US Tax Credit Structure

US Tax Credit Structure  

Overview

The Inflation Reduction Act or ‘IRA’, increased the value of the tax credits. It did this through a requirement to support local workers, combined with ‘tax credit adders’. These ‘adders’ are designed to incentivize US manufacturing jobs and investment in certain local communities Learn more in this video

Video

Video Transcript 

The Inflation Reduction Act, or IRA, increased the value of tax credits. It did this through a requirement to support local workers combined with tax credit adders. These adders are designed to incentivize US manufacturing jobs and investment in certain local communities. In this lesson, we’ll introduce these tax credit adders for the ITC and PTC for batteries, wind, and solar projects. We will demonstrate the impact of the adders on the value of the credits. In future lessons, we’ll cover the details of each adder as well as what projects may qualify for the adders, and we will start with the ITC.

Before the IRA, the ITC was roughly 30% of project value. The new ITC has a base credit starting at 6% of project value. If the project satisfies something called the prevailing wage and apprenticeship requirements, or PWA for short, the ITC value increases from 6% to 30%, or by five times. This is called the five times multiplier, and the 30% value is commonly referred to as the full rate. The PWA requires businesses to pay appropriate wages and to hire a certain number of apprentices. Satisfying this requirement alone adds 24% to your ITC. If we use domestic content to build our project, the project qualifies for a 10% domestic content adder. Although it is referred to as a 10% adder, it increases the ITC value by 10 percentage points to 40% of project value. The 10% adder increases the ITC by 33%. This incentivizes projects to use US manufacturer contents to drive US manufacturing job growth. The energy community adder can add another 10 percentage point increase to the ITC. This adder applies if the project is developed in a community with current or recent ties to the fossil fuel industry. The ITC could now be worth 50% of project value. Alternatively, you could qualify for the energy community adder, but not domestic contents. This would yield to 40% ITC. You can qualify for one or more adders. The last credit adder is the environmental justice adder. It increases the ITC by a further 10 or 20 percentage points. This adder is earned through an application process where qualifying categories determine if a project earns a 10% adder, increasing the total ITC to 60%, or a 20% adder, moving the total ITC to 70% of project value. The maximum potential ITC has increased in value from roughly 30% before the IRA to 70%, but don’t think that all projects will earn a 70% ITC. Some of these adders are really hard to qualify for. Tax advisors expect ITC projects to range between 30 to 50%, with most clustered in the 30 to 40% range.

The PTC has the same general structure as the ITC. As a point of reference, let’s showcase the ITC values first. The 2023 inflation-adjusted PTC base credit is $5.50 per megawatt hour. The five times multiplier for satisfying the PWA requirements brings the PTC up to a full rate of $27.50 per megawatt hour. With the full rate PTC, PWA adds $22 per megawatt hour, Projects may qualify for the 10% domestic content and 10% energy community adders. Each 10% adder increases the PTC value by 10% of that full credit value of $27.50 per megawatt hour, which is $2.75 per megawatt hour. This brings a PTC up to a 2023 maximum of $33 per megawatt hour. Like the ITC, you could qualify for one or for both of these adders, but the PDC does not qualify for the environmental justice credit adder. Each PTC adder increases the full rate PTC by 10%, but the ITC adders were 10 percentage point increases or 33% increases in the ITC value. Clearly, ITC adders are worth more relative to the full credit than PTC adders, and this could be relevant when deciding if you will elect the ITC or the PTC. PTC could be more favorable without adders, but when you include adders, the ITC may become more favorable. The PWA requirement is the single largest addition to the tax credit. To stress just how critical the PWA is, if the project is not compliant with the requirement, you lose a 24% ITC, or $22 per megawatt hour for PTC, and the domestic content and energy community adders are also reduced by the five times multiplier. ITC adders would only be worth two percentage points instead of 10 percentage points. The PTC adders also decreased by five times, from $2.75 per megawatt hour to $0.55 per megawatt hour. Meeting the PWA requirement is a must. If you’d like to clarify your understanding of this concept, we suggest that you download the Excel file attached to this lesson. It demonstrates the credit values based on achieving the PWA or other various adders. There’s an overwhelming amount of detail behind how to qualify for the PWA and each of the adders. For example, what is defined as domestic content? How many apprentices do I need to hire? And this really matters. With credits being somewhere between 25% and 70% of the present value of projects, forecasting and earning the correct value is clearly important. In future lessons, we’ll cover some of the details, but ultimately, you need to seek really, really good and clear tax advice.