2024 Energy Tax Credits Updates & Tips

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.

HOST: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today's topic is sustainability and recent IRS guidance related to clean energy credits and incentives enhanced or introduced in the Inflation Reduction Act of 2022, which we will refer to as the IRA throughout much of this discussion.

HOST: There are significant tax savings available from investment tax credits, including in wind and solar, production tax credits, incentives for energy-efficient buildings and homes, and many other areas.

HOST: Joining today's conversation are Tim Doran from Michigan, a director on our Energy Incentives team, and our manager, DAVID MOHIMANI. Tim, how are you doing today?

TIM DORAN: I'm excited to be here. We've been living and breathing this for the last year or so. It's exciting work. It finally got cold here; Thanksgiving had been snowless and we paid for it a few days later. It's in the 20s and we got a few inches.

HOST: David, how are you doing today?

DAVID MOHIMANI: I'm doing well and staying warm. I haven't been outside yet today. I'm sitting in Philadelphia.

HOST: You're not one of those Eagles fans, are you?

DAVID MOHIMANI: I've kind of been forced into it since moving here. If you're not with us, you're against us, and you don't want to be against all these people. I've been pulled into Eagles fandom.

HOST: As always, joining me is my partner, Sarah McGregor from Greenville. Sarah, how's life treating you?

SARAH MCGREGOR: Life is good. Over the Thanksgiving holidays I was hiking in the mountains and walking on the beach. It was a good week, and it's good to be back at work.

HOST: Sounds like a great Thanksgiving vacation. I'm Brooks Nelson, partner in Richmond. It's unusually cold in Richmond today as well.

HOST: The Inflation Reduction Act was signed into law in August 2022. Many of the new or enhanced credit provisions are effective in 2023. Because of the short time period for the effective date, the IRS has scrambled to issue guidance, forms, procedures, and regulations affecting these credits.

HOST: We'll discuss how companies and individuals can benefit, what to watch out for, and focus on recent guidance that has been coming out in a flurry over the last few weeks. Tim, you're up. Give us a quick overview of the IRA and the investment and production credits.

TIM DORAN: These are, broadly speaking, the core credits of the IRA. They existed in different forms before the act. There are two main incentive types: the Investment Tax Credit, which is an upfront credit based on the cost basis of the assets, and the Production Tax Credit, which is a credit based on energy produced and sold over time, typically over a ten-year window.

TIM DORAN: Prior to the IRA, many taxpayers who could elect the PTC instead of the ITC often chose the PTC because it was a greater benefit. That landscape has shifted because the ITC received significant enhancements, so more analysis is required now to determine the best approach.

TIM DORAN: There is also broader technology eligibility. Solar and wind are the traditional examples, but the IRA expanded eligible technologies. A key addition is standalone battery and broadly energy storage technology.

TIM DORAN: Previously, credits for batteries generally required co-location with eligible renewable generation and proof that a portion of energy charging the battery came from that renewable source. Now standalone battery storage can qualify, which opens many new opportunities for tax savings under both the ITC and the PTC.

HOST: David, in addition to the ITC and PTC, the IRA updated incentives for energy efficiency. Can you provide background?

DAVID MOHIMANI: The primary provision is Section 179D, the energy tax savings deduction, which existed before the IRA. The IRA made four key updates: it increased the maximum deduction to $5.00 per square foot, reduced the qualifying threshold for calculated energy cost savings from a 50% reduction to 25%, allowed tax-exempt owners of a building to allocate the Section 179D deduction to an eligible designer, and established a three- to four-year reset so the deduction can be claimed multiple times for continued improvements.

DAVID MOHIMANI: There is also Section 45L, the Energy Efficient Home Tax Credit. The IRA increased the base maximum amount from $2,000 to $5,000 and extended it to 2032.

TIM DORAN: From the market perspective, the allocation provision for tax-exempt entities is significant. Many tax-exempt entities involved in new or upgraded buildings had not previously considered Section 179D, so this change brings a new class of taxpayers into the program.

HOST: Returning to the ITC and PTC, the IRA introduced prevailing wage and apprenticeship requirements that are critical to maximizing credits. What guidance has the IRS issued to help taxpayers comply?

TIM DORAN: The IRS issued proposed regulations and notices that clarify prevailing wage and apprenticeship requirements. These provisions are new and are critical because they provide a five-times multiplier to the base credit when met. Given the multiplier, it is almost always financially worth pursuing the prevailing wage component.

TIM DORAN: The regulations define prevailing wages based on Department of Labor standards for the class of worker, geography, and time period. Taxpayers must meet these wages throughout the project life cycle, which requires documentation. The IRS has indicated documentation should be maintained, suggested at least quarterly.

TIM DORAN: Apprenticeship requirements also apply, requiring a certain percentage of workers to be apprentices throughout the project life cycle. The guidance includes taxpayer relief provisions: taxpayers can cure unintentional failures to meet prevailing wages, although it is costly. There is also a carve-out for apprenticeships recognizing geographic limitations and the need to make a good-faith effort to recruit apprentices.

TIM DORAN: We at Cherry Bekaert are available to provide services to determine whether projects meet prevailing wage and apprenticeship requirements.

HOST: Tim, what about other credit boosters based on materials, content, or project location?

TIM DORAN: The IRA includes additional credit adders beyond the prevailing wage multiplier. The prevailing wage and apprenticeship rules provide a multiplier, while these boosters add percentage points to the credit. For example, a project with a 6% base credit could reach 30% with the wage multiplier, then add 10% for domestic content and another 10% for location-based criteria to reach higher overall credit rates.

TIM DORAN: Domestic content requires certain steel to be sourced domestically and a proportion of other components to be domestically sourced. IRS notices provide guidance on calculating thresholds and which components qualify.

TIM DORAN: The energy community adder has three categories, from brownfield and former coal mine sites to certain high-unemployment areas. Guidance clarifies how to determine if a project is in an energy community, including looking at the square footage of the facility or the nameplate capacity to determine where the majority of activity occurs.

TIM DORAN: This guidance helps taxpayers plan for current and future projects to maximize credit potential based on domestic content and energy community location.

HOST: David, does timing matter with respect to project start or construction versus when guidance is issued?

DAVID MOHIMANI: Timing can matter. Under prior law, the ITC and PTC were phasing out for projects starting after December 31, 2019. The IRA extended and updated those rules. Projects placed in service after January 1, 2023, are eligible for a higher base rate if they meet prevailing wage requirements, and the same applies for the PTC.

DAVID MOHIMANI: Starting in 2025, new code sections—Section 45Z and Section 48Y—will replace the current Section 48 and Section 45 regimes and include greenhouse gas emission criteria. Projects placed in service before 2025 generally follow the existing framework, but attention is still needed for begun-construction safe harbors and other technology-specific rules that reference construction start dates.

TIM DORAN: When the IRA first passed, many thought begun-construction tests were no longer relevant, but some technologies and provisions still reference begun-construction dates. Taxpayers should analyze whether they fall under those provisions and monitor project timing accordingly.

HOST: Now to monetization—transferability and direct pay. Tim, talk about transferability.

TIM DORAN: Before transferability, ITC and PTC benefits were largely accessible to a small group of taxpayers, often utilities and energy developers who partnered with tax equity investors. Those structures were complex and limited market access.

TIM DORAN: Transferability allows a taxpayer to sell their credit to another entity for cash in a transaction that is not recognized for tax purposes by either party. The buyer can claim the credit against federal tax liability and typically pays less than the full credit value, creating an arbitrage. The seller monetizes the credit immediately.

TIM DORAN: The IRS has issued some guidance but has promised additional mechanisms, including a portal to register transfers and prevent invalid sales. Marketplaces are developing but the framework for registration and validation is still evolving.

TIM DORAN: Transferability can provide upfront cash useful for financing, covering interest, or contributing to project funding, making clean energy investments more accessible.

HOST: David, discuss direct pay and its significance.

DAVID MOHIMANI: Direct pay, also called elective pay, allows tax-exempt entities to receive a cash payment from the government for the amount of the credit they generate. This brings state and local governments, counties, and other tax-exempt organizations into the market in a meaningful way.

DAVID MOHIMANI: Many governmental entities entering renewables projects had not factored this into planning. Direct pay creates a new class of participants who can receive cash for credits rather than relying on tax equity markets.

TIM DORAN: Tax-exempt entities investing in renewable assets can now access direct pay mechanisms and receive cash from the IRS, which can materially change project economics.

HOST: Sarah, who are likely buyers of transferable credits?

SARAH MCGREGOR: Buyers will primarily be larger C corporations. The IRS has characterized these credits as passive activity credits, meaning individuals generally cannot use them because passive activity credits offset only passive activity income. That greatly limits the individual market for credit purchases.

SARAH MCGREGOR: Trusts, individuals, and closely held C corporations with five or fewer owners may also be restricted under passive activity rules, so large C corporations represent the most likely buyer pool.

HOST: David, what issues should buyers consider?

DAVID MOHIMANI: Buyers should consider timing—when credits will be generated, filed for, and transferred—because timing affects when credits can be claimed. Marketplaces are not fully open and registration processes are still pending.

DAVID MOHIMANI: Due diligence is critical to ensure sellers legitimately earned credits. Buyers need to verify compliance with prevailing wage and apprenticeship requirements and other eligibility criteria. If a project only qualifies for a lower base credit, the buyer could overpay relative to the credit's true value. This is an evolving area, so buyers should stay cautious.

TIM DORAN: Buyers should also consider cash flow timing, estimated federal tax payments, carryback provisions, and how and when cash from credits will be realized.

HOST: Final comments. David?

DAVID MOHIMANI: The IRA has generated tremendous interest because it opens these programs to many new participants. Previously, tax equity limited the market to a handful of players. Now many different types of clients can utilize these credits, receive cash, or reduce tax liabilities. The market is still in its infancy and will likely grow as successful transactions increase interest.

TIM DORAN: I'm a believer in this space. I have solar on my roof and I'm passionate about these incentives. There is broad applicability for many taxpayers, whether purchasing credits, adopting new technologies, or enhancing sustainability messaging. The space covers a wide gamut and it will be interesting to see how it develops over the next few years.

SARAH MCGREGOR: This is an exciting space, and somewhat the wild west, but with positive outcomes because cash incentives are broadly available. The mechanisms are designed to use economic incentives to move clean energy forward. There is still detail work to be done, but the tax code is often used to implement social and economic policy, and this demonstrates that.

SARAH MCGREGOR: I would welcome legislative changes that address the passive activity limitation for individual investors, which could further broaden participation.

HOST: A final note: this is complex and full of potential pitfalls. Work with professionals and be wary of unsavory players.

HOST: This concludes today's discussion on clean energy credits and sustainability under the IRA. We are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, regarding your specific tax issues.

HOST: Check the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics. This concludes today's podcast. Please like, share, and subscribe.

HOST: Thank you, Tim. Thank you, David. Thank you to our listeners for spending your time with us. Let's call it a day.