IRS Continues to Issue Guidance for Implementing Clean Energy Tax Credits
January 10, 2024
The Internal Revenue Service (IRS) issued proposed regulations for two Inflation Reduction Act (IRA) provisions at the end of 2023. Additionally, the IRS opened access to the pre-filing registration tool for taxpayers and tax-exempt entities looking to monetize IRA and Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act related eligible tax credits.
Section 45X Advanced Manufacturing Credit Proposed Regulations
Proposed regulations related to the Section 45X Advanced Manufacturing Production Credit (Section 45X) were released on December 14, 2023. Section 45X is an energy tax credit that operates in a slightly different context than many of the other energy investment and production credits. Section 45X is a production tax credit for domestic manufacturing of certain listed components for solar and wind energy, inverters, battery components and critical minerals. The tax credit is effective for sales that take place after December 31, 2022.
Highlights of the regulations include:
- A detailed definition of when eligible components produced by the taxpayer require a taxpayer to substantially transform constituent elements, materials or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from mere assembly or superficial modification.
- The new definition excludes a partial transformation. Additional rules apply based on the specific eligible components for which a taxpayer is seeking the energy tax credit.
- Clarification that materials and subcomponents of the eligible components produced may themselves be produced outside of the United States.
- Guidance for how contract manufacturing arrangements may affect eligibility of the credit for a taxpayer.
- Rules to help taxpayers determine the costs of certain minerals and eligible components for calculating the tax credit in those scenarios.
Section 45V Credit for Production of Clean Hydrogen
The proposed regulations for Section 45V Production of Clean Energy Credit (Section 45V) were released on December 22, 2023. Section 45V provides a production tax credit for each kilogram of qualified clean hydrogen produced by a taxpayer at a qualified clean hydrogen production facility.
The clean hydrogen production tax credit creates a 10-year incentive for clean hydrogen of up to $3.00 per kilogram. The amount of the tax credit is based on lifecycle greenhouse gas emissions (also referred to as carbon intensity). The tax credit provides a varying, four-tier incentive depending on the carbon intensity of the hydrogen production pathway.
Originally, Section 45V did not specify the methodology to determine the emissions from the production processes. The Department of Energy (DOE) released a white paper describing how to assess lifecycle greenhouse gas emissions associated with the use of electricity in hydrogen production. The DOE also released a new model for determining the lifecycle emissions of hydrogen production.
The proposed regulations require that taxpayers use DOE’s model to determine the lifecycle emissions of a hydrogen production process. This model includes emissions associated with feedstock growth, extraction, processing and delivery to the hydrogen production facility. Together with emissions associated with the power used by and any capture and sequestration of carbon dioxide generated by the hydrogen production facility.
Under the proposed regulations, power used in clean hydrogen production must be:
- Sourced from power facilities that began commercial operations no more than 36 months before the hydrogen plant was placed in service.
- Matched with the clean power generation hourly starting January 1, 2028.
- Sourced from a power producer in the same region as the hydrogen production facility.
There are other complex rules in the proposed regulations, including a clarification on how clean hydrogen must be produced for sale or use. Storage of the hydrogen does not disqualify it from the tax credit. The proposed regulations include more specific rules that govern the interaction of Section 45Q Carbon Oxide Sequestration Credit (Section 45Q) and Section 45V including how to define a facility for those purposes.
IRA and CHIPS Pre-Filing Registration Tool
On December 22, 2023, the IRS announced that qualifying businesses, tax-exempt organizations, or entities such as state, local and Indian tribal governments can register using the new IRA and CHIPS Act Pre-filing Registration Tool to take advantage of the elective payment or transfer of credit regimes.
- Elective pay makes certain clean energy tax credits refundable to entities that do not normally pay income taxes. With elective pay, an eligible entity that qualifies for a clean-energy investment tax credit can notify the IRS of its intent to claim the credit and file an annual tax return to claim elective pay for the full value of the credit. The IRS would then pay the value of the credit to the entity.
- Transferability allows entities that qualify for a tax credit but are not eligible to use elective pay, to transfer all or a portion of the credit to a third-party buyer in exchange for cash. The buyer and seller would negotiate and agree to the terms and pricing.
The IRS noted the following in its announcement:
- Taxpayers who intend to make an elective payment or credit transfer election must earn the tax credit. This means they must make a tax credit investment or undertake tax credit production activities to earn a tax credit that qualifies.
- The taxpayer must complete the pre-file registration process to receive a registration number. The registration number must be included on the taxpayer’s annual return as part of making a valid election.
- Interested taxpayers should complete and submit the pre-filing registration request no earlier than the beginning of the tax year where they will earn the tax credit they want to monetize.
- The IRS recommends that taxpayers and tax-exempt entities submit the pre-filing registration at least 120 days before they plan to file their tax return on which it will make its election. This should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers. A registration number is needed to properly file.
- If the elective payment amount, together with other tax payments and refundable tax credits, exceeds the taxpayer’s income tax liability, it will be treated as an overpayment of tax. Which can be refunded or credited to the estimated tax for the next tax year.
See more details of the registration process and a guide on how to use the pre-filing registration tool.
Your Guide Forward
Cherry Bekaert is here to be your guide forward as more proposed regulations are released. Our trusted Energy Tax Credits & Incentives advisors are ready to assist taxpayers in understanding the application of these developments to their operations.
Related Guidance
Highlights of Proposed Section 48 Investment Tax Credit Regulations
2024 Energy Tax Credits Updates & Tips
Impact of Section 6417: IRA Domestic Content Requirements
Capitalizing on Elective Pay and Transferability of Tax Credits Under the Inflation Reduction Act