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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 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
More to explore
There is tremendous incentive to begin your Inflation Reduction Act-eligible projects sooner rather than later—not only to maximize the available IRA funding but to avoid the stricter requirements (and potential tax credit reductions) that take effect further down the line. And while we covered four of the most important aspects of the IRA’s expanded funding opportunities, you may have unanswered questions as you consider your path forward.
- What does it mean to “begin construction” on an eligible project?
- What about the energy community bonus?
- How does the environmental justice credit increase work?
- How, where and when do I get started?
Fortunately, we’re here to help. During a recent webinar, we explored the IRA itself, the above topics, common outstanding questions and possible first steps forward. Access the on-demand recording below to learn more or contact us to get started today.
Since 2021, unprecedented legislation has been passed that directly impacts utility infrastructure. During this on-demand webinar Baker Tilly’s Doug Baldessari and Dan La Haye discuss the historic incentives and opportunities available through the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). Learn how to access these funding sources to upgrade, modernize and innovate utility infrastructure.
Key takeaways
Develop a baseline knowledge of relevant grants available through IIJA and IRA
Learn how not-for-profit and governmental utilities can now have access to financing through tax credits for projects previously only available to taxpaying entities through IRA
Understand what to do to ensure you won’t miss out on key sources of funding for upcoming projects
Presenter
Doug Baldessari, CPA | Principal, Baker Tilly Municipal Advisors
Dan La Haye, CPA | Senior Manager, Baker Tilly
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
Explore other Utility University sessions
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
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