Business Energy Tax Credits and the Road Ahead for 2025

The Inflation Reduction Act (IRA) of 2022 has been lauded as the most significant climate legislation in U.S. history, introducing 26 federal energy tax incentives designed to spur clean energy adoption, manufacturing, and innovation. But these business energy tax credits, pivotal for incentivizing clean energy investment and corporate sustainability, are entering a critical period, as Congress considers cuts to energy tax credits to pay for extending other corporate tax breaks set to expire at the end of 2025. As a result, businesses will need to keep up with policy changes as part of their federal tax planning strategies.

This article explores the current state of energy tax credits, potential changes tied to expiring tax policies, and actionable corporate tax planning insights and strategies for navigating the evolving tax landscape.

[Get insights on key issues impacting tax policy under the new administration with our 2025 Tax Outlook.]

Inflation Reduction Act energy incentives

The IRA was enacted to help the U.S. meet long-term emissions goals by accelerating investment in and the adoption of clean and sustainable energy, vehicles, and manufacturing. The legislation created 13 new tax incentives for businesses and individuals. It also extended or expanded 12 existing clean energy tax credits and one existing tax deduction. Unless Congress repeals or changes the IRA, these clean energy tax incentives will be available for the next 10 years.

Notably, the IRA provides an unprecedented opportunity to monetize the clean energy tax credits, allowing a far broader range of taxpayers to benefit from the credits:

• Energy project owners or sponsors can sell the tax credits in a tax-free transaction.
• Businesses can buy the tax credits at a discount and use them to reduce their tax liability.
• Tax-exempt entities can qualify for direct payments in lieu of the tax credits.

Leveraging incentives such as the clean electricity investment tax credit, businesses can maximize savings while contributing to sustainability goals. Additionally, the credit transferability and direct pay election mechanisms allow businesses and tax-exempt entities to further monetize tax credits and reduce tax liabilities.

What qualifies for federal clean energy tax incentives?

Any type of business in the U.S. and its territories can explore methods for optimizing tax strategies using the IRA credits. That said, to qualify for clean energy tax credits, businesses must produce or invest in the following resources or elements:

• Solar or wind energy
• Hydrogen power
• Zero-emission nuclear power
• Photovoltaic electricity (the conversion of light into electricity using specific semiconducting materials)
• Alternative energy sources
• Carbon capture and sequestration
• Biofuel
• Clean transportation fuel
• Sustainable aviation fuel
• Energy-efficient improvements to commercial buildings

Energy tax credits are also available for businesses that upgrade to energy-efficient lighting, remediate contaminated sites, or make other investments in environmentally friendly building structures.

List of key IRA tax credits

These green energy tax incentives were implemented to promote more environmentally friendly business practices. The following are the most common tax credits available to businesses. Unless otherwise noted, the credit or deduction applies to taxable years beginning after 2022.

Clean energy tax credits for renewable energy investments

• What is it and who is eligible? The “energy credit” provides a tax credit for investment in renewable energy (fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power) properties, clean hydrogen production facilities (if elected), and qualified interconnection properties.
• Base credit: This is 6% of a taxpayer’s qualifying investment, 30% credit for projects with a maximum net output of less than 1 megawatt of electrical or thermal energy, or projects that meet wage and apprenticeship requirements.
• Increases: Credit percentage will increase if certain requirements are met relating to domestic content, location on a brownfield site or in a community facing closures of coal mines or fossil fuel plants, location in a low-income community or on Indian land, and other factors.
• Maximum credit: This is 70% of investment.

Advanced energy project credits for clean energy manufacturing facilities

• What is it and who is eligible? This credit is a competitively awarded tax credit for investment in clean energy manufacturing projects. It provides for up to $10 billion of new credit allocations for businesses that invest in manufacturing facilities that produce or recycle clean-energy equipment or vehicles, or invest in facilities that process, refine, or recycle critical materials.
• Base credit: This is 6% of a taxpayer’s qualifying investment.
• Maximum credit: This is 30% of the qualifying investment amount for projects that meet wage and apprenticeship requirements.

Biodiesel, renewable diesel, and alternative fuel credits

• What is it and who is eligible? Producers of biodiesel, renewable diesel, or biodiesel mixtures are eligible for these credits.
• Base credit: This is $1 per gallon of biodiesel, renewable diesel, or biodiesel mixture.
• Bonus: There is an additional 10 cents per gallon for small agri-biodiesel producers.

Carbon sequestration credits for carbon capture investments

• What is it and who is eligible? The IRA extended and enhanced the credit, available to qualified industrial facilities and direct air capture facilities, for carbon oxide sequestration coupled with permitted end uses within the United States.
• Base credit: This ranges from $12-$36 per metric ton of qualified carbon oxide captured by the taxpayer.
• Maximum credit: This ranges from $60-$180 if the facility meets wage and apprenticeship requirements.

Clean electricity investment tax credit

• What is it and who is eligible? This new provision, applicable to qualified property placed in service in 2025 or later, will replace the energy investment tax credit. The clean electricity investment tax credit is a credit for investment in facilities that generate clean electricity with a zero greenhouse-gas emissions rate, as well as qualified energy storage technologies.
• Base credit: This is 6% of the taxpayer’s qualifying investment, or 30% of qualifying investment for projects with a maximum net output of less than 1 megawatt of electrical or thermal energy, or projects that meet wage and apprenticeship requirements.
• Increases: The credit percentage will increase if certain requirements are met relating to domestic content, location on a brownfield site or in a community facing closures of coal mines or fossil fuel plants, location in a low-income community or on Indian land, and other factors.
• Maximum credit: This is 70% of investment.

Advanced manufacturing production credit

• What is it and who is eligible? This new credit is available to manufacturers of solar, wind, or battery components, inverters, and critical minerals produced in the U.S. and sold by the manufacturer to an unrelated person. It is not available for property produced at facilities that received the advanced energy project credit.
• Base credit: This varies by component type.

Advanced manufacturing investment credit

• What is it and who is eligible? This new credit is available to domestic manufacturers of semiconductors and of equipment used to manufacture semiconductors.
• Base credit: This is 25% of the taxpayer’s investment in a qualified manufacturing facility.

Energy-efficient commercial buildings deduction

• What is it and who is eligible? Owners and long-term lessees of commercial buildings in the U.S., as well as designers of energy-efficient building property and tax-exempt owners of commercial properties, can receive this tax deduction for funding improvements to the energy efficiency of commercial buildings. This could include changes to the heating, ventilation, or lighting systems, among other elements.
• Base credit: This is $0.50-$1 per square foot. Alternatively, taxpayers may deduct 100% of their adjusted basis in “qualified retrofit plans” that reduce the building’s energy use intensity by at least 25%.
• Maximum credit: This is $2.50-$5 per square foot if wage and apprenticeship requirements are met. There is no maximum if the taxpayer deducts basis in a qualified retrofit plan.

Commercial clean vehicle credits for transitioning business fleets to clean technologies

• What is it and who is eligible? Businesses or organizations that purchase qualified commercial clean vehicles are eligible for this new tax credit.
• Base credit: This is either 15% of the vehicle cost (30% of vehicle cost if not powered by a gasoline or diesel engine) or the vehicle’s purchase price minus the price of a comparable internal combustion vehicle, whichever is less.
• Maximum credit: This is $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for all other commercial clean vehicles.

These incentives set the stage for business innovation and investment but must now be viewed with an eye toward the possible impact of TCJA expiring provisions on corporate tax planning.