September 28, 2022
The recently passed Inflation Reduction Act of 2022 (the “Act”) has generated a lot of buzz – and rightly so. This is a nearly $400 billion legislative package that expands tax incentives and discounts for solar, energy storage, and other renewable energy resources. For the first time ever, the law provides tax-exempt entities alternate ways to monetize solar tax credits.
In this blog, we describe the two federal solar tax credits included in the Act, and the alternate ways for certain tax-exempt entities to monetize these tax credits.
What Are the Federal Solar Tax Credits?
The federal solar tax credits are tax credits for installing a solar array; these are a dollar for dollar credit on an organization’s federal taxes. There are two types of federal solar tax credits, and eligibility for 100% of a tax credit requires that certain prevailing wage and apprenticeship requirements are satisfied.
- The Act increased the investment tax credit (ITC) to 30% of the total cost of a solar project.
- The Act reinstated the production tax credit (PTC) which provides a per kilowatt hour (kWh) rate for the electricity produced and sold by the solar installation, starting on the date the facility is originally placed in service and lasting for ten years. The current PTC (adjusted for inflation) is 2.6 cents per kWh.
The Act offers generous bonus tax incentives or “adders” to ensure that the climate investments create American manufacturing jobs and help communities that have benefited less from previous climate legislation.
- 10% bonus ITC or PTC for projects that meet “domestic content” requirements.
- 10% bonus ITC or PTC for projects built in certain energy communities with ties to traditional energy resources.
- 10% bonus ITC for projects built in certain low-income communities. The low-income adder does not provide the opportunity for a higher PTC.
The potential to stack multiple “adders” onto the base ITC or PTC means that certain projects could be eligible for a total ITC of 40%, 50% or more, or PTC of 120%!
Monetize Solar Tax Credits
The law provides two approaches for certain tax-exempt entities to participate in these solar tax credits: (1) direct pay option or (2) selling the tax credits to a third party.
With the direct pay option, certain tax-exempt entities can choose to receive a cash payment from the Treasury in lieu of claiming a solar tax credit. While the Act has provisions to accelerate US manufacturing of solar components, it is anticipated that it may take several years for US manufacturing to ramp up to meet demand. The IRA tries to address that gap – a project that does not meet the domestic content requirements may claim the following percentages of the tax credit:
- Construction begins before 2024: 100%
- Construction begins during 2024: 90%
- Construction begins during 2025: 85%
- Construction begins after 2025: 0%
And, 90% or 85% of a 30% ITC is still really good!
In addition, domestic content waivers for receiving direct payment may be granted if:
- Domestic products would increase the overall cost of the solar installation by more than 25%
- Satisfactory domestic products are not available
The Act includes a credit transfer provision, where certain tax-exempt entities can sell all or part of their tax credits to unrelated persons. The sale must be in cash. Additional guidance from the Treasury is needed before this option can be pursued.
The energy-related tax provisions of this historic legislation have provided an unprecedented economic opportunity for non-profits, state and local governments, and municipalities to go solar. If you would like to discuss how your organization might leverage these incentives to transit