Uncertainty surrounding the future of the Inflation Reduction Act is causing concern for developers and investors in the renewable energy sector, as potential modifications to tax credit policies and transferability could significantly impact project financing and market stability
The election of President Donald J. Trump last November cast doubt on the future of the Inflation Reduction Act (IRA), a landmark legislation aimed at encouraging investment in clean energy.
On his second day in office, Trump ordered “all federal agencies to immediately pause the disbursement of funds under the IRA” and through his executive orders, the president issued a directive to cease financial support for the development of electric vehicle charging infrastructure and other policies that favor electric vehicles.
For companies not involved in car manufacturing, the ambiguity surrounding the IRA continues, and this is causing some discomfort for developers of clean energy projects and buyers of tax credits. While a complete repeal of the IRA is unlikely, the new administration is likely to take a strategic approach to curtailing current energy incentives, according to Brandon Hill and Mike Smith, experts in energy tax services at CLA (CliftonLarsonAllen).
“We haven’t seen any kind of fine print or any formal legislative proposals,” but that “it seems unlikely that the government is going to take a sledgehammer to the whole Act,” says Smith. Indeed, any repeal could have far-reaching implications to local employment in communities in many states whose electoral college votes went for the current president.
Distilling the ambiguity of corporate players
Developers of renewable energy projects currently face a significant dilemma with the beginning of construction safe harbor provisions under the IRS code. Generally, these provisions allow projects to qualify for tax credits if construction begins by a certain date.
However, with potential modifications to the IRA and without specificity in the time frame, developers risk starting projects that may not qualify for credits if legislative changes occur. This uncertainty is exacerbated by discussions of significant reductions or even repeal of these tax credits, which could drastically impact the financial viability of renewable energy projects. Without these incentives, many projects may become economically unfeasible.
This lack of certainty surrounding potential changes to the IRA also creates a challenging environment because it forces companies to navigate the risk of investing substantial capital into projects that may not receive the expected financial benefits.
Equally, there are concerns among some corporate purchasers of IRA tax credits amid the anticipation of changes. One of the innovations of the IRA was the creation of tax credit transferability, which allows developers to sell their tax credits to corporate buyers at a discount. This provides immediate cash flow to fund projects while enabling corporate tax credit buyers to reduce their own tax liability. This mechanism benefits developers by monetizing credits they cannot use due to limited tax liabilities and also benefits corporate buyers by offering a straightforward method to lower their taxes.
The potential impact of changes in IRA tax credit policies could significantly affect pricing and availability, Hill notes. If transferability is restricted or removed, a pool of fewer credits could lead companies to reassess their tax planning strategies.
Further, any abrupt changes could significantly affect the renewable energy market. Investor confidence may waver, and the tax credit transfer market could compress, with fewer credits available and at higher prices, which could push smaller investors out of the market. “The IRA is very much a private-public sector partnership in a lot of ways,” Smith explains. “There’s still an amount of trust that needs to be built between the private sector and the US government, and yanking the rug out from underneath renewable energy credits doesn’t create a lot of trust.”
Any changes to the IRA, especially if the transferability provisions are eliminated, will likely push companies back towards traditional tax equity structures. This could exclude some smaller investors who entered the market due to transferability’s relative simplicity.
Guidance for companies
Hill and Smith say they are trying to help businesses understand the evolving landscape and make informed decisions amid the lack of specific changes in the IRA. They both stress that complete repeal is unlikely, but targeted adjustments are possible. At the same time, changes to the tax credit provisions seem probable, and effective dates and grandfathering of existing projects will be important to monitor.
While the Trump administration’s approach has introduced uncertainty, it is crucial for stakeholders to remain adaptive. And to navigate the upcoming changes, companies need to foster collaboration and trust with their tax advisors to remain informed about policy developments so they can position themselves well with the ability to adapt their cash flow and tax strategies if necessary.
You can find out more about potential changes to the nation’s tax regulations here
