On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act), which extends and expands existing tax credits and adds several new energy tax credits to encourage the production of clean energy and reduce carbon emissions. Section 48(a) of the Internal Revenue Code (IRC) as it existed prior to the adoption of the Act provides an investment tax credit (ITC) for the installation of certain renewable energy property as described in Section 48(a)(3). The Act amended Section 48(a)(3) to include additional categories of energy property, one of which is “qualified biogas property.”
“Qualified Biogas Property” Defined
In general, qualified biogas property is defined as property comprising a system which (i) converts biomass into a gas which (A) consists of not less than 52% methane by volume or (B) is concentrated by such system into a gas which consists of not less than 52% methane, and (ii) captures such gas for sale or productive use and not for disposal via combustion. Qualified biogas property is defined to also include any property which is part of such system which cleans or conditions such gas. The Act further provides that the term qualified biogas property does not include any property the construction of which begins after December 31, 2024.
Change in Base ITC Rate
The ITC under Section 48(a) prior to the Act was equal to 30% of the basis of such energy property placed in service during a taxable year. The Act reduced the ITC from 30% to a base ITC of six percent for certain categories of energy property, including qualified biogas property, subject to increase of such base rate as discussed below.
Increases to Base ITC
A taxpayer with a qualified biogas property project is eligible to increase the ITC rate from the six percent base rate to up to 30% if (i) its project’s maximum net output is less than one megawatt of electrical or thermal energy, (ii) its project begins construction prior to the 60th day following the Secretary of the Treasury’s publication of guidance on the prevailing wage and apprenticeship requirements, or (iii) it satisfies the prevailing wage and apprenticeship requirements described below (individually and collectively, the Project Requirements). A taxpayer may also receive an additional 10% domestic content bonus credit amount and a 10% energy community bonus credit amount, thereby potentially increasing the ITC rate to 50%.
Prevailing Wage and Apprenticeship Requirements
For purposes of satisfying the prevailing wage requirements under the Act, and subject to the Secretary’s publication of guidance, including regulations or other guidance relating to recordkeeping and information reporting, a taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in (i) the construction of the project, and (ii) for the five-year period beginning on the date such project is originally placed in service, the alteration or repair of such project, are paid wage rates no less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor (subject to the same correction and penalty rules applicable to bonus credits under Section 45 of the IRC).
For purposes of satisfying the apprenticeship requirements under the Act, and subject to the Secretary’s publication of guidance, including regulations or other guidance relating to recordkeeping and information reporting, a taxpayer must ensure that, with respect to the construction of the facility, not less than the applicable percentage of the total labor hours of the construction, alteration or repair work (including such work performed by any contractor or subcontractor) with respect to such facility is performed by qualified apprentices. The “applicable percentage” increases depending on when construction begins as follows: (i) 10% if construction begins before January 1, 2023; (ii) 12.5% if construction begins after December 31, 2022 and before January 1, 2024; and (iii) 15% if construction begins after December 31, 2023. Additionally, each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the construction of the facility must employ one or more qualified apprentices to perform the work. Certain limited exceptions apply, including demonstration by the taxpayer that its good faith request for qualified apprentices made to a registered apprenticeship program went unanswered after five business days or has been denied by the registered apprentice program other than due to the refusal by the taxpayer or any contractors or subcontractors to comply with the requirements of the registered apprenticeship program.
Domestic Content Bonus Credit
A taxpayer is eligible to receive an additional 10% domestic content bonus credit amount if it satisfies the Project Requirements, and it certifies to the Secretary (at such time, and in such form and manner, as the Secretary may prescribe) that any steel, iron, or manufactured product which is a component of such facility (upon completion of construction) was produced in the United States. As it relates to manufactured products which are components of the facility upon completion of construction, such products will be deemed to have been produced in the United States if not less than 40% (20% for offshore wind facilities) of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced or manufactured in the United States. If a taxpayer’s project does not meet the Project Requirements, but otherwise satisfies the domestic content requirements, then the taxpayer is eligible to receive a two percent domestic content bonus credit.
Energy Community Bonus Credit
A taxpayer is eligible to receive an additional 10% energy community bonus credit amount if it satisfies the Project Requirements, and the project is placed in service within an energy community. An energy community is defined as (i) a brownfield site, (ii) a metropolitan statistical area or non-metropolitan area which (A) has (or, at any time during the period beginning after December 31, 2009, had) 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary), and (B) has an unemployment rate at or above the national average unemployment rate for the previous year (as determined by the Secretary), or (iii) a census tract (A) in which (y) after December 31, 1999, a coal mine has closed, or (z) after December 31, 2009, a coal-fired electric generating unit has been retired, or (B) which is directly adjoining to any of the forgoing census tracts. If a taxpayer’s project does not meet the Project Requirements, but otherwise satisfies the energy community requirements, then the taxpayer is eligible to receive a two percent energy community bonus credit.
Prohibition on Double Dipping
As anticipated, the Act includes provisions to avoid so-called “double dipping.” The Act: (i) amended Section 45 of the IRC (which provides for the renewable electricity production credit) to preclude claiming both an ITC for property that produces electricity from gas produced at a “qualified facility” (as defined in Section 45(d)) to the extent an ITC is allowed under Section 48 (i.e., from qualified biogas property); and (ii) amended Section 48(a)(4) to incorporate the rules of Section 45(b)(3), which provide for the reduction of the otherwise available ITC by 15% in most transactions, where such qualified biogas property is financed with proceeds of tax-exempt bonds.