The Inflation Reduction Act (IRA) of 2022 significantly enhances many energy efficiency tax credits and deductions including the Renewable Electricity Production Credit (Section 45), the Clean Electricity Production Credit (Section 45Y), the Commercial Clean Vehicle Credit (Section 45W), the Advanced Manufacturing Production Credit (Section 45X), the Energy Investment Credit (Section 48), the Clean Electricity Investment Credit (Section 48E), the Qualifying Advanced Energy Project Credit (Section 48C), the New Energy Efficient Home Credit (Section 45L) and the Energy Efficient Commercial Buildings Deduction (Section 179D).

Here are the highlights for each of these energy incentives, including what has been added or enhanced by the IRA, and how to maximize the potential benefits.

The Renewable Electricity Production Tax Credit (Section 45) and The Clean Electricity Production Credit (Section 45Y)

What are Sections 45 and 45Y?

The production credits under Sections 45 and 45Y give a credit per kilowatt-hour (kWh) for electricity produced by certain renewable sources. For things like landfill gas, open-loop biomass, municipal solid waste, and small irrigation power, the credit is up to 1.3 cents/kWh. For wind, closed-loop biomass, and geothermal, it’s up to 2.6 cents/kWh. This credit is available each year for the 10 years after the equipment is placed in service. Section 45 is available for projects whose construction has begun by December 31, 2024 and Section 45Y is available for projects whose construction begins after December 31, 2024.

How has the IRA enhanced Section 45?

The IRA introduced new rules for large energy systems over 1 megawatt (MW). These projects can receive a tax credit starting at 0.5 cents/kWh, but the full credit is granted only if certain wage and apprenticeship criteria are met. Additionally, the IRA increases credit amounts for projects of any size — one for using domestic steel/iron materials and another based on the project’s location within an “energy community,” defined as a site with a history of coal, oil, or natural gas reliance and high unemployment.

Smaller projects (under 1 megawatt) can qualify if they start construction between January 1, 2022, and December 31, 2024. Larger projects have a construction window from January 30, 2023 (60 days after the IRS provides labor-related guidelines) until January 1, 2025.

The IRA also adds a direct pay option for tax exempt entities like local or Tribal governments and non-profits to directly receive money for certain energy investment and production credits, including Section 45. This applies to equipment in use between January 1, 2022, and December 31, 2032.

Section 45Y adds the requirement that the production projects must have a net greenhouse gas emissions rate of zero.

The New Energy Efficient Home Credit (Section 45L)

What is Section 45L?

Section 45L is a credit of up to $2,000 per unit for properties placed in service prior to January 1, 2023, and up to $5,000 per unit for projects placed in service between January 1, 2023, and December 31, 2032.

How has the IRA enhanced Section 45L?

The IRA extends Section 45L at the current rate of $2,000 per unit for single-family and multifamily (three stories and less) through the end of 2022, and both the Section 179D and Section 45L are extended at increased values through the end of 2032.

Under the IRA extension, energy efficient single-family homes and multifamily developments three stories and less can receive a tax credit of $2,000 per unit, and manufactured homes can receive a tax credit of $1,000 per unit.

For qualifying Section 45L projects placed in service after January 1, 2023:

The 45L Residential Credit increases for projects completed in 2023, with multifamily homes starting at a base credit of $500/unit, and a bonus credit of $2,500/unit for projects meeting prevailing wage requirements. Additional credits are available for projects meeting the DOE Zero Energy Ready home program requirements.

For single-family homes and manufactured homes, the base credit is $2,500/unit, increasing to $5,000/unit for projects meeting prevailing wage requirements.

¹Bonus credit if prevailing wage and apprenticeship requirements are met.

Additionally, starting in 2023, there are no limits on the height of the qualifying project or energy efficient multifamily projects pursuing 45L Residential Credits.

For affordable housing projects qualifying for the Low Income Housing Tax Credit (LIHTC), there is no basis reduction for Section 45L projects, meaning qualified projects can claim both the LIHTC and 45L.

What does it mean to meet ENERGY STAR Program Requirements?

The Inflation Reduction Act references two separate 45L credit tiers:

For homes “eligible to participate” in the applicable ENERGY STAR program, the credit is either $500 or $2,500, depending on the property type and if certain labor provisions or safe harbors are met.

For homes certified under the Department of Energy’s Zero Energy Ready Home (ZERH) Program, an enhanced credit of either $1,000 or $5,000 is available, depending on the property type and if certain labor provisions or safe harbors are met.

Notice 2023-65 clarifies the terms “eligible to participate” and “meets the program requirements” to mean that a home must be certified under the applicable ENERGY STAR standard.

What are the national and regional program requirements with 45L?

In order to satisfy the ENERGY STAR Program Requirements (certification), qualified homes must meet both the national and regional program requirements. These regional requirements generally apply to homes in Hawaii, Washington, Oregon, California and Florida.

How to Apply the New Section 45L Guidance

Pending additional guidance, the cost to certify a home under the applicable ENERGY STAR guidelines, absent other variables, may often outweigh the value of the 45L tax credit.

Residential builders or developers applying for the credit should consider consulting an energy rating company and a tax advisor to assist with the credit.

The Commercial Clean Vehicle Credit (Section 45W)

What is the new Section 45W?

Beginning January 1, 2023, under the new Section 45W, certain buyers of environmentally friendly commercial vehicles can get a tax credit. This credit can be up to $7,500 for vehicles weighing up to 14,000 pounds and $40,000 for those over 14,000 pounds. To qualify, these vehicles must be intended for use on public roads or mobile machinery, and the Treasury will provide guidelines for determining the extra cost of qualifying commercial vehicles.

Qualifying commercial clean vehicles are those with an electric motor powered by a battery capable of charging to at least 15 kilowatt-hours for vehicles weighing more than 14,000 pounds, and 7 kilowatt-hours for those under 14,000 pounds. This credit is applicable for vehicles purchased between 2023 and 2032.

Determining Eligibility for the New Section 45W Credit

Section 45W allows eligible businesses and tax-exempt organizations purchasing a qualified commercial clean vehicle a tax credit of up to $40,000. The credit is determined by the lesser of:

• 15% of the vehicle's cost basis (30% if the vehicle doesn't use gas or diesel)
• The incremental cost of the vehicle

The maximum credit is $7,500 for qualified vehicles with gross vehicle weight ratings (GVWRs) under 14,000 pounds and $40,000 for larger vehicles.

To be eligible, a vehicle must:

• Be subject to a depreciation allowance (with exceptions for tax-exempt organizations not under a lease).
• Be made by a qualified manufacturer as defined in IRC 30D(d)(1)(C).
• Be for business use or lease, not for resale.
• Be primarily used in the United States.
• Not have received a credit under sections 30D or 45W previously.

Additionally, the vehicle must either be treated as a motor vehicle for Clean Air Act purposes, manufactured primarily for use on public roads (excluding rail vehicles) or mobile machinery as defined in IRC 4053(8), including vehicles not designed for transporting loads on public highways.

The vehicle or machinery must also be a plug-in electric vehicle meeting specific battery capacity criteria or a fuel cell motor vehicle meeting the requirements of IRC 30B(b)(3)(A) and (B).

The Advanced Manufacturing Production Credit (Section 45X)

What is Section 45X?

The new Section 45X is a tax credit for U.S.-made wind, solar, battery power components and critical minerals. These components must have been produced and sold after December 31, 2022. The credit amount varies, ranging from $0.25 to $45 or in the case of critical minerals, 10 percent of the production costs. It depends on factors like the type of eligible component, production cost, and capacity factors.

This credit is applicable each year to eligible components and critical minerals produced and sold after December 31, 2022. Starting from January 1, 2030, the credit will decrease gradually based on phase-out percentages: 75% for 2030, 50% for 2031, 25% for 2032, and 0% for 2033. Notably, these phase-out percentages won't apply to critical minerals.

Determining Eligibility for the New Section 45X Credit

To be eligible for the credit, a qualifying component must be both produced and sold in the taxpayer's trade or business. A qualifying component includes any solar energy part, any wind energy part, an inverter, a qualifying battery, and any relevant critical mineral.

For 2023, DOE has determined the final Critical Materials List to include the following:

• Critical materials for energy: aluminum, cobalt, copper, dysprosium, electrical steel, fluorine, gallium, iridium, lithium, magnesium, natural graphite, neodymium, nickel, platinum, praseodymium, silicon, silicon carbide and terbium.
• Critical minerals: The Secretary of the Interior, acting through the Director of the U.S. Geological Survey (USGS), published a 2022 final list of critical minerals that includes the following 50 minerals: “Aluminum, antimony, arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt, dysprosium, erbium, europium, fluorspar, gadolinium, gallium, germanium, graphite, hafnium, holmium, indium, iridium, lanthanum, lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, tellurium, terbium, thulium, tin, titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium.”

The Clean Energy Investment Tax Credit (Section 48) and The Clean Electricity Investment Credit (Section 48E)

What are Sections 48 and 48E?

For most projects beginning prior to December 31, 2024, Section 48 is an Investment Tax Credit (ITC) for clean energy property, including:

• Active Solar
• Geothermal
• Fuel cells
• Small wind
• Energy storage
• Biogas
• Microgrid controllers
• Combined heat and power

For equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure, such as Geothermal heat pumps, Section 48 credit is available for projects in which construction begins before January 1, 2035.

Section 48E is an Investment Tax Credit (ITC) for property that produces clean electricity, which is meant to be technology neutral, and any energy storage technology. Further, it adds that the qualified property producing clean electricity must have a greenhouse gas emissions rate of zero.

The credits reduce an organization’s federal tax liability by a percent of qualifying energy property costs. Sections 48 and 48E provide up to 6% or bonus rates of 30%, plus 10% domestic bonus, plus another 10% if in an energy community. Exempt Organizations are also invited to participate with the ability to receive direct pay under Section 6417.

Section 48 is available for most projects whose construction has begun by December 31, 2024 and Section 48E is available for projects whose construction begins after December 31, 2024.

How has the IRA enhanced Section 48?

Solar Energy Property

This credit reduces a taxpayer’s federal tax liability by a percentage of qualifying solar energy property costs. Under Section 48, qualification is based on equipment using mechanically forced energy transfer, such as the use of fans or pumps to circulate solar-generated energy to:

• Generate electricity, not transmit or use electricity or heat
• Heat or cool a structure
• Provide hot water for use in a structure, except to heat swimming pools
• Provide solar process heat
• Illuminate the inside of a structure using fiber-optic distributed sunlight

Section 48E adds the requirement that the ITC projects must generate electricity and have a net greenhouse gas emissions rate of zero.

Qualified Geothermal Energy Property and Geothermal Heat Pumps

This credit reduces a taxpayer’s federal tax liability by a percentage of qualifying geothermal property costs. Geothermal energy property including production, distribution, and dual-use equipment, and geothermal heat pump property may all qualify for this credit. Equipment used in electrical transmission or geothermal fluid distribution as well as geothermal deposits located outside the United States, or a possession of the United States are not eligible.

The Qualifying Advanced Energy Project Credit (Section 48C)

What is Section 48C?

Section 48C was initially established by the American Recovery and Reinvestment Act of 2009. Before the IRA, the credit applied to projects enhancing industrial or manufacturing facilities for renewable energy equipment, energy storage, electric grid modernization, and more. Additionally, Section 48C capped the credits for advanced energy projects at $2.3 billion and requires an extensive application process to receive an allocation The second round of applications are due 48C applications are due on October 18, 2024, by 11:59 pm EST.

How has the IRA enhanced Section 48C?

The IRA now allows for an additional $10 billion in credits. At least $4 billion of these credits must go to projects in specific census tracts linked to coal mine closures or retirements of coal-fired electric generating units.

The IRA broadens the eligible projects to include those that:

• Establish or expand facilities producing energy-saving technologies for residential and commercial use.
• Establish or expand facilities producing components for hybrid and electric vehicles, along with the associated charging infrastructure.
• Upgrade industrial facilities with equipment aiming to cut greenhouse gas emissions by at least 20%.
• Upgrade, expand, or establish industrial facilities for processing, refining, or recycling critical minerals.

The Energy Efficient Commercial Buildings Deduction (Section 179D)

What is Section 179D?

Section 179D is a deduction of up to $1.88 per square foot for properties placed in service prior to January 1, 2023, and up to $5.00 per square foot for projects placed in service between January 1, 2023, and December 31, 2032.

The 179D Energy Deduction was originally introduced in the Energy Policy Act of 2005 as an annual extender, meaning the provisions sunset and were renewed every few years. In late 2020, Section 179D was made permanent at $1.80 per square foot in the Consolidated Appropriations Act of 2021, indexed to inflation.

How has Section 179D changed?

Starting in 2023, the base deduction rate starts at 50 cents per square foot for 25% improvement against a baseline model and increases incrementally up to $1.00 per square foot for 50% improvement.

A bonus deduction is available for projects meeting prevailing wage and apprenticeship requirements. This bonus deduction starts at $2.50 per square foot and increases 10 cents for each percentage improvement up to $5.00 per square foot.

For qualifying Section 179D projects placed in service after January 1, 2023:

Energy models using Department of Energy and IRS-approved software are developed for both the proposed/designed building and a similar reference building constructed according to the ASHRAE 90.1 Standard. The applicable ASHRAE 90.1 Standard depends on the date the project is placed in service:

• ASHRAE 90.1-2001: 1/1/2006 – 12/31/2015
• ASHRAE 90.1-2007: 1/1/2016 – 12/31/2026
• ASHRAE 90.1-2019: 1/1/2027 and beyond

The energy cost savings improvement over the ASHRAE 90.1 baseline determines the deduction thresholds available to the project. Incentives start at 25% savings over the baseline and are capped at 50% for a whole building model.

¹Bonus credit if prevailing wage and apprenticeship requirements are met.

The IRA modifies the previous lifetime limit on using the Section 179D deduction to instead a three-year cap, meaning a building can be eligible for the 179D deduction every three years assuming at least one of the systems contributing to energy efficiency has been properly renovated.

This deduction is now applicable to real estate investment trusts, and still applies to private building owners along with certain tax-exempt entities who can allocate the deduction to the qualified designers. Qualified designers are generally architects, engineers, and contractors who are primarily responsible for designing the property.

Qualified tax-exempt entities include:

• Federal government
• State or local government entities
• Indian tribal governments
• Other tax-exempt organizations including not-for-profit hospitals

"The tax deduction is the ultimate benefit of the 179D deduction, but the most substantive thing about going through the process with Eide Bailly was that they did all of the heavy lifting … so that I didn't have to take time away from my day-to-day duties."

Paul Arnold, President | PG Arnold Construction

Navigating a New Era of Energy-Conscious Practices

Tax credits and deductions exist to help you save money and promote a clean green energy infrastructure. These incentives are available for the next 10 years and allow for proactive planning, including:

• Accounting and tax departments incorporating these incentives into their Capitalization Policy and Fixed Asset Ledgers.
• Environmental, Sustainability and Governance (ESG) officers to fund and advance their organization's goals.
• Developers, owners, contractors, and architects including these incentives during design and construction.

Working alongside an experienced team of advisors with a proven track record in the energy efficiency space will help you maximize these new opportunities. Eide Bailly’s energy efficiency specialists and business advisors are here to evaluate your eligibility and collaboratively optimize the full potential of these energy-efficient incentives.