IRA Renewables Tax Credits: Are You Missing Out?
The Inflation Reduction Act (IRA) of 2022 is proving to be a source of ongoing, significant financial benefits for manufacturing companies advancing solutions to combat climate change. When companies’ financial and tax leaders key into the tax credits, the benefits are proving to be so meaningful that the company’s financial standing, or entire capital stack, can be reimagined
In short, the IRA has revised, updated and extended production tax credits (PTCs) and investment tax credits (ITCs) for U.S. companies that either manufacture or purchase components for renewable energy production, including wind facilities, biodiesel and other biofuel and alternative fuels. Some of the credits have been extended to 2032, with an increased credit percentage.
Importantly, there is no cap on the dollar amount of product tax credits that manufacturers can earn. If a company makes, for instance, photovoltaic wafers for solar energy products, at a cost of $12 per wafer, and if it manufactures half a million of them in a year, the company earns a $6 million credit against its federal tax liability.
What’s more, the company has options when it comes to recognizing the tax credits. In some instances, a manufacturer can apply them directly against tax liabilities – for a five-year period – or it can receive a direct payment for the amount. It could also split them. For instance, in the example above, the same maker of photovoltaic wafers could use the $6 million tax credit to wipe out a $3.5 million tax liability and receive the other $2.5 million as a direct payment. (The direct payments are, of course, not taxable.)
All manufacturing companies, regardless of size, within the renewables orbit – even the outskirts of it – should proactively be investigating the renewables tax credits, especially those connected with Internal Revenue Code (IRC) Sections 45/45Y Clean Electricity Production, Sections 48/48E Renewable Energy Investment, Section 45V Clean Hydrogen Fuel, Section 45Q Section Carbon Oxide Sequestration, 45X Advanced Manufacturing Production and Section 48D Advanced Manufacturing Investment. The government has developed an extensive of list of technologies that earn tax credits, and it is incentivizing both manufacturing and purchasing.
Transferring Credits to Investors
There’s also another option for manufacturers when it comes to both kinds of tax credits. Beyond accepting a reduction in tax liability and/or a direct payment, companies can transfer the credits to investors, including other corporations or other large manufacturers that would find significant value in reducing their tax liabilities over time.
The IRA enables clean energy credits that have been in service from January 2023 on to be transferred between corporate taxpayers. However, there is some flexibility with Section 45X Advanced Manufacturing where only production – and not the placed-in-service date – matters. The Internal Revenue Service has issued several rounds of clarifications that make the credits much more user-friendly. Companies can sell them in a straightforward way to unrelated, qualified taxpayers. Prior to the IRA, the only way to monetize credits involved complex tax equity partnership arrangements.
Today, a company that makes a renewables component under Section 45X – perhaps a start-up that does not have a significant tax liability – may elect for direct payment for up to five years. After the first five years, this company could opt to sell its tax credits going forward at, say, 90 cents on the dollar, via a marketplace clearinghouse to another organization that would benefit from the tax credits. Alternatively, a manufacturer may decide to outfit their facilities with solar panels via Section 48 – and then sell the investment tax credits they’d receive to an interested buyer.
In these scenarios, the seller benefits from the present value of the money, and the buyer benefits from the discounted purchase price as well as the streamlined legal processes and indemnifications from the credit sellers that the clearinghouses arrange. Buyer demand, in fact, is currently outpacing the supply of credits.
Importantly, tax credit purchasers may consider these credits when calculating their projected tax liability and estimated tax payment. In other words, the purchase is allowed to reduce estimated tax payments for credit transfers that are expected to occur, allowing the purchaser to realize economic benefits immediately.
Delving Deeper Pays Off
Clearly, a key takeaway is that any company that manufactures, buys or invests in renewable energy equipment would be wise to delve into the details of the latest tax codes. Otherwise, the company risks leaving truly significant sums of money on the table.
The renewables supplier and manufacturer tax credits are a real positive for all parties involved, even when viewed through disparate lenses. On the one hand, they provide the opportunity to exercise smart fiscal stewardship to those who earn the tax credits – and to those who purchase them via a clearinghouse. On the other, they enable manufacturers, corporate investors and other buyers of the credits to participate in advancing the renewables industry and its benefits to the economy and society.
Ian Boccaccio is a principal and practice leader, Income Tax at tax services and software firm Ryan LLC.
