Inflation Reduction Act: End of Summer Policy Update
NOTE: Since the original publication of this blog, the IRS has announced that the application for the Bonus Low-Income Tax Credits will open on October 19, 2023. Learn more here
As the IRS has released the final guidelines for the various tax credits under the Inflation Reduction Act, our team has been diving deep into the policy. Below is a high-level update on the most relevant policies for low-income solar and affordable housing. If you’re just wading into the ocean that is the IRA, we’d suggest checking out our previous explainers on the IRA for Nonprofits and our June 2023 IRA update. This blog post will clarify some of the new information that has come out since our last update.
Support from Resonant Energy
We cannot cover every policy detail in this blog post and there is much more to unpack. Existing clients can reach out to their business development representative for more specific questions about your project. We will also provide clients with a more detailed breakdown of all of the relevant policies.
Resonant Energy will work with all of our clients to ensure they have a pathway to access the highest possible federal tax credit incentives to support their projects. We will outline where applications have a greater or lesser chance of approval, estimated timelines for next steps, and financial implications for how the project can be financed under different scenarios. Once the Treasury makes the portal available, Resonant Energy will work to either submit applications on clients' behalf or to prepare all submission documentation for clients to submit directly if that is required.
Total Potential Tax Credit Value:
Between all of the applicable tax credits, solar projects will be eligible for up to a 70% Investment Tax Credit or Direct Payment. However, unless the project is an affordable multifamily housing project, built with domestically manufactured components and located near a decommissioned coal power plant, or another equally specific scenario, it will likely qualify for a lower tax credit. We expect most projects to fall into the 30-50% range.
Guaranteed Adders (No Application Required)
Energy Community (10%)
The Energy Communities Adder automatically adds 10% to the tax credit if a project is located in one of the following:
Brownfield Site (note: must have contamination not solely from petroleum).
Census tracts near current/former coal-fired power plants
Census tracts with a high rate of employment in the energy sector and high rates of unemployment (e.g. all of West VA).
You can determine if a particular census tract qualifies for the Energy Community Adder here. Resonant Energy is creating our own EJ Map that will incorporate both the Energy Community Adder and the Low-Income Bonus Tax Credit — stay tuned!
Domestic Content (10%)
We have some clarification on what is required to qualify for the domestic content adder. First, any steel and iron used in the racking for the project must be made in the US. Additionally, the total domestic content percentage must meet the increasing scale of minimum domestic content requirements (below), starting at 40% in 2023 and rising to 55% by 2027. The total domestic content percentage can be calculated by dividing the cost of domestically manufactured products and components used in a project by the total cost of materials (both domestically and internationally manufactured). The cost of US-manufactured steel and iron can be included in this calculation, which, given the price of steel, makes most canopy projects eligible for this adder.
Bonus Low-income Tax Credits (Application Required)
The Low-income bonus tax credits can be combined with both the domestic content and Energy Community Adders but a project can only apply for one of the LI tax credits. Below is a summary table of the different low-income bonus tax credits. If you’re looking for a more in-depth overview of these tax credits, check out our previous IRA Update.
Additional Selection Criteria
In order to determine which projects win bonus tax credits, the Treasury has proposed new Additional Selection Criteria. Facilities that meet these criteria get priority in the tax credit allocation process. At least 50% of the capacity for each bonus tax credit category will be reserved for projects that meet one or both additional selection criteria, meaning that projects that meet the criteria will have a greater chance of receiving the higher tax credit.
The Additional Selection Criteria are bifurcated into ownership and geographic categories. Facilities that fulfill at least one requirement in each category will be given the highest priority; facilities that meet a requirement in one category (say, ownership but not geographic) will be prioritized above those that meet none of the requirements.
The ownership category includes structures such as Tribal Enterprises, Alaska Native Corporations, Renewable Energy Cooperatives, Qualified Renewable Energy Companies, and Tax-Exempt Entities. On the geographic front, the facility should be located either in a Persistent Poverty County (PPC) or in a census tract designated as disadvantaged based on specific percentile parameters for energy burden and low income which can be identified using this screening tool.
Application Timing
The application for bonus low-income tax credits will be open for a 30-day window beginning on October 19, 2023. There will be no first-come first-serve element to that window. Projects with one or two Additional Selection Criteria will receive priority and all other projects will be put into a lottery if oversubscribed.
For any categories that are not fully subscribed after the initial window, applications will continue to be reviewed on a rolling basis.
Conclusion
We’re excited to finally see the details of the IRA coming together. While we are still waiting on the exact timing from the Treasury on when the applications will open, we are excited to get to be able to provide clients and partners with the tools and resources they will need to make the most of this opportunity. The IRA is landmark legislation that is fundamentally changing the way low-income and environmental justice solar projects will be built in the US and we are eager to get started.
Existing Resonant clients can contact their business development representative for further guidance. If you’re ready to explore solar for your portfolio or have questions about these policies, reach out to us at info@resonant.energy and someone will reach out.