More than 500 companies and 45,500 projects have requested registration for clean energy tax credits under the Inflation Reduction Act as of March 8, according to a tally from the Treasury Department.
The rise in applications is due in part to an online portal from the Internal Revenue Service that makes it easier for companies receiving an elective payment, transferring a clean energy credit or claiming a CHIPS credit.
“Before the Inflation Reduction Act, it was more challenging for companies to access tax incentives to finance projects and deploy new clean power. The law included two new mechanisms to fix this and translate credits into financing,” U.S. Deputy Secretary of the Treasury Wally Adeyemo said in a statement. “Meeting our economic and climate goals depends on the ability of companies to finance capital-intensive projects like building new factories, and initial data is encouraging.”
Which tax credit is best for solar manufacturers?
Eighty percent of projects requested registration under the clean energy investment tax credit (section 48), while more than 15% did so under the clean energy production tax credit (section 45), according to the Treasury release. The projects are “primarily” related to solar and wind facilities, according to the IRS.
Tax credit section 45 may be more useful for smaller solar manufacturers, as it’s based on energy produced from renewable solar, wind, geothermal sources and is measured in kilowatt hours, according to Sharvil Sheth, tax director for credits and incentives at Armanino LLP.
“At a high level, if you've got a low-cost project, it may make sense to take the production tax credit, because the energy you do over a certain period is going to be higher, so you may just get generally more benefit. But if you're a capital investment project worth millions of dollars, it's probably better to do the [investment tax credit],” Sheth said.
The IRS offers two new credit delivery mechanisms — elective, or “direct” pay, and transferability, the latter of which launched last June. Elective pay is generally for tax-exempt organizations, such as state or county projects or nonprofits.
Transferability, however, means a company can sell all or a portion of the tax credit to a third-party buyer in exchange for cash, usually at a discounted price. More than 98% of facilities or projects that have requested registration are pursuing transferability, the IRS stated.
“It's important because traditionally, these credits were just non-refundable. So if you can imagine as a high manufacturer with all the deductions you have, generally you may operate a taxable loss. So these credits may be trapped or just carrying a poor year-over-year, so you're not able to monetize the benefit. So this is kind of the main change here,” Sheth said.
Some companies, like First Solar, are already taking advantage of the option. First Solar agreed to sell up to $700 million in 2023 45X advanced manufacturing production tax credits to fintech firm Fiserv, according to a Dec. 27 announcement.
Unclear domestic content guidance limits manufacturers’ interest
Only around 50 projects requested registration numbers under the advanced manufacturing production credit (45X), the IRS noted.
Sheth noted the low number of registrants is likely due to uncertainty and nuance around the rules, especially regarding how to comply with domestic content requirements. While section 45X does not require subcomponents to be made in the U.S. to qualify for the domestic manufacturing tax credit, the domestic content bonus credit offered under sections 45, 45Y, 48 and 48E does.
Under these sections, manufacturers are eligible for a 10% increase in value to the production tax credit if all structural steel or iron products used at the facility are made in the U.S., as well as a “required percentage” of the total costs of manufactured goods at the site.
This difference has caused some confusion among solar panel manufacturers that previously believed they could qualify for bonus tax credits given the less stringent guidance under 45X, said Mike Carr, executive director of the Solar Energy Manufacturers for America Coalition.
He added that the more lenient rules under 45X could also put domestic solar component manufacturers in "an awkward position" if their products are not treated with a premium under the IRA compared to foreign imports.
“So we don't think that's what Congress intended,” Carr said.
In order to fully utilize the clean energy tax credits, there needs to be more clarification regarding domestic requirements under different sections of the law, Carr said.
“We think that domestic content is a critical step in solidifying investments in those upstream components so that we can have a successful reshoring,” he added.
