Clean Electricity Investment Tax Credits for Affordable Housing Developers

At a glance

• The main takeaway: The Investment Tax Credit (ITC) promotes clean electricity generation and supports the transition to a sustainable energy future.
• Impact on your business: The ITC can be an additional tax credit that benefits both syndicators and developers; credit can be paired with Low-Income Housing Tax Credits, is based on total development costs of technology implementation, and does not rely upon the future results of an asset.
• Next steps: Aprio’s Affordable Housing team can help in reviewing the tax credits available to affordable housing developers who plan on investing in renewable energy technology to support future developments.

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The full story:

Investing in renewable energy technology can bring significant benefits to both affordable housing owners and residents such as reduced energy costs, increased property value, and elevated sustainability awareness. However, if you are an affordable housing developer or investor, incorporating these technologies within your developments can also provide additional benefits through government incentives as these additions can generate additional tax credits for the overall developments.

Investment Tax Credits can help affordable housing developers offset the upfront costs of implementing such technologies through the generation of additional tax credits associated with the overall development. While generating additional tax credits is a huge incentive for developers and syndicators, investing in these new technologies can also benefit the future residents by making those developments more affordable and attractive to low-income residents.

Why are renewable tax credits important?

In the U.S., there is a need for an accelerated transition to the deployment of clean energy technologies and investment in these game-changing innovations. With clean energy tax credits, there is a cost advantage that can benefit both affordable housing developers and residents, since solar and wind energies have become cheaper than coal and gas.

Using renewable energy technologies and leveraging clean energy tax credits will help to make the following National goals a reality:

100% carbon pollution-free electricity by 2035

• 50%-52% reduction in greenhouse gas pollution by 2033
• Net zero carbon emissions by 2050

How does the Inflation Reduction Act (IRA) apply to these tax credits?

The Inflation Reduction Act (IRA), which was passed into law as of August 16, 2022, provided both an extension and expansion of Section 48 of the Internal Revenue Code to help focus on cutting greenhouse gas emissions and reducing pollutants. The update of Section 48 promotes clean energy development by offering billions in tax credits related to the deployment of clean energy technology. Also, the IRA provides additional incentives in the form of bonus credits for developments placed into service within qualified low-income residential building projects, low-income communities, energy communities, as well as for sourcing developments with technologies developed and manufactured within the U.S.

How are credits determined?

The IRA provides two options in determining the amount of tax credits to be earned on your additional investment into renewable technologies. For most Affordable Housing Developers, the Investment Tax Credit (“ITC”) will be an extremely attractive option as the credit is determined by the total costs incurred to develop and deploy the renewable energy technology. These credits can be forecasted and budgeted based on the expected costs to be incurred, which make these credits more attractive to syndicators.

The second option available for credits is the Production Tax Credit (“PTC”), which calculates the credit you are going to receive based on the actual amount of energy that is produced by the technology. While these credits can be beneficial, the ability to forecast the amount of energy to be produced in the future can be difficult.

New and modified provisions provided by the Inflation Reduction Act

Under the passing of the inflation reduction act, Section 48 of the code was enhanced further to include additional technologies to qualify for tax incentives. Below are some of the new technologies that are now eligible and included within Section 48:

• Standalone energy storage with capacity of at least 5 kWh
• Biogas Technology
• Microgrid controllers (20MW or less)
• Interconnection property for small projects (5MW or less)

While expanding the types of technologies that would qualify for tax incentives was a significant change in the Code the most significant outcome of the IRA was the extension of the full credit percentage of 30% of eligible costs spent on the development for projects placed in service prior to December 31, 2032. This extension of the credit guaranteed a 10-year life span of the energy credits, which is the longest extended period of Section 48 that has been granted by congress since the initial passing of Section 48 in 1978. By providing this extended timeframe, developers and syndicators will be able to properly implement changes that will allow for more developments to take advantage of these incentives and allow for tax credit equity financing for projects. According to the Environmental Protection Agency (EPA), the following is a comprehensive list of the technologies that are eligible for the PTC and ITC credits:

Eligible for ITC or PTC	Eligible for ITC	Eligible for PTC
multiple solar and wind technologies, municipal solid waste, geothermal (electric), and tidal	energy storage technologies, microgrid controllers, fuel cells, geothermal (heat pump and direct use), combined heat & power, microturbines, and interconnection costs	biomass, landfill gas, hydroelectric, marine and hydrokinetic

Source: Environmental Protection Agency (EPA)

Will there be any anticipated changes?

Starting January 1, 2025, the IRA will replace the traditional ITC with the Clean Electricity Investment Tax Credits (CE ITC) (§ 13702). The CE ITC is a technology-neutral tax credit for clean electricity generation. Eligibility for the new tax credit will be based on an anticipated greenhouse gas emissions rate of zero.

The CE PTC and CE ITC encourage cleaner energy production and investment in a sustainable future. They provide incentives for a broader range of clean energy projects and the calculation methods align with the traditional PTC and ITC.

In practice, the CE ITC is.  most beneficial for tax credits syndicators and investors; the credit can be estimated based on development costs and does not rely upon the future results of an asset. The tax credit is available for facilities placed in service after December 31, 2024. Phase-out begins on the latter of (a) 2032 or (b) when U.S. greenhouse gas emissions from electricity are 25% of 2022 emissions or lower.

The CE ITC is available for facilities with zero or lower greenhouse gas emissions as well as qualified energy storage technologies.

The bottom line

The ITC and future CE ITC promotes clean electricity generation and supports the transition to a more sustainable future. It can be beneficial to developers and syndicators to continually review the tax credits available to affordable housing developers who plan on investing in renewable energy technologies to help promote a more sustainable future.

Related Resources/Assets/Aprio.com articles/pages

About Aprio’s Affordable Housing Practice

Summary of Inflation Reduction Act Provisions Related to Renewable Energy