Energy and excise proposals in the Inflation Reduction Act

UPDATE: The Senate passed the bill on Aug. 7 after negotiations resulted in changes to some of the tax proposals it contains. RSM’s Aug. 9 tax alert analyzes the version that the Senate passed, including the changes.

Executive summary

Energy and excise proposals

Energy and climate initiatives worth $369 billion are a focal point of the new, rebranded budget reconciliation bill that Senate Democrats are considering after an unexpected agreement on July 27. The so-called Inflation Reduction Act of 2022 proposes a massive investment in renewable energy through a series of tax incentives that would affect businesses across industries, including energy, manufacturing, construction, transportation, private equity and consumer products. The bill also proposes a number of incentives for individuals.

The proposal contains 29 separate renewable energy-related provisions that span 292 pages of the 725-page bill and amount to the largest source of spending at $369 billion. The provisions fall into nine broad categories:

1. Clean electricity and reducing carbon emissions
2. Clean fuels
3. Clean energy and efficiency incentives for individuals
4. Clean vehicles
5. Investment in clean energy manufacturing and energy security
6. Superfund
7. Incentives for clean electricity and clean transportation
8. Credit monetization and appropriations
9. Other provisions

The proposals are subject to change—or even outright removal—during congressional negotiations as part of the budget reconciliation process ahead of the Sept. 30 deadline for passage.

Proposed renewable energy tax credits

The Inflation Reduction Act of 2022 intends to serve as a huge spark for the domestic renewable energy industry, providing a wide array of tax credits to incentivize significant project development. Senate Democrats publicized the proposed legislation on July 27 after an unexpected agreement between Sen. Joe Manchin of West Virginia and Senate Majority Leader Chuck Schumer. It was a stark turnaround after Manchin on July 14 withdrew his support for any legislation that included climate or tax provisions.

If enacted, companies across many industries—including energy, manufacturing, construction, private equity and consumer products—will be encouraged to invest in renewable technologies and green energy projects. 

In essence, the proposal extends and modifies existing and expired renewable energy credits through 2024, adds new credits for additional technology and energy sources generally effective beginning in 2023, and then provides a switch in 2025 to three technology neutral credits. The framework is the result of a compromise previously negotiated between the House and the Senate. 

For a number of the provisions, the bill proposes additional qualifications for taxpayers to achieve a “bonus rate” on credits as opposed to a “base rate”:

• Apprenticeship requirements. The apprenticeship requirements would require the taxpayer to guarantee that an increasing percentage of labor hours are performed by “qualified apprentices.”
• Prevailing wage requirements. In circumstances where the bill proposes “bonus rates,” to claim this additional rate with respect to a project, the taxpayer must ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of the project.  
• Domestic content requirements. This requires taxpayers to ensure the facility qualifying for the credit was produced with steel, iron or products manufactured in the United States.

To facilitate investment in renewable energy projects where a project developer may not have taxable income, the bill proposes two new mechanisms for monetization of certain nonrefundable income tax credits. 

In limited circumstances, the bill provides for an election to essentially treat the credits as refundable through a “direct pay” mechanism. 

More broadly, the bill contains a new provision for the transferability of certain credits, which essentially allows for the sale of credits if certain conditions are met. The novel transferability provision is a departure from the traditional tax-equity partnership structuring models and would create a private marketplace for tax credits in lieu of direct payments from the government.

With respect to production of renewable electricity and reduction of emissions, notable proposals include:

• Extending expiring provisions in the section 45 production tax credit (such as wind and biomass facilities)
• Extending expiring provisions in the section 48 investment tax credit (such as solar)
• Adding energy storage technology, qualified biogas property, microgrid controllers, certain fuel cells, dynamic glass and interconnection property as qualifying property
• Increasing the credit rate for solar and wind facilities placed in service in connection with low-income communities
• Extending and expanding the section 45Q carbon capture and sequestration credit
• Creating a new production tax credit for zero-emission nuclear power plants

With respect to renewable fuels, the act proposes to:

• Extend biodiesel and renewable diesel credits
• Retroactively reinstate and extend alternative fuel, alternative fuel mixture, and second-generation biofuel producer credits
• Add a new income and excise tax credit for sustainable aviation fuel
• Add a new credit hydrogen production credit

With respect to credits for individuals and consumer products, the act proposes to:

• Extend and modify the individual credits under section 25C and 25D, the energy efficient commercial building deduction under section 179D, and the section 45L new energy efficient home credit
• Overhaul the “clean vehicle” credit under section 30D
• Create a new $4,000 credit for previously owned “clean vehicles”
• Create a new credit for certain commercial “clean vehicles”
• Reinstate, extend and modify the alternative fuel refueling property credit under section 30C

With respect to manufacturing, the act proposes to:

• Provide new funding allocations and modifications for the section 48C advanced energy project credit
• Add a new manufacturing production tax credit for manufacturers of certain solar and wind energy components 

Note the proposed section 48D clean electricity investment tax credit proposed under the Inflation Reduction Act of 2022 is not to be confused with the section 48D Advanced Manufacturing Investment Credit to be enacted under the CHIPS Act of 2022. As of the release of the proposed Inflation Reduction Act of 2022, both bills had Section 48D credits, one of which will be renumbered if both bills are enacted.

Proposed excise taxes

The bill proposes three new excise tax provisions:

• Reinstatement of the section 4611 Hazardous Substance Superfund financing rate imposed on crude oil and petroleum products and increase the tax rate to 16.4 cents per barrel, adjusted for inflation.
• Make permanent the section 4121 coal excise tax which funds the black lung disability trust fund for coal miners.
• In the prescription drug pricing section, add a new excise tax on the sale of selected drugs by manufacturers, producer or importers during specific “non-compliance” periods.

Takeaways

If enacted, the provisions outlined above would be a major expansion to existing green energy incentives in the tax code. Upon passage, additional guidance would be critical for taxpayers with respect to the proposed direct pay and transferability of credits, requirements governing apprenticeship hours; prevailing wages; domestic contents and more. It is important to remember that these proposed changes must still proceed through several additional steps before becoming law. That said, Washington National Tax is closely monitoring the progress of this legislation. Subscribe to our tax alerts to ensure you stay updated on how these proposals are evolving.