The Inflation Reduction Act and Site Selection

Signed into law by President Biden in August 2022, the Inflation Reduction Act of 2022 (IRA) provides over $320 billion new and enhanced incentives designed to increase clean energy production in the United States, support energy innovation, and encourage investing in disadvantaged communities and projects that redevelop fossil fuel infrastructure and employ displaced workers. While the IRA took effect on January 1, 2023, some tax credits are available for use currently while others are not available for use until future years. This resource guide is intended to provide an overview of key tax credit provisions and relevant issues, and particularly geographic factors that could – and likely should – be taken into consideration during a site selection process.

IRA Summary

The IRA includes new and expanded tax credits and grant programs spanning a variety of categories. Following is a list of select programs most relevant to private sector companies and project investors:

• Clean Energy Credits & Financing (including both production and investment credits)
• Fuel Tax Credits
• Clean Vehicle Tax Credits
• Carbon Management Credits
• Energy Innovation
• Offshore Wind and Oil & Gas Systems
• Community Investment & Energy Justice
• Permitting Process Efficiencies
• Programs to support Agriculture and Forestry

The IRA allows taxpayers who don't have enough tax liability to fully benefit from these credits, such as project-specific Special Purpose Entities (SPEs), to transfer most of the credits. This enables them to monetize the credits by selling them to taxpayers who have enough tax liability to make full use of the credits. Governmental entities and tax-exempt organizations may also be eligible to receive a direct payment of the credit.  

The IRA’s federal income tax credits for production and investment energy projects have designated “base rates” with the opportunity to earn “bonus” rate increases by meeting additional qualifying criteria, several of which are tied to the geographic location of the project.  

“Base rate” means different things for different programs. More details can be found in the chart following, but, as an example, the new investment credits provide a base tax credit rate of 6%of qualified investment. If the project meets the prevailing wage and apprenticeship requirements, the project could receive a credit five times greater than the base, i.e., 30%.    

The following chart provides an overview of production and investment credits created or extended by the IRA followed by an explanation of bonus enhancement and related requirements. Additional details on these programs-- as well as information on other fuel, vehicle, carbon management and other credits created by the IRA -- can be found on the BLS & Co. website.    

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Bonus Enhancements

Energy Communities Bonus: As defined in the IRA, the Energy Community Tax Credit Bonus applies a bonus of up to 10% for projects and facilities located in energy communities. The IRA defines energy communities as any one of the following:

1. A “brownfield site” (as defined in certain subparagraphs of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA))
2. A “metropolitan statistical area” or “non-metropolitan statistical area” that has (or had at any time after 2009)
     a. 0.17%or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
     b. has an unemployment rate at or above the national average unemployment rate for the previous year.

1. Acensus tract (or directly adjoining census tract)
     a. in which a coal mine has closed after 1999; or
     b. in which a coal-fired electric generating unit has been retired after 2009.

There is no current mapping for all qualified brownfield sites; however, the Department of Energy launched a mapping tool that provides geographic eligibility for coal mine closures and unemployment data.  (See map below.)  The map contains 2022 employment data.  The Treasury Department and the IRS will release a listing of MSAs and non-MSAs qualifying by means of their unemployment rate once unemployment data for future years becomes available, expected in May 2024. This listing will apply to the period beginning on January 1, 2023, and will remain effective until the next annual listing.

With regards to brownfield site requirements, the IRS provided additional guidance on June 23, 2023, that provided refined definitional guidance on what qualifies as a brownfield site.  Most notably:

• A brownfield site is not limited to only the portion of a parcel of real property that has or may have a hazardous substance, pollutant, or contaminant that complicates redevelopment but contains the entire site delineated by the boundaries of the entire parcel; and
• A brownfield site is defined in 42 U.S.C. § 9601(39)(A) as real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant (as defined under 42 U.S.C. § 9601).   Examples of hazardous substances contamination include Arsenic, Asbestos, Lead, Polycyclic Aromatic Hydrocarbons, Polychlorinated Biphenyls, Volatile Organic Compounds, Chromium, Dioxin, and Mercury but not petroleum or controlled substances.  

While no comprehensive map exists that covers eligible brownfield sites, the US Environmental Protection Agency has launched a mapping tool, “Re-Powering Mapper,” which identifies over190,000 contaminated lands, landfills and mine sites for renewable energy development illustrated here.

Domestic Requirements Bonus: To qualify for the domestic content bonus credit (10%), taxpayers must demonstrate sufficient use of domestic iron, steel, and manufactured components.

Prevailing Wage and Apprentice Bonus: Several tax credits provide enhanced clean energy tax benefits of 5 times the base rate if prevailing wage and apprenticeship requirements are met.  

• “PrevailingWage” refers to aligning a company’s compensation (basic hourly wage plus fringe benefits) with published industry norms for a given occupation/job in a given location.  Prevailing wage is determined by the U.S. Secretary of Labor and, applies to all laborers and mechanics for all hours performing construction, and in some cases alteration or repair, on the site of the work of a qualified facility. Companies must undertake specific record-keeping activities to document compliance with prevailing wage requirements.
• To meet apprenticeship requirements, qualified apprentices must be used for a designated percentage of total labor hours for construction, alteration, or repair work on the qualified facility or energy project (10% for projects started before 1/1/23, 12.5% for projects started during 2023 and 15% for projects started after 12/31/23).  

Site Selection Considerations

Projects considering utilization of IRA tax credits, including bonus enhancements, should consider the following when engaging in the site selection process: 

• Notably, eligible census tracts for the energy community bonus (except for the brownfield site qualification) exclude significant portions of the eastern seaboard, west coast and the middle part of the country.   According to the Re-Powering Mapper, eligible brownfield sites exist within the excluded areas noted above; however, brownfield redevelopment can add additional time, risk and complexity to the site selection process.  
• Based on census tract criteria and brownfield status, it is likely that energy community bonus eligibility may overlap with eligibility for other federal programs such as Opportunity Zone investments, New Market Tax Credits and EPA funding.  Consideration should be made on project structuring should other federal credits or tax incentives be pursued based on census tract eligibility.
• Some IRA credits are eligible for a 5x enhancement by meeting prevailing wage and apprenticeship requirements. Depending on program and jurisdiction, other state and local incentives also have prevailing wage requirements.   Sometimes one program with prevailing wage requirements alone may not justify the impacts to project cost and administrative time to comply with wage requirements; however, stacking multiple programs with similar requirements can increase the overall value to the project.
• Many states have enacted new programs or enhanced existing programs that are synergistic with IRA bonus enhancements qualifications.   For example, in addition to existing brownfield redevelopment programs last year Ohio allocated $500M to two new programs (the Ohio Brownfield Remediation Program and the Ohio Building Demolition & Site Revitalization Program), the majority of funds were available to applicants on a ‘first come first serve’ basis aimed at revitalizing brownfield and vacant sites to increase Ohio’s availability of competitive sites.    Other states have enacted new programs targeted an industry specific investment aligned with the IRA such as Pennsylvania and Massachusetts.   Regardless of whether states are using new or existing programs to attract investment, the combination of state, local and federal resources can help reduce up front and ongoing costs to move a project forward.

Conclusion

The IRA has provided significant tax incentives designed to transition the nation’s reliance on fossil fuels to clean energy production and use. BLS & Co. would be pleased to assist you in pursuing IRA benefits and designing a site selection strategy that optimizes IRA eligibility and other important location considerations.  

Click here for a full breakdown of the IRA Tax Credits.