As shared in the Fall 2022 IRIS report, on August 16, 2022, US President Joe Biden signed the Inflation Reduction Act of 2022 (the IRA) into law, which includes $369 billion in energy and climate spending. The IRA includes several new and expanded sources of government support for the development of a domestic clean energy industry and for the gradual transition to a more sustainable energy economy.
Major provisions of the IRA that are of interest to the energy industry include an extension and expansion of existing investment and production tax credits for renewable energy; a mechanism to sell tax credits for renewable energy; a production tax credit for existing nuclear plants; newly created hydrogen tax credits and many more incentives. The IRA also implements a new alternative income tax on corporations and creates an excise tax on corporate stock buybacks.
The IRS and Treasury have issued limited guidance to date and such guidance has been on topics related to the corporate alternative minimum tax, the 1% excise tax on stock share buybacks, and the prevailing wage and apprenticeship requirements. For the remaining provisions of the IRA, guidance is still forthcoming and expected to be issued later in 2023.
Please refer to the below sections for further details on the major provisions of the IRA, including updates, where applicable, for regulatory guidance that has been issued.
The IRA introduces a new 15% corporate alternative minimum tax (Corporate AMT) on the “adjusted financial statement income” (AFSI) of certain “applicable corporations” (generally corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements) for tax years beginning after December 31, 2022. The Joint Committee on Taxation (JCT) has estimated the provision would raise approximately $222.25 billion over the 10-year budget window.
Under the new law, a company’s Corporate AMT is equal to the amount by which the tentative minimum tax (15% of AFSI reduced by AMT foreign tax credits) exceeds the company’s regular tax for the year (including any Base Erosion and Anti-Abuse Tax (BEAT) liability, but before the consideration of general business credits).
In general, the Corporate AMT applies to an “applicable corporation”—any corporation, other than an S corporation, regulated investment company, or real estate investment trust that meets the “average annual adjusted financial statement income test” (Income Test) in one or more tax years ending after December 31, 2021, but prior to the tax year at issue.
In general, the Income Test would be met for a tax year if the average annual AFSI of a corporation in the three tax years ending with the tax year at issue exceeded $1 billion (subject to certain adjustments for newly formed corporations, predecessor corporations, and short tax years). Once a corporation is an applicable corporation, it remains an applicable corporation for all future years, subject to certain limited exceptions. The new law explicitly provides that financial statement net operating losses are not to be taken into account for purposes of the Income Test.
AFSI generally starts with the net income or loss of the taxpayer as reported on its applicable financial statement with certain modifications, including an addback for certain federal and foreign taxes and the ability to use tax depreciation instead of book depreciation. An applicable financial statement includes a corporation’s Form 10-K filed with the SEC, certain audited financial statements, and certain other similar financial statements filed with a federal agency. Companies may claim a credit against regular tax in future years for Corporate AMT previously paid, but the credit cannot reduce that future year’s tax liability below the computed minimum tax for that year.
The IRA amends section 38, the general business credit (GBC) to take into account the Corporate AMT. The IRA limits the availability of GBCs to $25,000 plus 75% of a taxpayer’s net income tax that exceeds $25,000. This generally follows the pre-enactment law paradigm for the ability to use GBCs. For this purpose, net income tax means the sum of regular tax liability and the AMT, reduced by credits allowed under Subpart A and B of Part IV of the Code (credits against tax). Section 901 foreign tax credits are included among the taxes allowed under Subpart B.
On December 27, 2022, Treasury and the IRS issued Notice 2023-7, which provides taxpayers interim guidance (until regulations are issued) to assist taxpayers in determining whether they are an applicable corporation subject to the AMT and in computing applicable financial statement income. Taxpayers may rely on the Notice pending the issuance of proposed regulations.
The Notice provided clarity on tax free corporate reorganizations, mergers, acquisitions, and divisions which allow for such transactions to not be included as part of financial statement income, unless there is cash (boot) paid in connection with the transaction. Additionally, the Notice provides several examples of corporate reorganizations when companies join or a leave a group and how taxpayers should be computing AFSI for purposes of the applicable corporation test and the three-year test period. Generally, a taxpayer may utilize a reasonable method in performing such AFSI calculations for the new or departing member of the group. Taxpayers do not need to include in AFSI any cash received through either direct pay credits or transferred credits sold to other taxpayers.
The Notice also clarified that a corporation does not need to include in AFSI its share of partnership income if it is a partner in the partnership. The treatment of tax depreciation was also included in the Notice and allows taxpayers to utilize current year tax deprecation (including COGS depreciation) rather than book depreciation. The Notice, however, did not provide any true-up provisions for taxpayers that may have taken accelerated depreciation in prior years and in CAMT years no longer have tax depreciation for that asset. Lastly, the Notice provides relief for taxpayers that may be emerging from bankruptcy, by allowing them to not recognize such debt discharge in income for purposes of AFSI.
The IRS still needs to issue additional guidance on CAMT, primarily for international taxpayers and taxpayers that have mark to market financial statement income.
The IRA introduces a new 1% excise tax on corporate stock buybacks starting January 1, 2023. Generally, any domestic corporation which is publicly traded on a national securities exchange will be subject to the new buyback excise tax. A stock buyback or repurchase is defined as a redemption of the corporation stock for cash or property (defined in section 317(b)) and any other economically similar transaction. The excise tax is calculated based on the fair market value of stock repurchased less any stock issued during the year measured at fair market value, therefore companies should give consideration to the timing of both stock buybacks and issuances. The excise tax also applies to preferred shares issued in connection with publicly traded stock. A few exceptions to the new 1% excise tax include tax free reorganizations, stock repurchases which then transfer the shares to an employee sponsored retirement plan or similar plan, and any repurchase where the total value of such transactions does not exceed $1 million in a single tax year.
On December 27, 2022, Treasury and the IRS issued Notice 2023-2, which provides taxpayers interim guidance (until regulations are issued) on how the new 1% excise tax on stock-buybacks will be imposed and administered. Taxpayers may rely on the Notice pending the issuance of proposed regulations.
The Notice clarifies that, for purposes of the stock repurchase excise tax, a repurchase means solely a redemption under Section 317(b) of the Code (with several exceptions discussed below) or an “economically similar transaction.” For example, the Notice stated that neither of the following types of redemptions would be considered a “repurchase” for purposes of the excise tax:
The following transactions are considered to be economically similar transactions to a repurchase:
Additionally, complete liquidations under Sections 331 and 332 and divisive transactions under Section 355 (other than split-offs) are not considered to be economically similar transactions to a repurchase.
Finally, the Notice also provides for timing and valuation guidance on the repurchased stock. Generally, stock is treated as repurchased at the time at which ownership of the stock transfers to the covered corporation or to the applicable acquiror. The fair market value of the stock is determined by the market price of the stock on the date it is repurchased. If the repurchased stock is traded on an established securities market, the market price must be determined by consistently applying one of four specified methods (daily volume-weighted average price, closing price, average of high and low prices, or trading price at the time of repurchase) to all repurchases throughout the covered corporation's taxable year. If the repurchased stock is not traded on an established securities market, the market price is determined under certain Section 409A principles.
The IRA extended and modified the current PTC for wind and certain other renewable facilities that are placed in service after 2021 and begin construction before 2025. The IRA also allows for a PTC for solar facilities placed in service after 2021 and that begin construction before 2025. The extended credit will apply utilizing a base credit of .5 cents/kWh and a bonus credit of five times that amount or 2.75 cents per kWH if the new prevailing wage and apprenticeship requirements are met. Additional bonus credits are available if the qualified facilities meet the domestic content or energy community requirements. Projects that begin construction prior to 60 days after the date the government issues guidance on the prevailing wage or apprenticeship requirement will be treated as eligible for the bonus rate even if those requirements are not satisfied.
The IRA also extended the ITC for qualified energy projects including solar projects. The base credit under the extension is 6% of the basis of qualified energy property and the credit is increased to 30% for projects that satisfy the prevailing wage requirements and apprenticeship requirement. The bonus credits are also available for the ITC if domestic content or energy community requirements are met. Additionally, the IRA has a new ITC for stand- alone energy storage. Energy storage technology is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen storage, to store energy), and has a capacity of not less than 5 kilowatt hours.
After 2024, taxpayers will be able to take advantage of the PTC under section 45Y or the ITC under 48E for a power facility with any technology, so long as the facility’s greenhouse gas emissions rates are at or below zero. For this purpose, the greenhouse gas emissions rate means the amount of greenhouse gases emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2e per kilowatt. In the case of a facility which produces electricity through combustion or gasification, the greenhouse gas emissions rate for such facility must be equal to the net rate of greenhouse gases emitted into the atmosphere by such facility taking into account lifecycle greenhouse gas emissions as described under the Clean Air Act. Similar rules regarding prevailing wage and apprenticeship requirement will be applicable.
On November 30, 2022, the IRS issued Notice 2022-61, which pertains to the prevailing wage requirement and the apprenticeship requirement, that will be necessary for green energy projects to qualify for the full value of tax credit subsidies (e.g. bonus credit rates) enacted by the IRA earlier this year.
The Notice features two important aspects of IRS guidance. The first aspect of the Notice describes which projects are exempt from complying with the prevailing wage and apprenticeship Requirements. Projects that begin construction on or before January 29, 2023 need not comply with the requirements to receive the full value of the tax credit subsidies. The Notice defines beginning of construction by reference to a set of earlier IRS rules that have been published over the past decade. Those rules liberally permit projects to be treated as under construction when some amount of physical work has commenced either at the project site or by a manufacturer of certain critical project components. Projects owners can also incur 5% or more of the project’s cost as a means of establishing that their project is under construction for purposes of those rules (safe harbor rule).
The second aspect of the Notice fills in some important details about how to apply these rules, largely incorporating the well-established principles of the Davis-Bacon Act. The Davis-Bacon Act was enacted by Congress in 1931 and directs the Department of Labor to determine prevailing wage rates for most contractors and subcontractors performing on federally funded or assisted contracts for the construction, alteration, or repair of public works projects. The Department of Labor has issued numerous pieces of guidance interpreting the Davis-Bacon Act, including defining concepts such as “construction, alteration or repair” and “laborer or mechanic.” Nevertheless, the Notice leaves open a number of important questions that will need to be addressed in supplemental guidance, including the definitions of a contractor and subcontractor.
Finally, on a matter of practical importance, the Notice requires a taxpayer, along with any contractors and subcontractors, to maintain books of account and records of work performed in sufficient form to establish that the taxpayer, its contractors, and subcontractors have satisfied the prevailing wage requirements with respect to the facility
The IRA introduces a new tax credit specifically for hydrogen production. Starting in 2023 and running ten years for projects placed in service prior to January 1, 2033, the new section 45V credit allows for a production tax credit (PTC) or an investment tax credit (ITC). The base amount of the PTC is $.60 cents/kg of clean hydrogen produced and can be increased to $3/kg if wage and apprenticeship requirements are met. Additionally, the 45V hydrogen PTC allows for direct payment for the first five years of the project, meaning a taxpayer can receive cash from the Treasury for the value of credit. Alternatively, the PTC may be transferred for cash to a third party and is not taxable to the seller. The transfer of credits allows for a producer of clean hydrogen who may not have the ability to utilize credits, to nonetheless monetize the credit through the sale and potentially eliminating the need for a traditional tax equity structure.
In order to qualify for the maximum amount of the PTC, the underlying source producing the hydrogen generally needs to come from green hydrogen and the project needs to be located in the United States. The hydrogen can be produced and available for sale or for use in the ordinary course of the taxpayer’s trade or business. Alternatively, a taxpayer can claim an ITC with a base rate of 6% of the eligible costs and can be increased to 30% if the prevailing wage and apprenticeship requirements are met. . Similar rules apply for the ITC in that the credit can qualify for either direct pay or may be transferred. Below is a chart summarizing the qualifications of the 45V hydrogen credit based upon CO2E emissions and corresponding credit:
| CO2E emissions equivalent per kg hydrogen | PTC Base Rate | Bonus Rate | ITC Base Rate | Bonus Rate |
| Less than .45 kg | $.60/kg | $3 | 6% | 30% |
| Between .45 kg and 1.5 kg | $.20/kg | $1 | 2% | 10% |
| Between 1.5 kg and 2.5 kg | $.15/kg | $0.75 | 1.50% | 7.50% |
| Between 2.5 kg and 4 kg | $.12/kg | $0.60 | 1.20% | 6% |
To satisfy the new prevailing wage requirements for the bonus credit rates, a taxpayer needs to pay laborers and mechanics (and subcontractors) in construction or repair of the project must be paid prevailing wages for that region as defined by the Department of Labor (DOL) which publish such rates. Additionally, there needs to be an apprentice program for the project, meaning a certain number of the total labor hours on a project need to be filled by qualified apprentices, which again coincide with ratios published by the DOL by geographic region and job type. The domestic content requirement refers to the sourcing of the materials for the hydrogen project, but generally requires the steel and iron to be sourced in the U.S. and a minimum percentage of manufactured products must come from the U.S. A taxpayer claiming a 45V hydrogen credit can also claim a credit under IRC section 45U for existing nuclear plants but cannot claim a carbon capture credit under IRC section 45Q.
A new zero-emission clean nuclear power production credit is created under section 45U for electricity generation using nuclear energy at a qualified nuclear power facility and sold to an unrelated third party over the 10-year period after 2023 and through 2032. Qualified nuclear power facilities must be placed in service before the date of enactment of this section and do not include an advanced nuclear power facility defined under section 45J(d)(1).
The base PTC amount is 0.3 cents/kWh of electricity produced and sold (subject to an inflation adjustment), which exceeds the reduction amount for the taxable year. The associated bonus PTC is multiplied by five or 1.5 cents/kWh if certain wage requirements are met. The 5x multiplier for the 45U credit does not include an apprenticeship requirement that is present for many of the other renewable energy credits.
The 45U credit is reduced as the sale price of such electricity increases. The credit for any taxable year is reduced by 16% of the excess gross receipts from any electricity produced and sold by the qualified nuclear power facility over the product of 2.5 cents multiplied by the amount of electricity sold during the year. Therefore, facilities with receipts of less than 2.5 cents/kWh or $25/MWh would be eligible for the full credit amount. The reduction amount for any taxable year is the lessor of (1) the PTC amount multiplied by the electricity generated and sold, or (2) the amount equal to 16% of the excess gross receipts from any electricity sold over 2.5 cents (subject to inflation) multiplied by the amount of electricity sold.
The gross receipts shall include any amount received by a taxpayer during the taxable year with respect to the qualified nuclear power facility from a zero-emission credit program, except if the full amount of the credit calculated is used to reduce payments from such zero-emission credit program. Zero-emission credit program means any payments with respect to a qualified nuclear power facility as a result of any federal, state, or local government program for (in whole or in part) the zero-emission, zero-carbon, or air quality attributes of any portion of electricity produced by such facility. For purposes of determining the amount received during such taxable year, the taxpayer shall take into account any reductions required under such program.
Like the other credits included in the IRA, nuclear PTCs generated under Section 45U are eligible to be transferred. Therefore, in lieu of using the tax credits to offset their own tax liability, taxpayers that own nuclear assets that generate PTCs may elect to sell the PTCs to unrelated parties. The proceeds from such transfers are nontaxable to the taxpayer that generated the PTC.
Due to the significance of the reduction amount in the PTC calculation and its incorporation of the term “gross receipts,” significant open questions remain on how this term will be defined for purposes of computing the reduction amount. In an attempt to seek clarity, the industry is currently working together to solicit administrative guidance from Treasury and the Internal Revenue Service on how to define “gross receipts.”
With the Internal Revenue Code (IRC) receiving yet another set of legislative changes, after the Tax Cuts and Jobs Act in 2017 (TCJA) and the Coronavirus Aid, Relief, and Economic Security Act in 2020, how states incorporate the Act into their own tax laws is an important issue taxpayers must consider when determining the full impact of the Act on their business operations.
States generally incorporate the IRC into their own tax laws through two main methodologies, “rolling conformity” and “static conformity.” States that utilize “rolling conformity” adopt the IRC as amended and do not need the state legislature to act for new provisions of the IRC to be incorporated into the states’ tax laws. Conversely, states that utilize “static conformity” adopt the IRC as of a specific date. Here, the state legislature must act to advance the conformity date for any new provisions of the IRC to be incorporated into the state’s tax laws. It should be noted that a small number of states utilize neither rolling conformity nor static conformity, but rather conform to only specific provisions of the IRC or adopt changes to the IRC only if certain conditions are met such as revenue impact.
As discussed above, the IRA introduces a new 15% Corporate AMT on the adjusted financial statement income of certain large corporations for tax years beginning after December 31, 2022. In those states that impose a Corporate AMT, the majority do not calculate tax due based on a corresponding alternative minimum tax liability determined at the federal level. In these instances, the corporate AMT provisions are not likely to have a significant state tax impact. On the other hand, if the state liability is tied to the liability determined at the federal level, state conformity to the IRC will be important in calculating alternative minimum tax liabilities.
For example, Alaska imposes an alternative minimum tax at a rate of 18% of the applicable federal alternative minimum tax. Alaska utilizes rolling conformity to the IRC. As a result, Alaska’s alternative minimum tax liability beginning in tax years after December 31, 2022 is likely based on the corporate AMT of the Act. Another state that imposes an alternative minimum tax that references the federal alternative minimum tax provisions is California. California utilizes static conformity and conforms to the IRC as of January 1, 2015. Therefore, the Corporate AMT provisions would not be incorporated for California purposes unless state legislative action is taken.
For multistate taxpayers, the previous examples of Alaska and California highlight the importance of considering state conformity to the IRC. After the IRA was passed, the Joint Committee of Taxation estimated the Corporate AMT would raise approximately $222.25 billion over the 10-year budget window. Mechanisms to generate additional state revenues, especially considering revenue shortfalls caused by the health pandemic over the last couple of years, is a shared goal across state legislatures. Taxpayers should continue to monitor state responses to the IRA such as changes to conformity to the IRC or the enactment of state specific legislation that may seek to drive additional state tax funding.
For tax years beginning after 2022, the IRA provides that a taxpayer may elect to transfer the PTC and/or ITC to an unrelated taxpayer for a cash payment and exclude such sale proceeds from gross income. The transferability election must be made annually and separately with respect to each facility. Transferability has never been available for federal tax credits, and it remains to be seen how the market for the tax credits and the associated tax credit sale transactions develop.
From a state perspective, the starting point for determining state taxable income is federal taxable income. Under the IRA, proceeds from the sale of federal energy credits would not be included in the state taxable income starting point – assuming the state conforms to the current version of the IRC. In states that have static conformity to the IRC as of a date prior to August 16, 2022, or if a state decouples from IRC section 30D, a situation arises where the proceeds from the transfer of PTC or ITC credits may create state taxable income, while being excluded from federal taxable income. Furthermore, if a state should require the proceeds be included in the taxpayer’s state taxable income base, then consideration should also be given as to how those proceeds should be represented in the taxpayer’s state apportionment formula. The sale of credits is likely not considered the sale of tangible personal property, and therefore, taxpayers will need to pay special attention to the state rules that control how to properly source the sale of intangible assets.
The transferability of federal energy credits will impact the project finance landscape by changing the way developers and their financial partners can share the economic benefit of the incentives. If taxpayers have plans on generating new ITC or PTC credits with the intent to sell those credits, additional consideration should be given on where a project is placed and how that state conforms to the IRA. This will help to avoid any surprises where income excluded from tax at the federal level may be subject to tax at the state level. On a related point, taxpayers should also analyze whether state specific credits are available based on the type of project being commenced in the state. With the IRA generating a lot of attention of the credits available at the federal level, state credits can provide additional tax benefits that taxpayers can take advantage of.
If taxpayers claim an ITC, the basis of property must be reduced by 50% of the credit amount. While not a new provision of the IRA, it is important to remember how state depreciable basis interacts with the basis utilized for federal depreciation purposes. In most cases, state depreciable basis will reference the depreciable basis utilized at the federal level. For instance, New York provides that “Depreciable basis is the cost or other basis reduced by the part of the basis you elected to amortize or expense under IRC section 179, and any federal investment credit subtracted when computing the federal unadjusted basis of the asset.” Given the mechanics of determining depreciable basis in New York, any reduction in basis at the federal level relating to ITC credits awarded, is likely to also reduce the New York asset basis. Conversely, California explicitly decouples from IRC Section 48, the Section which authorizes the ITC. Because of this, depreciable basis for California purposes is without consideration of any reduction required by claiming an ITC.
As taxpayers generate federal tax credits that require adjustments to property basis, a review of the state conformity provisions to the IRC is important to ensure the proper basis is utilized in determining state depreciation expense deductions.
Congress failed to pass any 2022 year-end tax extenders. The most significant omission which affects nearly all taxpayers was the reversion of Section 174 expenses that was set to sunset as a result of the TCJA. Therefore, starting with tax returns for the 2022 tax year, a taxpayer must now amortize Section 174 research expenses over a 15-year period. The IRS issued Revenue Procedure 2023-08 which provides taxpayers an automatic method change to be included on 2022 tax returns to now amortize Section 174 research expenditures. Taxpayers are able to include a statement with their 2022 tax return in lieu of filing a Form 3115 Method Change with the IRS. Taxpayers failing to make the automatic change on their 2022 tax returns, will be required to submit a Form 3115 for years ending after 12/31/2023.
