Section 48 guidance has been released, updating the requirements for the ITC under the Inflation Reduction Act.
When the Inflation Reduction Act (IRA) of 2022 was passed, one of the cornerstones of the $369 billion set aside for climate and energy spending is the Investment Tax Credit (ITC).
The U.S. Department of Treasury has released guidance on how to access the ITC. Find the full document here.
The ITC sets aside a federal tax credit of 30% of installed system costs for clean energy technologies like solar, wind and energy storage. The credit is offered as a base 6%, and the 30% credit is only offered to projects that satisfy prevailing wage requirements.
A further 10% tax credit adder is offered to projects installed in eligible Energy Communities, which are defined by income status and the economic impact of legacy energy systems in their area.
Another 10% adder can be applied to projects that meet domestic content requirements. A large portion of the spending in the IRA is directed towards supporting the buildout of U.S.-based clean energy manufacturing, and the 10% domestic content adder is designed to stimulate demand for these products. The three credits can be combined to cover 50% of installed system costs.
Two other key facets of the ITC are direct pay and transferability. Direct pay is made available to tax-exempt entities investing in clean energy projects. Credits including the 30% Investment Tax Credit, plus any applicable adders, can be used by these entities as a payment against tax liability, and any remaining balance can be refunded as a direct payment to these entities. Tax years beginning January 1, 2023 are eligible for this transaction.
Organizations that are exempt from tax by § 501(a) are eligible for the direct pay option, as well as those described by § 501(c), including public charities, private foundations, social welfare organizations, labor organizations, business leagues, and others. The option is available to Tribal Governments, rural electric cooperative utilities, and the Tennessee Valley Authority, as well. A frequently asked questions page offers more information.
As for transferability, this process enables project owners to monetize tax credits by transferring them to other taxpayers. Under this transaction, renewable energy developers and owners are essentially able to sell tax credits for cash, making financing easier for new clean energy projects. The transferability option is generally open to the entities that are not covered by the direct pay option. More information in the frequently asked questions section can be found here.
pv magazine USA will continue to provide updates on the Section 48 guidance, which can be read in full here.
