Inflation Reduction Act tax-exempt bonds incentives

Renewable energy projects that are currently, or will be, financed by tax exempt bonds received an added incentive with the passing of the Inflation Reduction Act of 2022 (IRA22). 

Prior to the enactment of IRA22, renewable energy projects financed by tax exempt bonds were limited in the investment tax credit (ITC) or production tax credit (PTC) that could be claimed on a project. The available credit was required to be reduced by the lesser of 50% of the available credit or, if the project was only partially funded through tax-exempt bonds, a pro rata percentage of tax exempt funding used.  Projects funded through tax exempt bonds often fell under the 50% credit reduction.

IRA22 revised the credit reduction from 50% to 15%, resulting in a significant increase in net credits available to projects financed with tax exempt bonds. The amendment to the credit limitation is applicable to projects which have “begun construction” after August 16, 2022, the enactment date of IRA22. 

The credit reduction moving from 50% to 15% has created an incentive for qualifying tax exempt financed projects to meet the requirements of beginning construction after the enactment of IRA22 and fall under the more favorable credit reduction requirements.

A project has begun construction by either (1) incurring five percent or more of the total costs of the facility, or (2) physical work of significant nature has begun on a project. Determining when a project has begun construction is critical to understanding what credit reduction guidelines to follow for tax exempt financed projects.

Baker Tilly can assist with establishing when construction begins for clean energy projects. Connect with our team to learn how we can help.

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.