Reconciliation bill includes numerous energy incentive tax proposals

In brief

On August 7, the Senate passed the Inflation Reduction Act of 2022 (the bill), which included incentives for clean, renewable, and traditional energy sources. The House is expected to act on the bill on August 12, clearing the measure for President Biden to sign.

The bill would reinstate and significantly expand current incentives by providing an estimated $370 billion of new energy-related tax credits over the next 10 years. The legislation also would have a significant impact for companies relying on financing arrangements for energy-related projects, permitting more flexibility with direct-pay and transferable credit options. 

Taken as a whole, these incentives could be of significant interest not only for traditional energy companies but also for a wide range of “business-to-business” (B2B) and “business-to-consumer” (B2C) companies, including those in the transportation, real estate, and manufacturing industries. The bill aims to advance the economy further into the environment, social, and governmental (ESG) policy space.

Collectively, the energy tax provisions in the bill would represent the largest US effort to spur reductions in greenhouse gas emissions and are intended to catalyze material investments by the corporate sector with several major themes:

• Decarbonizing energy generation: The bill would extend the current system of tax credits for renewable energy through 2024 and then would transition those incentives into a “technology-neutral” clean electricity credit beginning in 2025. New credits would support nuclear energy and other lower-carbon technologies.
• Decarbonizing transportation: The bill would extend renewable fuels credits and add a new credit for sustainable aviation fuel and clean hydrogen. Many of these would be replaced by a technology-neutral clean fuels credit beginning in 2025. The bill also includes major extensions, expansions, and enhancements of credits intended to support the widespread adoption of electric vehicles for both passenger and commercial use, as well as incentivizing efforts to “on-shore” parts of the electric vehicle supply chain.
• Building energy efficiency: The bill contains extended and expanded provisions to support investments in building energy efficiency by both commercial real estate owners and homeowners.
• Carbon capture: The bill would enhance the existing tax credits for carbon capture and utilization or storage, including a new provision intended to incentivize the commercialization of direct air capture technologies.
• Lower-carbon manufacturing and green jobs: Most of the proposed credits are available at significantly higher levels if prevailing wage and apprenticeship requirements are met. In addition, the bill would revive the tax credit program for building advanced energy manufacturing facilities in the United States.
• Credit monetization: While the existing US tax code includes refundable credits, the bill would add several at once, and would allow eligible taxpayers to elect to be treated as having made a payment of tax equal to the value of these credits. Taxpayers ineligible for the direct-pay election instead opt to transfer any applicable credit to another taxpayer.

As discussed in more detail below, each of these thematic areas would present significant investment opportunities and choices for companies to consider.

The bill retains, with some modifications, many of the clean energy incentives included in the ‘Build Back Better’ (BBB) reconciliation bill that was approved by the House in November 2021 but later stalled in the Senate. For prior coverage, see PwC Tax Insight, Revised ‘Build Back Better’ bill retains most ESG tax proposals, adds new credits, November 19, 2021.

The bill would structure many new and existing clean-energy and energy-efficiency tax incentives as two-tiered incentives with a ‘base rate’ and a ‘bonus rate.’ The bonus rate would equal five times the base rate and would apply to projects that meet certain wage and apprenticeship requirements. A taxpayer must satisfy both requirements to receive the bonus credit rate; otherwise, the taxpayer may claim the relevant credit at the base rate.

Some of the credits in the bill also would include bonus rates based on the domestic content of the property to which the credit would apply.

These incentives are intended to encourage additional accelerated investment in lower-carbon technologies. That result would represent a significant step toward adoption and promotion of these technologies by businesses and individuals, by helping to bend their cost curve in light of various climate-related goals adopted by the Biden Administration for accelerating decarbonization of the US economy, including a goal to reduce emissions by 50% by 2030, against a 2005 baseline.

Observation: The revised structure of these credits makes it important for companies to analyze not only what low-carbon investments they are making but also how those projects will be built and where. The bill would add a social benefit lens to environmental credits, and companies will want to consider the entire range of their ESG goals and strategies when planning investments intended to take advantage of these credits. Furthermore, companies should apply a tax lens in assessing their ESG goals and strategies for attaining them. These incentives could have a significant effect on the after-tax costs of capital investments or other innovations to achieve those goals. 

Action item: Given the range of potentially significant consequences, businesses should analyze these proposals and model their impact in the broader context of their overall ESG goals. Businesses also should consider potential changes to their manufacturing or operating models intended to align with the specific tax incentives in the bill, also taking into account the perspective of active stakeholders — both shareholders and customers — increasingly interested in actions a business may be taking or considering in the environmental area. 

Action item: Companies should evaluate whether extended incentives for renewable energy and expanded incentives for electric vehicles could help fund their transition toward cleaner energy and attainment of near-term ESG commitments. In the longer term, new incentives such as those for clean hydrogen, carbon capture, and electric transmission property could drive strategies for capital expenditures. Finally, the return of the Section 48C credit for advanced energy manufacturing property may incentivize companies to locate more such facilities in the United States.

Note: One BBB credit that is not in the bill was the proposed ITC for property for the manufacturing of semiconductors and semiconductor tooling equipment, including buildings and equipment that are integral to such manufacturing. This credit was enacted as part of the CHIPS legislation signed by President Biden on August 9. For prior coverage, see PwC Tax Insight, Senate approves CHIPS funding and tax credit bill to promote US semiconductor manufacturing, July 27, 2022.