Tag: IRA

What Happened: Policy and Politics

Baseline: The future of the Inflation Reduction Act (IRA), signed in 2022 to boost US clean energy with new tax incentives, hangs in the balance. President-elect Trump and some Republicans in Congress have threatened to repeal all or part of it because they don’t agree with the policy, and they need the revenue savings to offset their 2017 Tax Cuts and Jobs Act (TCJA) extensions. The processing of a tax bill next year provides a rare opening for taxpayers who are dissatisfied with the IRA or with the Biden administration tax regulations which implement the IRA.

Pulse Check: Much depends on whether Republicans gain control of both chambers of Congress, enabling them to tap into the vaunted congressional budget reconciliation process and easing their path to legislative change.

What to Monitor: Expect IRA supporters to spend time educating administration officials and congressional offices about the valuable economic and other benefits provided by these tax provisions, particularly in GOP-represented congressional districts and states. Meanwhile, industries from biofuels to hydropower are lobbying for new tax credits in the 2025 tax bill, aiming to secure a place in the complex tax landscape that lies ahead.

Voters delivered a sweeping victory to Donald Trump on Tuesday, setting him up to be the 47th President, and the first since Grover Cleveland in 1892 to be elected to a second non-consecutive term. After a surprise electoral college victory in 2016 and a narrow defeat in 2020, Trump won an outright majority of the national popular vote, the first Republican to do so since George W. Bush in 2004. While his victory helped propel a pickup of at least four Senate seats, wresting back control of the chamber from Democrats, the fate of the House remains uncertain pending the counting of outstanding California mail ballots that could drag out for a week or more.

The victory was driven by disproportionate gains among key demographics and subgroups that will become clear as the dust settles, but the overall pattern was unmistakable: Trump made significant gains coast-to-coast, in urban, suburban, and rural areas, and among virtually every cohort of the electorate. His improvement in the key battlegrounds was actually dwarfed by his gains in the nation’s bluest states, with double-digit swings in places like New York, Maryland and California. In addition to avenging his 2020 loss, the President-elect can now credibly claim a popular mandate for his policies, and quite possibly the congressional majorities to pursue them legislatively.

The restoration of President-elect Trump represents a return to 2016-17, with many of the same conditions seen seven years ago: the potential for a unified Republican government, and a clear commitment from the new administration to roll back the regulatory agenda of the previous administration and institute “America-first” policies when it comes to energy, immigration and trade. The key difference is that while the outcome of the 2016 election caught even the Trump apparatus flat-footed, preparations for President-elect Trump’s second term have been underway for the past three years. Expect a second Trump administration to be savvier and more focused in carrying out its goals, installing key personnel, and implementing policy.

The expectation is that strong policy decisions are ready for implementation on Inauguration Day through Executive Orders that will clearly lay out the regulatory and policy framework for rescinding and replacing the Biden administration agenda. Examination of the Inflation Reduction Act and Infrastructure Investment and Jobs Act mechanisms will certainly occur. President-elect Trump has made clear his intentions to leverage American foreign policy through trade and tariffs rather than military means. Particularly in the energy space, President-elect Trump has pledged a return to American energy dominance backed by a foundation and focus on leveraging domestic traditional energy resources. As observed in his first term, separating campaign rhetoric from implanted policy will continue to be a critical exercise. It is a guarantee that President-elect Trump intends to staff up quickly with political loyalists who have experience in navigating the proclivities of both a Trump administration and Washington bureaucracy, one that he has yet again pledged to dismantle.

President-elect Trump re-assumes the White House with a certain Republican majority in the US Senate and a likely slim majority in the US House of Representatives, providing the ability to implement legislative initiatives while ensuring a full swath of Cabinet-level and senior-level appointees. Legislative action will be necessary for targeting provisions of the Inflation Reduction Act, and while the notion of full repeal exists in rhetoric, it is more likely that Republicans use a more precise approach, preserving legacy provisions that tend to benefit traditional energy sources and targeting those that are more renewable energy focused. However, the slim majorities in each chamber complicate the full breadth of legislation that Republicans can expect to implement. The focus in the early days of Congress will be on the aforementioned Senate confirmation process and resolutions of disapproval under the Congressional Review Act to repeal Biden administration regulations finalized in the last 60 days of the previous Congress, which are both likely to be comfortable party-aligned exercises. The tools of congressional oversight will be trained on assisting the Trump administration in implementing regulatory changes and building a record toward federal agency reforms – such as permitting, federal workforce, and agency re-organization.

© 2024 Bracewell LLP
For more on the 2024 General Election, visit the NLR Election Law Legislative News section

Major Changes Coming for Medicare Drug Program: Negotiated Prices, Cap on Out of Pocket and Creditable Coverage

Some major changes are on the way for Medicare beneficiaries regarding drug costs. Due to the Inflation Reduction Act, the federal government now will have the ability to negotiate the prices of drugs for Medicare beneficiaries. After an initial set of negotiations, new lower prices have been announced for 10 expensive drugs. The discounts for some blood thinners and drugs for arthritis, cancer, diabetes, and heart failure result in costs as much as 79% lower. The new drug prices will go into effect starting in 2026. Just these 10 drugs make up about 20% of the program’s drug spending, so the impact is huge for the medicinal market. The federal government will turn to negotiating another batch of drugs in 2025, with 15-20 drugs targeted annually.

Another major change under the Inflation Reduction Act will be the out-of-pocket maximum under all Medicare Part D plans of $2,000 per year beginning January 2025. Beneficiaries will be able to prorate the cost monthly or pay it as the costs are incurred. This will be a game changer for many Medicare beneficiaries with high drug costs. In addition, certain drugs covered by Part B (typically those administered in a doctor’s office or hospital) might incur a co-pay of less than the standard 20% if the prices have increased faster than inflation. The drugs subject to reduced copays will be published quarterly.

These changes may have an unintended consequence for Medicare-eligible individuals who are still working and therefore enrolled in employer plans, or other individuals enrolled in retiree or other private plans. Those who are Medicare eligible but are enrolled in non-Medicare plans must show that they have “creditable” coverage under Medicare standards. A plan is “creditable” if coverage is at least as good as or better than the Medicare drug benefit. Creditable coverage is based on a test that measures whether the expected amount of paid claims is at least as much as the standard Part D benefit. Non-Medicare plans must advise enrollees if their coverage is considered “creditable.” It is crucial for coverage to be considered “creditable;” otherwise, the Medicare beneficiary can be subject to a Late Enrollment Penalty (LEP) for each month they are not enrolled in a plan providing creditable coverage.

It is unclear whether the $2,000 cap coming to Part D plans or other changes in drug coverage will mean that non-Medicare plans that do not match the changes will continue to be considered creditable in the future. Beneficiaries need to be aware of this important issue when considering their coverage options.

©2024 Norris McLaughlin P.A., All Rights Reserved
For more on the Medicare Drug Program, visit the NLR Health Law Managed Care section

Energy Tax Credits for a New World Part I: Overview of Energy Tax Credits under the IRA

Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) is the most significant long-term commitment made by the U.S. government to encourage and support a clean energy future. The IRA works through the Internal Revenue Code (Code) in ways that fundamentally change the landscape on how clean energy tax credits and incentives are designed, awarded, and monetized.

The regulation, taxation, and financing of energy projects has been an integral aspect of my law practice for decades. These are exciting times now, as the structuring of energy tax credits under the IRA expands on a number of themes that I first covered in an energy and environmental project finance book I coauthored for Oxford University Press back in 2010. Then, as now, my perspective is shaped by my work for clients in the traditional and emerging clean energy sectors.

Why launch a series now about the energy tax credits that were extended, modified, or introduced by the IRA?

  • Many of the IRA energy credits run until 2032, so project developers still have ample opportunity to get their projects underway while credits remain available.
  • The Treasury and the IRS have yet to provide us with many important details on IRA implementation, with much of the guidance having been provided in Notices and proposed Treasury Regulations. But while the details are being ironed out, taxpayers still need to move forward with their projects, and tax returns need preparation. As project owners and funders continue to seek assistance, it remains critical to remain vigilant and stay on top of the large number of new developments.
  • Two important technology-specific credits expire at the end of 2024. They will be replaced in 2025 by two technology-neutral credits. The technology-neutral credits do not expire until 2032, or until certain greenhouse gas emissions (GHG) are reduced to specific levels set out in the Code (most likely, later).
  • Projects that seek to qualify for IRA energy tax credits and which begin construction in and after 2025 will need to meet statutory requirements not required for earlier projects.

Developers and investors would be well advised to consider the tax consequences to their energy projects during the second half of 2024, which I look at as a transition period.

In this Q&A with Andie, Energy Tax Credits For A New World, I aim to provide an overview of the IRA as it relates to many important energy credits. I will take deep dives into some of the requirements and mechanics of some of these credits, and I will look at the ways in which these credits can be monetized.

Through Summer and Fall 2024, Readers can look forward to reading this extended occasional series presented in the following parts:

Part I: Overview of Energy Tax Credits under the IRA

Part II: Production Tax Credits and Investment Tax Credits: The Old and The New

Part III: Overview of Bonus Credits

Part IV: Prevailing Wage and Apprenticeship Bonus Credits

Part V: Domestic Content Bonus Credits

Part VI: Energy Community Bonus Credits

Part VII: Low-Income Communities Bonus Credits

Part VIII: Monetizing Energy Tax Credits

Part XI: Changes to Traditional Tax Equity Financing

The IRA’s tax benefits are enormous. As a result, when a “qualifying energy project” is properly structured and timed, it can receive tax credits that reduce certain related costs by more than 50 percent.

As I launch this series, I would like to extend my gratitude to Nicholas C. Mowbray for his comments and exceptional assistance.

Part I: Overview of Energy Tax Credits under the IRA

“Dozens of countries are widening the gap between their economic growth and their greenhouse gas emissions. . . . If these trends continue, global emissions may actually start to decline,” observed Umair Irfan writing for Vox.[1]

What is the importance of the Inflation Reduction Act (IRA) to energy tax credits?

The IRA has strengthened the United States’ long-term commitment toward a clean energy economy. It is the most ambitious U.S. effort to date to incentivize the development of renewable energy technologies[2] that can help to reduce greenhouse gas (GHG) emissions. The IRA targets the enormous capital expenditures needed to create, commercialize, and broadly make available renewable energy technologies. The IRA’s goal is to lay out a path toward a net-zero GHG economy by 2050.[3]

How does the IRA affect energy project funding?

The IRA has brought about major changes in the ways in which energy projects are structured and funded. It provides for loans, grants, financial and technical assistance, rebates, and energy tax credits. About $400 billion has been allocated for clean energy innovation, technology, and manufacturing. Of this funding, about $260 billion applies to the extension and modification of existing tax credits and the introduction of new ones. In fact, more than 70 percent of the IRA’s benefits are delivered through tax incentives. Now, more than 20 tax credits allow for monetization that supports clean energy generation, develops related manufacturing capacity, incentivizes the increased use of clean vehicles and energy sources, and increases carbon capture programs.[4]

How does the IRA target GHG emission?

The IRA uses funding and financial incentives to support research, development, and commercialization of low- and zero-GHG emission technologies. It also seeks to steer project developers to locate their projects in “energy communities” or “low-income communities”; to pay prevailing wages and encourage the training of registered apprentices; and to increase the use of domestic content components in project-related manufacturing and construction processes.

Have the IRA initiatives been effective?

Initial IRA success stories are very positive, but we have a long way to go. In 2023, “more solar panels were installed in China […] than the US has installed in its entire history. More electric vehicles were sold worldwide than ever.”[5] As the United States seeks to become a global leader in decarbonization and to compete with other major economies like China, the IRA is creating “new opportunities for workers […] and lower costs for America’s families.”[6]

Congress also seeks to ensure that monies provided by the IRA strengthen domestic supply chains and ensure the nation’s energy security in its transportation modes. The IRA is boosting domestic manufacturing for critical renewable energy components, while partially funding the construction of renewable energy projects through its rigorous domestic sourcing requirements.

In 2023 the American Council on Renewable Energy found that, “One of the most notable impacts of the IRA is how quickly it helped to onshore new advanced green manufacturing. More than 83 new or expanded wind, solar, and battery manufacturing facilities have been announced since August 2022, including 52 plants for solar production, 17 for utility-scale wind production, and 14 for production of utility-scale battery storage.”[7]

Notwithstanding some initial successes, two years after passage of the IRA, there are some serious concerns that some of the credits are unworkable, and that the IRA’s domestic sourcing requirements have fallen short of expectations.[8]

Is it possible that the IRA could be dismantled by future Administrations?

Yes. It is possible. Perhaps, a better question might be should the IRA be dismantled? Is it in our best interests to shut down the onward innovation of a thriving high-growth, high-benefit fledgling U.S. industry segment, substantially underwritten by the government, and made available to the residents of a leading market economy?

What makes the IRA different from prior environmental and climate efforts?

The IRA is fundamentally different from the carrot-and-stick approaches of many prior U.S. environmental and climate laws. It has an incentives-based focus: it does not rely on traditional regulation and enforcement to achieve its desired outcomes. It proactively seeks to encourage long-term commercial investments to decarbonize transportation, manufacturing, and construction. The IRA is popular among early adopters. Kimberly Clausing, the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law, noted in a 2023 interview, “There’s a lot of things to like about these tax credits […] they’re broad, they’re longer lived than prior tax credits, and they don’t phase out as quickly. They’re more flexible than prior tax credits. They’re more transferable and refundable, and that enables them to be ultimately more effective.”[9]

The IRA’s long-term focus on tax credits, financial incentives, and monetization may offer prospective project developers a degree of certainty in their planning; persuade investors to commit to clean energy undertakings; and broaden the pool of capital available to do so. So far, the facts speak for themselves: in the first year after the IRA’s enactment, 280 clean energy projects were announced across 44 states, representing $282 billion of investment.[10]

What deference will be given to Treasury Regulations addressing the IRA provisions?

Since passage of the IRA, the Treasury and the IRS have been carefully moving through the details of its rollout.[11] At the date of this writing, many critical questions remain unanswered. In addition, for many decades, the Treasury and the IRS have enjoyed broad latitude on the administration of the laws. But the legal landscape might be changing. On June 28, 2024, in Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court effectively overturned the so-called Chevron doctrine. Chevron is a 40-year-old Supreme Court case that afforded federal agencies a degree of deference in the reasonable interpretation of a statute that fell within their areas of expertise.[12] As a result, many questions will be raised about many laws, along with the frameworks for their roll out and enforcement. Although the Treasury and the IRS will be able to claim broad expertise in some areas of the tax law, it is likely that there will be disputes and litigation over the deference to be given to climate-related tax regulations.[13]

What is the starting point for the IRA’s focus on tax credits?

Let’s take a walk down memory lane. Federal income tax credits for wind and solar energy were first enacted in The Energy Tax Act of 1978.[14] They were structured as refundable 10 percent tax credits for energy property and equipment that produced electricity using wind and solar sources. Later, The Windfall Profit Tax Act of 1980 extended the expiration through 1985, increased the credit to 15 percent, and removed a taxpayer’s ability to get a tax refund based on the value of the credit.[15] The Tax Reform Act of 1986 reduced solar energy credits from 15 percent to 10 percent and extended them through December 31, 1988. Further energy credit extensions for solar property were enacted between 1988 and 1991.

With The Energy Policy Act of 1992,[16] Congress made solar energy credits “permanent” and named them “investment tax credits” (ITCs). The same legislation also enacted the “renewable electricity production tax credit,” or the PTC. When the PTC expired in 1999, it was subsequently extended and expanded to include additional energy technologies.

The Energy Policy Act of 2005 increased the ITC for solar energy from 10 percent to 30 percent, and it extended the credit to additional types of energy property.[17] It did not, however, extend the PTC for solar and refined coal facilities. This meant that from 2005 until enactment of the IRA, the PTC was not available for electricity that was produced from solar energy.

Does the IRA move away from technology-specific tax credits?

Yes. Before the IRA, the PTC at Section 45 and the ITC at Section 48 were the two principal energy tax credits. They were enacted to encourage the development of U.S. wind farms and solar arrays. Both the PTC and the ITC included technology-specific statutory provisions that had been amended over the years to include additional technologies identified by Congress.

The IRA modified and extended both the Section 45 PTC and the Section 48 ITC through the end of 2024 at which point they will be replaced by the next generation of technology-neutral credits: the Section 45Y Clean Electricity Production Tax Credits (CEPTC) and the Section 48E Clean Electricity ITC (CEITC).[18] The rest of the energy tax credits that the IRA modified or introduced took effect for projects beginning on or after January 1, 2023, with most of those credits expiring on December 31, 2032.

In the next part of this series, we will take a look at the production tax credit (PTC), the investment tax credit (ITC), and their progeny. Many of the IRA tax credits are modifications or expansions of the PTC and the ITC. It is an important next step to consider the underlying framework of the old credits and the new.

The firm extends gratitude to Nicholas C. Mowbray for his comments and exceptional assistance in the preparation of this article.

[1] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[2] Ibid.

[3] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[4] Treasury, Inflation Reduction Act, https://home.treasury.gov/policy-issues/inflation-reduction-act#:~:text=The Inflation Reduction Act, enhanced, for clean energy and manufacturing. See also, “Elective Pay Overview,”
IRS Pub. 5817 (Rev. 4-2024) Number 941211. https://www.irs.gov/pub/irs-pdf/p5817.pdf

[5] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[6] “Inflation Reduction Act Tax Credit,” U.S. Department of Labor, Inflation Reduction Act Tax Credit | U.S. Department of Labor (dol.gov), accessed August 15, 2024.

[7] “Celebrating One Year of Progress: The Inflation Reduction Act’s Impact on Renewable Energy and the American Economy,” Greg Wetstone, American Council on Renewable Energy, August 14, 2023.

[8] Press release, www.manchin.senate.gov, June 4, 2024.

[9]  “Why the Inflation Reduction Act Can’t Be Repealed,” Evan George, Legal Planet, April 17, 2023.

[10] “The US Inflation Reduction Act is Driving Clean-Energy Investment One Year In,” Marco Willner,

Sebastiaan Reinders and Aviral Utkarsh, Goldman Sachs, October 31, 2023.

[11] “Here’s What the Court’s Chevron Ruling Could Mean in Everyday Terms,” By Coral Davenport et al., The New York Times, June 28, 2024.

[12] “The Supreme Court’s Elimination Of The Chevron Doctrine Will Undermine Corporate Accountability,” Michael Posner, Forbes, July 8, 2024.

[13] “Tax Pros Discuss Impact of Loper Bright on IRS Regs,” Tim Shaw, Thomas Reuters, July 29, 2024,
“The Supreme Court’s decision […] may have ripple effects on Treasury and IRS rulemaking, though to what extent remains unclear, tax professionals say.”

[14] Pub. L. No. 95-618, 92 Stat. 3174 (1978).

[15] Pub. L. No. 96-223, 94 Stat. 229 (1980).

[16] Pub. L. No. 102-486, 106 Stat. 2776 (1992); H.R. 776, 102nd Congress (1991̵–1992).

[17] Pub. L. No. 109-58, 119 Stat. 594 (2005). I will discuss the term “energy property” in a future article.

[18] The PTC, ITC, CEPTC, and CEITC are discussed in Part V: Domestic Content Bonus Credits of this series.

by: Andie Kramer of ASKramer Law

For more news on Energy Tax Credits under the IRA, visit the NLR Tax section.

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

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© 2022 Bracewell 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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©2022 Pierce Atwood LLP. All rights reserved.

SECURE Act Brings About Significant Changes to IRAs

As we reach the end of 2019 and prepare to flip the calendar to 2020, Congress and the president have finally passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The act brings about significant changes to federal tax law impacting individuals and business owners alike. Here are some of the law’s most significant provisions:

Removes Some Stretch Distributions for Inherited IRAs

This is a long-expected change that significantly impacts what an IRA beneficiary receives upon the death of the account owner. Under current law, any traditional IRA account owner must begin taking required minimum distributions (RMDs) from the IRA upon reaching age 70½. If the account owner dies after that age, any funds remaining in the IRA at the owner’s death may be inherited, with the RMDs being paid out to the heir over his or her life expectancy in most cases. This stretch enabled a younger beneficiary to grow the inherited IRA substantially (and tax-free), sometimes over many decades.

As a result of the SECURE Act, most beneficiaries will be required to distribute the entirety of an inherited IRA over a 10-year period. The writing has been on the wall since 2014 when the Supreme Court declared that an inherited IRA in the hands a non-spouse beneficiary was not a retirement account in the bankruptcy context (Clark v. Rameker). However, RMDs payable to the following persons still qualify for the stretch:

  • Surviving spouse of an account owner
  • Person who is not more than 10 years younger than the account owner
  • Minor child of the account owner
  • Disabled person
  • Chronically ill person

These new RMD rules apply to retirement accounts whose owners die after December 31, 2019.

Increases RMD Ages

As noted above, under current law, any traditional IRA owner must begin taking RMDs upon reaching age 70½. Under the SECURE Act, this age has been raised to 72, providing for a slightly increased period of tax deferral as well as greater clarity given the lack of half-birthday celebrations.

Removes Age Limitations on Traditional IRA Contributions

Under current law, while an individual could contribute to a Roth IRA without any age restriction, contributions to a traditional IRA were disallowed upon attaining age 70½. As a result of the SECURE Act, any individual may continue contributing to a traditional IRA throughout his/her lifetime with no age restriction.

The benefit of the removal of the contribution age restriction is significantly muted when read in conjunction with the removal of the stretch distributions for non-spousal beneficiaries above. Nevertheless, the removal of age restrictions on contributions presents an attractive tax deferral opportunity for the septuagenarian wage earner with a younger spouse who is named as the IRA’s beneficiary.

Adds Penalty-Free Distributions for Birth of Child or Adoption

As a default rule, withdrawals from retirement accounts prior to age 59 1/2 are subject to income tax on the withdrawn amount plus a 10 percent penalty. The SECURE Act provides a specific carve-out from the penalty if the funds – up to $5,000 – are withdrawn in order to pay expenses associated with a qualified birth or adoption. You’ll still pay income tax on the funds withdrawn but only if they aren’t repaid.

Adds Qualified 529 Plan Expenditures

The Tax Cuts and Jobs Act signed into law back in December 2017 permitted 529 account funds to be used for the payment of K-12 education expenses on behalf of the account beneficiary. The SECURE Act further expands the list of permissible uses of 529 funds to include costs associated with registered apprenticeships and student loan repayments.

Unfortunately, Michigan residents are still in a strange limbo with regard to using 529 account funds to pay K-12 education expenses as Michigan has not amended state law in coordination with the change in federal law. As a result, while withdrawals from 529 accounts for K-12 education expenses are explicitly qualified withdrawals under federal tax law, they may or may not be qualified expenses under Michigan state law. This position is further complicated by the presence of the Blaine amendment in Michigan’s constitution requiring that no money be appropriated from the state treasury for the benefit of any religious sect. If the Michigan Department of Revenue determined that withdrawals for the payment of K-12 education expenses were not qualified, any income withdrawn from the 529 account would be subject to income tax as ordinary income along with a 10 percent penalty.

Enhances Small Employer Access to Retirement Plans

Congress previously authorized the creation of the SIMPLE (1996) and SEP (1978) IRAs in an effort to improve access to retirement accounts for small employers. In the SECURE Act, Congress acknowledged that those previous efforts produced some success but left room for improvement. The new law should increase the willingness of small employers to participate in pooled retirement plans by softening the impact for an employer when another employer in a pooled plan fails.

The act also increases the credit for plan start-up costs, which will make it more affordable for small businesses to set up retirement plans. The existing $500 credit is increased by changing its calculation from a flat dollar amount to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.

The SECURE Act will bring about both opportunities and complications for individuals planning their own financial futures as well as employers seeking to maximize their attractiveness to potential employees.

© 2019 Varnum LLP

For more on retirement regulation, see the National Law Review Labor & Employment law page.

The Malta Pension Plan – A Supercharged, Cross-Border Roth IRA

Relevant US Tax Principles

In the cross border setting, two of the principal goals in international tax planning are (i) deferral of income earned offshore and (ii) the tax efficient repatriation of foreign profits at low or zero tax rates in the United States. For U.S. taxpayers investing through foreign corporations, planning around the controlled foreign corporation (CFC) rules typically achieves the first goal of deferral, and utilizing holding companies resident in treaty jurisdictions generally accomplishes the second goal of minimizing U.S. federal income tax on the eventual repatriation of profits (for U.S. corporate taxpayers, the use of foreign tax credits may be used to achieve this latter goal).

In a purely domestic setting, limited opportunities exist to defer paying U.S. federal income tax on income or gain realized through any type of entity, and fewer opportunities, if any, exist for the beneficial owners of such entities to receive tax-free distributions of the accumulated profits earned by these entities. A Roth IRA may be the best vehicle available to achieve these goals.

A Roth IRA (hereafter, “Roth”) is a type of tax-favored retirement account, under which contributions to the Roth are not tax deductible (like contributions to a traditional IRA would be), but all earnings of the Roth accumulate free of U.S. tax. In addition, qualified distributions from a Roth are not subject to U.S. federal income tax. In other words, once after-tax funds are placed in a Roth, those funds generally are not taxed again. As with traditional IRAs, however, the tax benefits of Roth IRAs are restricted to certain taxpayers who fall below certain modified adjusted gross income thresholds, and even then, such persons are limited in the amounts that can be contributed each year. Additionally, those who are eligible to contribute to such Roth accounts are limited to a maximum contribution of $5,500 per year ($6,500 for taxpayers age 50+). Any “excess contributions” beyond the stated limitations trigger an annual 6 percent excise tax until the excess contributions are eliminated. Finally, because of the “prohibited transaction” provisions, it is not possible for U.S. taxpayers to transfer property (whether appreciated or not) to a Roth without triggering certain taxes (i.e., excise tax as well as income tax on any built-in gain). Therefore, while the benefits of Roths are significant, they are not widely available, particularly to high-income taxpayers.

Relevant Maltese Principles Relating to Malta Pensions

Since 2002, Maltese legislation has been in existence which allows for the creation of cross-border pension funds (although these pension funds have become more relevant to U.S. taxpayers since the effective date of the U.S.-Malta income tax treaty (the “Treaty”) in November of 2010). In contrast to the stringent limitations imposed on contributions to Roths under U.S. law, unlimited contributions may be made to a Malta pension plan. This is true also for U.S. citizens and tax residents, regardless of whether such persons are resident in or have any connection at all to Malta (though no U.S. deduction is permitted for contributions to such Maltese plans). A Maltese pension plan generally is classified as a foreign grantor trust from a U.S. federal income tax perspective because of the retained interest of the grantor/member in the pension fund. Thus, contributions to such a pension fund (including contributions of appreciated property) generally are ignored from the U.S. income tax perspective and should not trigger any adverse U.S. tax consequences.[1]

There also appears to be almost no limitation on what types of assets can be contributed tax-free to a Malta pension, including, for example, stock in private or publicly-traded companies (including PFICs), partnership and LLC interests (including so-called “carried interests”), and interests in U.S. or non-U.S. real estate. While the specific terms of each pension plan vary, Malta law generally permits distributions to be made from such plans beginning at age 50.

The relevant Maltese pension rules allow an initial lump sum payment of up to 30% of the value of the member’s pension fund to be made free of Maltese tax. This initial payment must be made within the first year of the retirement date chosen by that member. Additional periodic payments generally must then be made from the pension at least annually thereafter, and while such payments may be taxable to the recipient, they are usually significantly limited in amount (generally being tied to applicable minimum wage standards in the recipient’s home jurisdiction). Beyond those minimum wage amounts, excess lump sum distributions of up to 50 percent of the balance of the plan generally can be made free of Malta tax.

U.S.-Malta Income Tax Treaty Provisions

As noted above, when the Treaty became effective in late 2010, Maltese pension plans became more attractive to U.S. taxpayers. The Treaty contains very favorable provisions that can result in significant tax benefits to U.S. members of a Maltese pension. In order for such U.S. members to take advantage of these benefits, the pension must qualify as a resident of Malta under the Treaty and also satisfy the limitation on benefits (LOB) article of the Treaty.

Article 4, paragraph 2 of the Treaty provides that a pension fund established in either the United States or Malta is a “resident” for purposes of the Treaty, despite that all or part of the income or gains of such a pension may be exempt from tax under the domestic laws of the relevant country. Under Article 22(2)(e) of the Treaty, a pension plan that is resident in one of the treaty countries satisfies the LOB provision as long as more than 75% of the beneficiaries, members, or participants of the pension fund are individuals who are residents of either the Unites States or Malta.[2]

Thus, as long as a Maltese pension is formed pursuant to relevant Maltese law and more than 75% of its members are U.S. and/or Maltese residents, the pension plan should be eligible for Treaty benefits.

Pursuant to Article 18 of the Treaty, income earned by a Maltese pension fund cannot be taxed by the United States until a distribution is made from that fund to a U.S. resident. This article of the Treaty contains no restrictions on the types of income that are covered, and thus is generally believed to apply broadly to all income (including, for example, income arising in connection with interests in U.S. real estate, PFIC stock, and assets connected to a U.S. trade or business).[3]

Article 17(1)(b) of the Treaty further provides that distributions from a pension arising in one country, and which would be exempt from tax in that country if paid to a resident of that country, must also be exempt from tax in the other country when paid to a  resident of the latter country.  The U.S. Treasury’s Technical Explanation to the Treaty further clarifies that, for example, “a distribution from a U.S. Roth IRA to a resident of Malta would be exempt from tax in Malta to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident.”[4]

As mentioned above, pursuant to Maltese law, the initial lump sum payment from a Maltese pension (up to 30% of the value of the relevant pension fund) generally is not taxable in Malta. Thus, based on Article 17(1)(b) of the Treaty, such amounts likewise must not be taxed in the United States when made to a U.S. resident beneficiary. Additionally, this same Maltese exemption generally applies to further lump sum payments received by Maltese resident beneficiaries in certain subsequent years (generally, such distributions may be made tax-free beginning three years after the initial lump sum distribution is received). Notably, any required annual (or more frequent) periodic payments would be taxable in Malta if made to a Maltese resident, and therefore also are taxable in the United States under Section 72 when received by a U.S. resident member of the pension fund.[5]

Finally, while under the so-called “savings clause” the United States generally reserves the right under its income tax treaties to tax its citizens and “residents” as though the treaty did not exist, this savings clause contains certain exceptions. Under the Treaty, Article 1(5) provides that Articles 17(1)(b) and 18 are excepted from the savings clause (found at Article 1(4)). Consequently, the savings clause of the Treaty should not prevent a U.S. citizen or resident member of a Maltese pension from qualifying for Treaty benefits under relevant provisions of Articles 17 and 18.

Example

Assume a U.S. resident individual 49-years of age owns both highly-appreciated U.S. real estate and founders’ shares of a technology start-up that is about to go public. In combination, the interests are worth approximately $100 million, and the aggregate tax basis of the assets is $10 million. As part of her retirement planning, this U.S. individual decides to contribute these assets to a Maltese pension fund.[6] During this same tax year, the real estate is sold for fair market value and the technology company goes public, though she is required to hold the shares for at least six months before disposing of them.  During the following tax year, after her lockup period expires, she sells her shares for fair market value, leaving her portion of the pension plan holding proceeds of $100 million. Since at this time she is at least 50 years of age, assuming the terms of the pension plan permit her to begin withdrawing assets at age 50, the U.S. individual can cause the pension plan to distribute to her during that tax year $30 million of the pension plan funds without the imposition of any tax, either in Malta or the United States.

At this point, the pensioner would need to wait until year 4 to be able to extract additional profits tax-free (pursuant to Maltese law, three years must pass after the initial lump sum distribution before additional lump sum distributions could be made to a resident of Malta tax-free). Thus, in year 4, additional assets can be distributed to the member without triggering tax liability. To calculate how much can be distributed free of tax, it is necessary to first determine the pension holds “sufficient retirement income.” This amount in turn is based, pursuant to Maltese law, on the “annual national minimum wage” in the jurisdiction where the member is resident. To the extent the pension plan balance exceeds the member’s “sufficient retirement income” (on a lifetime basis), 50% of the excess can be withdrawn tax-free each year. Assuming the $70 million remaining assets (after accounting for the initial lump sum distribution) had increased in value to $85 million by year 4, and further assuming it was determined that the individual needed $1 million as her sufficient retirement income, 50% of the $84 million excess, or $42 million, could be distributed to her that year free of tax. Such calculations could likewise be performed in each succeeding tax year, with 50% of the excess being available for tax-free receipt by the beneficiary each year. Consequently, while it is not possible to distribute 100% of the proceeds of such a pension tax-free, a substantial portion of any income generated in the pension (including gains realized with respect to appreciation accrued prior to contribution of assets to the pension fund) may be distributed without any Maltese or U.S. tax liability.

Conclusion

Some commentators have suggested that the purported benefits of Maltese pensions in this context were not intended by Treasury in negotiating the Treaty and that therefore the use of such pensions in this manner is “too good to be true.” The underlying legal principles, however, are not so different from those that apply to Roths in the United States. Like participants in Roths, participants in Maltese pensions can contribute after-tax dollars to the plan and never pay future tax on profits realized with respect to assets held in the plan. Admittedly, the biggest differences relate to the unlimited amounts that may be contributed to Maltese pensions and the fact that prior appreciation in assets that are contributed to the plan also may avoid being subjected to any U.S. tax. Regardless, these distinctions result from features of domestic Maltese law (not U.S. law), and make the use of such pension plans by U.S. residents so potentially attractive.

[1] Note, however, that U.S. information filing obligations may be triggered to the U.S. transferor member pursuant to Section 6048. Unless otherwise noted, all Section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury regulations promulgated under the Code.

[2] For this purpose, the term resident includes a U.S. citizen.  Article 4(1) of the Treaty.

[3] It should be noted that the FIRPTA provisions of Section 897 and Section 1445 should not be applicable because the pension plan is treated as a foreign grantor trust for U.S. federal income tax purposes.

[4] Treasury Technical Explanation of the U.S.-Malta Income Tax Treaty, signed 8/8/2008, Article 17, paragraph 1.

[5] Under Section 72, a portion of each payment represents tax-free return of basis.

[6] Note that, as discussed above, there should be no U.S. tax implications on contribution of the assets (for example, under Section 684), as the pension plan should be classified as a grantor trust for U.S. federal income tax purposes.

This post was written by  Jeffrey L. Rubinger and Summer Ayers LePree of  Bilzin Sumberg Baena Price & Axelrod LLP.
Read more on the National Law Review.