Are you asking “How will the new IRA bill affect my solar project?”? Well, there is a lot to unpack to answer that question. We’ve compiled some frequently asked questions regarding the new IRA bill that will help you navigate the changes.
Right now the passage of the IRA will allow commercial business to take a up to a 70% tax credit (an increase from 26%) However, once fully implemented, the new regulations of the IRA will trigger massive changes in how potential tax credits for solar are calculated.
The overall impact on a projects financials will be dictated based on the size of the system.
Projects Under 1 MW – AC
The Investment Tax Credit (ITC) increases from 26% (was set to reduce to 22% in 2023) to 30% without adding cost for prevailing wage or apprenticeships. These projects are eligible for all Bonus ITC Credits detailed below.
Projects Over 1 MW-AC – But Begin Construction Less Than 60 Days After Dept of Treasury Issues Guidance
The Base ITC will be 30% with no labor (prevailing wage or apprenticeship) requirements if they begin construction before or within 60 days of the Department of Treasury issuing their guidance on prevailing wage and apprenticeships.
Projects Over 1 MW-AC – Post 60 Days from Guidance Issued
Projects over 1 MW-AC will have a Base ITC of 6%. If they do not meet the labor requirements for prevailing wage and apprenticeships, they are only eligible for a 2% bonus ITC. If they meet labor requirements the base ITC will increase to 30% and the Bonus ITC will increase to 10% each.
What are the labor requirements?
The IRA notes that we must use prevailing wage for the labor crews to build the project and for 10 years post build for any O&M and maintenance. Until the guidance is issued, we do not have the full details on the prevailing wage requirements but are able to speculate based on some states that currently have prevailing wage in place.
The bill also stipulates that we must attempt to utilize apprenticeships wherever available. We will be required to employ a pre-set work hour percentage of government-registered apprentices.
Given the considerable uncertainty as to how the newly required provisions will be implemented, there is significant concern that the additional cost of prevailing wage and apprenticeships may out weight the benefit of the increased ITC. Nonunion contractors currently make up 87% of the workforce. The increased demand for skilled labor could further exacerbate the construction industry’s skilled labor shortage.
The new law also imposes significant penalties on those who claim the tax credits without fully complying with prevailing wage and registered apprenticeship requirements. Much of the impact will depend on the guidance to be issued by the Treasury and Labor Departments. Ultimately, they will increase costs – but will the benefit out way the cost?
Bonus ITC Credits
- Projects meeting Domestic Content Minimums will receive an added 10% Bonus ITC.
- Projects sitting in Energy Communities will also receive an added 10% Bonus ITC.
- Projects under 5 MW-AC can also receive up to 20% Bonus ITC as a Low-Income Bonus.
- Low-Income Community as defined by the New Markets Tax Credit or on Indian Land will receive 10%. Projects on a Qualified Low-Income Residential Building Project of Qualified Low-Income Economic Benefit Project. The Low-Income Bonus must be approved in advance by the IRS. All Bonus Credits can be stacked. In theory, a project could potentially qualify for a 70% tax credit.
Direct pay is available for state and tribal governments, Alaska native corporations, and certain tax-exempt entities and rural cooperatives. In the past, nonprofit organizations were not able to directly benefit from the incentive and had to partner with a tax equity organization to utilize some discount on the overall solar project. Now, tax-exempt organizations can get the credits by direct pay and receive a check for 30% of the project costs just like a tax-paying entity would receive the credit when filing taxes. We are still waiting on official guidance from the Treasury Department regarding the logistics of direct pay.
The IRA Bill had an additional provision to send $1 Billion in total funding to the USDA for REAP Grants. Projects in REAP eligible areas (defined by USDA map) automatically qualify for a grant of up to 50% of projects costs, capped at $500,000, if it is not tied to any residential consumption. In the past, REAP grants were granted 1-2x a year and only a limited amount were granted with a limited percentage of the requested amount based on the state funding, the number of applications submitted, and how the project scored on a long list of requirements. Now, the USDA has received a significant increase in funding, and it is expected all projects that meet the requirements, will receive 100% of the eligible amount.
Impact On Labor Requirements
The estimated labor requirements will increase labor costs by an estimated $.30/watt – a 15% increase in the project’s cost. In addition, we see the increase demand created by the IRA already increasing labor costs due to supply/demand.
Due to the significant penalty risk, projects will require additional documentation to ensure they meet all requirements – adding administrative and CPA cost. Our projection is that this requirement could increase costs by 20-40% depending on the guidance.
When will the Department of Treasury issue guidance?
Estimates on this vary, but most companies are planning on the guidance being released around November 1, 2022. However, we do know that the Dept of Treasury is short staffed and it very well may extend into 2023.
What does Begin Construction mean?
Assuming the IRS adopts the same “begin construction” rules as the current regulation stipulates, then there are three ways for a project to qualify.
- The 5% safe harbor – spend 5% of the ultimate total cost of the project.
- Offsite significant physical work – entering a ‘binding written’ contract to purchase a custom component that is not held in inventory.
- On-site significant physical work – this also requires a ‘binding written contract’ and requires us to put steel in the ground or building a road that will be used for O&M purposes.
What are the Domestic Content Requirements?
Immediately, projects must include 100% domestic iron and steel. It also requires an increasing amount of manufactured products are manufactured in the United Sates. Manufactured products are deemed to have been manufactured in the United States if the adjusted percentage of the total cost of the components and subcomponents of the project is attributable to components that are mined, produced, or manufactured in the United States. For projects that begin the construction before 2025 must have at least 40% of content. This increases 5% every year until 55% in 2027 for every year thereafter.
What is an Energy Community?
The project qualifies for this credit if it is located in any of the following: 1. A brownfield site; 2. An area which has significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary); 3. A census tract in which is on a coal mine (with some stipulations) or is directly adjoining to any census tract. We anticipate further guidance from the IRS to fill in more details of this program.
What is a type of projects qualify for the low-income bonus credit?
Projects less than 5 MW for which the IRS makes an allocation of “environmental justice solar and wind capacity” qualifies for a Bonus ITC. To qualify the facility must be either:
- Located in a low-income community or Native American land
- Part of a ‘qualified low-income residential building project’ or a ‘qualified low-income economic benefit project’.
If both 1 and 2 are met, the project may qualify for a 20% Bonus ITC.
For more information about the IRA bill and other commercial solar incentives, be sure to check back here or request a meeting with one of our experts.