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TAX CLINIC

to transfer a credit must be made at the extends the PTC-related beginning- provisions; (4) energy communities;
partnership or S corporation level. of-construction deadline to projects and (5) hydropower.
Implications: The new Sec. 6418 in- that begin construction before Jan. 1, Implications: The modifications
troduces more options for project develop- 2025. Importantly, the Inflation Reduc- to the Sec. 45 PTC — specifically,
ers and sponsors to monetize tax attributes, tion Act reinstates the PTC for solar the inclusion of certain technolo-
thus giving them alternatives to tax equity projects (that begin construction before gies, extension through 2024, and
financing. It is too early to tell whether the Jan. 1, 2025), and the beginning-of- switchover to the technology-neutral
direct transfer of tax credits (which will not construction deadline for geothermal credit regime — ought to be positively
monetize depreciation or provide an op- projects is further extended. The Infla- received. Providing certainty and the
portunity to “mark up” ITC assets) is more tion Reduction Act also eliminates the ability to forecast investment deci-
attractive than tax equity. This will depend credit rate reduction for qualified hy- sions and related returns is critical in
largely on the ultimate pricing of the direct droelectric production and marine and capital-intensive industries.
transfer tax credits and the development of hydrokinetic renewable energy property. Sec. 48 ITC: Under prior law, the
an efficient project-level debt market that The PTC is now subject to the two- ITC began phasing out for certain
could offset the failure to monetize depre- tiered credit structure, with a base credit projects beginning construction after
ciation or benefit from a markup inherent amount and a bonus credit amount. Dec. 31, 2019. The Inflation Reduc-
in tax equity structures. The Inflation Reduction Act also tion Act extends the ITC for most
includes a domestic content bonus projects that begin construction before
Modified credit carryback for the PTC. This allows taxpayers to Jan. 1, 2025 (except for geothermal
The Inflation Reduction Act provides increase their Sec. 45 PTC by 10%, property, which is extended to before
for a three-year carryback period (instead so long as the applicable requirements Jan. 1, 2035, although such credit
of a one-year period) for certain cred- are met related to the percentage of is subject to a phaseout schedule).
its, including: the total cost of components that are For projects that began construction
■ The Sec. 30C credit for alternative fuel mined, produced, or manufactured in after Dec. 31, 2019, and that were
vehicle refueling property; the United States, or in relation to the placed in service prior to Jan. 1, 2022,
■ The Sec. 45 PTC; location of qualified facilities in ap- the ITC credit amount is 26%. For
■ Sec. 45Q; plicable “energy communities” (which projects placed in service after Dec.
■ The Sec. 48 energy credit; generally include certain brownfield 21, 2021, the limited ITC amount/
■ The zero-emission nuclear power sites; certain areas that historically had phaseout generally does not apply.
production credit under new Sec. 45U; significant employment related to the Similar to the Sec. 45 PTC and
■ The credit for production of clean extraction, processing, transport, or other credits, the Sec. 48 ITC is
hydrogen under new Sec. 45V; storage of coal, oil, or natural gas; or a subject to the two-tiered investment
■ The technology-neutral PTC and ITC Census tract where certain coal mines structure (with the top, bonus rate
(new Secs. 45Y and 48E, respectively); or coal-fired power plants used to oper- being achieved if the prevailing wage
■ The qualifying advanced energy project ate). The Inflation Reduction Act also and apprenticeship requirements are
credit under Sec. 48C; includes certain phaseout provisions for met, with similar exceptions to those
■ The clean fuel production credit under the domestic content rules, as well as of the Sec. 45 PTC).
new Sec. 45Z; other ancillary provisions. The Inflation Reduction Act
■ The credit for advanced manufacturing Finally, the Inflation Reduction Act expands the Sec. 48 ITC to include
production under new Sec. 45X; and requires a limited reduction of the Sec. three new technologies — stand-
■ The Sec. 45W credit for qualified com- 45 PTC where tax-exempt bonds are alone energy storage, qualified biogas
mercial vehicles (in certain situations). used to provide the financing for the property, and microgrid controllers
qualified facility. — if construction begins by Dec.
Energy production and generation The Sec. 45 PTC amendments 31, 2024.
The Inflation Reduction Act made sig- apply to facilities that are placed in A potentially unpopular change
nificant changes to the Sec. 45 PTC and service after Dec. 31, 2021, with the from prior legislative proposals is the
the Sec. 48 ITC. exception of the following provisions, absence of the 30% ITC for transmis-
Sec. 45 PTC: Under prior law, the which apply to facilities placed in sion, with the Inflation Reduction
PTC was largely unavailable for proj- service after Dec. 31, 2022: (1) tax- Act providing that a Sec. 48 ITC only
ects that began construction after Dec. exempt bond financed facilities; (2) applies to qualified interconnection
31, 2021. The Inflation Reduction Act domestic content; (3) certain phaseout property used in installing energy

20 January 2023 The Tax Adviser