rather than its partners or S corporation shareholders. Refunds under the direct pay provisions are treated the same as tax credits for purposes of basis reduction, depreciation rules, and recapture.

For qualifying facilities electing direct pay that do not meet the domestic content requirements, a reduction applies for projects beginning construction in 2024 (90%) and 2025 (85%). Thereafter, the direct pay option will not be available for projects that do not satisfy the domestic content requirement.

TRANSFERRABLE CREDITS

The IRA allows eligible taxpayers that do not elect the direct pay option to transfer certain credits to unrelated taxpayers including, among others, the ITC, PTC, clean hydrogen, and carbon capture credits. The transferred credit must be exchanged for cash. Credits may only be transferred once. Carryforwards or carrybacks are not transferable. Payments made to the transferor of the credit are not taxable to the transferor, nor is the payment by the transferee to the transferor deductible to the transferee.

The credit period for transferred credits is 23 years (including three years for carrybacks). The credit must be used in earliest possible year of transferee. A 20% penalty may apply for both direct payments and transfers where excessive payments have occurred.

Zero Emission Nuclear Power Production Credit

The Act includes a new PTC for the production of electricity from an existing nuclear facility that was placed in service before the date of enactment of the Act. To qualify, the electricity from the facility must be produced and sold to an unrelated person after December 31, 2023. The credit terminates on December 31, 2032. The base PTC amount is 3 cents per kWh, but is increased five times if wage and apprenticeship requirements are met (to 1.5 cents per kWh), in each case adjusted annually for inflation and reduced by a reduction amount to the extent electricity from the plant is sold at a price over $0.025/kWh.

Electric Vehicles and Hydrogen-Fueled Cars

The Act includes a $7,500 credit for taxpayers purchasing new electric vehicles and a $4,500 tax credit for used ones. The Act eliminates the previous “per-manufacturer” limits that applied to the new vehicle credit, but imposes new domestic content and assembly requirements, as well as caps on the retail price of new vehicles, and the income of the taxpayers purchasing the vehicle.

The Act also sets aside financing and credits to promote electric vehicle manufacturing. It calls for $2 billion in grants to help convert existing auto manufacturing factories into ones that make electric vehicles and $20 billion of loans for new clean vehicle manufacturing facilities. The Act extends the credits to hydrogen-fueled cars in addition to EVs.

Alternative Fuel Refueling Property Credit

The Act revives the expired credit for alternative fuel refueling property (i.e., electric vehicle chargers), allowing it for property placed in service before December 31, 2032. The base credit is 6% of the cost of property, and is increased to 30% if wage and apprenticeship requirements are met. The previous $30,000 cap is also increased to $100,000.

OFFSHORE WIND

The IRA puts in place a 10-year window in which a lease for offshore wind development cannot be issued unless an oil and gas lease sale has also been held in the year prior and is not less than 60 million acres. The Act also withdraws the Trump administration’s moratorium on offshore wind leasing in the southeastern U.S. and eastern Gulf of Mexico.

GREEN BANK

The Act includes $27 billion toward a clean energy technology accelerator to support deployment of emission-reduction technologies, especially in disadvantaged communities. The EPA Administrator would be permitted to disburse $20 billion to “eligible recipients,” which are defined as non-profit green banks that “provide capital, including by leveraging private capital, and other forms of financial assistance for the rapid deployment of low- and zero-emission products, technologies, and services.

Clean Fuel Production Credit

The Act creates a new tax credit for domestic clean fuel production starting in 2025 and expires for transportation fuels sold after December 31, 2027. The tax credit is calculated as the applicable amount multiplied by the emissions factor of the fuel. The base credit is $0.20 per gallon of transportation fuel produced at a qualified facility and sold, which increases to $1.00 if prevailing wage requirements are met. The base credit is $0.35/gallon for sustainable aviation fuel, $1.75 if labor and wage requirements are satisfied. The emissions factor of the fuel may reduce the credit amount. The credits are adjusted for inflation. The credit cannot be claimed if other clean fuel credits are claimed, including clean hydrogen production.

Article By Kris J. Eimicke and Merrill Kramer of Pierce Atwood LLP

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