President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) into law on Aug. 16, 2022, following its passage along party lines in the U.S. Senate and House of Representatives. The comprehensive legislation is the result of many months of negotiations among Democrats to advance some of President Biden’s highest policy priorities.
The IRA will reduce the deficit and make major investments in healthcare, domestic energy production and manufacturing, and climate change. This Holland & Knight alert breaks down some of the IRA provisions and incentives that will benefit local governments across the nation, with a comparison to similar programs offered by the Infrastructure Investment and Jobs Act (IIJA).
In support of clean energy and combating climate change, the IRA extends, modifies and enhances many existing tax incentives and also creates new tax incentives with the same goals. It is difficult to overstate the breath of these changes and the impact they will have.
Generally, entities exempt from federal income taxation – such as local governments – do not benefit from tax incentives contained in the Internal Revenue Code. The IRA has changed this dynamic by unlocking the ability to access these tax incentives. Specifically, under new Internal Revenue Code Section 6417, certain “applicable entities” can elect to be treated as if they made a payment of tax equal to the amount of an “applicable credit.” Stated simply, this new section allows certain entities to ask the Internal Revenue Service (IRS) for a cash refund in the amount of credit to which they are entitled, i.e. they can ask the IRS for a direct payment.
As stakeholders await guidance from the IRS on the mechanics of this new section, first effective in 2023, the ability to seek a direct payment of tax credits is a sea change for applicable entities, which includes states and any political subdivision thereof.
There are 12 applicable credits under the IRA that can be elected for direct pay by applicable entities.
As with the prevailing wage requirements found in other IRA energy credits, there exists the opportunity for taxpayers to remedy violations.
Base Credit
(Per metric ton of carbon)
Bonus Credit
(Per metric ton of carbon)
Carbon captured and used for enhanced oil recovery (EOR) or utilization
Carbon capture and sequestered
Direct air captured and used for EOR or utilization
Direct air captured and sequestered
The tax credits described above may be subject to reduction if such projects are financed with tax exempt bonds.
In addition to tax credits mentioned above, tax incentives are also found in the form of tax deductions. Like tax credits, tax deductions are generally not beneficial to those entities that are not subject to federal income tax. However, the tax deduction under Section 179D has been and continues to be under the IRA, available to property owned by state, local governments and political divisions thereof. Specifically, government entities can benefit from Section 179D by allocating the deduction to the person primarily responsible for designing the property (e.g., architect, engineer, contractor, environmental consultant or energy-services provider).
By way of background, Section 179D provides a tax deduction for making efficiency improvements to commercial buildings. Energy-efficient building property that qualifies for the deduction includes improvements to the building envelope, certain heating, ventilation and air conditioning systems and lighting systems. It applies to new construction and the retrofitting of existing buildings. Government entities will want to reconsider the value of the Section 179D, given that the IRA enhances the value of the deduction and lowers the threshold such that deductions will be available for buildings that improve energy efficiency by 25 percent (down from 50 percent).
For a full overview of the IRA in its entirety, please see the previous Holland & Knight alert, “The Inflation Reduction Act: Summary of the Budget Reconciliation Act,” Aug. 17, 2022.
Members of Holland & Knight’s Local Government Advocacy Team, along with other attorneys in relevant practices, stand ready to assist clients in understanding the IRA as well as with navigating and engaging the federal agencies through implementation.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.
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