Enacted in August 2022, the Inflation Reduction Act (the “IRA”) expanded energy tax credits by increasing credit amounts across the board and broadening eligibility criteria to include new technologies. 

Notably, the IRA allows firms to develop and sell energy tax credits, as outlined here.  The IRA also established a “direct pay” system that allows non-profits and governmental entities with no tax liability to receive cash refunds in lieu of credits.  By expanding the market for these credits, the IRA aims to incentivize clean energy investment to help the U.S. meet the emissions reduction targets set by global climate agreements.

In our last update, available here, we discussed the release of new rules on the tax credits for electric vehicle charging stations and sustainable aviation fuel, noting that other participants in the clean energy economy are still awaiting critical guidance.

On October 24, the IRS finalized rules on the advanced manufacturing production credit, available here.  These rules clarified key terms for eligible components, providing greater certainty for developers who intend to claim or sell credits.  Treasury noted that this credit has already contributed to more than $126 billion in investment in manufacturing for batteries, critical minerals, and solar and wind production.

The IRA has already demonstrated its potential.  According to John Podesta, the Biden administration’s senior advisor on climate policy, the IRA has spurred $450 billion in clean energy deals over the past two years, with momentum expected to grow further with the incentives for emerging technologies.

However, all of this could change as the IRA now faces a direct challenge under Trump’s tax plan, which proposes to eliminate the clean energy tax incentives.  With Republicans in control of the House and Senate, this outcome seems increasingly likely as other tax priorities come to the forefront.

These other priorities include lowering the corporate tax rate, extending the expiring Tax Cuts and Jobs Act (“TCJA”) provisions and reforming the taxation of U.S. citizens abroad.  Trump has also proposed establishing a tax credit for unpaid family caregivers and eliminating taxes on overtime pay and tips for service workers.

So, what’s the catch?  These initiatives would be funded by imposing tariffs on imports—and by eliminating the clean energy tax incentives.  Still, while deregulation could lead to an uptick in oil and gas, clean energy remains popular in red states, with many of the tax credits for clean energy manufacturing and electric vehicle production seemingly benefiting Republican-led districts. 

While Treasury and the IRS are expected to finalize the outstanding rules by year-end, it is evident that other tax priorities will trump the initiatives of the Biden administration.  For now, the fate of these credits—and the broader clean energy agenda—remains uncertain.