Inflation Reduction Act: Federal Incentives for Public Entities for Clean Energy Improvements

Posted by National Alliance for Fair Contracting on

Bricker Graydon LLP
June 15, 2023

By now, you are likely aware that the federal government is making the largest investment in climate and energy improvements in American history, known as the Inflation Reduction Act (IRA). The IRA allocates funding to provide incentives that reduce renewable energy costs for an expanded number of organizations including public educational institutions, school districts, states, counties, and local municipalities. Previously, renewable energy incentives were only available to private tax-paying entities. The IRA, however, now allows public entities to have access to these incentives.

Specifically, the federal government has made $369 billion available over the next decade for new and existing programs with the goal of a 40% reduction in the nation’s carbon emissions by 2030. The Act expressly allows these incentives to be used for installing energy facilities like solar arrays and wind turbines, installing certain water and sewage facilities, converting fleets of gas-powered vehicles to electric and hybrid vehicles (for example fleets of police cars, ambulances, fire trucks, school buses, garbage trucks, snow plows), and electric and other alternative fuels vehicle charging stations.

Investment Tax Credits (ITC) and Production Tax Credits (PTC)

One of the most innovative aspects of the IRA involves its creation of a direct-payment mechanism that is available to public entities. This new ability to receive direct cash payments is available for many of the different credits and programs funded by the IRA. Two of the most valuable types of tax credits that are eligible for direct payments under the IRA are the Investment Tax Credit (ITC) and Production Tax Credit (PTC).

Both types of credits were expanded to assist with financing renewable energy projects with the hope of spawning a new era of clean energy projects where ownership is retained by public and other tax-exempt entities. Among other categories of assets, the PTC was extended to include wind and solar projects that begin construction before January 1, 2025, and the ITC was expanded to include wind, solar, and energy storage projects that begin construction before January 1, 2025. The ITC and the PTC expire in their current form on December 31, 2024, and will be replaced by even more expansive technology-neutral and zero-emissions clean energy investment and production tax credits.

An ITC can be claimed after a clean energy project is completed and placed into service. The amount of an ITC that a project might be eligible for is calculated based off the upfront costs of installing and placing the project into service. The base rate for the ITC is 6% of the costs of a project. If prevailing wage and apprenticeship requirements are met, the base rate is automatically increased 5x to 30% of the project’s costs. On November 30, 2022, the IRS published its initial guidance for meeting these prevailing wage and apprenticeship requirements.

While an ITC is a one-time credit based on the upfront costs of a project, a PTC provides a yearly credit that can be claimed over a 10-year period. The amount of credit that an energy project is eligible to claim depends on the amount of energy it produces and sells to unrelated entities each year. The base rate of the PTC varies each year due to inflation. In 2022, for instance, the PTC had a base rate equal to $0.005/kWh. Like the ITC, if prevailing wage and apprenticeship requirements were met, the base rate for 2022 was increased 5x to $0.026/kWh.

Historically, for public entities, income and other types of tax credits are useless. Thanks to the IRA, public entities are now able to receive direct payments in lieu of credits by filing a tax return for the tax year that a project was placed into service that requests a refund equal to the amount of a project’s eligible tax credit. The ability to receive direct payments is available for many of the different credits created by the IRA and is not limited to only ITCs and PTCs. Entities can only elect to receive these new direct payments at such time and in such manner as the Secretary of the Treasury provides.

Public entities should consult experienced public finance counsel to further explore these financing options.

Clean commercial vehicle credits

The IRA provides resources to facilitate the purchase of clean energy commercial vehicles that replace traditional combustion-engine vehicles. The IRA expanded commercial vehicle tax credits to encompass any clean energy commercial vehicle. Each purchase of an eligible clean energy vehicle can receive a credit that equates to the lesser of 30% of the purchase price (15% if a hybrid vehicle) or the difference between the clean energy vehicle’s purchase price and a comparable combustion-engine vehicle’s purchase price, known as the incremental cost. Vehicles weighing under 14,000 pounds are eligible for a credit of up to $7,500. Vehicles weighing more than 14,000 pounds are eligible for a credit of up to $40,000. As alluded to above, this credit is also able to be received as a direct payment by tax-exempt entities.

The IRA carved out an additional amount of funding for an Environmental Protection Agency (EPA) program, consisting of $1 billion in competitive grants and rebates, that is aimed at offsetting up to 100% of a public entity’s replacement cost for heavy-duty Class 6 and 7 commercial vehicles. The grants and rebates under this EPA program can even be used to reimburse the costs of any charging or other associated infrastructure that is necessary to replace those types of vehicles, including workforce development.

Alternative fuel charging station credits

The Alternative Fuel Vehicle Refueling Property Credit is a general tax credit for an entity that installs alternative fuel vehicle refueling and recharging stations, including direct current fast charging stations. The base value of credit is 6% of the cost of the charging station with a maximum credit capped at $100,000. Like the ITC, the value of this credit increases from 6% to 30% of the cost of a qualified alternative fuel vehicle refueling station, but is still subject to the cap of $100,000 per station, if the requirements for prevailing wages and apprenticeship are met. Please note that public entities cannot use this credit to offset expenses related to the permitting and inspection of project sites. There are strict geographic limitations on the ability to qualify for this charging station tax credit. The station must be installed in rural or low-income areas. This credit is able to be transferred by certain tax-paying entities for cash and is eligible to be received by tax-exempt entities as direct payments in lieu of non-refundable tax credits.

Davis-Bacon Act

The Davis-Bacon Act applies to IRA-funded or assisted contracts in excess of $2,000 for the construction, alteration or repair (including painting and decorating) of public buildings or public works. This Act triggers an obligation on the contractors and subcontractors to pay federal prevailing wage.

Apprenticeship requirements

Lastly, the IRA sets forth apprenticeship requirements that must be complied with for IRA-funded or assisted contracts. These requirements include at least one apprentice for each subcontractor with four employees or more, ratio requirements as set by the Department of Labor or a state agency and required percentage of apprenticeship work hours (12.5% for 2023, and 15% for 2024 and beyond) for projects. The IRA does, however, include a good-faith exception for projects that do not receive a response in five business days from qualified apprentices from a registered apprenticeship program or for when no apprentices are available.

In sum, IRA has provided public entities with a unique opportunity to reduce energy costs while also reducing the amount of their carbon emissions.

(View Article)

IRS Requests Comments on Various Aspects of Energy Tax Credits

Posted by National Alliance for Fair Contracting on

JD Supra | Oct. 6, 2022

On October 5, 2022, the U.S. Internal Revenue Service (IRS) issued six notices requesting comments on various aspects of extensions and enhancements of energy tax benefits in the Inflation Reduction Act. Here is list of, and links to, the notices.

  • Notice 2022-46 requests comments on credits for clean vehicles.
  • Notice 2022-47 requests comments on energy security tax credits for manufacturing.
  • Notice 2022-48 requests comments on incentive provisions for improving the energy efficiency of residential and commercial buildings.
  • Notice 2022-49 requests for comments on certain energy generation incentives.
  • Notice 2022-50 requests comments on elective payment of applicable credits and transfer of certain credits.
  • Notice 2022-51 requests comments on prevailing wage, apprenticeship, domestic content, and energy communities requirements.

Inflation Reduction Act Brings Big Changes to Clean Energy Tax Incentives

Posted by National Alliance for Fair Contracting on

JD Supra
August 22, 2022

Over the next decade, the United States, through enactment of the Inflation Reduction Act of 2022 (IRA), is primed to make a $369 billion investment in clean energy and climate change programs. The lion’s share of this investment comes in the form of tax credits (extending or expanding existing tax credits, reinstating expired tax credits, and establishing new tax credits) to incentivize behavior that makes significant progress in reducing greenhouse gas (GHG) emissions (with projections showing a nearly 40% decrease in GHG emissions compared to a 2005 baseline) while at the same time encouraging domestic manufacture of key climate change technologies.

Companies looking to execute projects to take advantage of these tax credits should note two significant differences from how these types of tax credits have been provided in the past.

First, with limited exceptions, most credits are set up with a low “base” credit that can be increased by satisfying certain requirements. For example, the investment tax credit has a “base” credit amount of 6%, which can be increased to 30% if the project meets both a prevailing wages requirement for its laborers, mechanics, contractors, and subcontractors and an apprenticeship labor requirement that a certain percentage of the total labor hours for construction, alteration, or repair work on a project are performed by qualified apprentices. The credit can be increased even further by satisfying a domestic content requirement, locating the facility in an “energy community” (which includes brownfields, areas with a history of significant fossil fuel employment, and properties on which a coal mine or coal-fired electricity generation has been recently located), or locating smaller scale projects in low-income communities or on Indian land. Similarly, some credits contain an enhanced credit for using certain technologies in project execution (e.g., the carbon oxide sequestration tax credit is enhanced for projects using direct air capture).

Second, and a change that is poised to shake up how certain projects are financed and developed, new methods of monetizing tax credits have been added. For developers, the ability to transfer all or a portion of eligible credits to an unrelated third party provided in exchange for cash consideration (which consideration is not included in the transferee’s gross income nor deductible by the transferor) will be fairly significant in how a project is structured (even if projects may still need a tax equity component to monetize accelerated depreciation). The IRA will also help incentivize certain tax-exempt and government entities to execute projects by offering direct payment in lieu of certain tax credits. For-profit entities pursuing clean hydrogen production, carbon capture and sequestration, and domestic advanced manufacturing projects can also elect direct pay in lieu of tax credits for those types of projects. We expect direct payment to drive significant activity towards those types of projects. Ultimately, new ways of monetizing credits will give rise to several new transaction structures.

This update is intended to provide a high level overview of some of the IRA’s tax credit incentives targeting clean energy and climate change. We have also published separate updates regarding the Act’s energy storage incentives and a general overview of IRA incentives.

(Read More)

unnamed

Offshore Wind and the US Inflation Reduction Act

Posted by National Alliance for Fair Contracting on

Mayer Brown | 8/19/22
Authors – Amanda L. Rosenberg, Lauren A. Bachtel and Daniel T. Kiely

The Inflation Reduction Act of 2022 (IRA), which was signed into law by President Joe Biden on August 16, 2022, has the potential to shape offshore wind development for the foreseeable future. Among other things, the IRA modifies the investment tax credit requirements for offshore wind projects, ties offshore wind leasing to offshore oil and gas leasing while also opening new areas for potential offshore wind development, and appropriates additional funds for the planning and development of interregional electricity transmission and transmission of electricity generated by offshore wind.

Tax Credits

There are now more onerous requirements for offshore wind projects to qualify for investment tax credits (ITCs) at the full rate but a renewed opportunity to claim production tax credits (PTCs).

Previously, offshore wind projects under construction by the end of 2025 qualified for a 30% ITC but were ineligible for PTCs at the full rate unless they were under construction by the end of 2016. Wind projects under construction between 2017 and 2021 qualified for PTCs at a reduced rate. Most offshore wind projects are expected to claim the ITC given the high capital costs of constructing such projects.

Now, offshore wind projects under construction by the end of 2024 are eligible for a reduced base credit (6% ITC or 0.3 cent PTCs, adjusted for inflation) that is subject to increase if certain criteria are met. In order to be eligible for the full ITC or PTCs, offshore wind projects must meet certain prevailing wage and apprenticeship requirements or else be under construction no later than 60 days after the Treasury secretary issues guidance on the prevailing wage and apprenticeship requirements.

Prevailing wage requirement: A taxpayer, as well as its contractors and subcontractors, must pay prevailing wages to laborers and mechanics in the construction of the facility and, during the first five (in the case of ITC projects) or 10 (in the case of PTC projects) years of operation after the facility is placed in service, the alteration and repair of the facility. Prevailing wages are determined by the secretary of Labor. Taxpayers have the ability to correct a shortfall in wages by paying to the laborer or mechanic the difference between the prevailing wage amount and what the laborer or mechanic was actually paid plus interest and a penalty to Treasury. The amount owed to the laborer or mechanic for a shortfall is multiplied by three and the penalty is higher, if there was “intentional disregard” of the prevailing wage requirement.

Apprenticeship requirement: A certain percentage of the total labor hours for the construction, alteration or repair work with respect to the facility (including work by contractors or subcontractors) must be performed by qualified apprentices. The percentage is 10% for projects under construction before 2023, 12.5% for projects under construction in 2023, and 15% for projects under construction after 2023. A “qualified apprentice” is an apprentice employed by the taxpayer or its contractors or subcontractors and who participates in certain registered apprenticeship programs. Additionally, any taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the facility must employ at least one qualified apprentice. There is an exception to the apprenticeship requirement if (i) the taxpayer requested qualified apprentices from a program and either the request was denied or there was no response from the apprenticeship program within five days or (ii) the taxpayer otherwise pays a penalty to Treasury for failing to meet the labor hours and minimum participation requirements. The penalty is multiplied by 10 if the taxpayer intentionally disregarded the apprenticeship requirement.

Practical considerations: For wind projects, the determination of whether the prevailing wage requirement and apprenticeship requirements are satisfied is made on a “qualified facility” basis. The IRS generally considers each turbine, pad and tower a separate facility. It is unclear how the requirements will apply to the balance of the wind project. Another consideration is whether the start of construction rules that have been used for qualification purposes over the last nine years, including the “single project” rule, will apply for purposes of determining whether a project was under construction in time to avoid having to meet the prevailing wage and apprenticeship requirements. Recordkeeping will be critical in deals claiming the full tax credit rates. Investors are likely to ask sponsors to make representations that the prevailing wage and apprenticeship requirements are met, if applicable. Beginning of construction analysis will be important for projects looking to avoid having to meet the requirements. Sponsors will need to coordinate with contractors to ensure the requirements are met and may attempt to push these risks on to contractors. It is worth noting that the start of construction deadline for claiming an ITC for an offshore wind project was pulled forward by one year, but projects under construction in 2025 or later may be eligible for a technology-neutral ITC or PTCs as discussed below.

(Read More)

Carpenters: Industry plagued by tax fraud (MA)

Posted by National Alliance for Fair Contracting on

Picketers aim illuminate illegal employment practices

By Mike LaBella
April 11, 2019

HAVERHILL – More than a dozen union carpenters, including members of New England Regional Council of Carpenters Local 339, stood at the corner in front of City Hall for several hours Thursday morning to illuminate what they claim is rampant tax fraud tainting the construction industry.

They held picket signs and banners bearing statements such as, “Tax fraud impacts me,” and “Construction industry tax fraud costs taxpayers over $80 per second and $2.6 billion per year.”

Organizers said the event was intended to educate the public on the magnitude of illegal construction employment practices, discuss their impact on Haverhill and Massachusetts, and call for a unified front against what they called an insidious activity. Similar events took place Thursday in Lynn, Framingham and Portland, Maine, they said.

…

Local 339 issued a statement saying that each year, labor brokers and contractors cheat their tax obligations by misclassifying their hires, such as classifying a carpenter as a laborer, and paying an estimated 1.2 million workers “off the books,” (also known as “under the table”), thereby robbing taxpayers of up to $2.6 billion through lost federal income, employment taxes, and state income taxes.

Union member Adam DiGiovanni of Haverhill said he is reaching out to city officials in hopes they will support the creation of an ordinance that would penalize an employer for engaging in unfair wage practices on large construction projects that involve taxpayer money, including projects that receive tax credits.

“Other communities have passed these kinds of ordinances, including Springfield, Quincy and Lynn,” he said. “There needs to be oversight as right now it’s a free for all.”

He said that such an ordinance would typically speak to large-scale commercial construction projects valued at $10 million or more, and typically not the “local home-builder market.”

(Read More)

Wage Theft in Downtown Worcester AGAIN! (MA)

Posted by National Alliance for Fair Contracting on

15 Jan, 2019
in Uncategorized by Kevin

This just isn’t right. Why are we seeing wage theft in downtown Worcester AGAIN! Worcester is in a renaissance we’re told, but many of the carpenters who are building the new Worcester continue to be victims of illegal business practices on high profile projects.

The stolen wages occurred at the historic Central Building at 332 Main St. This is a publicly supported project that has millions of dollars in public assistance. A partial listing of funding as recorded by the Worcester Telegram and Gazette begins, “MassHousing is providing a $3.7 million permanent loan and $1.4 million in workforce housing funding from the agency’s $100 million Workforce Housing Initiative. The project also received approximately $12 million through an allocation of federal and state low-income housing tax credits by the Massachusetts Department of Housing and Community Development, more than $3 million in direct affordable housing funding from DHCD, $1.2 million in HOME funds from Worcester, and approximately $5.3 million through allocations of federal and state historic tax credits.” (Worcester T&G – $5.1M financing deal for Central Building in Worcester 5/7/2016)

With this much public resources and taxpayer dollars you would expect this to be an exemplary project.

Sadly, Dellbrook Construction hired Nayelie Drywall, which is registered both as a Hartford, CT or Holyoke, MA subcontractor. Nayelie then stole wages from two non-union carpenters. After not receiving the money they were owed, these two Latino non-union carpenters came forward to the Carpenters Union for help.

“Worcester needs to stay vigilant in efforts to prevent wage theft. We’re willing to take on the Dellbrooks and Nayelie Drywall, but we’re hoping the Worcester City Council can pass a wage theft ordinance to help end the exploitation of workers in our City.”
Dave Minasian, Business Agent – Carpenters Local 336

(Read More)