Research | Policy Briefs
Inflation Reduction Act of 2022
45Y
45Y Clean Electricity Production Credit
(IRA Section 13701)
Background
Section 13701 of the Inflation Reduction Act created a new tax credit, the Clean Energy Production Production Credit, to replace the traditional PTC for systems placed in service on or after January 1, 2025. Originally enacted in 1992, the PTC has been renewed and expanded numerous times. (source)
What is it?
45Y (IRA Section 13701) offers a technology-neutral, inflation-adjusted 0.3¢/kW tax credit for the production of clean electricity from facilities generating zero-emissions electricity placed in service on or after January 1, 2025. (Projects placed in service prior to 2025 fall under the Section 45 renewable electricity PTC).
What types of projects/businesses are eligible?
As the 45Y tax credit is technology-neutral, any projects generating zero-emissions electricity are eligible, as long as they do not qualify for the following tax credits: 45 (renewable electricity production); 45J (advanced nuclear power facility production); 45Q (carbon oxide sequestration), 45U (zero-emission nuclear power production); 48 (energy credit); 48A (advanced coal projects); or 48E (clean electricity ITC). The credit is expected to mostly benefit utility-scale solar and wind projects.
In addition to the base credit, businesses can claim the following:
a credit of 5x the base if they meet prevailing wage and apprenticeship requirements
a 10% increase if they meet domestic content requirements for steel, iron, and manufactured products
a 10% increase if they locate the project in an energy community
How do businesses take advantage of it?
The 45Y tax credit is available at 100% of its value to projects placed in service between January 1, 2025 and the later of (a) 2032 or (b) when US GHG emissions from electricity are 25% of 2022 emissions or lower. Following this point (the “applicable year”), the credit starts to phase down (to 75% the second year after the applicable year, 50% the third year, and 0% the fourth year).
Tax-exempt organizations can receive the credit as direct pay for a 10-year period beginning on the day that the qualified facility was placed in service. This tax credit is also transferable, meaning that businesses that do not qualify for direct pay can transfer part or all of the credit to a third-party buyer in exchange for cash.
Importantly, businesses eligible for the 45Y tax credit can be classified as 5-year property via the modified accelerated cost recovery system (MACRS) under the IRA’s Provision 13703, making them eligible for the MACRS depreciation deduction. MACRS allows businesses to lower their tax liability and recover the capitalized cost of an asset over 5 years through annual deductions.
Businesses wishing to take advantage of the tax credit for facilities placed into service prior to January 1, 2025 should fill out IRS Form 8835. Additional guidance will be released for businesses filing after January 1, 2025.
What other IRA incentives are available for clean energy projects?
The IRA extended or implemented a number of tax credits for the production of and investment in clean energy technologies and projects. In addition to the 45Y PTC, the IRA implemented the complementary 48E clean electricity investment tax credit (ITC). Unlike PTCs—which reduce federal income tax liability annually (during the period of eligibility) based on a percentage of a facility’s electricity production—ITCs reduce liability based on a percentage of an investment’s upfront cost in the tax year that the facility is installed. Businesses must claim either the PTC or ITC.
Beyond the 48E ITC, other tax credits are available for the manufacturing and use of specific technologies critical to power sector decarbonization. These credits include the 45U nuclear power PTC, 45Q carbon oxide sequestration credit, 45V clean hydrogen PTC, 45X advanced manufacturing PTC, and 48C advanced energy project credit, to name a few.
Additional Resources