In-Depth Look: Transferable Tax Credits Under the Inflation Reduction Act
The Inflation Reduction Act (IRA) created 11 transferable tax credits.
Key features of the IRA's 11 transferable tax credits
The Inflation Reduction Act (IRA) created 11 transferable tax credits to promote investment into clean energy. This article summarizes key features of each transferable credit including technology, duration, period of availability, and rates. Depending on the credit, we included three rates:
- Base: Rate assuming prevailing wage and apprenticeship requirements are not met.
- Full: Rate assuming prevailing wage and apprenticeship requirements are met. The full rate is five times higher than the base rate.
- Bonus: Additional rates assuming bonus credits – energy community, domestic content, low-income community – are met.
Jump to a credit
To jump directly to a credit, click a link below:
- §45 PTC – Electricity produced from certain renewable sources
- §45Y PTC – Clean electricity production credit (technology-neutral PTC)
- §48 ITC – Energy credit
- §48E ITC – Clean electricity investment credit (technology-neutral ITC)
- §30C ITC – Alternative fuel vehicle refueling property credit
- §45U PTC – Zero-emission nuclear power production credit
- §45Q PTC – Credit for carbon oxide sequestration
- §45Z PTC – Clean fuel production tax credit
- §45V PTC – Clean hydrogen production tax credit
- §48C ITC – Advanced energy project credit
- §45X PTC – Advanced manufacturing production credit
§45Y PTC - Clean electricity production credit
Funding mechanism: Production tax credit
Technology grouping: Electricity
IRA Section: 13701
New or existing: New
Eligibility: Technology-neutral tax credit for production of clean electricity. The §45Y PTC is for facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero
U.S. Code: 26 U.S. Code §45Y
Duration: 10 years from the date the project is placed in service
Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.
The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.
Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2035 and meets PWA requirements will generate §45Y PTCs worth $13.75 per MWh when it is placed in service.
Stackability and limitations: Cannot be stacked with §48E or §45Q
Inflation adjustment: Subject to an annual inflation adjustment
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Not applicable
Rates
- Base rate: $5.50 per MWh (as increased by annual inflation adjustment factor from 2023)
- Full rate: $27.50 per MWh (as increased by annual inflation adjustment factor from 2023)
- Energy Community: 10%
- Domestic Content: 10%
Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§48E ITC - Clean electricity investment credit (technology-neutral ITC)
Funding mechanism: Investment tax credit
Technology grouping: Electricity
IRA Section: 13702
New or existing: New
Eligibility: Technology-neutral tax credit for investment in facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero
U.S. Code: 26 U.S. Code §48E
Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.
The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.
Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2034 and meets PWA requirements will generate a §48E ITC worth 22.5% of the project’s qualified investment when it is placed in service
Stackability and limitations:
- Cannot be stacked with §48, §45, §45Y, §48C, §45Q
- Subject to recapture per §50
Inflation adjustment: None
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Subject to five-year recapture period beginning on placed-in-service date. Recapture amount decreases by 20% per year
Rates
- Base rate: 6%
- Full rate: 30%
- Energy Community: 10%
- Domestic Content: 10%
- Low-Income: 10% if located in low-income community or on Indian land. 20% if part of qualified low-income residential building project or qualified low-income economic benefit project. Limited to projects less than 5 MW
Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
Related Articles
San Francisco, Sept. 24, 2024 /PRNewswire/ — Reunion, a leading clean energy finance company, today announced that it has facilitated the purchase and sale of over $1.6 billion in clean energy tax credits through Q3 2024.
Drawing on decades of clean energy financing experience, Reunion has transacted across a range of transferable tax credits – §48 ITCs, §45 PTCs, §45X AMPCs, and §30C alternative fuel infrastructure credits – and technologies. "Our team has facilitated dozens of tax credit transfers involving established clean energy technologies, like solar, wind, and battery storage, as well as emerging technologies, like biogas, fuel cells, and EV charging," said Reunion's president, Billy Lee. "Advanced manufacturing and critical minerals, however, have been the largest areas of growth for us. We've executed §45X transactions from $10M to well over $500M."
Reunion recently published a study that estimates the size of the transferable tax credit market, and quantified the total credit market by monetization strategy (transfer, direct pay, retention and transfer). We estimate that over $45B in clean energy tax credits will be generated in 2024. Of this total, Reunion estimates that approximately $21B to $24B will be transferred – a significant increase from the $5B to $7B in transfers Reunion estimated in 2023.
"At the end of 2023, many buyers were hesitant to be 'first to market.' A year later, however, the vast majority of corporate finance and tax leaders are aware of clean energy tax credits, and we are seeing significant demand for high quality opportunities," said Reunion's CEO, Andy Moon. "We are thrilled to see corporations across many industries invest in transferable tax credits."
The influx of new buyers and sellers has created a fast-moving market. When working with Reunion, typical transaction timelines have fallen from over 90 days in Q4 2023, to less than 45 days in Q3 2024.
About Reunion
Reunion facilitates the purchase and sale of clean energy tax credits, and has worked with major corporations to purchase over $1.6 billion in tax credits from solar, wind, storage, advanced manufacturing, and other clean energy projects. Our curated marketplace features billions of dollars in high quality tax credit opportunities, and our team of clean energy finance veterans supports buyers and sellers through each step of the transaction process, with a focus on commercial negotiation, due diligence and risk mitigation.
To learn more, visit www.reunioninfra.com and download our comprehensive handbook on clean energy tax credit transfers.
The latest energy community guidance, which meaningfully expanded the number of qualifying areas, placed the 10% adder back in the spotlight for the transferable tax credit marketplace. At the same time, Reunion has observed a marked increase in the number of projects in our marketplace claiming the energy community bonus.
While our transferable tax credit handbook goes deep on energy communities, we wanted to share a comprehensive (and refreshed) look at the adder.
Our guide begins with the basics, so we invite you to jump ahead.
- Background and scope
- Credit and project eligibility
- Diligence
- Guidance
- Annual updates to areas qualifying as energy communities
- Resources
The Inflation Reduction Act created three bonus credits, or "adders"
The Inflation Reduction Act (IRA) created three "bonus" credits that can increase the value of a clean energy project's transferable tax credits:
- Domestic content: 10% bonus
- Energy community: 10% bonus
- Low-income community: 10% or 20% bonus
The energy community adder provides a 10% bonus credit
The energy community bonus provides a 10% increase to a project's credit value if the underlying project is located in an energy community (and meets prevailing wage and apprenticeship requirements).
A utility-scale solar project, for instance, that meets PWA requirements would receive tax credits worth 30% of its eligible cost basis. If the same project is located in an energy community, it would receive tax credits worth 40% of its eligible basis.
The IRA defines three types of energy communities
To qualify for the energy community bonus, a project must be located in at least one of three energy community "categories."
Category 1: Brownfield
A brownfield site is defined in 42 U.S.C. § 9601(39)(A) as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant" (as defined under 42 U.S.C. § 9601), and includes certain "mine-scarred land" (as defined in 42 U.S.C. § 9601(39)(D)(ii)(III)). A Brownfield site does not include the categories of property described in 42 U.S.C. § 9601(39)(B).
Three types of sites qualify as a brownfield under a safe harbor:
- Existing brownfield: Brownfields that are already tracked by a federal, state, territorial, or federally-recognized Indian tribal brownfields program. Many states, like Idaho and New York, have their own brownfields programs with supporting maps. A valid brownfield site could be tracked by a state program but not a federal program, and vice versa
- Phase II assessment: A Phase II Assessment has been completed with respect to the site and such Phase II Assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. § 9601(14), or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33)
- Phase 1 assessment (for projects with a nameplate capacity of not greater than 5MWac): A Phase I Assessment has been completed with respect to the site and such Phase I Assessment identifies the presence or potential presence on the site of a hazardous substance, or a pollutant or contaminant.
Category 2: Coal closure
A census tract (or directly adjoining census tract):
- in which a coal mine has closed after 1999; or
- in which a coal-fired electric generating unit has been retired after 2009
Category 3: Statistical area
A "metropolitan statistical area" (MSA) or "non-metropolitan statistical area" (non-MSA) that has (or had at any time after 2009):
- 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
- has an unemployment rate or above the national average unemployment rate for the previous year
The scope of "direct employment" is determined by ten NAICS codes.
No double bonus for multiple energy communities
If a clean energy project is located in two energy communities – a brownfield site within a coal community, for instance – the bonus remains 10%. Developers cannot double up.
Bonus credits cannot be sold in stand-alone tranches
Bonus credits are not treated differently from base credits for the purpose of transferability. Treasury guidance released in June 2023 specified that all transferable credits must be sold as “vertical slices” and be pari passu to one another, as opposed to “horizontally” bifurcating bonus credits from base credits.
Four IRA credits are eligible for the energy community bonus
The IRA created 11 transferable tax credits, four of which are eligible for the energy community bonus:
- §45 PTC: Electricity produced from certain renewable resources
- §45Y PTC: Clean electricity production credit
- §48 ITC: Energy credit
- §48E ITC: Clean electricity investment credit
§48 and §48E ITC eligibility determined on placed-in-service date
For projects that claim an investment tax credit under §48 or §48E, eligibility for the energy community bonus credit is determined on the date that the project is placed in service (PIS) and is not tested again.
Because eligibility is determined on a PIS date that is subject to potential delays, developers should think carefully about how to incorporate the statistical area category into their financial assumptions.
The statistical area category is determined annually, based on the prior year's unemployment rate. As the IRS FAQs state, "Because an MSA's or non-MSA's status as an energy community depends on its unemployment rate for the previous year, an MSA or non-MSA that qualifies as an energy community in one period might not qualify as an energy community in a later period if its unemployment rate for the previous year falls below the national average."
§45 and §45Y PTC eligibility determined annually with a beginning-of-construction safe harbor
For projects that claim a production tax credit under §45 or §45Y, eligibility for the energy community bonus credit must be determined every year during the ten-year PTC period. Theoretically, a wind project could qualify one year under the statistical area category but not qualify the following year because of a change in employment rates.
However, the IRS created a safe harbor for PTC projects with beginning-of-construction dates on or after January 1, 2023. If the project owner determines that the project is eligible for the energy community bonus credit on the date construction is considered to have started for tax purposes, then the project will qualify for the bonus credit for the entire ten-year PTC period and is not tested again.
"Legacy" §45 PTCs are not eligible for energy community bonus
Projects that generate §45 PTCs that were placed in service before December 31, 2022 are not eligible for the energy community bonus, even if the project happens to be located in an energy community and is within its ten-year period of credit generation.
The December 31, 2022 date is set in the IRA itself (H.R.5376).
50% of a project's nameplate capacity (or square footage) must be in an energy community
A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that a project is capable of producing on a steady-state basis during continuous operation under standard conditions.
For battery storage projects, at least half (50%) of the storage capacity, as measured in megawatt hours, should be in an energy community.
Lastly, for projects that do not generate nor store energy, like biogas, the 50% threshold is measured on a square footage basis.
When performing due diligence on the energy community bonus, it's helpful to approach the process based on the credit type and energy community category.
Credit type
ITCs
Tax credit buyers should request documentation that demonstrates when and where the project was placed in service. Then, buyers and their advisors should crosswalk that location to an appropriate energy community siting resource, like one of the IRS's appendices. (We provide links to these appendices in the guidance section of this post.)
When validating a project's location, it's important to keep the "50%" rule in mind.
PTCs
Due diligencing the energy community bonus for PTCs is effectively the same as ITCs, although buyers will want to validate when and where the project began construction (versus when and where the project was placed in service). Once again, it's important to keep the "50%" rule in mind.
Energy community category
As far as each category is concerned, the statistical area and coal closure categories are relatively straightforward from a due diligence standpoint: the IRS has published lists of areas that qualify for each. The brownfield category, however, may present a slightly more nuanced due diligence process.
Statistical area
It's important to recall that the statistical area category changes every year, based on the prior year's unemployment rate. As we'll discuss below, the IRS is obligated to publish updates to this category every year, generally in May.
Coal closure
Unlike the statistical area category, the coal closure category cannot shrink – that is, once an area qualifies as a coal closure, it remains as such for the duration of the energy community bonus.
However, the coal closure category can expand, and we fully expect it to do so. According to a 2022 analysis by the Energy Information Agency (EIA), nearly a quarter of the operating U.S. coal-fired fleet is scheduled to retire by 2029. Every closure will add more census tracts to the list of areas eligible for the energy community bonus.
Brownfield
The IRS has not published – and, as far as we know, has no plans to publish – a consolidated list of areas that qualify as brownfields for purposes of the energy community bonus. In fact, the DOE energy community map doesn't even include federally-recognized brownfield sites. (The EPA, however, maintains a list of federally-recognized brownfields in its cleanups in my community map.)
We doubt the IRS or any federal agency will publish a definitive list of brownfields. There are simply too many moving parts across federal, state, local, and tribal brownfields programs.
So, an opinion from an environmental attorney may be warranted, and the scope of the opinion will vary based on which of the three brownfields safe harbors a project is claiming.
Latest guidance expands the number of areas that are eligible for the energy community bonus
The most recent IRS guidance, Notice 2024-30, broadened eligibility for the energy community bonus through two key changes:
- Expansion of the "nameplate capacity attribution rule"
- Inclusion of two additional NAICS codes – which are in our list above – for determining the fossil fuel employment rate for a statistical area category
Expansion of the nameplate capacity attribution rule
The "nameplate capacity attribution rule" pertains to projects with offshore generation – namely, offshore wind – that have a nameplate capacity but are not located within a census tract, an MSA, or a non-MSA. The rule, essentially, allows developers to allocate their offshore nameplate capacity onshore for purposes of qualifying for the energy community bonus.
Prior to Notice 2024-30, the attribution rule generally allowed offshore wind projects to qualify for the energy community bonus if their power-conditioning equipment closest to the point of interconnection was in an energy community.
Notice 2024-30 expanded the nameplate capacity attribution rule to include not only power-conditioning equipment, but also supervisory control and data acquisition (SCADA) equipment.
SCADA equipment must be owned by the developer and located in an "energy community project port." To qualify as an energy community project port, a port must:
- Be used "either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance" of the project
- Have a "significant long-term relationship" with the project, meaning the developer owns or leases all or part of the port for a minimum term of ten years
- Be the location at which staff employed by, or working as independent contractors for, the project are based and perform functions essential to the project's operations. Essential functions include "management of marine operations, inventory and handling of spare parts and consumables, and berthing and dispatch of operation and maintenance vessels and associated crews and technicians"
Inclusion of two additional NAICS codes
Notice 2024-30 added two additional NAICS codes for determining the fossil fuel employment rate for a statistical area category:
- 2212: Natural gas distribution
- 23712: Oil and gas and pipeline and related structures construction
These NAICS codes cover workers in local gas distribution companies and construction workers on oil and gas pipelines.
According to Norton Rose Fulbright, "The biggest additions to the list of potentially eligible counties are in six Midwestern states: Minnesota (57), Missouri (57), Illinois (28), North Dakota (23), Wisconsin (23) and Indiana (20)."
The IRS has released five pieces of energy community guidance, with regulations to come soon
Energy community regulations should arrive by June 30, 2024
As Notice 2024-30 notes, proposed regulations are forthcoming. Until then, "taxpayers may rely on the rules described in sections 3 through 6 of Notice 2023-29, as previously clarified by Notice 2023-45 and modified by section 3 [of] this notice, for taxable years ending after April 4, 2023."
Based on the Q2 update to the IRS 2023-2024 Priority Guidance Plan, energy community regulations should arrive before the end of the current "plan year," which concludes on June 30, 2024.
Where to find the latest guidance
The IRS and Treasury maintain lists of IRA-related guidance, including guidance specific to the energy community adder. Although the lists generally overlap, there may be differences based on when each website was last updated.
Below is a close look at all the guidance that's been released through March 2024.
Notice 2022-51: Request for Comments on Prevailing Wage, Apprenticeship, Domestic Content, and Energy Communities Requirements under the Inflation Reduction Act of 2022
- Date: October 5, 2022
- News release: IRS
- Companion documents: N/A
Notice 2023-29: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: April 4, 2023
- News release: IRS
- Companion documents: Appendix A, Appendix B, Appendix C
Notice 2023-45: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
Notice 2023-47: Energy Community Bonus Credit Amounts or Rates (Annual Statistical Area Category Update and Coal Closure Category Update)
- Date: June 15, 2023
- News release: IRS
- Companion documents: Appendix 1, Appendix 2, Appendix 3
Notice 2024-30: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: March 22, 2024
- News release: IRS
- Companion documents: Appendix 1, Appendix 2
Expect energy community eligibility updates every May, beginning in 2024
According to Notice 2023-29, "The Treasury Department and the IRS intend to update the listing of the Statistical Area Category based on Fossil Fuel Employment annually. These updates generally will be issued annually in May."
The first update should arrive in May 2024 – that is, next month.
DOE, EPA, and IRS have provided energy community eligibility and project siting resources
U.S. federal agencies who are responsible for administering or managing parts of the energy community bonus credit have published several key resources that are valuable to buyers, sellers, and their advisors:
- Department of Energy (DOE): Energy community map
- IRS: Frequently asked questions
- DOE National Energy Technology Laboratory (NETL): Frequently asked questions
- Environmental Protection Agency (EPA): RE-powering America's land initiative
- EPA: Cleanups in my community
- Interagency working group: Energy community tax credit bonus
To learn more, you can download our 100-page transferable tax credit handbook or start a conversation with our transactions team.
Recording
Overview
For corporate taxpayers who are considering purchasing tax credits in 2024, please join Reunion's transactions team – with 50+ years of combined experience in tax credits – for a 60-minute workshop to walk through a sample tax credit transfer.
The webinar will equip tax and treasury teams with the information and resources they need to efficiently pursue a tax credit transaction.
Topics
The interactive workshop will include three 15-minute modules and five minutes of Q&A per module.
Speakers
Reunion's CEO, Andy Moon, and President, Billy Lee, will co-host the webinar. Over the course of their careers in clean energy financing, Andy and Billy have executed over $2B in transactions across a range of technologies.
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