How Businesses Can Maximize Clean Energy Tax Credits Under the Inflation Reduction Act

Imran Syed PE, LEED AP, CEEM and Managing Director of Energy Services at Source Advisors explains what businesses need to know about leveraging clean energy tax credits to maximize savings and drive sustainability.

The Inflation Reduction Act (IRA), passed in 2022, represents a major step forward in the U.S. efforts to combat climate change, drive economic growth, and promote sustainability.  The IRA offers businesses across the country the opportunity to reduce tax liability through Investment Tax Credits (ITCs) and Production Tax Credits (PTCs)

With over $369 billion allocated to clean energy investments, the IRA includes new incentives while extending and expanding existing ones. This makes it a vital resource for businesses looking to navigate the ever evolving landscape of clean energy tax benefits. These incentives play a critical role in helping the U.S. reach its environmental goals by encouraging the adoption of clean energy technologies.

Who can qualify for ITC and PTC Tax Credits?

Both the ITC and PTC are available to a broad range of entities, including for-profit businesses, nonprofits, local governments, and even individuals. The eligibility requirements vary based on the type of credit and the technology being used.

• Investment Tax Credit (ITC): Businesses, nonprofits, and local governments can benefit as long as they invest in qualifying renewable energy technologies. This includes systems such as solar, wind, geothermal, and energy storage technologies. Businesses that adopt these technologies can use the ITC to reduce their tax liabilities, thereby lowering the overall cost of their investment. Additionally, nonprofit and tax-exempt entities can use the elective pay option to monetize certain tax credits.
• Production Tax Credit (PTC): Available to companies that produce energy from renewable sources or manufacture certain eligible clean energy systems. The PTC works by offering a per-kilowatt-hour tax credit for the energy generated from renewable sources, meaning that businesses can continue to receive tax benefits as long as their renewable energy systems are operational and producing energy.

Do you need to meet some requirements?

To qualify for the full Investment Tax Credit or Production Tax Credit, businesses must meet certain new requirements under the Inflation Reduction Act (IRA).

Key requirements:

Prevailing wage and apprenticeship, which means workers on the project—including those from contractors and subcontractors—must be paid local prevailing wages. A portion of the work must also be done by registered apprentices. Failure to meet the requirements will result in a business being limited to only the base credit instead of the increased amount. However, businesses can fix wage shortfalls by paying owed wages plus interest and penalties. For apprenticeships, there’s a “good faith effort” exception if businesses try to hire apprentices but are unable to do so.

The IRA also offers bonus credits for businesses that meet certain conditions.

Bonus requirements:

• Domestic Content Rule:
  • The structural steel and iron products used in a project must be produced completely in the U.S.
  • A certain adjusted percentage of the manufactured products in an energy facility must be mined, produced, or manufactured in the U.S.
• Energy Communities:
  • Extra credits for projects built in energy communities, such as former coal mining areas, and for small wind and solar projects in low-income areas.

What are the financial benefits of Clean Energy Tax Credits?

The financial benefits of clean energy tax credits can be transformative for businesses, especially in the current economic climate. By taking full advantage of the ITC and PTC, businesses can significantly lower the upfront costs of adopting renewable energy technologies and reduce ongoing energy expenses.

For example, if you’re a business owner interested in adopting solar energy technology, the Federal Investment Tax Credit is one of the smartest ways to cut the cost of your installation by 30%, as well as reduce your federal taxable income liability.

The PTC, while structured differently, offers long-term benefits. The credit is based on the amount of clean energy a business produces. For example, businesses receive a per-kilowatt-hour credit for the electricity generated from renewable sources like wind. Over time, this credit can add up to significant savings for energy-intensive companies. For businesses that rely heavily on energy for production, manufacturing, or other activities, the PTC offers a way to offset energy costs while helping the environment.

These tax credits help cover both the upfront costs and ongoing production expenses of energy projects, making renewable energy investments more affordable. By lowering financial barriers, they encourage private investment, create jobs, drive innovation, and speed up the adoption of clean energy technologies, ultimately supporting carbon reduction and long-term energy sustainability.

How accountants can maximize the business benefits of adopting clean energy

A crucial function of accountants is strategically planning to ensure clients benefit fully from ITCs and PTCs:

• Evaluate Eligibility: A deep understanding of eligibility criteria ensures clients qualify for the right incentives. Accountants can identify opportunities to integrate these credits into a client’s long-term financial plan.
• Analyze Project Documentation: A thorough review of project documentation, such as invoices, contracts, purchase orders, and construction cost breakdowns, is critical for accountants to ensure clients maximize the tax credits and be at ease with IRS audits and recapture risks.
• Monetizing Tax Credits: Accountants help unlock cash benefits for tax-exempt entities such as nonprofits, municipalities, and tribal entities using a Direct pay or Elective payment method. For-profit businesses can monetize the credit by selling credits to third parties (credit transferability) or using tax equity financing to bring in investors who can use the tax credits.
• Maximize Combined Incentives: Beyond ITCs and PTCs, accountants should look for additional federal, state, or local incentives that can be layered with these credits, optimizing financial outcomes.

By focusing on developing a strategy for clean energy tax credits, accountants can help clients avoid costly mistakes and ensure they fully leverage the available incentives and maximize tax savings.