Understanding the IRA – Tax Credits for Waterpower Manufacturers

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Understanding the IRA – Tax Credits for Waterpower Manufacturers

DATE:

September 6, 2022

BY:

Will Pisano, Director of Government Affairs, NHA

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Understanding the IRA – Tax Credits for Waterpower Manufacturers

NHA thanks our sponsors:

Kleinschmidt Associates

As part of the Inflation Reduction Act (IRA), Congress provided an important tax credit for manufacturers of waterpower generating equipment, the 48C Qualifying Advanced Energy Project investment tax credit (ITC).

The 48C tax credit was created as part of the American Recovery and Reinvestment Act in 2009. 48C provides up to a 30% investment tax credit to re-equip, expand, or establish facilities that are used to manufacture clean energy generation technologies. The original 48C investment tax credit was capped at $2.6 billion.

The Inflation Reduction Act adds an addition $10 billion to the 48C investment tax credit and makes two important eligibility changes:

  1. Prior to the Inflation Reduction Act, waterpower equipment manufacturers were eligible only because the language included the phrase “other renewable resources.” Now, the law specifically designates “water” under the 48C credit, making eligible investments by hydropower and marine energy manufacturers to re-equip, expand, or establish manufacturing facilities.
  2. The tax credit makes “energy storage systems and components” eligible for the 48C manufacturing credit. Previously, the language only included “an energy storage system for use with electric or hybrid electric motor vehicles.” This should allow manufacturers of pumped storage equipment to qualify for the 48C investment tax credit as well.

Waterpower manufacturers – hydropower, pumped storage, and marine energy – will be able to take advantage of the 48C Manufacturing Tax Credit to strengthen their manufacturing capabilities to satisfy the demand for U.S. manufactured goods.

HOW THE CREDIT WORKS

Unlike some of the other tax provisions in the IRA, manufacturers will need to apply to and receive certification from the IRS to claim the 48C tax credit. The Secretary of the Treasury has 180 days from enactment of the 48C credit to establish a certification program.

Upon receiving a certification that their project is eligible, a recipient has two years to re-equip, expand, or establish their manufacturing facilities. If manufacturing equipment is not placed in service within two years of certification by the IRS, then the facility is no longer eligible to receive a tax credit.

The base rate of the 48C credit is 6%; however, if laborers and mechanics employed in the re-equipping, expansion, or establishment of a manufacturing facility are paid prevailing wages and the manufacturer complies with the apprenticeship requirements, then the tax credit is increased to 30%. The prevailing wage and apprenticeship requirements only apply to workers re-equipping, expanding, or establishing manufacturing facilities, not those who are employed producing the energy generation or storage equipment.

Of the $10 billion available for the 48C tax credit, $4 billion is reserved for manufacturing facilities in energy communities where no manufacturing facility has previously received a 48C credit payment.

Energy communities are defined as any of the following:

  1. A brownfield site
  2. An area which has, or, at any time after December 31, 1999, had significant employment related to oil, gas, or coal activities
  3. A census tract, or any adjoining tract, in which a coal mine closed after December 31, 1999; or
  4. A census tract, or any adjoining tract, in which a coal-fired electric power plant was retired after December 31, 2009

The threshold for “significant employment” in carbon-based forms of energy activities is not defined in the IRA and will be determined by the Secretary of Treasury.

MOVING FORWARD

Covered in POWERHOUSE’s “Unpacking the Inflation Reduction Act” article, the IRA contains a domestic content bonus that increases the production tax credit or investment tax credit for taxpayers that place into service energy generation or storage equipment containing set percentages of US manufactured goods. The 48C Manufacturing Tax Credit should help existing U.S. hydropower, pumped storage hydropower, and marine energy equipment manufacturers expand their facilities to meet the demand for U.S. manufactured goods.

NHA will continue to monitor the Department of Treasury’s plan for implementing the 48C Manufacturing Tax Credit, so be on the lookout for additional updates in future editions of POWERHOUSE.