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How to maximize Inflation Reduction Act federal funding opportunities
Dec. 18, 2023 · Authored by Doug Baldessari
With the passing of the Inflation Reduction Act (IRA), state and local governments and other public sector entities gained access to nearly $500 billion in new federal funding and tax credit opportunities. Nearly 78% of the available funding is focused on environmental/energy projects (clean fuel and vehicle credits, clean electricity incentives, clean manufacturing and more).
But just how big is the energy slice of the IRA pie? The sky (almost literally) is the limit. Wind, solar, hydro, biomass, combined heat and power, geothermal, carbon capture, electric vehicles, charging stations, renewable/low-carbon fuels and more are all eligible as qualifying energy projects for the IRA tax credits.
Before you pursue these IRA incentives and funding opportunities, consider these four things:
The direct pay provision is a real game changer for public sector organizations. This is the first time that entities without tax liabilities, such as cities, towns, utilities, Tribal organizations, not-for-profit organizations, and colleges and universities, can benefit from clean energy tax credits. The provision gives public sector energy project owners access to federal funding for a portion of their project thereby reducing local funding requirements.
These more than 70 tax credits — the majority of which are entitlements — normally amount to anywhere between 30-50% of qualifying eligible project costs. Most credits are good through 2032 (though some provisions might necessitate that you take quicker action) and eligibility backtracks to project completion dates beginning January 1, 2023. So, whether you’ve already completed your project, are in the middle of one or haven’t even begun to plan ahead, your project may qualify for these direct pay tax credits.
The IRA includes a prevailing wage credit increase bonus. It’s a five times multiplier of the base credit, which is the largest available bonus for the IRA tax credits, (and, therefore, is critical to meet, if possible. Conversely, your tax credit can be reduced substantially for projects over one megawatt if prevailing wages are not paid during construction/operations.
In addition to satisfying prevailing wage requirements, it’s crucial you maintain and preserve sufficient records along the way (especially if your project is over one megawatt). We don’t anticipate the need to provide such records when you register and file for your project, but these credits will be subject to future audit by the Internal Revenue Service (IRS) so you’ll want to ensure proper documentation to support the tax credit(s) received.
*Note: Prevailing wage requirements do not apply for projects less than one megawatt in size nor for those that began construction before Jan. 29, 2023.
Alongside prevailing wage, you’ll need to satisfy apprenticeship requirements to maximize your tax credit(s). To do so, you’ll need to meet the apprenticeship labor hour requirements (subject to any applicable apprenticeship ratio requirements), satisfy the apprenticeship participation requirements and comply with the general recordkeeping requirements.
*Note: Apprenticeship requirements do not apply for projects less than one megawatt in size nor for those that began construction before Jan. 29, 2023.
If met, the domestic content provision can provide an additional 2-10% in credit value. There are two main domestic content requirements:
1. Steel and iron must be 100% produced in the United States
2. An annual percentage of products must be deemed to have been manufactured in the United States, as follows:
- 40% for projects that begin construction before 2025
- 45% for projects that begin construction in 2025
- 50% for projects that begin construction in 2026
- 55% for projects that begin construction thereafter
As with prevailing wages, your overall tax credit will be subject to reduction if you fail to meet domestic content requirements for projects beginning in future years. Beginning Jan. 1, 2024, your overall tax credit will be reduced in future years if domestic content requirements are not met (though projects less than 1 megawatt in size are exempt from this requirement). If you fail to meet domestic content requirements, your credit will value will be:
- 100% if construction begins before Jan. 1, 2024
- 90% if construction begins in calendar year 2024
- 85% if construction begins in calendar year 2025
- 0% if construction begins after Dec. 31, 2025
