Tax professionals are giving the IRS credit for how it has prepared to administer the dozens of tax provisions under the Inflation Reduction Act and hear feedback from those in the green energy community eager to capitalize on new incentives while staying compliant.
The second in a two-part series, this article features analyses from tax pros, including those specializing in the energy sector, on the impact of the Inflation Reduction Act so far. Part 1 reviews guidance released from IRS and the Treasury Department through early October 2023.
“This legislation, its core, is government enabled but it’s private-sector led. Unlike past legislative efforts, the Inflation Reduction Act invests in every emitting sector: power, transportation, buildings, industry, agriculture, and forestry, and the law’s 10 years of tax credits create unprecedented policy certainty for clean energy in this country,” said John Podesta, senior White House advisor for clean energy innovation and implementation during his keynote address at an Inflation Reduction Act one-year anniversary event hosted by the Brookings Institute.
“We’ve already seen a tremendous response to the passage of the bill from the private sector over the past year alone,” he continued. “Just since the bill passed and was signed into law last August… $115 billion in clean energy manufacturing investments have been announced.” According to Podesta, green energy investments in structures, equipment, and durable consumer goods doubled over the last year compared to four years ago, up to 4% of all such investments. Based on Department of Energy Investments, the Biden administration appears confident that by 2030, carbon pollution could be cut by as much as 52% and electric vehicle sales may exceed half of all new vehicle sales.
It has been a busy year to say the least for tax practitioners with clients in the energy industry with the buzz and anxiousness around the various tax credits and deductions for green initiatives.
“It really is very exciting to see how the marketplace has developed over the last year,” Managing Partner, Energy Devin Hall of Crowe told Checkpoint in an interview. “CPAs, attorneys, brokers, financial institutions, insurance, brokers, and companies are all kind of coming together around this piece of legislation that has essentially created a marketplace that didn’t exist what months ago. It’s going to be very interesting to see where this goes in the next 12 to 18 months as the marketplace differ develops and matures in the area of credits and incentives.”
Hall observed that more investors have shown interest than he expected, from solar, wind, hydrogen, and carbon capture sequestration opportunities. Developers now have a “wide variety” of investors due to the bill’s incentives. He added he has also started to see tax-exempt entities beginning to make investments in clean energy, such as installing solar panels on their buildings.
Keith Martin, co-head of projects at Norton Rose Fulbright, told Checkpoint in an interview that “everyone working in this sector feels like he or she is on a treadmill that has turned up to ramp to warp speed. The incentives in the bill are significant… they are drawing capital to the sector [and] gave us a lot of development activity.”
“The sector is not immune to the winds that are battering other parts of the economy,” Martin added. “The cost to capital has gone up significantly, which is a headwind, but the without the IRA tailwind, the sector wouldn’t be as healthy as it is.”
According to Martin, an economic transition had already been occurring, a shift away from just fossil fuels. The bill sparked movement in areas that “had not been as hot before,” such as green hydrogen; renewable natural gas; domestic component manufacturing (such as for solar, wind, and battery projects; and mineral processing.
The Inflation Reduction Act “put the foot on the accelerator,” Martin said,” but the car was already moving forward. “The issue the U.S. government had was that the car wasn’t moving as fast as we need it to deal with climate change.”
Rob Kovacev, member at Miller & Chevalier, told Checkpoint in an interview that taxpayers are particularly excited about the transferability of some green energy credits. “Historically, federal tax credits have not been transferable – you couldn’t buy and sell them. IRA created a huge new market for people to literally purchase tax credits from taxpayers who are engaged in qualifying activity but couldn’t make use of those credits.”
The bill allows taxpayers to choose to treat certain credits as payments against their federal income tax instead, an option known as the elective payment election. In June, the IRS released proposed regs on both the transferability of credits and elective payments, as well as FAQs. Kovacev said this guidance is “welcome” and an area that “has been eagerly awaited by taxpayers, by and large.”
“There are certain things that are still left open but I think taxpayers for the most part are glad to receive at least some element of increased certainty, knowing what the IRS position is.”
Taxpayers will be able to transfer credits or opt to receive direct payments through an online registration portal, as described in the proposed regs, something Hall said the IRS is working on but will be “the critical piece.” A report from the Treasury Inspector General for Tax Administration (TIGTA) covered in Part 1 of this series mentioned the IRS was targeting October for work on the portal to be completed, but Hall estimated it may not be available to taxpayers until perhaps early next year based on “what the IRS is working on and some of the signaling they’ve given.”
“I know they’re focused on it,” he reiterated. “And to me, that’s one of their highest priorities right now.”
Martin explained that the applicable tax credits “can’t actually be transferred legally until an election is filed” and that there is “plenty of time for the IRS” to complete the portal. “People are transacting without waiting for it. They aren’t paying yet… they’re waiting for the numbers, but they’re signing up this year.”
These credit elections are but one guidance area the IRS has made headway on so far since the passage of the Inflation Reduction Act. While there is much left to be done to clear up taxpayer confusion around the nitty gritty of some provisions during the regulatory hearing process, Kovacev said it is “clear” that getting guidance out when possible has been a point of emphasis.
“I think that given the resource constraints that [the IRS and Treasury] have, they have done a commendable job of getting guidance out in a timely manner in this area,” he said. “And even with the additional funding provided by the IRA, there are limitations to how fast the IRS and Treasury can issue guidance… I’m sure they’re doing the best they can.”
Hall believes the pacing of the guidance rollout has been “fairly quick” for the IRS despite their being a high appetite and limited patience among developers for a faster pace. He noted that either a notice or reg seems to come out relating to an Inflation Reduction Act provision every few weeks or so.
“Things are happening fast,” said Hall, who remarked on how practitioners like himself have been frequently digesting 100 to 200 pages as guidance is issued. Some major components have already been in motion, such as clarity on the prevailing wage and apprenticeship labor requirements. Hall said he expects the “majority of the guidance,” at least the first round (initial guidance, proposed regs, etc.) will probably be out in some form by early 2024.
Martin expects guidance that could be release before the end of the year includes the Code Sec. 45X advanced manufacturing production credit, the investment tax credit (addressing solar and co-located batteries), and work on hydrogen incentives. He suggested already-released guidance on the domestic content bonus credit could be reworked, something he called a “notable bust” in an otherwise solid set of statutory implementations.
“The government was heavily lobbied about how far up the supply chain the Treasury should look for domestic content in order to award the bonus credit,” said Martin. “Treasury said: ‘Look, you have to get three costs from the factories,’ and the factories are loath to disclose those costs because they feared it would just show their profit margins or lack of them in some cases. And that has caused the process to stall.”
“But for the most part the rest of it was well thought out and dealt with most of the issues that needed to be addressed.”
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