The Inflation Reduction Act (IRA) has spurred significant investments in renewable energy for more than two years through a combination of tax credits and incentives. Looking ahead to 2025, the incoming Trump administration and Republican majorities in Congress are expected to revisit those incentives during debate over a new round of tax legislation. Our tax specialists examine the tax legislative outlook for 2025 through the lens of the Inflation Reduction Act.
Post-election review of tax policy
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, made significant changes to the Tax Code, including tax cuts on businesses and individuals. The bulk of those changes were temporary, with a looming expiration date on Dec. 31, 2025. That context amplified the significance of the 2024 election, since the candidate in office would be determining the fate of the TCJA.
That election concluded with President-elect Trump set to return to the White House and the Republican Party holding majorities in the House and Senate for the new two-year congressional term. With that, we know who will be involved in the tax legislative debate that will unfold over the coming months. Beyond that, questions abound about the specifics of which business tax and individual tax rules will be extended or modified. The IRA will also be a key area of focus during that legislative debate.
Is the Inflation Reduction Act a target for change?
The IRA was a signature piece of legislation for the Biden administration and Democratic leadership in Congress. What began as the Build Back Better Act during 2021 was initially put on hold. Then, in 2022, negotiations within the Democratic Party resulted in a pared-down version of that bill renamed the IRA. At its core, the IRA provided broad spending and tax incentives to support the adoption of renewable energy technologies, as well as incentives for the domestic production of qualifying equipment. In that respect, it involved conceptual coordination with the Infrastructure Investment and Jobs Act (Infrastructure Act) and CHIPS and Science Act (CHIPS Act), both enacted in 2022.
Enactment of sizable legislation involves many policy choices. In the case of the IRA, Democratic leaders provided incentives with a focus on climate, energy, and domestic production. Inevitably, a change in administration and congressional majorities provides an opportunity for those policy choices to be revisited. On the campaign trail, Trump announced intentions to rescind any unspent funds allocated by the IRA. Trump and other Republican leaders have also criticized electric vehicles (EVs) and offshore wind installations.
Irrespective of policy choices, modification of the IRA will likely be a pragmatic source of funding for any extension of the TCJA. The overall cost of tax legislation is expected to be a critical variable during the debate in Congress. Opinions vary within the Republican Party over the degree to which tax cuts need to be offset through revenue-raising provisions. However, the fiscal situation of the United States has changed considerably since enactment of the TCJA, especially given substantial government programs implemented during the COVID-19 pandemic, including the CARES Act and American Rescue Plan Act.
In summary, yes, the IRA is expected to be carefully reviewed both on policy grounds and as a source of funding to offset tax cuts. However, the analysis becomes much more complicated when reviewing key IRA-related tax credits.
The reality of Inflation Reduction Act modifications in Congress will be complicated
Once enacted, tax incentives and other government funding drive market adoption as businesses and individuals seek to benefit from such programs. That’s especially true for the IRA given the expansive nature of the tax incentives. The Department of Energy (DOE) maintains a map outlining announced investments into renewable energy and production of equipment across the United States. The Biden administration also recently announced a combined $1 trillion in private sector investments related to the IRA, CHIPS Act, and Infrastructure Act.
The reports from the DOE and White House highlight both the scale of investments and the geographic distribution across the entire country. Many of those investments involve multiyear periods of development and construction prior to being placed in service. Those facts complicate matters as Republican leaders in Congress begin evaluating legislative options. Accordingly, most expect that the IRA will be subjected to targeted scrutiny rather than broad repeal of tax credits.
Beyond substantive changes, Congress could look to accelerate future expiration dates for key IRA-related tax credits. Many of the credits created or modified by the IRA extend into the early 2030s. To offset tax cuts, Congress could merely accelerate an expiration date from Dec. 31, 2032, to Dec. 31, 2028. That type of change might be especially attractive for programs that have broad support.
The road ahead for key Inflation Reduction Act tax credits
An analysis of the outlook for all aspects of the IRA is beyond the scope of this article. However, the most popular tax credits are examined in depth below.
Direct pay and credit sales
The IRA significantly changed the tax credit landscape by creating alternative monetization options for those engaging in credit-eligible activities. In the first case, this involved the creation of the direct pay mechanism through Section 6417, which is available to governments (any state or political subdivision), tax-exempt organizations, Indian tribal governments, Alaska Native corporations, the Tennessee Valley Authority, or rural electric cooperatives. Such rules allow organizations that don’t have federal tax liabilities to obtain cash refunds equal to their credit claims. In the second case, a new mechanism was created for tax-paying entities to sell tax credits pursuant to Section 6418 in exchange for cash payment. Taxpayers purchasing credits then utilize such amounts against their own tax liabilities.
By expanding the monetization options, the IRA greatly amplified the incentives for organizations of all types — both taxable and nontaxable — to pursue qualifying investments and activities. These rules haven’t generated much public scrutiny and are subject to detailed reporting through a pre-filing registration process operated by the IRS. Tightening or eliminating these rules would raise revenue by reducing the cash value of benefits. However, major changes to the monetization options appear to be less likely than substantive changes to the underlying tax credits themselves.
Investment tax credit and production tax credit for renewable energy
Tax credits related to the generation of electricity from renewable resources predate the IRA by decades. The Section 48 Investment Tax Credit (ITC) provides a one-time credit calculated as a percentage of a qualified investment in renewable energy property placed in service during the year. By contrast, the Section 45 Production Tax Credit (PTC) provides an annual credit calculated on a per-kilowatt-hour basis for electricity produced during the first 10 years after a qualifying facility is placed in service.
The IRA significantly modified these credits by increasing the value of the credits, subject to new qualifications, and expanding the scope of equipment that would qualify for the ITC. These modifications apply to facilities placed in service after Dec. 31, 2022, and for which construction begins before Jan. 1, 2025. Key aspects of these enhanced credits include the following:
- Prevailing wage and apprenticeship. One inducement to obtain increased credits is the prevailing wage and apprenticeship (PWA) hour requirement. That applies to projects involving more than 1 megawatt of electrical (or thermal) output. PWA requires that all laborers involved in the construction of the energy equipment be paid a prevailing wage, as determined by the Department of Labor (DOL). Apprentices must also complete a specified percentage of the total hours on the project.
- Domestic content. Bonus credits are available if the energy equipment meets domestic content sourcing requirements. This means that all structural steel and iron used must be produced in the United States. Moreover, at least 40% of the components of manufactured products must be produced in the United States.
- Energy community. Additional bonus credits are available for projects that are located within energy communities, as defined by the IRA. This is purely a location-based factor and can be verified by consulting a DOE interactive map.
Those modifications increased the complexity of ITC and PTC tax positions but were offset by increased credit opportunities.
The IRA also created new versions of the ITC and PTC, pursuant to Section 48E and Section 45Y, which will apply to facilities for which construction begins after 2024. Such rules directly import the PWA, domestic content, and energy community rules described above. Functionally, these credits are indistinguishable from the prior ITC and PTC, as modified by the IRA, for core equipment such as wind, solar, and energy storage technologies. However, the situation is more complex for other equipment given the adoption of a new zero greenhouse gas (GHG) emissions standard for qualification. Thus, for example, a combined heat and power system that would qualify under Section 48 will find it incredibly difficult to qualify under Section 48E.
The ITC and PTC will undoubtedly be reviewed by Congress as part of the legislative process and some form of change is possible. However, the ITC and PTC are likely to survive in at least some form. Here are the key questions that we are monitoring:
- Will the list of qualifying technologies be modified? The bulk of qualifying equipment is not expected to be controversial or necessarily subject to change. However, some aspects will be the focus of attention. In particular, Trump has previously noted a desire to stop offshore wind installations. In addition, certain projects related to biogas, combined heat and power, fiber-optic lighting, and electrochromic glass won’t be eligible under the new versions of the ITC and PTC. When charting a course forward, Congress will need to make an important decision about which types of facilities to incentivize.
- Which set of rules will be utilized? This question involves some aspects of the technology question above. More crucially though this question relates to the inclusion of the zero GHG standard in Section 48E and Section 45Y. Should Congress wish to eliminate the new rules, then it would be possible to simply repeal Section 48E and Section 45Y and extend the current expiration dates for Section 48 and Section 45.
- Where does PWA fit in? The PWA rules face an uncertain future. In many cases, these rules have the effect of raising wages paid to laborers and contractors involved in such projects. However, they also add meaningful complexity to projects. That complexity leads some taxpayers to forego the enhanced credit and instead claim a lower value. Ultimately, the fate of PWA will depend on which policy goal — simplification or increased wages — is favored.
- What about the bonus credits? The enhanced credits for satisfaction of the domestic content requirement or locating a project in an energy community could be modified with an eye toward reducing the overall value of tax credits. However, these aspects have policy implications that will be difficult to overlook. Specifically, the domestic content requirement drives demand for domestically produced equipment and the energy community requirement spurs investments in underdeveloped communities across the country.
The ITC and PTC will be subjected to the same scrutiny as other IRA-enhanced tax credits during the coming legislative session. However, on balance, these credits have history, pending investments, and broadly supported policy as factors pointing to their continued survival in at least some form.
Domestic production of energy components and critical minerals
Many aspects of the IRA provided demand side support for renewable energy equipment. However, the Section 45X advanced manufacturing production credit was added to incentivize domestic production of such equipment. To qualify, a business must produce qualifying items within the United States and sell them to an unrelated party. For this purpose, qualifying items include solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals.
At its core, Section 45X supports domestic production, which will likely be viewed favorably by many Republicans in Congress. On the campaign trail, Trump promoted the concept of pairing lower corporate taxes on domestic production with tariffs on foreign production. Those comments weren’t specific to renewable energy equipment, but the general push for onshoring will be relevant moving forward. The aspects of Section 45X focused on solar equipment, wind equipment, inverters, and critical minerals might be especially attractive to Congress, given the historic importation of such items.
Republicans in Congress are expected to review the battery aspects of Section 45X in considerable detail given their connection to EVs. As described below, tax incentives for EVs face an especially challenging path given public statements in opposition to EV mandates. However, an aversion to mandates to purchase EVs doesn’t necessarily require opposition to incentives for domestic production of such EVs. In this respect, it’s notable that some of the most significant post-IRA investments in domestic manufacturing have involved battery production facilities. Those investments have also been bolstered by nontax DOE grant and loan programs funded by the IRA. Batteries produced by facilities qualifying for Section 45X also have broader application, especially for energy storage applications supporting renewable energy facilities and residential installations. Further complicating the situation is foreign investment in U.S. entities that are eligible for Section 45X, which have already drawn the focus of some Republicans in Congress.
Similar to the ITC and PTC discussion above, there are many aspects of Section 45X that are expected to find broad support among Republicans in Congress. However, some modification of these rules appears likely given political dynamics and the overall cost of these credits.
Electric vehicles and charging equipment
Tax credits related to EVs and charging equipment also predate the IRA. Historically, various incentives have been made available for these types of investments, as well as for alternative fuels. Following enactment of the IRA, there are three core vehicle credits and one credit for refueling property. Those credits can be summarized based on the nature of their application.
- Business and commercial applications. EVs and charging equipment installed for commercial use, including by governments and tax-exempt organizations, are eligible for expanded benefits. Section 45W, created by the IRA, extends tax credits for the purchase of EVs, fuel cell vehicles, and mobile machinery in nonresidential situations. There are two tiers to such credit, which expand opportunities beyond passenger vehicles to trucks, buses, and other vehicles. The alternative fuel refueling property credit under Section 30C was also expanded in an important way by increasing the limitation. Previously, taxpayers installing such property in commercial applications were limited to a total of $30,000 in credits for the tax year. The IRA modified the limitation to $100,000 per single item of property without an annual per-taxpayer limitation. Taken together, Section 45W and Section 30C have greatly expanded the incentives for upgrading commercial fleets and supporting infrastructure.
- Residential applications. The tax credit opportunities for residential application of EVs and charging equipment were also expanded by the IRA. Taxpayers purchasing EVs and fuel cell vehicles may qualify for credits for both new vehicles under Section 30D and used vehicles under Section 25E. Both of those credits have important limitations, including an income-based phase out that eliminates the benefit for higher income earners. Finally, the Section 30C credit described above also has a residential component providing for a tax credit of up to $1,000 when charging equipment is installed at the taxpayer’s home.
EVs have been the subject of considerable public debate for multiple years. Given that scrutiny, it’s expected that some changes will be made to these credits. However, further speculation is difficult until the legislative process begins in earnest in late January or early February. For example, it’s unclear whether scrutiny of tax credits for the purchase of EVs would also extend to tax credits supporting the installation of charging stations given the need for supporting infrastructure across the country.
What to do now?
The legislative outlook for tax credits created or modified by the IRA appears to involve considerable nuance. That likely precludes wholesale repeal of credits regarding the various factors described above. However, that also makes planning incredibly difficult and increases uncertainty regarding specific credits. In this situation, two actions are recommended.
- Bolster beginning of construction and placed in service positions. Many of the credits related to investments in renewable energy property rely on effective dates tied to either the beginning of construction or the date that the property is placed in service. For example, the switch in ITC and PTC rules described above is tied to whether the project began construction before the end of 2024. Congress could make retroactive changes to tax credits but typically avoids that step when taking away tax benefits. Thus, tax positions to support beginning construction or even placing the property in service as soon as possible may be recommended. Such actions aren’t always possible, especially for larger scale projects that require lead time for engineering, permitting, and contracting.
- Carefully monitor developments. The exact timeline for completion of tax legislation in 2025 isn’t settled, but Republican leaders have announced intentions to accelerate such process. Accordingly, it’s expected that details will begin to emerge throughout the first quarter of 2025. Continued monitoring of those developments will go a long way toward identifying key action steps that may be required to maximize tax credit opportunities.
