IRA Domestic Content Bonus Credit: How To Maximize Your Energy Tax Credits

JASON HODELL: Hi everybody. This is Jason Hodell, and I'm with Ron Wainwright. We're both from Cherry Bekaert.

I am a supply chain consultant to Cherry Bekaert. Most recently, I was the CFO, then COO, and then CEO of Skullcandy, a big headphone brand making about 20 million headphones a year and shipping globally.

Last year, we won the Walmart Consumer Electronics Supplier of the Year award. A big part of winning that award was having a solid supply chain.

We had to deal with many challenges coming out of Asia, including increased freight costs and other issues in the news. We felt it and had to work through it.

Ron and I have been talking to many clients about opportunities to improve the supply chain while doing it smartly so that costs are covered by lucrative tax credits that are now federal law.

Today, we are going to focus on the domestic content sub-provisions within the available tax credits.

As a reminder, we published several thought leadership pieces, including articles, case studies, and webinars, on the Cherry Bekaert website if you want more information.

Why don't we kick it off? Ron, could you give us some high-level background on energy tax credits in the IRA?

RON WAINWRIGHT: Thanks, Jason. My name is Ron Wainwright, and I lead the energy practice for Cherry Bekaert.

Hopefully, all our listeners are aware of a major piece of tax legislation passed on August 16, 2022, referred to as the Inflation Reduction Act of 2022.

We will be talking today about some key provisions in the Inflation Reduction Act. The takeaway is that a significant expansion occurred regarding tax credits available for the production of clean energy or the installation of property used to generate clean energy.

Specifically, we are going to talk about a recent notice referred to as "Boosting Clean Energy Credits for Domestic Content in New Facilities."

We will discuss four specific credits: Section 45, the electricity produced from certain renewable sources credit; and Section 45Y, the clean electricity production credit.

We will also discuss Section 48, which is the energy property or Investment Tax Credit, and Section 48E, the clean electricity investment credit.

These provisions were expanded in the Inflation Reduction Act for the benefit of taxpayers so they can utilize and ultimately monetize clean energy tax credits.

JASON HODELL: Ron, we put out a thought piece and a case study that seemed too good to be true.

You had a manufacturer that could get 50%, 60%, or 70% of their investment in a new sustainable strategy back as transferable tax credits in a very short period of time.

What are some of the new credits and the bonus tiers that can help a client maximize their tax credits on the back end?

RON WAINWRIGHT: What we saw under the Inflation Reduction Act of 2022 was a paradigm shift regarding sustainability and clean energy.

Under the act, which took effect January 1, 2023, there are base credits. If a taxpayer uses U.S. domestic content in their facilities, they get an additional bonus credit of 10%.

In our case study, we saw a base credit of 30% for solar. Using domestic content gave them another 10%, and being in a defined energy community gave them another 10%.

Instead of the credit being at a base of 30%, it moved to 50%.

There are other opportunities if you are investing in a low-income credit area or meeting Prevailing Wage and Apprenticeship requirements, which could add another 20% credit.

In our case study, we saw that through these credits and bonus credits, a taxpayer could earn up to 70% attributable to an Investment Tax Credit or a Section 48 credit.

Today, we are going to talk about recent guidance that the IRS just gave us regarding the domestic content credit.

JASON HODELL: As a reminder, these credits are dollar-for-dollar reductions in your ultimate tax liability.

When we talk about 30%, 40%, or 50% tax credits, that is a percentage of the original capital expenditure.

This is a direct return of capital to the firm that made the investment to power the sustainable strategy.

Ron, one interesting bonus is qualifying under domestic content. Help our listeners understand what that means and the different flavors of domestic content they must consider during the planning phase.

RON WAINWRIGHT: That is a great question, Jason. This podcast respects a recent IRS pronouncement from May 12, 2023, specifically Notice 2023-38.

This notice provides guidance on domestic content requirements for taxpayers to qualify for bonus amounts related to clean energy investments.

Notice 2023-38 gives initial guidance on what domestic content means for facilities and equipment. To satisfy these rules, the taxpayer must certify the requirements.

Domestic content includes steel or iron construction materials that are structural components of a qualified facility and were mined or produced in the United States.

It also requires that 40% of the total cost of manufactured products and equipment used in the facility be mined, produced, or manufactured in the United States.

For offshore wind facilities starting after 2026, the domestic content requirement increases from 40% to 55%.

One goal of the Inflation Reduction Act is to bring industrial manufacturing facilities back to the United States through onshoring or nearshoring.

The bonus for domestic content in new facilities is key to this policy. Let’s talk about the increase in the credit amount.

For Section 45 and Section 45Y, a taxpayer can earn a 10% increase in the base credit. We see this as a significant driver for qualifying for that additional 10%.

Regarding Section 48 and Section 48E, there is an increase of 10% in the base credit if certain conditions are met.

This applies if the net output is less than one megawatt, if construction started before January 29, 2023, or if Prevailing Wage and Apprenticeship requirements are met.

Under the clean electricity investment credit, there is an increase of two percentage points above the base credit.

Notice 2023-38 also provides a Safe Harbor for classifying components in qualified facilities or energy storage technologies.

Claiming this bonus credit requires the taxpayer to certify the details. They will likely want to use an independent party, such as Cherry Bekaert, to provide this certification.

This certification is needed because you will be completing Form 8835, the electricity production credit, filed in the year the credit is taken.

There are specific information requirements regarding the energy project and the technology used. This is why using an independent third party is beneficial.

JASON HODELL: To summarize, we have a 30% base tax credit plus major bonuses.

We’ve discussed Prevailing Wage and Apprenticeship, the 10% bonus for domestic content, and another 10% for setting up in an approved energy community.

These bonuses allow you to get much of your capital back in a relatively short period of time.

Ron, does the CFO still get to depreciate the full cost of their CapEx and receive those tax benefits?

RON WAINWRIGHT: Excellent point, Jason. Yes, in addition to the base and bonus energy credits, the taxpayer is eligible to depreciate the asset.

Assets with a life of less than 20 years are eligible for bonus depreciation. For 2023, that is at an 80% level.

They will likely expense the CapEx over a five-year period. With bonus depreciation at 80% in 2023 and 60% in 2024, they are writing off the majority of their CapEx for tax purposes.

If a taxpayer does not have the tax capacity to use the credit, we have an upcoming podcast on the transferability provisions.

The IRS recently gave us initial guidance on this. Under the Inflation Reduction Act, if I cannot utilize the credit, I can sell it.

When I sell the base credit and the bonus credit, the taxpayer does not recognize any income tax consequences. We will talk more about transferability in a future episode.

JASON HODELL: Looking at this from the CFO level, they now have tools to get 30%, 40%, or 50% of their capital back from the government.

They can also accelerate depreciation to gain tax shields. Additionally, they get energy savings for the life of the solar array, which impacts the income statement.

Finally, they have a great carbon neutrality story for the capital markets, which is a major pressure point for CFOs. It is a win-win situation.

Ron, what should clients think about when choosing a strategic energy tax credit provider, and how does Cherry Bekaert handle this?

RON WAINWRIGHT: That is a great question, Jason. All this information is coming out very fast.

At Cherry Bekaert, we use a simple process called assess, identify, and quantify.

We provide a complementary assessment of energy bonus credits, deductions, rebates, and exemptions, as well as grants and loan programs within the Inflation Reduction Act.

You want a firm with experienced professionals. Our team includes electrical and civil engineers with real-world engineering experience paired with technical tax knowledge.

Our engineers are also CPAs, giving us the best of both worlds. There are many new requirements to qualify for the maximum credit and documentation rules to follow.

Our firm has been involved in this area for 15 years. We hope this podcast highlighted areas for you to consider and that our qualifications can assist you in maximizing bonus credits.

JASON HODELL: Thanks for listening, everybody. Tune in next time as we dive into more details on other bonus thresholds and requirements.

RON WAINWRIGHT: Thank you.