Inflation Reduction Act Tax Briefing - Tax Credits & Excise Taxes
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Inflation Reduction Act Tax Briefing – Tax Credits & Excise Taxes

Inflation Reduction Act Tax Briefing - Tax Credits & Excise Taxes

Inflation Reduction Act Tax Briefing – Tax Credits & Excise Taxes

Inflation Reduction Act Tax Briefing – Tax Credits & Excise Taxes – at a very high level provides opportunities for investment in clean energy via the reduction of carbon emissions by, among other things, expanding tax benefits for renewable energy, including the Internal Revenue Code Section 45 production tax credit (PTC) and Internal Revenue Code Section 48 investment tax credit (ITC).

It also adds to the Internal Revenue Code new sections. Specifically:

Other changes include expansions and amendments to the existing Internal Revenue Code Sections, including (in part):

How are WE paying for these new changes?

The answer is generally 4-fold:
  1. 15% Corporate Minimum Tax
  2. Excise Tax on stock repurchases
  3. IRS budget increase for enforcement to improve collections
  4. Medicare changes to negotiate pricing with drug companies
15% Corporate Minimum tax
  • Starting in 2023 the new corporate minimum tax will be 15% of a corporation’s “adjusted financial statement income” reduced by a corporate AMT foreign tax credit.
  • This tax applies to corporations with average annual adjusted financial statement income exceeding $1 billion for the 3 prior tax years.
  • IF the US corporation is owned by a foreign parent the threshold is reduced to $100 million.
  • Adjusted Financial Statement = Applicable Financial Statement with adjustments for consolidated returns and foreign income.
  • Exempt from these requirements are corporations involved with certain manufacturing AND corporate subsidies of private equity firms – go figure.
Excise Tax on Stock Repurchases
  • Starting in 2023 – 1% excise tax on fair market value of stock repurchases by domestic corporations trading on an ‘established’ exchange.
  • A “Covered Corporation” is a domestic corporation which is traded on an established securities market including IRC Section 7704(b)(1) partnerships
  • A repurchase = a redemption OR any transaction SIMILAR to a redemption.
  • Applies to specified affiliate corporations (50% ownership rule)
  • Separate rules apply the tax to purchases of stock in a foreign affiliate.
Excise Tax on Stock Repurchases Does Not Apply to:
  • Total repurchased of $1 million or less
  • Repurchases treated as dividends
  • Repurchases contributed to employer-sponsored retirement plans
  • Repurchases by regulated investment companies
  • Repurchases by REITs
  • Certain repurchases in the ordinary course of business by securities dealer
  • IRC §368 tax-free reorganizations
IRS Budget Increase for Enforcement to Improve Collections
  • The intent is to bring the IRS back to funding levels last seen in the 1990s with the expectation of reducing the ‘tax gap.’
  • The ‘tax gap’ is the difference between what is constructively collected by the IRS and what actuaries/economists have told us ‘should’ be collected.
  • Treasury Secretary Janet Yellen issued a directive that the IRS should implement new programs in a way that does not increase examination of taxpayers earning less than $400K
IRS Budget Breakdown – $79.6 billion in funding over the next 10 years with the biggest areas being:
  • Taxpayer Services $3,181,500,000
  • Enforcement $45,637,400,000
  • Operations support $25,326,400,000
  • Business systems modernization $4,750,700,000
  • Study a “free direct e-file tax return system” $15,000,000
Compliance and Enforcement
  • Over 50% of Budget
  • Currently maintaining that IRS won’t target businesses and families making less than $400,000/year
  • Expectation that enforcement and technical investments will focus on large corporations
  • Will likely include Transfer Pricing as the IRS looks more closely for companies shifting profits to lower-tax jurisdictions to reduce overall tax liability
Medicare Changes to negotiate pricing with drug companies
  • For 10 high-cost drugs beginning in 2026, ramping up to 20 drugs in 2029
  • If drug company does not come to the table a tax of up to 95% of sales of drug can be asserted
  • Drug costs can be capped but primarily for Medicare

Before Drilling Down into the Tax Credits – These Are the BIG Items

For Individuals

Clean Vehicle Credit
The changes that are expected to have the broadest impact include:
  • Caps on the income of the taxpayers eligible for the credit.
  • Starting in 2023, only households with incomes of up to $300,000 qualify for the credit if married filing jointly.
  • A limit on the retail price of qualifying vehicles and new sourcing requirements.
  • Battery-powered cars priced at less than $55,000 are eligible, or $80,000 for vans, SUVs and trucks.
  • Final assembly of the vehicle must have been in North America.
  • The materials from which the vehicle is constructed must meet specified sourcing requirements.
  • Includes plug-in electric vehicles AND fuel cell vehicles.
  • Eliminates the limitation on the number of vehicles produced by specific manufacturers.
  • Maximum credit = $7,500 with some limitations under IRC Section 30D
  • A new credit capping at $4,000 is available for purchasing a previously owned clean vehicle, subject to income limitations under new IRC Section 25E
  • A list of eligible vehicles is available on the U.S. Department of Energy website.
The newly named Energy Efficient Home Improvement Credit (formerly the Nonbusiness Energy Property Credit)
  • 30% of the costs of eligible home improvements made during the tax year, with a $1,200 annual limit.
  • Extended through 2031 & applies to secondary residences
Calculation Changes Starting in 2023
  • Increased to $2,500 for single family homes –Requires Energy Star Single-Family National Home Program
  • Credit can increase to $5,000 for eligible homes certified as zero energy ready under the Department of Energy Zero Energy Ready Home Program
Qualifying Properties include
  • Single family homes
  • Apartments
  • Townhomes
  • Condominiums
  • Assisted living facilities (must have kitchen in units)
The specific annual limits for improvements are:
  • $150 for home energy audits
  • $250 for exterior doors meeting Energy Star requirements ($500 total for all doors)
  • $600 for windows and skylights meeting Energy Star’s most efficient certification requirements
  • $2,000 for specified heat pumps and heat pump water heaters, biomass stoves and boilers
  • $600 for other qualified energy property
Practical questions related to these changes
  •      How does Energy Star Effect Qualifying?
  •      Do all contractors need Energy Star Certification?
  •      Do all trades need to pay prevailing wages?
  •      How do apprenticeship and other requirements translate to painters and landscapers?
The newly named Residential Clean Energy Credit (Formerly the Residential Energy Efficient Property Credit)
  • This credit was scheduled to expire at the end of 2023 is now extended through 2034.
  • The credit amount increased to 30% for 2023 through 2032, but drops to 26% in 2033 and 22% for 2034.
  • No longer applies to biomass furnaces and water heaters
  • Does apply to battery storage technology with a capacity of at least three kilowatt hours.
Affordable Care Act Expansion
  • Premium Tax Credits remain available for taxpayers through 2025

For Businesses

R&D Credit for Small Businesses
  • Small businesses may claim a limited amount of the R&D tax credit against employment (payroll) taxes.
  • Starting in 2023 the amount of the limitation increases from $250K to $500K.
  • Small business is defined as $5 million in gross receipts & the entity must be less than 5 years old.
Electricity Produced from Renewable Sources
  • Extended through 2024
  • An increased credit may be claimed if building construction or facility operation if workforce and wage requirements are satisfied
Energy Investment Credit
  • Extended through 2024
  • An enhancement of the credit is also available for solar facilities placed in service in low income communities
Other Extended Green Energy Credits
  • Alternative Fuel Refueling Property Credit is increased and extended through 2032
  • Second Generation Biofuels Credit is extended though tax year 2025
  • Carbon Oxide Sequestration Credit is extended through tax year 2032
Other NEW Green Energy Credits
  • Nuclear power facility credit = .3 cents per kilowatt-hour for energy produced from a zero-emissions facility
  • Sustainable aviation fuel
  • Production of clean hydrogen

The remainder of this post address these key issues:

Clean Energy Provisions

Wind Energy
Wind Projects Eligible for Production Tax Credit (PTC), Investment Tax Credit (ITC) or New Clean Electricity Tax Credit (after 2025)
  • 2.75 cents per kWh PTC for projects PIS in 2022
  • Full credits available through 2032 under technology neutral Clean Electricity tax credit
  • Tax credit phase-out eliminated for projects placed in service 2022 and later
Expansion of the Production Tax Credit (PTC)
  • “Full” PTC reinstated through 2024
  • Projects must meet prevailing wage requirements (or one of the exceptions)
  • 10% domestic content and energy credit available to projects in service in 2023 or later
Offshore Wind
  • PTC phaseout for projects placed in service before 2022 now inapplicable
  • Lower thresholds for domestic content adders
  • Unclear how energy community will apply to Offshore wind
Monetization
  • Direct pay opportunities limited for most taxpayers
  • Transferability election more broadly available
  • PTCs may be sold on an annual basis after credit is generated
Solar
Solar Projects Now Eligible for Either ITC, PTC, or Clean Electricity Tax Credit
  • 2.75 cents per kWh PTC for projects placed in service in 2022
  • Full credits available through 2032 under technology neutral Clean Electricity tax credit
  • When paired with energy storage technology, taxpayers may elect the PTC for solar property and the ITC for energy storage technology
Expansion of Investment Tax Credit (ITC)
  • 30% ITC reinstated through 2024
  • Projects must meet prevailing wage requirements
  • 10 % domestic content and energy credit available to projects in service in 2023 or later
Monetization
  • Direct pay available for tax-exempt owners
  • Solar ITC or PTC may be transferred to third parties in exchange for cash
Distributed Solar
Small Solar Projects of 5MW (AC) or Less Qualify for Additional Benefits
  • May add interconnection costs to ITC basis
  • Eligible for Environmental Justice adder
  • Solar projects of 1MW (AC) and smaller are permanently exempted from prevailing wage rules
  • Small-scale solar may stack credits up to 70%
Applicability to Interconnection Property
  • Certain interconnection property eligible to be included in small ITC projects
  • ITC-qualifying facility must have a net output of not more than 5MW
Environmental Justice for Small Projects
  • 10% bonus credit for projects in low-income communities or on Indian land
  • 20% bonus credit for projects which are also part of a low-income residential building project or economic benefit project

“Treasury must make allocation of environmental justice solar and wind capacity limitation.”

Energy Storage
Stand-Alone Energy Storage Projects Eligible for Full 30% ITC
  • Old rules allowed credits for storage only when paired with wind or solar, and when grid charging was limited to less than 25%
  • Now, energy storage technology stands on its own as energy property eligible for claiming the full 30% ITC without pairing or charging limitations
  • Must be placed in service after 2022, regardless of start date
  • Certain modifications to 2022 or earlier batteries may qualify
  • ITC bonus credits available for domestic content and energy communities
Storage Technologies
  • Defined broadly to include batteries, compressed air, pumped storage
  • Does not include property primarily used for transportation of goods or people
Pairing Opportunity
  • Taxpayers may elect the ITC for energy storage technology and elect the PTC for a paired solar or wind project
Carbon Capture
Expanded and Extended IRC 45Q
  • Extends start of construction deadline to 2033
  • Increases credit rate across technologies (maximum of $180 for direct air capture)
  • New law retains credit preference for sequestration over EOR and more than triples incentive for direct air capture
  • Significantly lowers carbon capture thresholds
Other features
  • As with PTC and ITC, must meet wage and apprenticeship requirements to receive “full” 45Q credit
  • Unlike PTC and ITC, no domestic content bonus credit is available
Monetization
  • Direct pay available for all taxpayers for first 5 years
  • Transferability available
Hydrogen
New PTC and ITC for Clean Hydrogen
  • Clean hydrogen projects may now qualify for a PTC (based on hydrogen production) or an ITC (based on cost of project).
  • Credit rate varies by facility emission standards.
  • Credit is technology and source-neutral so long as minimum emissions standard is satisfied.
  • GHG lifecycle emissions must use the GREET LCA model.
  • Hydrogen can be sold or used within a taxpayer group if volume is verified by third party.
  • PTC available for hydrogen produced after 2022, and ITC available for facilities placed in service after 2022
Interaction with Other Credits
  • Must meet wage and apprenticeship requirements to receive “full” credit
  • Clean hydrogen credits cannot be claimed on facilities where 45Q credit is claimed
  • Projects that source power from renewable energy generation may claim PTCs on renewable power and take clean hydrogen credits
Monetization
  • Direct pay available for all taxpayers for first 5 years
  • Transferability available
Advanced Manufacturing Production
New Credit Basics
  • Available for components of clean energy projects and minerals
  • Examples include solar and wind components, inverters, batteries, aluminum, graphite
Two independent credits
  1. IRC Section 48C – Qualifying Advanced Energy Project Credit
  2. IRC Section 45X – Advanced manufacturing production credit
Other things to know
  • Requires production in the US and sale to an unrelated party
  • Credit amount varies dependent on material produced
  • Full credits available for components sold from beginning of 2023 to end of 2029
  • No credit for components sold after 2032
Monetization
  • Direct pay available for all taxpayers for first 5 years
  • Transferability available

Qualifications for the new Clean Vehicle Credit under Section 30D

Overview – Credit Amount up to $7,500
$3,750 for meeting critical mineral requirement
  • For 2023 40% of mineral components in battery must be extracted or processed in the US or country with a foreign trade agreement
  • Percentage increases until reaching 80% for vehicles placed in service in 2027
$3,750 for meeting battery component requirement
  • For 2023 50% of the value of components of the battery must be manufactured or assembled in North America
  • Percentage increases to 100% for vehicles placed in service in 2029
Eligibility
  • Manufacturer vehicle caps removed for vehicles sold after December 31, 2022
  • MSRP of eligible vehicles capped at $80K for SUVs, vans and pickups and $55K for all other vehicles
  • AGI limitations of $300K for joint filers, $225K for head of household, $150K for all others
  • Final assembly must occur in North America
New Final Assembly Requirement
  • If you are interested in claiming the tax credit available under section 30D (EV credit) for purchasing a new electric vehicle after August 16, 2022 (the date the Inflation Reduction Act of 2022 was enacted), a tax credit is generally available only for qualifying electric vehicles for which final assembly occurred in North America (final assembly requirement).
  • The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on the Department of Energy list that do not meet the final assembly requirement in all circumstances.
  • To identify the manufacture location for a specific vehicle, please search the vehicle identification number (VIN) of the vehicle on the VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA). The website, including instructions, can be found at VIN Decoder.
Transition Rule for Vehicles Purchased before August 16, 2022
  • If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022 (for example, because the vehicle has not been delivered), you may claim the EV credit based on the rules that were in effect before August 16, 2022.
  • The final assembly requirement does not apply before August 16, 2022.
Vehicles Purchased and Delivered between August 16, 2022 and December 31, 2022
  • If you purchase and take possession of a qualifying electric vehicle after August 16, 2022 and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).
  • If you entered into a written binding contract to purchase a new qualifying vehicle before August 16, 2022, see the rule above.
What Is a Written Binding Contract?
  • In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit).
  • While the enforceability of a contract under State law is a facts-and-circumstances determination to be made under relevant State law, if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract.
  • For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount.
  • For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract.
  • A contract is binding even if subject to a condition, as long as the condition is not within the control of either party.
  • A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions.
Future Guidance
  • To reduce carbon emissions and invest in the energy security of the United States, the Inflation Reduction Act of 2022 significantly changes the eligibility rules for tax credits available for clean vehicles beginning in 2023.
  • The Internal Revenue Service and the Department of the Treasury will post information and request comments from the public on various existing and new tax credit incentives.
Pre-Inflation Reduction Act of 2022 Information
  • The information below pre-dates the enactment of the Inflation Reduction Act of 2022 but, subject to the final assembly rule described above, remains relevant for qualifying vehicles purchased and delivered prior to January 1, 2023.
  • Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.
  • For vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours.
  • The total amount of the credit allowed for a vehicle is limited to $7,500.
  • The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).
  • Section 30D originally was enacted in the Energy Improvement and Extension Act of 2008.
  • The American Recovery and Reinvestment Act of 2009 amended section 30D effective for vehicles acquired after December 31, 2009.
  • Section 30D was also modified by the American Taxpayer Relief Act (ATRA) 2013 for certain 2 or 3 wheeled vehicles acquired after December 31, 2011 and before January 1, 2014.
  • The vehicles must be acquired for use or lease and not for resale.
  • Additionally, the original use of the vehicle must commence with the taxpayer and the vehicle must be used predominantly in the United States.
  • For purposes of the 30D credit, a vehicle is not considered acquired prior to the time when title to the vehicle passes to the taxpayer under state law.
For additional information see Notice 2009-89
  • Notice 2009-89 applies to vehicles acquired subsequent to December 31, 2009 and provides procedures that a vehicle manufacturer may use if it chooses to certify that a vehicle meets certain requirements that must be satisfied to claim the Qualified Plug-in Electric Drive Motor Vehicle Credit and the amount of the credit allowable with respect to that vehicle
Another helpful resource
Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D) Phase Out
  • The qualified plug-in electric drive motor vehicle credit phases out for a manufacturer’s vehicles over the one-year period beginning with the second calendar quarter after the calendar quarter in which at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009) (“phase-out period”).
  • Qualifying vehicles manufactured by that manufacturer are eligible for 50 percent of the credit if acquired in the first two quarters of the phase-out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period.
  • Vehicles manufactured by that manufacturer are not eligible for a credit if acquired after the phase-out period.
  • Quarterly Sales by Manufacturer

IRC 45W – Commercial Clean Vehicles

Credit Amount is equal to the lesser of
  • 15% of the basis of the vehicle or
  • 30% of the basis if fully electric starting in 2023
  • Capped at $7,500 per vehicle under 14,000 lbs GVW and $40,000 per vehicle over 14,000 lbs GVW

“The term “comparable vehicle” is not clearly defined in the statute.”

Eligibility
  • There is no “original use” requirement in the statue.
  • Used vehicles should qualify for the 45W Credit.
  • The statutory language of 45W does not include the adjusted gross income, MSRP limits, battery component limits and critical minerals requirements from IRC 30D

IRC 30C – Alternative Fuel Refueling Property

Credit Amount
  • For large scale projects, the base credit is equal to 6% of the cost of the qualified alternative fuel vehicle refueling property and the maximum credit amount is $100,000 for each single item of property placed in service by the taxpayer.
  • The credit rate can be increased from 6% to 30% if the project meets prevailing wage and apprenticeship rules or the project commenced construction prior to the date that is 60 days after the US Treasury publishes guidance with regard to the prevailing wage and apprenticeship requirements.
Eligibility
  • Qualified property includes property for the recharging of motor vehicles propelled by electricity if the original use begins with the taxpayer (used property is not eligible).
  • The expanded 30C Credit is limited to projects that are installed in qualified census tracts defined as the census tracts that meet the definition for the New Markets Tax Credit or census tracts that are not defined as “urban.”

New Markets Tax Credit qualifying census tracts are those with a poverty rate of at least 20% or with a median family income that does not exceed 80% of either the statewide or metropolitan area median family income.

Section 45 production tax credit (“PTC”) & Section 48 investment tax credit (“ITC”)

Production Tax Credit (PTC)
  • The Act extends the current PTC framework for qualified facilities that begin construction prior to January 1, 2025, but (as with the ITC) implements a new structure with a “base credit amount” and “increased credit amount.”
  • Qualified facilities include wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities.
  • Additionally, the Act reinstates the PTC for solar energy facilities, which were last eligible for the PTC if placed in service before 2006.
  • Taxpayers that own qualified facilities are eligible for the PTC for electricity produced and sold during the 10-year period beginning on the date the facility was originally placed in service.
Investment Tax Credit (ITC)
  • As with the PTC, the Act extends the current framework for the ITC for qualified facilities that begin construction prior to January 1, 2025 and implements a similar base credit and increased credit structure.
  • Qualified facilities include solar, fiber-optic solar, qualified fuel cell, qualified microturbine, combined heat and power system, qualified small wind, and waste energy recovery properties.
  • The Act also permits taxpayers to claim the ITC with respect to several additional technologies, including standalone energy storage, qualified biogas property, fuel cells using electromechanical processes, dynamic glass, and microgrid controllers.
  • The election to claim the ITC in lieu of the PTC for otherwise eligible PTC facilities is retained.
Other Provisions
  • The Act extends the current PTC framework for qualified facilities that begin construction prior to January 1, 2025, but (as with the ITC) implements a new structure with a “base credit amount” and “increased credit amount” with a 10% bump when labor requirements are met for prevailing wages and apprenticeships.
  • Both the PTC & ITC are eligible for a 10% bump when labor requirements are met for prevailing wages and apprenticeships.
Prevailing Wage & Apprenticeship
Exceptions and options
  • Exceptions for small projects and those which begin construction prior to 60 days after IRS issues guidance
  • Otherwise, eligible for lower credit (generally 20% of full credit amount)
Prevailing Wage
  • Laborers or mechanics employed in the construction, alteration, or repair of the project must be paid wages not less than the prevailing rates in the applicable locality
  • Applies throughout construction and during recapture period
  • Notice 2022-61 covers how taxpayers receive the increased credits or deductions for meeting prevailing wage requirements.
  • Increased credits are available under §30C, §45, §45Q, §45V, §45Y, §45Z, §48, §48C, and §48E require prevailing wage and apprenticeship requirements.
  • Increased deduction under §179D requires prevailing wage and apprenticeship requirements.
  • Increased credits under §45L and §45U requires prevailing wage requirements.
Notice 2022-61 covers how taxpayers receive the increased credits or deductions for meeting prevailing wage requirements
  • Starts the 60-day clock – Requirements start for projects that begin starting January 30, 2023
  • Describes Process for identifying the applicable wage determination using the Department of Labor’s sam.gov website.
  • Provides additional specificity regarding the apprenticeship labor hour, ratio and participation requirements.
Two methods for determining beginning of Construction
  1.  Starting work of a significant nature (Physical Work Test)
  2.  Paying or incurring five percent or more of the cost of the facility (Five Percent Safe Harbor)
Physical Work Test
  •      Construction begins when physical work of a significant nature begins
  •      Must maintain a continuous program of construction
  •      Does not include preliminary activities such as planning, designing, financing, exploring, researching, permitting, licensing, or clearing a site
Five Percent Safe Harbor
  •      Taxpayer pays or incurs five percent or more of the total cost, and
  •      Makes continuous efforts to advance towards completion
Example
  • A taxpayer employs laborers and mechanics to construct a facility.
  • The taxpayer also uses a contractor and subcontractor to construct the facility.
  • The Department of Labor has issued a prevailing wage determination that applies to the type of construction that the laborers and mechanics perform for the county in which the facility is located.
  • The taxpayer ensures that the taxpayer, contractor, and subcontractor pay each laborer and mechanic a wage rate equal to the applicable rates for their respective labor classifications listed in this prevailing wage determination.
  • The taxpayer maintains records that are sufficient to establish that the taxpayer and the taxpayer’s contractor and subcontractor paid wages not less than such prevailing wage rates.
  • Such records include but are not limited to, identifying the applicable wage determination, the laborers and mechanics who performed construction work on the facility, the classifications of work they performed, their hours worked in each classification, and the wage rates paid for the work.

Under these facts, the taxpayer will be considered to have satisfied the Prevailing Wage Rate Requirements with respect to the facility.

Apprenticeship
  • Percentage of work must be performed by apprentices
  • Good-faith exception
  • The Department of Labor posted a list of FAQs here

Direct Pay (IRC 6417) v. Transferability (IRC 6418)

  • Only available to fairly limited category of “applicable entities”
  • Generally tax-exempt organizations and governmental entities for most credits
  • There are exceptions for carbon capture credits, clean hydrogen credits, and advanced manufacturing tax credits available to property placed in service in 2023 or later.
  • Election made at owner level, and owner may be partnership or disregarded entity.
  • If direct pay is elected, the entities are not eligible to transfer the credits
  • Election for direct pay is available from 1-1-2023 through 12-31-2032
Eligible Credits for Direct Pay
Other provisions
  • Taxpayers who are not eligible for direct pay may elect one time to transfer all or a portion of an eligible credit to an unrelated buyer in exchange for cash.
  • Election to transfer are made with respect to each facility.
  • Payments from the sale of a tax credit are not included in gross income by the seller and are not deductible by the buyer.
  • No subsequent transfer of the credit is permitted.
  • Credit carryforwards and carrybacks are not eligible for transfer.
  • Owner of the project may not be tax-exempt entity.
  • If the direct holder of a facility is a partnership, the election to transfer is made at the partnership level.
  • If the direct holder is a disregarded entity, the election is made at the level of the first regarded owner.
  • Does not apply until 2023 and election may not be made earlier than 180 days after enactment of IRA (2/12/23).
Eligible Credits that can be transferred:

For more on the Inflation Reduction Act Tax Briefing – Tax Credits & Excise Taxes – contact me today.



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