Inflation Reduction Act Of 2022 ' New Tax Credits For Manufacturers Of Clean Energy Equipment

• Published date: 12 August 2022
• Subject Matter: Tax, Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Tax Authorities, Renewables
• Law Firm: Norton Rose Fulbright US LLP
• Author: Mr David Burton, Jenna Goldman and Viktoria Vozarova

The Inflation Reduction Act of 2022 (the Act) has been celebrated for its proposed extension and expansion of credits for renewable energy project developers. However, there are also significant wins for US manufacturers of renewable energy technology. This post focuses on the proposed amendments to section 48C¹, a tax credit for the cost of factories to manufacture clean energy components, and the proposed enactment of section 45X, which is a tax credit that manufacturers earn for each unit of clean energy components manufactured.² An overview of the new investment tax credit for semi-conductor factories that was enacted in the CHIPS and Science Act of 2022 is also provided.

Section 48C Manufacturers' Tax Credit

Effective January 1, 2023, the Act expands section 48C to provide $10 billion in tax credits. The tax credit is 30 percent of the amount invested in new or upgraded factories to build specified renewable energy components.

1. Types of Clean Energy Components that can be Built by a Factory Eligible for Section 48C Credit

There are several notable expansions to the list of manufactured products that will qualify for the advanced energy project credit under section 48C. First, the definition of "qualifying advanced energy project" for purposes of section 48C is expanded from strictly facilities that manufacture certain renewable energy components to include facilities that also recycle qualifying property.³ Second, qualifying property and components will include products designed to be used to produce energy from water,⁴ along with those designed to be used to produce energy from the sun, wind, geothermal deposits, and other renewable resources.

The new list also includes grid modernization equipment and components,⁵ property designed to "capture, remove, use, or sequester carbon oxide emissions"⁶, equipment designed to "refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low emission,"⁷ products designed to produce energy conservation technologies⁸, and technology, components, and materials for electric or fuel cell vehicles and their associated charging or refueling infrastructure,⁹ including, specifically, heavy duty vehicles (those with a weight rating of over 14,000 pounds).¹⁰

Finally, the proposed expansion of section 48C would broadly encompass all other such advanced energy property designed to reduce greenhouse gas emissions as may be determined by the IRS (including any property that re-equips existing infrastructure to reduce greenhouse gas emissions by at least 20 percent).¹¹ Such sweeping language may leave open the opportunity for new technologies to take advantage of these credits in the future.

2. Section 48C's Allocation Process and Cap

Factory owners will need to apply to the IRS for an allocation of the section 48C credit. That is, a factory may otherwise appear eligible for the section 48C credit, but the factory owner may not claim the credit without being awarded an allocation from the IRS.¹² The IRS will have 180 days from the date of enactment of the Act to establish a program to consider and award certifications for qualified investments,¹³ then applicants will have two years from the date of certification by the IRS to provide evidence that the requirements of the certification have been met and that the project has been placed in service.¹⁴ Once awarded, the IRS will publicly disclose the identity of the applicant and the amount of credit the applicant is to receive.¹⁵

The section 48C credit is not subject to phaseouts, which are unnecessary given the certification system, credit amount cap, and the two year deadline to get the facility up and running.

3. Construction Labor Requirements

The construction of, or upgrade to, the factory will have to be done by workers who are paid the equivalent of union wages with apprentices hired for the construction (unless an apprenticeship program is not available). Unlike other tax credits regimes under IRA, a taxpayer cannot avoid these requirements by "beginning construction" on the factory within 59 days of the IRS publishing guidance addressing the wage and apprenticeship rules.¹⁶ These requirements do not apply to the factory workers who will fabricate the renewable energy components at the factory. ¹⁷

4. Energy Communities

Forty percent of the $10 billion in credits is earmarked for factories located in "energy communities"¹⁸ meaning those factories are built in a census tract (or a directly adjoining census tract), in which, after December 31, 1999, a coal mine has closed or a coal-fired electric generating unit has been closed.¹⁹

5. Impermissible Double Benefit

The Act's amendment to section 48C prohibits certain double tax credit benefits. A taxpayer is not allowed to benefit from the expanded section 48C credit if the investment in the factory already qualifies for a tax credit under section 48D (clean electricity investment credit), section 45Q (carbon capture credit for carbon oxide sequestration), or section 45V (clean hydrogen production credit ).²⁰ In any event, it is difficult to imagine how a factory could realistically have qualified for a section 48C credit and any of the prohibited credits.

Section 45X Advanced Manufacturing Production Credit

The Act adds new section 45X that provides a tax credit for each eligible component, as described below, produced in the US and sold by a manufacturer to an unrelated person. The credit would apply to components produced and sold after December 31, 2022, and...