Status Update: The Inflation Reduction Act Turns Two

Are the Inflation Reduction Act’s clean-energy provisions working?

Two years on from the law’s passage, its proponents have a compelling case. Since August 2022, the US utility-scale clean energy industry has announced more than $500 billion of investment and more than 160 new manufacturing facilities or expansions.

But as many in the industry will tell you, launching a successful clean-energy project remains highly complex and carries numerous risks. Making the most of the law’s many generous tax incentives can feel like jumping through a series of compliance hoops.

In this edition of Vantage Point, three areas for companies to consider as they work to develop clean-energy projects and capitalize on the landmark law.

Protecting Intellectual Property

In new thought leadership with Utility Dive, our attorneys explain the intellectual property risks facing energy-transition innovators, and how they can construct and implement a sound patent strategy.

No two energy-transition patent strategies will be identical, but following some key principles is essential for innovators in this space:

• Identifying existing patents to understand whether any element of the technology they plan to develop and market could invite legal liability from third parties.
• Building robust patent portfolios using all available incentives.
• Enforcing patent portfolios, whether through licensing or litigation, to ensure that no competitor can benefit unfairly from their initiative and ingenuity.

Read more from two of our leading Intellectual Property partners.

Earning the Domestic Content Bonus

The domestic content bonus is one of the Inflation Reduction Act’s most powerful tax incentives.

Eligible projects and facilities that meet requirements for US-produced steel, iron, and manufactured products can claim a bonus of up to 10 percent on top of credits earned under several sections of the tax code (Sections 45/45Y and 48/48E).

But as our attorneys write in a new Bloomberg Tax opinion piece, this bonus is difficult for taxpayers to earn, largely because of complexities associated with the manufactured product requirement, and new guidance from Treasury and IRS doesn’t do nearly enough to simplify that requirement.

Here’s the main challenge:

To earn the full bonus, taxpayers must calculate how much of their project’s manufactured-product costs are attributable to manufactured products (including components) that are mined, produced, or manufactured in the United States.

But to calculate this percentage, taxpayers can’t use their own costs. Instead, they must obtain material and labor costs from their manufacturers or suppliers.

The new guidance provides a “safe harbor” for a few project types — photovoltaic solar, onshore wind, and battery storage — but it does little to help determine whether a product or component is in fact manufactured in the United States.

The good news here is that the guidance cross-references rules under the Buy America statute. There are also concepts from other areas of the tax code that taxpayers can look to for help.

Relying on these areas of law, taxpayers may consider several questions to help determine whether products and components in their project or facility have been manufactured in the United States. And ultimately, whether the project or facility qualifies for the domestic content bonus.

Read more from three of our leading Renewable Tax partners.

Understanding the Prevailing Wage and Apprenticeship Requirements

The Inflation Reduction Act’s prevailing wage and apprenticeship (PWA) requirements are a novel concept in the tax and credit world, and satisfying them is a heavy lift. But final regulations on the requirements, again from Treasury and the IRS, should lighten the load.

To claim the full value of the tax credits, developers must pay laborers and mechanics a prevailing wage during construction, alteration, and repair of a project or facility; ensure that a minimum amount of apprentices work on the construction; and keep rigorous records related to both.

Last year’s proposed regulations had drawn numerous concerns and requests for clarifications, and taxpayers will be pleased that this final version responds to much of that feedback.

With many accommodations and reasonable revisions, Treasury and the IRS have shown that they are listening to stakeholders' perspective on the PWA requirements, and are committed to making them workable.

Our Renewable Tax team with a detailed analysis.

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