State-level clean-energy tax credits and incentives
The IRA, which was signed into law by President Joe Biden on Aug. 16, 2022, is designed to encourage investments in domestic energy production by promoting clean energy programs and committing to greenhouse gas emission reductions. The IRA offers credits and incentives to accelerate the transition from fossil fuels to clean energy.
The wide variety of incentives includes the Investment Tax Credit, Production Tax Credit (PTC), Clean Energy Investment Tax Credit, Clean Energy PTC and Tax Credit Monetization program. As the Trump administration continues to define its energy policy, modifications or rollbacks to provisions of the IRA are possible. Despite those potential changes, businesses investing in energy and receiving or considering IRA incentives should review the myriad state energy incentives.
Many states offer clean energy programs that businesses may take advantage of to help offset or reduce the costs of implementing investments in clean or renewable energy production. These programs include incentives such as:
- Green roof credits
- Property tax abatements
- Green jobs credits
- Commercial/industrial manufacturing credits
- Data centers credits and incentives
- Vehicle charger installation credits
- Energy-efficient buildings credits
- Solar and wind installation credits
- Alternative fuel, CNG (compressed natural gas) or electric vehicle conversions for fleets
- Energy-specific sales and use tax exemptions
Depending on the state, some credits are refundable, while others may only be taken on the tax return against a current tax liability.
State-specific energy incentives
Many states offer incentive opportunities similar to those in the IRA. Taxpayers should consider that eligibility, credit availability totals (both taxpayer-specific and program availability), transferability, refundability, salability, compliance obligations and many more factors may impact the attractiveness of state or local energy incentives. The following are a sample of available programs, often with comparable versions available in other states:
- California Electric Vehicle Infrastructure Project (CALeVIP): Provides rebates for installing EV chargers, covering up to 75% of costs
- California PG&E Data Center Efficiency Rebate Program: Provides rebates up to $4 million per project for energy efficient cooling and IT infrastructure
- Florida Property Tax Abatement for Renewable Energy: Offers an abatement up to 100% of the property tax for qualified systems
- Georgia Alternative Fuel Vehicle (AFV) Rebate Program: Grants up to $20,000 for converting fleet vehicles to CNG or electric
- Illinois MidAmerican Energy – Illinois Business Programs and Rebates: Rebates for upgrades to HVAC, lighting and industrial energy efficiency
- Kansas Rural Energy for America Program (REAP): Grants up to 50% of agricultural gross income and loan guarantees up to 75% for renewable energy and energy efficiency projects
- Minnesota Wind Energy Equipment Tax Exemption: Provides a 100% sales tax exemption on wind energy equipment
- New York Property Tax Exemption for Solar, Wind and Farm Waste Energy Systems: Provides a 100% 15-year property tax exemption for renewable energy installations
- Oregon Renewable Energy Production System Grant Program: Offers grants covering up to 75% of system costs
- Washington Renewable Energy System Program Tax Credits: Offers public utility tax credits of up to 100% for investments in renewable energy
Taxpayers considering energy-related investment should diligently research the jurisdictions where the investment will take place, as well as identify alternative jurisdictions that may have better incentives for the investment.
Monetizing state incentives
As with the IRA, some state incentives may be monetized by either selling the incentive to an unrelated party or transferring the incentive to a related entity to offset that entity’s tax liability. So-called sellable credits are generally sold through tax credit exchange markets. The availability to sell or transfer earned credits will depend on the type of credit and the location the credit was received.
Eligibility requirements, application processes and timing
Incentive eligibility varies widely depending on the jurisdiction and the credit, with requirements ranging from identifying single qualifications to requiring complex and highly nuanced analysis of multifactored guidelines. Similar programs among the states may also employ different requirements—taxpayers cannot assume that eligibility for an incentive in one state will match the eligibility requirements of a similar incentive in another state.
While some incentives may be taken directly on a state tax return or evidenced by a sales tax exemption certificate, others require formal applications followed by taxing authority or other agency approval. Some incentives cannot be claimed once the investment for which the incentive would be claimed has already begun or finished, e.g., project construction. While not always the case, a general rule of thumb is that state programs with significant benefits are likely to involve an application process and/or preapproval.
Other considerations
Businesses should also be aware of evolving and growing state environmental, social and governance (ESG) regulations and reporting requirements. For example, recent legislation in California mandates various climate-related emissions and risk reporting for certain businesses operating in the state. Similar legislation has been proposed in New York. More recently, New York has established a ‘climate superfund’ intended to be funded by levies on fossil fuel businesses for their contributions to greenhouse gas emissions impacting the state. While state ESG regulatory frameworks are relatively unestablished, more states are studying ESG-style reporting and regulation, with more proposals for ESG regulation introduced each year. Businesses considering state energy incentives for future projects should consider how state ESG regulations may impact the viability of such projects.
State and local clean energy incentives as an alternative or addition to IRA incentives
Businesses considering energy-related projects should not disregard the availability of state or local energy incentives as both alternatives and additions to existing IRA incentives.
The IRA’s uncertain future and lower chances of near-term expansion increase the attractiveness of state energy incentive programs. However, state incentive can require significant time to review eligibility requirements, complete applications or preapprovals, and conduct ongoing compliance once incentives are received. Businesses considering state or local energy incentives or that have questions about the availability of such incentives should speak to their state and local credits and incentives advisors.
