Vol 2023-5 Credits and Incentives Under the Inflation Reduction Act and CHIPS Act

Rödl & Partner Tax Matters Volume 2023-5, published May 17, 2023

On August 16, 2022, President Biden signed into law the Inflation Reduction Act ("IRA"). In our prior Tax Matters Vol 2023-5, we summarized changes to the corporate tax regime that could impact small to medium-sized businesses. This Tax Matters issue focuses on the energy incentives in the IRA as well as the CHIPS and Science Act and their relevance to our client base.

The IRA is the largest energy incentive effort in U.S. history. It builds on and expands previous energy initiatives to encourage investments in green and alternative energies. We have reviewed the various incentives offered in the IRA, as well as the CHIPS and Science Act of 2022, and summarized the most relevant opportunities for our clients below.

Please note that most of these incentives are credits, and therefore, offset your federal income tax liability. If you do not anticipate having sufficient taxable income in future years, then pursuit of a particular credit may not be worthwhile.

Please contact your Rödl & Partner representative with any questions regarding your unique situation.
 

The following credits and deductions are most relevant to our entity clients.

Extension of the Advanced Energy Project Credit

This credit, a percentage of the qualified investment (base rate of 6%), extends the advanced energy project credit which is a competitively awarded investment tax credit for clean energy and energy efficient manufacturing projects. The credit can be up to 30% of the investment if the wage and apprenticeship requirements are met.

The credit applies to projects that (1) re-equip, expand, or establish an industrial or manufacturing facility for the production or recycling of a range of clean energy equipment and vehicles; (2) re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent; or (3) re-equip, expand, or establish an industrial facility for the processing, refining, or recycling of critical materials.

Taxpayers must apply for the credit between May 31^st and July 31^st.

Due to the time investment required to determine eligibility and apply for this credit, we recommend applying only if the investment is of a significant amount and other credits are not available.

Advanced Manufacturing Production Credit       

This credit applies to domestic manufacturing of components for solar and wind energy, inverters, battery components, and applicable critical minerals used in the manufacture of such components (e.g. aluminum, chromium, cobalt, germanium, graphite, lithium, nickel, tungsten, tin). The amount of the credit varies widely depending on the type of component produced.

Credit for Qualified Commercial Clean Vehicles

This credit is for the purchase of qualified commercial clean vehicles in an amount equal to the lesser of 15% (or 30% for a vehicle not powered by a gas or diesel internal combustion engine) of cost, or the incremental cost of the vehicle (excess of purchase price of such vehicle over purchase price of a comparable vehicle, up to $7,500 (or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds).

Modification of Energy Efficient Commercial Buildings Deduction
The increased deduction applies to taxpayers making energy efficiency improvements to commercial buildings, such as improvements to interior lighting; heating, cooling, ventilation, and hot water; and building envelope. Eligible recipients include owners and long-term lessees of commercial buildings and designers of energy efficient building property (architects, engineers). The computation of the deduction is complex but focuses on a reduction in energy consumption.

The following credits may be relevant to our entity clients depending on the nature of the investment.
 
Advanced Manufacturing Investment Credit (CHIPS Act)             

This credit is equal to up to 25% of the qualified investment in an advance manufacturing facility which is defined as facilities primarily used for the manufacturing of semiconductors, or the manufacturing of equipment used in semiconductor production. Facilities that are suppliers to either advanced manufacturing facilities or producers of semiconductors do not qualify.

Extension and Modification of the Energy Investment Tax Credit (ITC)

The credit is 30% (with potential additional bonuses) of the investment in fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties.

Extension and Modification of the Renewable Electricity Production Tax Credit ("PTC")

This credit is computed based on kilowatt hour of electricity generated by solar or other qualifying technologies during the first ten years of a system's operation with additional bonuses for meeting certain domestic manufacturing requirements or for facilities located in energy communities. The credit applies to investments generating electricity from wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, and marine and hydrokinetic renewable energy.

Extension and Modification of Alternative Fuel Vehicle Refueling Property Credit           

This credit is generally 30% (6% if the property is depreciable) of the cost of installing qualified alternative fuel vehicle refueling and charging property in low-income and rural areas. Alternative fuels include electricity, ethanol, natural gas, hydrogen, biodiesel, and others.

Extension and Modification of Carbon Oxide Sequestration Credit

Increases existing credits for certain captured carbon oxide emissions. It generally applies to facilities or equipment placed in service after 2022 and before 2033.

The following credits are likely not relevant to our entity clients.
 
Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low- Income Communities         

Applies to small-scale solar and wind facilities in low-income communities, on American Indian land, or part of a low-income residential building project or a low-income economic benefit project.

Zero-Emission Nuclear Power Production Credit              
This credit applies to existing nuclear power plants at the time of enactment that are not eligible for the 45J credit.
 
Extension of Tax Credits for Biodiesel, Renewable Diesel, and Alternative Fuels

The income tax credit component applies to registered producers of alternative fuels. Certain producers and users of alternative fuels may also obtain a credit on their excise tax liability.

Extension of Second-Generation Biofuel Credit

This credit applies to registered producers of second-generation biofuels.

Sustainable Aviation Fuel Credit              
This credit applies to producers and blenders of SAF-kerosene fuel mixtures for aviation.

Credit for Production of Clean Hydrogen             
This credit applies to producers of clean hydrogen in the U.S.

Extension, Increase, and Modification of New Energy Efficient Home Credit

This credit applies to contractors / homebuilders.

Clean Electricity Production Credit and Clean Electricity Investment Credit

These credits apply to electricity generation facilities for which the greenhouse gas emissions rate is not greater than zero.

Clean Fuel Production Credit     

This credit applies to domestic producers of clean transportation fuels, including sustainable aviation fuels.
 
The following credits are applicable to individuals.
 
Extension and Modification of Nonbusiness Energy Property Credit

This credit applies to homeowners and renters for certain improvements that increase the heating and cooling efficiency of their principal residence.

Extension and Modification of Residential Energy Efficient Property Credit (Residential Clean Energy Credit)  

This credit applies to homeowners and renters who install certain qualified alternative energy property or make specified energy saving improvements to their principal residence.

Modification and Termination of New Qualified Plug-In Electric Drive Motor Vehicle Credit (Clean Vehicle Credit)   

This credit applies to individual consumers who purchase new clean vehicles.
 
Credit for Previously-Owned Clean Vehicles       

This credit applies to individual consumers who purchase pre-owned clean vehicles.

Please contact your Rödl & Partner representative with any questions regarding your unique situation.

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