US Green Tax Credits for Businesses
With the recent unprecedented federal spending of somewhere in region of $400 billon on various green initiatives under the Inflation Reduction Act (IRA) 2022, the United States has become one of the best places in the world for green multinationals to invest.
Below we look at some of the different US green tax credits for businesses introduced or extended under the IRA, including the ITC tax credits for companies and each PTC tax credit for businesses looking to establish a commercial presence or relocate to the USA.
Why is the US a good place for green multinationals to invest?
With high pollution levels and natural disasters becoming increasingly common in the US, the United States government has recently taken significant steps under the IRA to actively encourage sustainable development in an urgent attempt to address climate change. These steps include a whole host of US green tax credits for businesses looking to establish a commercial presence or relocate to the United States, where one of the most effective ways to encourage sustainable development is by offering attractive financial incentives.
By attracting green and clean businesses to the US, and by incentivising existing businesses to embrace sustainable development and become more eco-friendly, it is hoped that the drastic action needed to reduce carbon emissions will be taken, significantly minimising the environmental impact across various industry sectors. The US government aims to reduce its share of global greenhouse gas emissions by around 40% or more by the year 2030.
Below we examine the various green tax credit schemes currently available, designed to encourage sustainable business practices in the United States, and how these tax credit schemes are making the US a key location for overseas green multinationals looking to invest there. Many of the US green tax credits for businesses also offer bonus credits to projects located in low-income or energy communities, that pay prevailing wages and use registered apprentices, or meet certain domestic content requirements, all with the overall goal of creating good-paying and high-quality jobs, with shared economic growth.
For the most-up-to-date information on US green tax credits for businesses, and the various other financial incentives currently available in the US, reference should be made to the website for the Database of State Incentives for Renewables & Efficiency (DSIRE). The DSIRE website provides the most comprehensive source of information on financial incentives and policies that support renewable energy in the US, and will allow a search to be undertaken for each state. It also provides a section on federal incentives, including the different US green tax credits for businesses that multinationals can take advantage of.
ITC tax credits for companies
As the most ambitious investment in clean energy in US history, the IRA offers extensive tax incentives across a range of industry sectors to advance and deploy domestic clean energy technologies. Referred to as investment tax credits (ITCs) and acting as significant tax breaks to American-based businesses, ITCs are one of the main ways being used by the US government to incentivise green multinationals to invest their money in the US.
ITCs are corporate tax credits which work by reducing the federal tax liability for a percentage of the costs incurred in qualifying clean energy purchases or projects during the relevant tax year, up to the qualifying amount, in this way reducing the upfront cost of the investment. By heavily subsidising renewable energy costs invested by US businesses, this is making the US one of the most attractive places for green multinationals to move to.
The ITC tax credits for companies currently or soon-to-be available in the US include:
- the Business Energy Investment Tax Credit
- the Clean Electricity Investment Tax Credit, and
- the Advanced Energy Project Credit.
The Business Energy Investment Tax Credit (ITC)
The Business Energy ITC is aimed at investment in a number of different renewable energy technologies, including solar and wind technologies, and is applicable to the commercial, industrial and agricultural sectors, as well as the utilities sector, both investor-owned and co-operative. As an existing ITC, but significantly modified under the IRA, several changes to this tax credit include expanding the eligible technologies, extending the expiration date, providing for new bonus credits and establishing new criteria to qualify for the full credit.
The Business Energy ITC offers 6% to 30% of the qualifying investment costs, depending on project status and labour factors, where the 6% credit will be increased by 5 times if a prevailing wage and apprenticeship requirement is met. It also offers a number of bonus credits designed to strengthen America’s manufacturing base and to incentivise the use of investment in communities most in need of new economic development. These bonus credits include an additional 10% domestic content bonus, an additional 10% energy community bonus, an additional 10% low-income community bonus, and an additional 20% low-income residential building or low-income economic benefit bonus.
The domestic content bonus is for projects in which 100% of any steel or iron is a component of the facility in question, and 40% of the manufactured products that are facility components were produced in the US. The energy community bonus is for facilities located at a brownfield site or in a community with significant job losses within the fossil fuel economy following the closure of a coal mine or coal-fired power plant. The low income community bonus is for projects built in either a low-income community or on Indian Land, while the low-income residential building or low-income economic benefit bonus is for projects associated with qualifying buildings or economic benefit projects.
The Clean Electricity Investment Tax Credit
The Clean Electricity ITC is a brand new technology-neutral tax credit introduced under the IRA which will replace the traditional ITC for investment in facilities and systems that generate clean electricity from 1 January 2025. This will be similar in functionality to the Business Energy ITC, but not technology-specific, applying to all generation facilities and energy storage systems with an anticipated greenhouse gas emissions rate of zero.
The credit amount will be calculated in much the same way, but will be phased out as the US meets its greenhouse gas emission reduction targets. This will be the later of either 2032 or when US greenhouse gas emissions from electricity are 25% or lower than 2022 emissions. For projects commencing in the second year following the target being met, the ITC will be worth 75% of what it would otherwise be, while projects in the third year will receive a credit worth 50%. All projects commenced after will not be eligible for a credit.
The Advanced Energy Project Credit
The Advanced Energy Project Credit is a credit for projects that:
- re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of a range of clean energy equipment and advanced vehicles
- re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20%, or
- re-equip, expand or establish an industrial facility for the processing, refining or recycling of critical materials.
There is a total of $10 billion of allocations here, although the law requires 40% of this money to be set aside for projects in communities where a coal mine or coal-fired electric generating unit has closed, so at least $4 billion to be allocated in energy communities. The credit is set at 6% of the qualified investment amount, where projects meeting prevailing wage and registered apprenticeship requirements can claim 5 times this amount.
PTC tax credits for businesses
In addition to ITC tax credits for companies, there are a whole host of production tax credits (PTCs) available, again to boost the clean energy sector. PTCs work by providing a tax credit for every kilowatt-hour (kWh) of electricity produced from eligible renewable resources. The different types of PTC tax credit for businesses in the US include:
- the Renewable Electricity Production Tax Credit
- the Clean Electricity Production Tax Credit
- the Clean Hydrogen Production Tax Credit
- the Advanced Manufacturing Production Tax Credit
- the Nuclear Power Production Tax Credit.
The Renewable Electricity Production Tax Credit (PTC)
The Renewable Electricity PTC is an inflation-adjusted per kilowatt hour (kWh) tax credit for electricity that is generated by qualified energy resources and sold by the qualifying taxpayer to an unrelated person during the course of the taxable year. The PTC for electricity from renewables essentially provides a tax credit for production of electricity from renewable sources. This applies to facilities generating electricity from wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, as well as marine and hydrokinetic renewable energy. This is for projects commencing construction before 2025.
The base rate is set at 0.3 cents/kW, although this has been extended under the IRA where this credit is increased by 5 times for projects meeting prevailing wage and registered apprenticeship requirements. As with the Business Energy ITC, there are also various bonus credits available, including a 10% domestic content bonus for steel, iron and manufactured products, and a 10% energy community bonus for qualifying American sites.
The Clean Electricity Production Tax Credit
The Clean Electricity PTC is a new technology-neutral tax credit introduced under the IRA which will replace the traditional PTC for investment in facilities and systems that generate clean electricity at the end of 2024. This will be functionally similar to the Renewable Electricity PTC, but will not be technology-specific, where it will apply to all generation facilities in the US that have an anticipated greenhouse gas emissions rate of zero.
The IRA modifies and extends both the current PTC and ITC through 2023 and 2024, at which point they will sunset in favour of technology-neutral, emissions-based credits. As with the new Clean Electricity ITC, the credit amount for the new Clean Electricity PTC will be calculated in much the same way, and all technologies that satisfy the labour requirements will be eligible for the full tax credit value, as adjusted for inflation.
Again, as with the new Clean Electricity ITC, the new Clean Electricity PTC will be phased out as the US meets its greenhouse gas emission reduction targets.
The Clean Hydrogen Production Tax Credit (PTC)
The Clean Hydrogen PTC is a new tax credit under the IRA to incentivise the domestic production of clean hydrogen, making this emerging low-carbon fuel source more cost-competitive. This PTC is specifically for the production of clean hydrogen at a qualified clean hydrogen production facility and is aimed at energy developers.
The base credit amount is $0.60/kg multiplied by the applicable percentage, where the applicable percentage ranges from 20% to 100% depending on lifecycle greenhouse gas emissions. This $0.60/kg will be adjusted for inflation. This credit will also be multiplied 5 times if the facility meets prevailing wage and registered apprenticeship requirements.
The Advanced Manufacturing Production Tax Credit (PTC)
The Advanced Manufacturing PTC is a new tax credit for domestic manufacturing of components along the supply chain for solar and wind energy, inverters, battery components and critical minerals, where the applicable rate will vary by technology.
The Nuclear Power Production Tax Credit (PTC)
The Nuclear Power PTC is a tax credit for electricity produced at a qualified nuclear power facility, set at 0.3 cents/kWh, and inflation adjusted. This is available for electricity produced and sold after the end of 2023, in tax years beginning after that date, but will not be available for the tax years beginning after the end of 2032.
This is set at 0.3 cents/kW, inflation adjusted after 2024, where the credit amount phases down depending on the amount of energy produced and the gross receipts of the nuclear power facility. There are no bonus credits, although this PTC will be increased by 5 times for meeting prevailing wage and registered apprenticeship requirements.
Tax credits for clean vehicles
In addition to the different ITC tax credits for companies, plus the various options for a PTC tax credit for businesses, the IRA also offers US green tax credits for businesses around the use of electric vehicles and cleaner fuel. This is because the transportation sector represents the single largest source of greenhouse gas emissions in the United States, surpassing even industrial sector emissions. To meet the climate goals set by the US government, a significant transition in the United States to both a clean energy economy and cleaner vehicles will therefore be necessary to help make this happen.
The available options for clean vehicle tax credits in the US include credit for purchasers of qualified commercial clean vehicles; an alternative fuel vehicle refuelling property credit; a tax credit for producers of biodiesel and renewable diesel; a tax credit for the producers of alternative clean fuels; a tax credit for second-generation biofuel production; and a tax credit for the domestic production of clean transportation fuels, including aviation fuels.
In conclusion, the combination of US green tax credits for businesses, including the production and use of renewable energy and clean vehicles, is something that green multinationals should be looking to take advantage of right now. Many of these financial incentives are time-limited, introduced or extended under the IRA in a bid to make drastic reductions to US carbon emissions over the next few years. If, as the US government promises, its carbon emissions are significantly reduced, these incentives will be cut.
NNU Immigration are dedicated US immigration attorneys based in London. We provide specialist advice to organizations from multinationals through to small to medium enterprises, as well as investors, entrepreneurs and key personnel with all aspects of US immigration and visa applications, including eligibility requirements, petitioning procedures and costs of US work visa applications. If you’re exploring plans to relocate your company, or to set up operations, in the US, to take advantage of US green tax credits, contact us.
This article does not constitute direct legal advice and is for informational purposes only.