Learn about the advantages of the Clean Energy Investment Credit and understand how this credit could impact you and your business.
Energy property includes:
- Energy Storage Technology (new)
- Equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat and equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight
- Combined heat and power system (increased credit amount)
- Equipment that uses ground or groundwater as a thermal energy source to heat and cool a structure (increased credit amount)
- Microgrid controller (new)
- Equipment used to produce distribute or use energy derived from a geothermal deposit
- Qualified Small Wind Energy Property
- Waste Energy Recovery Property
- Qualified Fuel Cell Property
- Qualified Biogas Property (new)
- Election to treat production facilities under the investment credit (as opposed to renewable electricity production credit)
Are There Additional Items That Must Be Present for the Property to Be Considered Qualified Energy Property?
Yes, in addition to meeting the definition of property provided above, the property also must:
- be acquired by the taxpayer as original use property or the construction, reconstruction, or erection of must be completed by the taxpayer,
- be depreciable, and
- must meet the performance and quality standards (if any) prescribed by the Secretary by regulations and be in effect at the time of the acquisition of the property.
How Can the Energy Credit Percentage Be Increased From the 6% Base Percentage to 30%?
The base energy project 6% can be increased to 30% if the project:
- has a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy,
- construction began before January 30, 2023, or
- meets the prevailing wage and apprenticeship requirements.
What Are the Prevailing Wage and Apprenticeship Requirements That Must Be Met if the Net Output of the Energy Project Exceeds 1 Megawatt?
Taxpayers that place in service an energy project that has a net output that exceeds 1 megawatt can receive an enhanced 30% credit if specific wage and apprenticeship requirements are met.
A taxpayer ensures the prevailing wage requirementis met provided
- any laborers, contractors, subcontractors, and mechanics employed by the taxpayer in the construction of the energy project and
- for the 5-year period the project is originally placed in service, the alteration and repair of the project
Are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor. In addition, the taxpayer must maintain and preserve sufficient records, including books of account or records for work performed by contractors or subcontractors of the taxpayer, to establish that such laborers and mechanics were paid wages not less than such prevailing rates.
A taxpayer that doesn’t meet the prevailing wage requirement can satisfy the obligation by making the laborer or mechanic whole and paying certain penalties.
For a taxpayer to meet the apprenticeship requirements in relation to an energy project, they need to ensure that they satisfy:
- Apprenticeship Labor Hour Requirements,
- Apprenticeship Participation Requirements, and
- Comply with general recordkeeping requirements, including maintaining books of account or records for the taxpayer's contractors or subcontractors, as applicable
A taxpayer must ensure that the applicable percentage of the total labor hours of the construction, alteration, or repair work (including such work performed by any contractor or subcontractor) concerning the project is performed by qualified apprentices. The applicable percentages are based on the year of construction and are as follows:
- In the case of construction that begins before January 1, 2023, 10 percent;
- In the case of construction that begins after December 31, 2022, and before January 1, 2024, 12.5 percent; and,
- In the case of construction that begins after December 31, 2023, 15 percent
A taxpayer will satisfy the apprenticeship participation requirements provided that every taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of an energy project employs one or more qualified apprentices to perform the work.
A taxpayer can cure the failure to satisfy the apprenticeship requirements if the taxpayer can fall under the good faith exception or pays the Treasury $50 per labor hour for which the apprenticeship requirement was not satisfied.
How Can the Percentage Be Increased by 10% For the Domestic Content Requirement?
If the credit percentage is 30%, the applicable percentage can be raised to 40% if the domestic content requirement is met. However, if the credit percentage is only 6%, only an additional 2% is added for the domestic content requirement.
The domestic content rules are satisfied with respect to an energy project if the taxpayer certifies that any steel, iron, or manufactured product that is a component of such an energy project was produced in the United States. The manufactured products that are components of energy project upon completion of construction are deemed to have been produced in the United States if at least 40% (20% in the case of qualified offshore wind facility) of the total costs of all such manufactured products are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States.
How Can the Percentage Be Increased by 10% For the Location of the Project in an Energy Community?
If the credit percentage is 30%, the applicable percentage can be raised to 40% if the project is placed in an energy community. However, if the base credit percentage is 6%, only an additional 2% is provided if the project is placed in an energy community.
An energy community is defined to include a brownfield site and certain areas where the extraction, processing, or storage of coal, oil, or natural gas tax place that have a higher unemployment rate than the national average. In addition, certain census tracts where a coal mine has closed or a coal-fired electric generating unit has been retired also qualify as an energy community.
How Can the Applicable Energy Project Percentage Utilized for the Credit Be 50%?
For the energy project’s applicable percentage to be 50%, the following generally must occur:
- Energy project has a maximum net output of less than 1 megawatt of electrical or meets the prevailing wage and apprenticeship requirements
- Energy project meets the domestic content requirement and
- Energy project is placed in an energy community.
How Do I Claim a Federal Energy Project Income Tax Credit?
For-profit entities claim the energy credit on their income tax return. The energy credit is non-refundable. For-profit entities must reflect an income tax liability to receive an immediate benefit from the credit. If there is no income tax liability for the taxable year, the for-profit entity can transfer (i.e., sell) the energy credit. Not-For-Profits can make a direct pay election, which would allow them to receive a tax refund for the energy credit even if no unrelated business income (UBI) is identified.
Does the Federal Energy Project Income Tax Credit Affect My Depreciable Tax Basis?
A taxpayer must reduce the basis of the property by 50% of the amount of the credit. However, the basis reduction does not apply for purposes of determining the low-income housing credit for property placed in service after December 31, 2022.
Contact Us
For more information on this topic, please contact a member of Withum’s Tax Services Team.
