Even though the investment tax credit (ITC) and production tax credit (PTC) have been altered by the Inflation Reduction Act of 2022 (IRA), they are not new. However, come 2025, the property eligible and the qualification requirements for the credits are changing. Recently issued proposed regulations bring this shift into the foreground and highlight additional steps and considerations for taxpayers in the clean energy space moving into the new year.
As some of the most commonly pursued clean energy credits, taxpayers benefit from ITCs based on the amount they pay for their property (their “investment”), and from PTCs based on the energy generated from their property (their “production”). Historically, 48 and 45 were the code sections through which these benefits have been possible. However, 2025 brings a shift in how ITCs and PTCs operate. For projects placed in service after December 31, 2024, Section 48E and 45Y credits may be available—and with them a new set of considerations.
ITC & PTC Updates Within This Article:
- Breakdown of what is changing in 2025
- Top five action items and planning considerations
Old vs. New Clean Energy Credits: A Comparison
Some Basics
The chart below summarizes high-level differences between the “old,” aka §45 and §48 versus “new,” aka §45Y and §48E credits:
| Credit | Base | 5 Times Bonus? | Energy Community | Domestic Content? | Inflation Adjusted? | Qualified Property | Dates | Period |
|---|---|---|---|---|---|---|---|---|
| 45 | 0.3 cents x kWh | Yes: 1) < 1 MW 2) Beginning of construction (BOC) < January 29, 2023 3) Prevailing wage & apprenticeship (PWA) | Yes, 10% | Yes, 10% | Yes, base & 5 times bonus | See listing of qualified facilities within §45 | Available for BOC < January 1, 2025 | 10 years from PIS |
| 45Y | 0.3 cents x kWh | Yes: 1) < 1 MW 2) BOC < 60 days after PWA guidance 3) PWA | Yes, 10% | Yes, 10% | Yes, base & 5 times bonus | Greenhouse gas (GHG) emissions rate = 0 | PIS > December 31, 2024 | 10 years from PIS, phaseout w/ “applicable year” |
| 48 | 6% | Yes: 1) < 1 MW 2) BOC < January 29, 2023 3) PWA | Yes, 10% | Yes, 10% | No | See listing of qualified property within §48 | Available for BOC < January 1, 2025 | Year PIS |
| 48E | 6% | Yes: 1) <1 MW 2) BOC < 60 days after PWA guidance 3) PWA | Yes, 10% | Yes, 10% | No | GHG emissions rate = 0, energy storage technology < 5kWh, interconnection property < 5 MW | PIS > December 31, 2024 | Year PIS, phaseout w/ “applicable year” |
Timing
As mentioned previously, §48E and §45Y “kick in” for those projects placed in service after December 31, 2024. However, §48 and §45 are still available for those projects placed in service in 2025 or later, but that begin construction before January 1, 2025. Therefore, there is an overlap period where taxpayers may need to consider which credit is most beneficial—or convenient—to pursue; however, these are mutually exclusive and taxpayers cannot claim both simultaneously for a property. If the project would qualify for both “new” and “old” PTC or ITC credits, then depending on the type of property there could be fewer engineering assessments and record-keeping requirements for the §48 and §45 credits. Further details about these requirements are included later in this article.
Insight From Forvis Mazars: For a period of time, there may be an option to choose between the 48 versus 48E credit or 45 versus 45Y credit. Depending on whether the project is automatically considered to have a GHG emissions rate not greater than zero, taxpayers may prefer to expedite the BOC date for their projects into 2024 to qualify for the 48 or 45 credits.
GHG Emissions Rates
Perhaps the biggest difference between “new” and “old” ITCs or PTCs is the consideration of GHG emissions rates. Previously, §48 and §45 provided a defined listing of what property types were considered eligible property for the respective credits. While there were some specification requirements for certain property types, for many properties simply being considered within the definition of the property type would provide the opportunity for a credit. With §48E and §45Y, only those properties that have a GHG of not greater than zero may qualify for the ITC or PTC.
There are certain facility types that are automatically considered to have emission rates that meet the GHG threshold. Per §1.47Y-(c)(2), those facility types are:
- Wind (including small wind properties)
- Hydropower
- Marine and hydrokinetic
- Solar
- Geothermal
- Nuclear fission
- Nuclear fusion
- Certain waste energy recovery property
However, for other facility types, taxpayers should reference annually published tables that outline GHG rates for various categories of clean energy facilities. Although not set to be published until after the final regulations are issued, these rates would be determined at the date construction begins on the facility. If there is no published rate applicable for the facility, taxpayers can file a petition for a provisional emissions rate (PER) from the Treasury Secretary.
The details of how to determine and substantiate GHG rates for both combustion and gasification (C&G) and non-C&G facilities are a large portion of the details within the proposed regulations. For example, certain specific emission types are not included in the GHG rate, including emissions from normal maintenance, facility infrastructure emissions, and emissions resulting prior to the beginning of commercial operations.
Insight From Forvis Mazars: GHG emission rates exclude carbon dioxide that is produced and sequestered. Therefore, if the carbon dioxide is either disposed or utilized in line with the requirements of the §45Q carbon oxide sequestration credit, the resulting emission would not be included in the GHG rates. While this may prove beneficial for the qualification of the ITC and PTC, the §45Q credit cannot be claimed on a facility for which the taxpayer also is claiming the ITC or PTC.
Included Property Types
Even though §48E and §45Y do not generally have a defined listing of qualifying property types similar to §48 and §45, there are still some rules that scope out what is not included come 2025. The proposed regulations detail combined heat and power (CHP) systems for both the ITC and the PTC. Assuming the system meets the specifications listed, CHP property has the potential to qualify for the §45Y credit. On the other hand, §48E aligns its definition of energy storage technology with that of the §48 credit. Therefore, CHP systems are not included within the definition of “energy storage technology” for §48E.
Insight From Forvis Mazars: Similar to CHP property, thermal energy storage property has the same definition for 48E as it did for 48. With many entities—especially those with larger-scale facilities like universities and healthcare systems—needing to replace their boiler and chiller systems, it would seem intuitive that replacing these systems for a more energy-efficient variety should qualify for a credit. However, taxpayers should work closely with their engineers to make sure that the specifics of their property meet the requirements of the credits as outlined in the regulations. Section 1.48E-2(g)(6)(ii) of the proposed regulations includes examples of eligible property:
- Thermal ice storage systems that use electricity to run a refrigeration cycle to produce ice that is later connected to the HVAC system as an exchange medium for air conditioning a building
- Heat pump systems that store thermal energy in an underground tank or borehole field to be extracted for later use for heating and/or cooling
- Electric furnaces that use electricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system
In solar and other ITC projects, the cost of interconnection property can often be a high-ticket item. Unfortunately, the regulations have stated that §48E does not allow for the cost of interconnection property to be considered eligible for the credit if the maximum net output is greater than five megawatts.
While power-conditioning equipment and transfer equipment are included as potentially eligible property, certain roads, fences, buildings, and structures are not. Further, transmission equipment—such as transmission lines and towers, or any equipment beyond the electrical transmission stage—are not within scope of either the §48 or §48E credit.
Note that the §48E and §45Y credits are mutually exclusive, meaning they cannot be taken on the same facility simultaneously. However, the proposed regulations do state that if there is shared property between ITC and PTC facilities that is integral to both, that shared property can qualify in portion to each credit. An allocation of cost basis would need to be done to determine what portion should “count” for the ITC versus the PTC in this situation.
Top Five Action Items & Planning Considerations
The listing below includes some action items to be aware of as the “new” ITC and PTC rules become applicable:
- For PTCs, consider installing a metering device.
For §45Y, unless the energy is sold by the taxpayer to an unrelated party, a metering device must be installed and used at the facility. This metering device should be owned and operated by an unrelated person and meet the specifications as outlined in the proposed regulations, e.g., meet the American National Standards Institute C12.1-2022 standard. If the metering device is present and used as intended, then the energy can be sold, consumed, and stored by the taxpayer during the tax year while still maintaining eligibility for the credit.
- Complete a life-cycle analysis (LCA) for your C&G facilities, and a technical and engineering assessment for non-C&G facilities.
For those project types not listed within §1.47Y-(c)(2) as meeting the emissions threshold, taxpayers may need to have a life-cycle analysis or other assessments completed. A life-cycle analysis determines the emissions rate applicable to the facility so that the rate can be compared to required levels in determining eligibility. In these analyses, it is important to understand starting and ending boundaries, so that the correct property is being measured. Further, these studies should include both direct, “significant indirect emissions,” and a consideration of “alternative fates.” Therefore, not only the direct emissions are studied but also future estimated conditions like macroeconomic factors. Further, what is categorized as co-products, byproducts, and waste products also affects results.
Similarly, non-C&G facilities must determine their GHG emissions rate “through a technical and engineering assessment of the fundamental energy transformation into electricity, and that such assessment must consider all input and output energy carriers and chemical reactions or mechanical processes taking place at the facility in the production of electricity.”
- Energy attribute certificates (EACs) may need to be acquired and retired.
The use of EACs is not new in the clean energy space—in fact, they are currently proposed to be required for the §45V clean hydrogen credit as well. However, they have not been required for ITCs or PTCs previously. The proposed regulations explain the purpose of EACs quite well:
“EACs are a form of book-and-claim accounting that conveys information about the attributes associated with a unit of energy, including the fuel or feedstock used to create the energy. EACs may also include information about the location of the facility that generated the unit of energy, when that facility began operations, and when the unit of energy was produced. Because EACs can serve as a system for tracking the attributes associated with the production of a unit of energy and as a means to avoid double-counting, the Treasury Department and the IRS are considering whether to provide rules that address the use of book-and-claim systems as a means of verifying the emissions profile of a facility’s use of fuel and electricity production.”
The preamble to the proposed regulations states that if the taxpayer is considered a producer of electricity “using biogas, RNG, or fugitive methane,” then EACs would be required as documentation that requirements are met.
Comment From Forvis Mazars: There is a request for comment on the requirement and use of EACs for this purpose. In the clean hydrogen space, there has been an uproar in the industry in requiring similar guidelines as the tracking can be cumbersome and limiting. There is more to come following the comment period if this portion of the proposed regulations is maintained.
- Consider investment into carbon sequestration.
The proposed regs stipulate that carbon that is captured and either disposed or utilized pursuant to the §45Q rules should exclude the related carbon dioxide when determining the emissions rate. An important note, however, is that a taxpayer cannot claim the new ITC or PTC on a facility for which they also claim the §45Q carbon oxide sequestration credit. Therefore, a cost-benefit analysis should take place as to which credit is more beneficial.
- Confirm documentation and record-keeping processes are in place.
Given the new requirements surrounding GHG emissions, substantiation surrounding the “design, operation, and if applicable, feedstock or fuel source used by the facility that establishes that such facility had a GHG emissions rate … is not greater than zero for the taxable year” should be kept. While the preamble to the proposed regulations does state that final regulations will have more specific documentation requirements outlined, a number of suggestions are included:
- Report prepared by an unrelated party confirming the zero emissions rate
- Data and further proof of zero emissions rate
- To support interconnection costs:
- “Final invoices, proof of payment or reimbursement, and permission to operate documentation or any other final project accounting documentation”
- Interconnection agreements
- Interconnection study
- Signed customer contracts
- Cost certification reports
Requests for comment on documentation requirements were present throughout the proposed regulations, so until final regulations are available, taxpayers may need to retain as much documentation as possible. Given this administrative burden, as well as the complexity of the requirements, taxpayers should work with their trusted tax advisor to consider eligibility for these credits. Having these advisors involved prior to investment may, in fact, affect the decision to pursue the project overall.
Even though final regulations are not yet available, the proposed regulations provide taxpayers with a better understanding of what is changing come 2025. For those properties that may require an LCA or other engineering assessment for the “new” version of ITC/PTC, taxpayers may consider expediting the start of construction into 2024 to claim the 45/48 versions of the credits. Further, understanding what is involved in these studies and the related documentation requirements can help taxpayers considering all of the factors with clean energy investment.
Forvis Mazars has a dedicated team focused on the IRA that can help you through these considerations, especially in the changing landscape come next year. If you have any questions or need assistance, please reach out to one of our professionals.