The IRA supplements the 2021 Infrastructure and Jobs Act (IJA) by creating a hydrogen production tax credit (PTC) in Section 45V and expanding the Section 48 investment tax credit (ITC) to include hydrogen projects and hydrogen storage technology. The PTC and ITC are eligible for a bonus multiplier if certain requirements are met. Additionally, the IRA provides monetization opportunities for both the PTC and ITC.
Importantly, current hydrogen production technologies result in significant carbon emissions. Hydrogen produced with less than four kilograms of CO2 per kilogram of hydrogen is considered “clean hydrogen,” under Section 45V(c)(2) of the IRA.
I. CLEAN HYDROGEN PRODUCTION TAX CREDIT AND INVESTMENT TAX CREDIT
The IRA provides the taxpayer the option of either a ten-year PTC or a one-time ITC. The PTC and ITC have a base credit (discussed below) amount and, if certain wage and labor requirements are satisfied, an increased credit amount. For both credits, the base credit amount is determined by the lifecycle greenhouse gas (GHG) emissions rate attributable to hydrogen production.
The IRA includes limits on claiming multiple clean energy tax credits. For example, a taxpayer may not claim the PTC if the taxpayer’s facility claims the Section 45Q Carbon Sequestration Credit. Similarly, taxpayers must make an election between the Section 45 ITC and the Section 48 ITC.
A. BASE CREDIT AMOUNT
Section 45V PTC
The PTC is a ten-year credit available beginning on the date the facility is placed in service and will be available for clean hydrogen produced after 2022. However, the clean hydrogen producing facility must begin construction before 2033. Credits earned by facilities owned by more than one taxpayer will be allocated in proportion to ownership interests in the gross sales from the facility. Existing facilities that undergo modification to produce clean hydrogen may also qualify for the PTC.
The base credit amount is equal to a percentage of $0.60, which is determined based on the lifecycle GHG emissions rate produced through hydrogen production and the percentage increases as the lifecycle GHG emissions rate decreases.
Section 48 ITC
The IRA expands the Section 48 ITC to allow taxpayers to treat clean hydrogen production facilities as energy property and thus claim a credit based on the cost of the energy property. Taxpayers with “qualified property” under Section 48, which is part of a clean hydrogen production facility, are eligible to receive the ITC. “Qualified property,” must be part of a clean hydrogen facility and either tangible personal property or other tangible property (not including a building and its structural components) if the property is used as an integral part of the facility.
The base credit amount of the Section 48 ITC is equal to a percentage of the cost of the energy property placed in service during the taxable year. The percentage is determined based on the lifecycle GHG emissions rate during hydrogen production. As with the PTC, the percentage increases as the rate decreases.
The base credit amounts of the Section 45V PTC and Section 48 ITC are as follows:
Additionally, the IRA makes energy storage technology eligible for the ITC. The base credit amount is six percent. The ITC is only available for hydrogen storage technology placed in service during the tax year.
B. “BONUS” CREDIT AMOUNT
In addition to the base credit amount, the PTC and ITC are eligible for an increased credit rate, also known as a “bonus.” To qualify for the “bonus” credit amount, the IRA sets forth certain prevailing wage and apprenticeship requirements (“labor standards”) that must be satisfied. For guidance, the Department of the Treasury released a Notice of Initial Guidance on the labor standards on November 30, 2022. If the hydrogen production facility satisfies the labor standards, the applicable base credit rate is multiplied by five.
If the labor standards are satisfied, the PTC and ITC “bonus” credit amounts would be as follows:
The “prevailing wage” is the minimum wage rates that must be paid to laborers and mechanics for constructing, altering, or repairing a facility. The Secretary of Labor publishes prevailing wage determinations. If the Secretary of Labor has published a prevailing wage determination for the geographic area and type(s) of construction, that wage determination is considered the prevailing rate. If prevailing wage rates have not been published for a particular geographic area of type of construction, the taxpayer must request a wage determination from the department of Labor, Wage, and Hour division via email at IRAprevailingwage@dol.gov. The request must provide certain information: (1) facility type; (2) facility location; (3) proposed labor classifications; (4) proposed prevailing wage rates; (5) job descriptions and duties; and (6) rationale for proposed classifications.
To meet the apprenticeship requirements, Apprenticeship Labor Hour Requirements and Apprenticeship Participation Requirements must be met. To comply with the Apprenticeship Labor Hour Requirements, apprentices must work a certain percentage of total labor hours, based on when construction begins. The Apprenticeship Labor Hour Requirements are subject to any applicable Apprenticeship Ratio Requirements. The Apprentice-to-Journey worker ratios are established by the DOL. To comply with the Apprenticeship Participation Requirements, taxpayers, contractors, or subcontractors, with four or more workers must employ one or more qualified apprentices to perform construction, alteration, or repair work for the facility.
The IRA includes a Good Faith Effort Exception. A taxpayer will have made a good faith effort in requesting apprentices if the taxpayer requests apprentices from a registered apprenticeship program. However, the taxpayer must maintain records that establish the request was made and the program’s denial or non-response to the request.
These wage and apprenticeship requirements will apply to projects that begin construction 60 days after November 30, 2022. There are two methods that may be used to establish the beginning of construction: (1) Physical Work Test and (2) Five Percent Safe Harbor. Under the Physical Work Test, construction begins when physical work of a significant nature begins. Under the Five Percent Safe Harbor, construction has begun if the facility has paid or incurred five percent or more of the total cost of construction.
C. DIRECT PAY AND CREDIT TRANSFER
The IRA allows tax credit recipients to monetize credits in two ways: (1) Direct pay and (2) Credit transfers. Only the PTC is eligible for direct pay. However, the PTC and ITC are eligible for credit transfers.
Direct pay allows the taxpayer to claim the value of the PTC through a tax refund, essentially making the PTC a “refundable” tax credit and allows a taxpayer to treat generated tax credits as an equivalent to a tax payment on the taxpayer’s filed return. The option to transfer credits allows a taxpayer to elect to transfer all or a portion of a credit to an unrelated taxpayer; however, the transfer must be paid in cash. Additionally, the option to transfer is strictly a one-time transfer.
The impact of direct pay and credit transfer provisions will provide flexibility to developers and producers. These options will likely change the future of project financing and provide an alternative to the typical tax equity financing structure. Hydrogen producers will look to take advantage of these various incentives in 2023 in myriad ways. Please contact Husch Blackwell LLP’s team of hydrogen professionals if you have any questions about the many incentives available through the IRA or IJA.