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Inflation Reduction Act clean-energy tax credits

By Traci DeLore

Date:

It’s been about a year since the Inflation Reduction Act (IRA) of 2022 expanded and added a host of tax credits for clean-energy products, but questions about what businesses and which projects qualify still abound.

Jessica LeDonne

“We’ve had so many questions about it recently, says Jessica LeDonne, director of policy and legislative affairs at The Bonadio Group, which offers accounting, tax, and consulting services from offices in Albany, Batavia, Buffalo, East Aurora, Rochester (HQ), Syracuse, and Utica. The questions range from “Am I eligible?” to “What do I need to do?”

IRA makes tax credits available to businesses, tax-exempt organizations, state/local/tribal governments, other entities, and individuals across an array of clean-energy projects.

They include credits for the production of clean energy and investments in clean energy, including sources such as wind, biomass, geothermal, solar, hydropower, and more. Tax credits are also available for domestic manufacturing of clean-energy components like solar panels, commercial clean vehicles, alternative-fuel vehicles, and more.

Many businesses will be able to take advantage of the investment tax credit, which includes a broad array of projects a business might undertake, such as installing solar panels or even adding electric vehicles to its fleet, as it works to reduce its carbon footprint, LeDonne says.

“If a project has already begun, it may likely qualify,” she says. Some projects may qualify for up to 30 percent of the project cost if certain conditions are met. While the base credit is 6 percent, projects that meet prevailing wage and apprenticeship requirements may qualify for the 30 percent.

One big change that comes along with the IRA is that groups typically left out on tax credits can now take advantage of these clean-energy credits, LeDonne notes. The inclusion of a new elective or direct-pay option opens these tax credits to government entities and tax-exemption organizations that would have otherwise been left out since they do not owe federal income tax. 

“This is something new in the Inflation Reduction Act,” she says. The details of how this new system will work are still being ironed out, but the Internal Revenue Service laid out proposed steps in June and recently wrapped up a public comment period on them. LeDonne expects the IRS to release final details after reviewing the comments.

As proposed now, entities wishing to use the direct-pay option need to submit a pre-filing registration and the IRS will assign them a registration number. That number is used in subsequent filings, and entities will file a specific form to claim the tax credit.

The direction payment option treats the credit amount like a payment toward federal taxes, LeDonne says. Since those entities don’t pay federal taxes, the credit is then refunded to them just like an overpayment would be.

“All of this is proposed regulation, so it’s subject to change,” she adds. 

While it can sound complicated to apply for these tax credits, LeDonne doesn’t think it will be overly burdensome. Businesses with what they believe is a qualifying project can start getting ready now by documenting the project and keeping all project receipts.

To learn more about the Inflation Reduction Act and clean-energy tax credits, businesses should consult with their legal and accounting professionals to start, LeDonne says. They can visit the IRS website for information and updates.  

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