A version of this article was published September 20, 2023, in Bloomberg Tax.
As the global energy transition accelerates, companies with robust environmental, social, and governance (ESG) strategies are more likely to emerge as leaders, supporting their long-term viability and growth in an increasingly competitive market.
A significant component of many ESG strategies is a further commitment to the renewable energy sector to offset carbon emissions as the public's demand for transparency around environmental impacts increases.
Investing in tax credits through the incentives in the Inflation Reduction Act could be an effective strategy to drive shareholder value while supporting the E component in ESG. Explore potential tax credits your business can pursue as well as other ESG considerations below.
How Tax Credit Investing Could Support ESG Initiatives
Companies that adopt sustainable practices often realize cost savings from utilizing renewable energy; these savings become even more pronounced if fossil fuel prices rise.
In addition to reduced operating costs, tax credit investing can help reduce a corporation's effective tax rate while advancing its ESG mission.
Before the passing of the Inflation Reduction Act, however, companies seeking to utilize federal tax credits to support ESG goals were required to enter into tax equity transactions. These transactions are complex, time-consuming to close, and involve complicated accounting considerations, and relatively few corporations were comfortable with tax equity investing.
What the Inflation Reduction Act Changed
The transferability provisions of the Inflation Reduction Act simplified the process for taxpayers with clean energy projects to monetize the credits generated. Instead of a complicated structure, taxpayers with eligible projects can now transfer the credits directly to a third-party transferee.
This significantly reduces the barriers to entry and creates a historic investment opportunity in clean energy technology. Thus, more businesses seeking to bolster their support for these clean energy technologies can do so.
The act also expands and extends a multitude of tax credits to incentivize these investments, including the following:
- Alternative Fuel Vehicle Refueling Property Tax Credit (IRC Section 30C)
- Renewable Energy Production Tax Credit (IRC Section 45)
- Carbon Capture and Sequestration Tax Credit (IRC Section 45Q)
- Zero Emissions Nuclear Power Production Tax Credit (IRC Section 45U)
- Clean Hydrogen Production Tax Credit (IRC Section 45V)
- Advanced Manufacturing Production Tax Credit (IRC Section 45X)
- Clean Electricity Production Tax Credit (IRC Section 45Y)
- Clean Fuel Production Tax Credit (IRC Section 45Z)
- Investment Tax Credit (IRC Section 48)
- Advanced Energy Project Tax Credit (IRC Section 48C)
- Clean Electricity Investment Credit (IRC Section 48E)
With more investors in the market, additional capital is helping bring about more renewable energy projects, as intended.
Tax Credits and Net-Zero Strategies
While tax credit investing doesn't directly support a corporation's net-zero strategies, it does result in tangible investments that directly support climate-changing technologies. For example, a corporation might report that in a given year it supported the development of a number of megawatts of renewable energy through tax credit investing.
However, many corporations are also examining how they can directly offset their own greenhouse gas emissions. This is especially important for companies looking to stay ahead of the curve regarding regulations and compliance related to climate disclosures, such as the SEC Climate Disclosure Proposal, which will require publicly traded companies to disclose their emissions data and climate-related risks in their public filings.
Corporations trying to reduce their own carbon footprint using technology such as solar power and batteries are looking at other net-zero strategies. One such strategy is to purchase carbon offsets or renewable energy certificates (RECs).
As a result, trends are emerging. Some taxpayers are examining ways to reduce their effective tax rate and pair tax credit investments with the purchase of RECs. Forward-thinking developers are also looking to pair the two investments. This pairing can be beneficial to both. Renewable energy developers can unlock additional capital to fund developments while providing a path for corporate taxpayers to reduce their effective tax rate and meet net-zero strategies.
The Inflation Reduction Act has created an unprecedented opportunity for more businesses to reduce their effective tax rate while supporting their ESG strategies.
We’re Here to Help
For guidance on how tax credit investing can impact your ESG initiatives, contact your Moss Adams professional.
Additional Resources