The Advanced Energy Projects Program is a federal tax credit program that provides incentives for businesses to invest in renewable energy and energy efficiency projects. The program offers a tax credit of up to 30% of the qualified investment for eligible projects.
Who is Eligible?
Businesses that are eligible for the Advanced Energy Projects Program include those that are:
- Expanding their manufacturing capabilities to produce renewable energy products.
- Establishing or enhancing recycling infrastructure for renewable energy equipment or essential materials and minerals.
- Implementing equipment upgrades to minimize greenhouse gas emissions.
There are three qualifying categories for the Advanced Energy Projects Program:
Category 1: Renewable energy equipment, fuel cells, microturbines, energy storage systems, electric grid modernization equipment, carbon capture and sequestration equipment, equipment for refining or blending renewable fuels, equipment for energy conservation, energy storage systems for electric or hybrid vehicles
Category 2: Low- or zero-carbon process heat systems, carbon capture, transport, utilization and storage systems, energy efficiency and reduction in waste from industrial processes, any other industrial technology designed to reduce greenhouse gas emissions
Category 3: Critical materials, including non-fuel minerals, elements, substances, or materials with high risk of supply chain disruption. They serve essential functions in energy technologies that produce, transmit, store, or conserve energy, as well as those using critical minerals like lithium and cobalt.
The Advanced Energy Projects Program encompasses three distinct qualifying categories:
Category 1: Renewable Energy Infrastructure and Technologies
This category encompasses a wide range of equipment and systems that contribute to the production, storage, and utilization of renewable energy sources. This includes:
- Renewable energy equipment, such as solar panels, wind turbines, and geothermal systems
- Fuel cells and microturbines, which provide efficient energy conversion
- Energy storage systems, enable the storage of surplus renewable energy for later use
- Electric grid modernization equipment, enhancing the resilience and efficiency of the power grid
- Carbon capture and sequestration equipment, mitigating greenhouse gas emissions
- Equipment for refining or blending renewable fuels, promoting the adoption of sustainable fuels
- Equipment for energy conservation, reducing energy consumption across various sectors
- Energy storage systems for electric or hybrid vehicles, advancing the electrification of transportation
Category 2: Industrial Decarbonization Technologies
This category focuses on technologies that enable industrial processes to achieve lower carbon emissions. It encompasses:
- Low- or zero-carbon process heat systems, reducing the reliance on fossil fuels for industrial heating
- Carbon capture, transport, utilization, and storage systems, effectively managing and storing captured carbon dioxide
- Energy efficiency and reduction in waste from industrial processes, optimizing industrial operations to minimize energy consumption and waste generation
- Any other industrial technology designed to reduce greenhouse gas emissions, promoting the development and adoption of innovative decarbonization solutions
Category 3: Critical Materials Production and Processing
This category addresses the critical importance of securing the supply of essential materials for renewable energy technologies. It encompasses:
- Critical materials, including non-fuel minerals, elements, substances, or materials with high risk of supply chain disruption
- Production and processing of critical materials, ensuring a reliable domestic supply for renewable energy applications
- Development of sustainable sourcing and recycling strategies for critical materials, promoting responsible and environmentally sound practices
These three categories collectively represent the key areas of focus for the Advanced Energy Projects Program, aiming to accelerate the transition towards a clean energy future.
The Advanced Energy Projects Program offers a streamlined application process, providing businesses with a straightforward path to securing tax credits for their renewable energy investments. Even if a business does not have immediate use for the credits, they can be sold for cash, ensuring immediate financial benefits.
The eligible categories of qualified energy property for the Advanced Energy Projects Program include:
- Energy Storage / Batteries: Investments in energy storage systems, such as batteries and microgrid controllers, installed after 2022 are eligible for tax credits. Energy storage systems play a crucial role in enhancing energy resilience and enabling the integration of renewable energy sources into the grid.
- Interconnection Property: Investments in interconnection property, which connects onsite renewable energy systems to the grid, are also eligible for tax credits. This type of infrastructure is essential for ensuring the seamless integration of renewable energy into the electricity distribution network.
- Qualified Biogas Property: Investments in qualified biogas property, which utilizes organic waste to generate renewable energy, are eligible for tax credits. This technology offers a sustainable and environmentally friendly approach to generating electricity from organic waste streams.
- Qualified Small Wind: Investments in qualified small wind systems, with an output of less than 5 megawatts (MW), are eligible for tax credits. Small wind turbines are particularly suitable for distributed generation applications, particularly for rural communities and remote locations.
- Solar: Investments in solar energy systems, including photovoltaic (PV) panels and solar trackers, with an output of less than 5 MW, are eligible for tax credits. Solar energy is a rapidly growing renewable energy source, and tax credits can help businesses capitalize on its cost-effectiveness and sustainability benefits.
- Combined Heat and Power (CHP): Investments in CHP systems, which simultaneously produce electricity and heat, are eligible for tax credits. CHP systems offer enhanced energy efficiency and reduced energy consumption, making them a valuable option for businesses with both electricity and thermal energy needs.
- Waste Energy Recovery Property: Investments in waste energy recovery systems, which convert waste into energy, are eligible for tax credits. This technology helps divert waste from landfills and mitigates environmental impacts while generating renewable energy.
- Fiber-Optic Solar Lighting: Investments in fiber-optic solar lighting systems, which integrate solar panels with fiber-optic lighting, are eligible for tax credits. This technology not only provides efficient lighting but also enhances the aesthetic appeal of solar installations.
- Geothermal Heat Pumps: Investments in geothermal heat pumps, which utilize the Earth’s natural heat for heating and cooling, are eligible for tax credits. Geothermal energy is a sustainable and renewable source of heating and cooling, making it a valuable option for businesses seeking to reduce their carbon footprint.
- Qualified Microturbines and Fuel Cells: Investments in qualified microturbines and fuel cells, which generate electricity from natural gas or hydrogen, are eligible for tax credits. These technologies offer a cleaner and more efficient alternative to traditional fossil fuel-based power generation.
Tax Credit Enhancements and Operating Rules
The Advanced Energy Projects Program offers a variety of incentives to encourage businesses to invest in renewable energy and energy efficiency projects. These incentives include:
- Increased Credit for Prevailing Wage and Apprenticeship Requirements: Certain “Energy Projects” can qualify for a five-fold increase in the tax credit if they meet prevailing wage and apprenticeship requirements. This provision incentivizes businesses to employ skilled workers and support the growth of the renewable energy workforce.
- Tax Payment Option for Not-for-Profit Entities: Not-for-profit organizations that receive the Energy Credit can elect to treat it as a tax payment, effectively reducing their tax liability. This provision provides additional financial benefits for non-profit organizations that invest in renewable energy.
- Varied Credit Rates: The Energy Credit rates range from 6% to 30%, depending on the type of project, the construction start date, and the placed-in-service date. This flexibility allows businesses to maximize the tax benefits of their renewable energy investments.
- Construction Completion or Original Use Requirement: To qualify for the Energy Credit, the construction of the project must be completed, or the taxpayer must commence the original use of the property. This requirement ensures that the tax credits are directed toward projects that are actually implemented and utilized.
- Specified Credit for Alternative Minimum Tax (AMT) Offset: The Energy Credit is a “Specified credit” that can be used to offset AMT liability under §38(c)(4)(B)(x). This provision ensures that businesses can fully utilize the tax benefits of the Energy Credit, even if they are subject to AMT.
- Performance and Quality Standards: Qualifying property must conform to established performance and quality standards to ensure that the investments support the adoption of efficient and reliable renewable energy technologies.
- Basis Reduction for §50(c)(3) Organizations: For §50(c)(3) organizations, a 50% basis reduction applies to the property that qualifies for the Energy Credit. This provision ensures that the tax benefits are not overly generous for non-profit organizations.
- Transferability of Tax Credits: The Energy Credit can be transferred to other taxpayers under §6418, allowing businesses to monetize their tax credits if they cannot fully utilize them.
- Depreciability Requirement: Qualifying property must be depreciable to be eligible for the Energy Credit. This requirement ensures that the tax benefits are aligned with the depreciation deductions that businesses typically claim for their investments.
- Production Tax Credit for Domestic Manufacturing and Critical Mineral Production
- In addition to the Advanced Energy Projects Program, businesses that manufacture certain renewable energy or energy storage products, parts, or components in the US, or that produce critical minerals in the US, may qualify for the Production Tax Credit (PTC). The PTC provides a tax credit of up to 10% of the qualified investment for eligible projects.
- Eligible Components for the Production Tax Credit
- The following components are eligible for the Production Tax Credit:
- SOLAR ENERGY: Photovoltaic cells, photovoltaic wafers, polymeric back sheets, solar grade polysilicon, solar modules, solar trackers and components, including torque tubes and structural fasteners
- WIND ENERGY: Blades, nacelles, towers, offshore wind foundations, related offshore wind vessels
- INVERTERS (DC TO AC): Central inverters with a capacity greater than 1 MW, commercial inverters suitable for commercial or utility-scale applications, distributed wind inverters with a capacity of up to 150 kilowatts, microinverters with a rated output of 120/240-volt single phase or 208/480 three-phase power, residential inverters with a rated output of 120/240-volt single-phase power, utility inverters with a rated output of not less than 600-volt three-phase power
- BATTERIES: Electrodes, battery cells, battery modules
- CRITICAL MINERALS: Minerals that are critical components in the manufacture of certain renewable energy products
These provisions aim to incentivize domestic manufacturing, promote critical mineral production, and foster a robust renewable energy industry within the United States.
What is Direct Pay (Elective Pay)?
The Inflation Reduction Act introduced and expanded tax credits for clean energy technologies, providing unprecedented policy certainty and opportunity for entities that manufacture, install, and produce clean energy over the next decade. In addition to providing incentives to spur private-sector investment, the Inflation Reduction Act includes game-changing new provisions that will enable tax-exempt and governmental entities—such as states, local governments, Tribes, territories, and nonprofits—to take an active role in building the clean energy economy, lowering costs for working families, and advancing environmental justice.
Benefits of Direct Pay
Direct pay offers several benefits for eligible entities, including:
- Increased investment in clean energy: Direct pay can make it easier for eligible entities to afford clean energy projects, which can lead to increased investment in clean energy technologies.
- Lower costs for working families: Direct pay can help lower energy costs for working families by making clean energy more affordable.
- Advancement of environmental justice: Direct pay can help to advance environmental justice by ensuring that clean energy benefits are accessible to all communities, including low-income and minority communities.
- Economic opportunity: Direct pay can create jobs and economic opportunity by stimulating the growth of the clean energy industry.
Who is Eligible for Direct Pay?
Direct pay is available to a wide range of entities, includingnaesco
- State, local, and territorial governments
- Tribal and Native entities
- Rural energy cooperatives
- Other tax-exempt entities, such as 501(c)(3) organizations and religious or apostolic 501(d) organizations
How to Apply for Direct Pay
To apply for direct pay, eligible entities need to follow these steps:
- Identify the project and the credit you want to pursue.
- Complete your project, place it into service, and determine the corresponding tax year.
- Determine when your tax return will be due.
- Complete pre-filing registration with the IRS before your tax return is due.
- Once you receive a valid registration number, file your tax return by the due date, including extensions.
- Receive your direct payment.
Sample Timeline for Claiming Direct Pay
Here is a sample timeline for claiming direct pay for most organizations with a calendar tax year*:
- Any time in 2023: Clean energy project goes into service
- Late 2023 or early 2024 before tax return is due: Pre-register with IRS
- By May 15, 2024 (for most tax-exempt and governmental entities): Deadline to file tax return ( if you don’t take an extension)
After return is processed: Receive direct payment