Important Parts of Inflation Reduction Act

Leverage the IRA to maximize available tax credits for your business

Updated December 2023

The Inflation Reduction Act has extended the federal income tax credit for solar projects for the next decade. Solar project owners can still benefit from this credit, which will flow through to shareholders via K-1s. There is now a bonus tax credit for select regions in the US equating up to 40%.

Federal Tax Credit Rates

• Through 2032: 30% tax credit
• 2033: 22% tax credit
• 2034 and beyond: 10% tax credit

New Provisions for Carryback and Transferability

One significant update is that the tax credit can now be carried back for three years. This means that if you install a solar system in 2024, you can amend your tax returns from 2021 to receive a refund.

Additionally, the Inflation Reduction Act allows solar tax credits to be sold for cash. While we await detailed guidance on the rules for direct sales, tax credits generated from 2023 onward can be sold to other parties, with transactions typically priced between 80 to 95 cents on the dollar. The seller will need to provide indemnification to the buyer to ensure the credit is valid, and insurance options are available to cover this risk.

Key Points:

• Tax credits can only be sold once, must be paid in cash, and cannot be transferred from another year.
• Sales proceeds from tax credits are not considered taxable income for the seller.
• If you can’t utilize your 30% solar tax credit, we can assist you in selling it.
• Entities such as non-profits that directly own solar projects can apply for direct cash payments from the IRS.

Additional Tax Credit Incentives

There are several add-on incentives that can increase the overall tax credit for solar projects, including:

• Brownfields: +10%
• Low-Income Communities: +10% (Eligibility can be checked via a searchable map)
• Tribal Communities: +10%
• Qualified Low-Income Projects: +20%
• Energy Communities with Retired Coal Plants: +10% (Eligibility can be checked via a searchable map here)
• American-Made Solar Equipment Bonus: +10%. IRS documentation here.

These incentives can boost the total tax credit up to 60-70%, depending on the specific project and its eligibility.

Federal Grants and Other Resources

Under the Rural Energy for America Program (REAP), federal grants are available to support solar projects in eligible rural areas. Application deadlines are at the end of each quarter (March 31, June 30, September 30, December 31). Commercial-Solar.org offers assistance with the application process. Check eligible rural regions here.

For more comprehensive information, the U.S. Department of Energy has published an extensive guide on solar tax incentives, and additional details can be found from the IRS and EPA regarding the Inflation Reduction Act.

Additional Considerations

Projects larger than 1 MW will require installers to pay prevailing wages, but it’s worth noting that the current labor market for solar talent is tight, and many installers already meet or exceed these wage standards.

Stay tuned for updates from the Treasury Department on several points of clarification, such as how to handle potential income from tax credit sales and who will be responsible for audit adjustments post-sale.

For a deeper dive into these topics and examples of how these incentives can enhance your solar project’s internal rate of return (IRR), see our detailed article and case studies.

Tax Credit Transferability Explained

If you can’t utilize your 30% solar tax credit, Commercial-Solar.org can help you sell it.

While we await further clarification on the rules for direct sales of federal tax credits, new guidelines are expected to permit the sale of these credits in the open market. Currently, market discussion suggests that these credits are being traded at rates between $0.80 to $0.95 on the dollar. However, any buyer purchasing these credits will require indemnification from the seller to ensure the credit is valid. Fortunately, there are insurance products available to cover such risks.

Key Points to Know About Selling Solar Tax Credits:

• Under the Inflation Reduction Act, solar project owners can sell their tax credits for cash, provided the credits were issued in 2023 or later (as outlined in Section 6418 of the US tax code).
• The deadline for selling a tax credit is the end of the year in which the seller becomes entitled to it, or up until the due date for filing tax returns for that year. For instance, if your solar project is completed in 2024, you have until March 15, 2025 (or your specific due date) to sell the credit.
• Proceeds from the sale of tax credits are not considered taxable income for the seller.
• There is still some uncertainty around whether buyers will need to report any difference between the purchase price and the face value of the tax credit as income.
• Tax credits can only be sold once, must be paid for in cash, cannot be carried forward from another year, and cannot be sold to related parties.
• Sellers might need to purchase insurance to cover indemnities in case a tax credit is later disallowed.
• The IRA also provides an option for non-profits and certain other entities that own solar projects to apply directly to the IRS for cash payments.

We are expecting additional guidance from the Treasury Department on several issues, such as whether tax credits transferred to another entity can be sold, how potential income from the sale of tax credits should be handled, and who will be liable for audit adjustments once tax credits have been sold.

For more in-depth information on tax credit transferability, check out this insightful article from a top law firm specializing in renewable energy.