In just over two years, the Biden Administration made impressive strides to release guidance to give teeth to the Inflation Reduction Act’s (IRA’s) promises and guard against future challenges, but work remains.
Since August 2022, the Treasury has issued 109 pieces of IRA-related tax guidance covering 30 different tax incentives. Only eight of these 109 documents are final rules. The rest range in form from frequently asked questions to proposed regulations to requests for public comment.
Let’s kick it off with the most long-awaited release. Last November, the IRS issued the first wholesale rewrite of the investment tax credit regulations in 42 years. While the proposed regulations answered some questions the market had (e.g., production tax credits can be claimed on the electricity output from a solar project and an investment tax credit can be claimed on a co-located battery), other questions remain (e.g., is a homeowner who sells excess power from its rooftop solar system to a local utility subject to recapture for a change in the non-residential use of the system during the five-year recapture period?). The IRS accepted comments through January 22.
“Adders” has become quite the trigger word for the industry these past two years. Project owners looking to align the stars and claim the coveted 70% investment tax credit need clear rules on each of the IRA’s three adders – domestic content, energy community, and low-income community.
Treasury’s first take at domestic content guidance was a flop. After much noise from developers and suppliers alike, the Treasury released subsequent guidance that greatly simplified the domestic content percentage calculation. Supplier costs are no longer needed, and instead project owners can simply sum prescribed values from a safe harbor table to determine if the required threshold of domestic content is met. However, there are only tables for solar, onshore wine, and battery projects. Treasury said it plans to add safe harbor tables for other sectors as well as to issue rules for projects owned by state and local governments, Indian tribes, rural electric cooperatives, or the Tennessee Valley Authority that can apply to the IRS for direct pay in lieu of a tax credit.
Countering the domestic content adder’s ambiguity is the (mostly) dependable energy community adder. Simply plug your project’s address into a Department of Energy mapping tool and voila – you qualify for an extra ten percentage points of investment tax credit. However, one category of energy communities changes based on the prior year’s unemployment statistics. Project owners must eagerly await a new IRS release each Spring to determine whether their planned project location is still a qualifying one.
The exclusive low-income community adder is available only for small solar and wind projects (under five megawatts) who are awarded application from the Department of Energy. The adder is worth up to 20 extra percentage points. Just last month the IRS released proposed rules for the low-income community bonus credit program in years 2025 and beyond. Learning from its successes and failures with the 2023-24 version of the program, the IRS proposed updated definitions and additional selection criteria to ensure underserved communities share in the benefits of the growth of the clean energy community.
The Treasury is not the only agency that has been putting in work – and continues to do so – to bring the IRA’s goals to life. The Department of Agriculture, Department of Energy, Department of Transportation and other agencies are digesting public feedback to draw up rules to timely disburse billions of appropriated funds to deserving projects.
Consequences of a repeal
Tis the season…election season. With the election front and center, a common question is: will the IRA be repealed, and if it is, what are the consequences? The good news for the industry is that a president cannot unilaterally repeal a law passed by Congress. The IRA is a law, and only Congress can pass and repeal laws. That’s right, even though Trump has said he will repeal the IRA if elected, only Congress can repeal the IRA.
In order to repeal the IRA, both houses of Congress would have to vote in favor of the repeal. This means that republicans would have to take control of both houses of Congress to implement a repeal. With many House districts too close to call, it is unclear if they will achieve the necessary margins. Even if the republicans take both houses, the Senate filibuster rules mean that a simple majority is not enough—it takes 60 votes to overcome a filibuster. This means that a stand-alone repeal is very unlikely.
However, if the republicans do manage to win both houses of Congress, one tool they will have at their disposal is reconciliation. Reconciliation may sound familiar because it is the process by which the democrats passed the IRA. Budget reconciliation is defined as expedited process for considering bills that would implement policies embodied in a Congressional budget resolution. It can be used to pass legislation with a simple majority in the Senate and avoids the Senate’s filibuster rules, which would otherwise require a 60-vote supermajority. This means that if the republicans take a simple majority in both houses, they can use the budget reconciliation process to repeal all or portions of the IRA just like the democrats used reconciliation to pass the IRA.
Even if the republicans do secure the majority in both houses, it is unlikely that there will be an immediate repeal of the IRA. Reconciliation is not quick. Both houses of Congress have to agree on a federal budget with reconciliation instructions that instruct the tax-writing committees to adjust the tax laws to hit new deficit targets—i.e., to repeal all or parts of the IRS to reduce spending and control the deficit or to pay for other tax breaks.
Republicans in Congress will likely be focused on extending the 2017 Trump tax cuts, which are set to expire at the end of next year, and may look to repealing portions of the IRA as a pay-for. The republicans seem most focused on rolling back subsidies for electric vehicles. Conventional thinking is that the technology neutral credits in Code Sections 45Y and 48E may also be in danger of repeal or early sunset. Under current law, Sections 45Y and 48E are not expected to phase out until the late 2030s or even into the 2040s.
Concern over the repeal of Sections 45Y and 48E has led to a flurry of activity trying to start construction by the end of 2024 to lock in the expiring tax credits under Section 45 and 48. It is generally thought that Congress will not retroactively roll back the expiring credits. Starting construction means either incurring 5% of the project’s depreciable costs or starting significant physical work either on-site or off-site under a binding contract. However, the start construction rules also carry a continuity requirement that means projects must go into service within four years of the construction start year (longer for certain types of projects such as offshore wind, carbon capture, and projects on federal lands). Such a timeline might not be feasible for all projects.
Even if projects cannot start construction to lock in the expiring credits, there will almost certainly be transition relief if Congress repeals all or a portion of the IRA. Congress has already repealed the ITC once, and when it did, it provided transition relief for projects that had already relied on the credits, but were not yet in service. Projects had to enter into written binding contracts and construction had to be completed within four years. Congress even offered transition relief for projects that had entered into binding offtake agreements.
Transition relief generally covers taxpayers that relied on the tax benefits (i.e., signed a written binding contract) before formal notice of the proposed change in tax law. Formal notice for this purpose is generally when the proposed tax legislation passes the House Ways & Means Committee. The House Ways & Means Committee has to originate any tax legislation, so this is where any repeal would be proposed, then voted on. This means that it will be a good idea to enter into written binding contracts prior to any vote on a repeal by the House Ways & Means Committee.
While we watch the spectacle of the 2024 elections unfold, it is wise to consider the implications of a repeal or rollback of the IRA, but know that in the event of a repeal, transition relief is likely.
Hilary Lefko is a partner at Norton Rose Fulbright and Gabrielle Jacques is a senior associate.
