Inflation Reduction Act Tax Opportunities for Tribes

Inflation Reduction Act Tax Opportunities for Tribes Presented by: Mr. Parsons Date: September 25, 2023 Lawyers for a Sustainable Economy - Xavier Becerra, Former California Attorney General • "We will continue to harness the power of the public and private sector together, moving forward to build a brighter, cleaner, and more sustainable future." - Firms offer pro bono legal assistance to eligible Tribal entities, non-profits, and earlystage entrepreneurs taking on key sustainability challenges. IRA: Climate & Energy - The most significant climate legislation in U.S. history - Provides incentives in the form of direct spending and tax benefits - Provides a significant runway for investments - Helps ensure disadvantaged communities are not left behind - Has strong labor components, ensuring job creation - Focused on domestic supply chain and onshoring Agenda - IRA Tax Benefits • Overview of Tax Provisions • Overview of Direct Pay - Section 48 – Investment Tax Credit - - Section 45 – Production Tax Credit - Questions and Answers Tax Credits - Renewable/Clean Energy: • Sec. 45 Production tax credits wind, solar, geothermal, hydropower, etc. • Sec. 48 Investment tax credits for solar, storage, biogas, fuel cells, etc. • Sec. 45Y and 48E Technology neutral clean electricity production and investment credits. - Manufacturing: • Sec. 48C Credit for manufacturing energy property including EV components, fuel cells, electric grids, etc. • Sec. 45X Manufacturing credit for solar and wind components, batteries and critical minerals. - Carbon Capture/Hydrogen Production: • Sec. 45Q Credit for carbon oxide sequestration (increased rates and lower thresholds). • - Sec. 45V Clean hydrogen production credit. Alternative fuels: • Sec. 40 Second-generation biofuel credit • Sec. 40A and 6426 Biodiesel and renewable diesel; biodiesel mixture credit; alternative fuel credit. - - • Sec. 40B Sustainable aviation fuel. • Sec. 45Z Clean fuel production credit. Energy Efficiency: • Sec. 25C & 25D Individual credit for energy efficient homes. • Sec. 45L New energy efficient home credit. • Sec. 179D Energy efficient commercial buildings deduction. Transportation: • Sec. 30D Electric vehicles. • Sec. 30C Charging and alternative fuel refueling stations. • Sec. 25E Used electric vehicles. • Sec. 45W Qualified commercial clean vehicles. Direct Pay of Tax Credits - Direct Pay = Elective Pay - Mechanism by which entities not subject to federal income taxation can benefit from tax credits. - Only available for certain tax-exempt entities, considered "applicable entities,” which includes Indian tribal governments - Direct payment = asking IRS for $ Who can claim direct payment? - Indian tribal government - Subdivision of an Indian tribal government - Agency or instrumentality of Indian tribal government or subdivision thereof - Alaska Native Corporations Investment Tax Credit – Section 48 - Tax credit for placing in service projects that produce renewable energy. - Credit claimed year the property is placed in service. Qualified Biogas Energy Property Storage Open-Loop Biomass Qualified Fuel Cell Microturbines Electro chromatic Glass - Solar Municipal Qualified Solid Waste Hydropower Combined Heat Microgrid and Power Waste Energy Recovery Property Available for construction if Wind Geothermal Marine & Hydrokinetic Controllers Certain Small Irrigation Interconnection Power Property begins before 12/31/2025 after which tax credit is technology neutral. ITC Value - 6% of the basis of the property. - If certain labor conditions are met, the credit value is multiplied five (6%→ 30%). - Additional bonus credit amounts are available based on domestic content, placement in an energy community, or with an allocation for placement in connection with a low-income community or on Indian lands. ITC Example - A Tribe purchases and places into service solar panels to put on the roof of its administrative building thereby generating electricity for the facility. The solar panels cost $500,000. Under the IRA, the tax credit eligible for direct payment is generally 6% of this cost, or $30,000. The value of the credit is increased if additional conditions are met - if certain labor conditions are met or if the output is less than 1 MW, the credit is increased by five-fold to $150,000. - Additional bonus amounts of 10% each are also available increasing the value if either certain domestic content requirements are met (e.g. the products were produced in the United States) and/or the solar panels are placed in specially designated communities (e.g. energy communities or receive an allocation under the low-income community bonus program). Accordingly, under the right circumstances, the credit can be as much as 70% of the cost of the energy property. Production Tax Credit – Section 45 - Tax credit for the production and sale of renewable power to an unrelated party. - Includes some, not all of same property covered under ITC. - Credit amount based on generation • 0.3 cents/kwh as base credit • 1.5 cents/kwh if certain labor conditions are met.  Exception for projects less than 1MW  Amounts are indexed for inflation - currently 2.75 cents/kwh - Tax credit can be claimed for 10 years after placed in service. - Additional bonus credit amounts are available based on domestic content, placement in an energy community, or with an allocation for placement in connection with a low-income community. - Available if construction begins before 12/31/25, after which tax credit is technology neutral and does not need to be sold to an unrelated party. Technology Neutral Credits 45Y Clean PTC Section 48E Clean ITC Applies to facilities placed in service after Applies to property placed in service after December 31, 2024 with zero GHG December 31, 2024, with zero GHG emissions emissions and applies to interconnection costs and energy storage technology PTC equal to 0.3 cents (or 1.5 cents) (indexed for inflation) per KWh of electricity ITC equal to 6% (or 30%) of qualified produced in US or US possession by investment in energy property for facilities taxpayer at a qualified facility and either (1) (1) used for generation of electricity; (2) sold to an unrelated person, or (2) if equipped anticipated GHG rate not greater than zero; with a metering device owned and operated (3) tangible personal property or other by an unrelated person, sold, consumed or tangible property (not including building or stored by taxpayer structural components) used as an integral part of the qualified facility; and (4) depreciable or amortizable - If PWA satisfied, the credit value is multiplied by five. - Bonus Credit: Additional bonus credit amounts are available based on domestic content, placement in an energy community, or with an allocation for placement in connection with a low-income community. - Credit available in full until at least 2033; possible ramp down thereafter unless target not achieved. - Ability to receive credit for capacity upgrades or expansions to facilities previously placed in service Base Rate Labor Conditions 6% For a number of the Multiplier x 5 IRA tax credits, including the ITC and PTC, the credit amount is increased by five times for projects that meet requirements for paying prevailing wages and using 0.3¢/kWh (indexed for inflation Base Rate Domestic Bonus Energy Bonus Content Community Low Income Communities Credit Program Bonus 6% registered apprentices. For a few of the IRA Extra 10% credits, including the ITC and PTC, meeting domestic content requirements entitles a Tribe to an additional 10%. Fiailure to meet domestic content requirements can also result in a reduction of the direct payment of the credit. For a few of the IRA Extra 10% credits, including the ITC and PTC, projects located in historical energy communities, including areas with closed coal mines or coal-fired power plants, are eligible for a 10%. The bonus is also available to brownfield sites and to areas that have significant employment or local tax revenues from fossil fuels and higher than average unemployment For one of the IRA Extra 10% or 20% credits - the ITC projects located in low-income communities, Indian lands, or federal housing projects, or serving low-income households can receive an increase in 10% or 20%. 0.3¢/kWh (indexed for inflation Base Rate 6% 0.3¢/kWh (indexed for inflation Tribes must apply and receive a capacity allocation. IRA Leverage Opportunities - If structured properly, funding from the Inflation Reduction Act, American Rescue Plan Act and other non-tribal sources could be used for qualifying projects that generate tax credits for tribal governments. - With many tribal governments already committed to transitioning to clean energy sources or making other climate investments, the Inflation Reduction Act presents a once-in-a-generation opportunity to make these energy-related investments in a manner that actually nets the Tribe money.