Category: Newsletters

The summer of 2024 might have seemed slow for the credits and incentives news cycle, but there was a bit still happening.  Below is a summary of the items taking place in regard to the IRA credits. 

45Q Procedures (Notice 2024-60)

Navigating the 45Q Tax Credit for Carbon Oxide Sequestration

Claiming the 45Q tax credit for carbon oxide sequestration involves multiple steps. To begin, taxpayers must ensure that carbon capture equipment is installed at a qualified facility. Next, they need to prepare a detailed lifecycle analysis (LCA) report, which outlines the greenhouse gas emissions linked to their carbon capture and sequestration activities.

This comprehensive report, along with supporting documents, must be submitted to both the IRS and the Department of Energy for approval. Upon receiving approval, taxpayers are then eligible to claim the 45Q tax credit.

By following these following steps, taxpayers can effectively leverage the 45Q tax credit to support their carbon sequestration efforts and contribute to a more sustainable future.

1. Installation of Carbon Capture Equipment:
   • Ensure that the carbon capture equipment is installed at a qualified facility. This facility must meet specific criteria set by the IRS to be eligible for the tax credit.
2. Lifecycle Analysis (LCA) Report:
   • Prepare a comprehensive LCA report. This report should detail the greenhouse gas emissions associated with your carbon capture and sequestration activities. It includes:
     • The amount of carbon oxide captured.
     • The methods used for capturing and sequestering the carbon oxide.
     • The environmental impact of the sequestration process.
3. Submission for Approval:
   • Submit the LCA report along with all supporting documents to both the IRS and the Department of Energy. This step is crucial for verifying the accuracy and legitimacy of your carbon sequestration efforts.
4. Claiming the Credit:
   • Once you receive approval from both the IRS and the Department of Energy, you can claim the 45Q tax credit on your tax return. This credit can significantly reduce your tax liability, making it a valuable incentive for carbon sequestration projects.

By following these steps, taxpayers can effectively leverage the 45Q tax credit to support their carbon sequestration efforts and contribute to a more sustainable future.

Final PWA Regulations Issued

New IRS Regulations on Prevailing Wage and Apprenticeship Requirements

The IRS has issued final regulations under the Inflation Reduction Act of 2022 (IRA) concerning prevailing wage and apprenticeship (PWA) requirements. These regulations are essential for taxpayers aiming to qualify for increased credit or deduction amounts under the IRA:

1. Prevailing Wage Rates:
   • Employers must pay workers prevailing wage rates for the construction, alteration, or repair of facilities. These rates are determined by the Department of Labor and are intended to ensure fair compensation for workers.
2. Apprenticeship Ratios:
   • Employers must adhere to specific apprenticeship ratios. This means that a certain percentage of total labor hours must be performed by qualified apprentices. The goal is to promote training opportunities and develop a skilled workforce within the clean energy industry.
3. Compliance and Penalties:
   • Failure to meet these requirements can result in penalties and reduced tax benefits. Employers must maintain accurate records and documentation to demonstrate compliance with the prevailing wage and apprenticeship requirements.

By complying with these regulations, employers can benefit from increased tax incentives and contribute to a more equitable and skilled workforce in the clean energy sector.

One clarification is that these final regulations do not apply to 48 or 48E ITC credits, but hopefully the IRS will make that adjustment some time this fall. 

Clean Fuel 45Z Registration Process (Notice 2024-49)

IRS Outlines Steps for Clean Fuel Production Credit Registration

The IRS has detailed the registration process for the Clean Fuel Production Credit, outlining several key steps for producers to follow:

1. Application Submission:
   • Producers must submit an application to the IRS. This application should include detailed information about the taxpayer, the production facility, and the type of clean fuel being produced. The application process ensures that only eligible producers can claim the credit.
2. IRS Review:
   • The IRS will review the application to ensure all required information is provided and that the producer meets the eligibility criteria. This review process helps maintain the integrity of the credit program.
3. Registration Letter:
   • Upon approval, the IRS will issue a signed registration letter to the producer. This letter serves as official confirmation that the producer is registered and eligible to claim the Clean Fuel Production Credit.
4. Ongoing Compliance:
   • To maintain eligibility, producers must comply with all ongoing reporting and record-keeping requirements. This includes submitting periodic reports to the IRS and maintaining accurate records of clean fuel production activities.

These steps are designed to streamline the process and ensure that only qualified producers benefit from the Clean Fuel Production Credit.

CFO Services Testifying in August on 48E/45Y Proposed Regulations

Public Hearing on Clean Electricity Credits Highlights Key Clarifications

A public hearing was held on August 12th and 13th to discuss the proposed regulations for Section 45Y Clean Electricity Production Credits and Section 48E Clean Electricity Investment Credits. The meeting featured 44 speakers, including Nick Panko from CFO Services, who provided valuable insights and suggestions to help taxpayers better understand the qualifications.

Key suggestions and clarifications discussed during the hearing included:

1. Qualified Facility Definition:
   • Clear Examples: Provide examples that clearly define what constitutes a qualified facility. This helps taxpayers understand the specific criteria that must be met.
   • Code Consistency: Review and ensure there is no ambiguity between different code sections. Consistency across sections helps prevent confusion and ensures that taxpayers can accurately determine their eligibility.
2. Reference Requirements:
   • If the “Constructed by the taxpayer” and “Original use” requirements are necessary for Production Tax Credits (PTCs), they should be referenced from Section 48E into Section 45Y or directly included in Section 45Y. The current inconsistency could allow taxpayers to count non-qualified investments to meet the 80/20 rule. Specifically, under Section 45Y, a taxpayer could include “non-original use” equipment as FICP under the 80/20 rule.
3. 80/20 Rule:
   • Integral Property Inclusion: Clarify whether integral property should be included in the 80/20 rule under Section 45Y.
   • Rewording for Clarity: Reword Section 1.48E-4(c)(5) to ensure it does not imply that adding new to used components should be excluded. While examples help, the paragraph remains unclear.
   • Original Use Clarification: Clarify if “Original Use” is included in the 80/20 rule. It seems implied but is not clearly defined. If the 80/20 rule is meant to be consistent across code sections, it should be clarified whether “original use” property is included within the qualified facility. Specifically, a new component in Section 1.45Y-4 does not require satisfying the “original use” condition. Therefore, a taxpayer under Section 1.45Y-4 could include property that is “new to the taxpayer.” This property might be a used piece of equipment that is new to the taxpayer, thus becoming a new component of property. This distinction should be clarified across Sections 1.45Y-4 and 1.48E-4, as well as the coordinating code sections. It’s important to make this clear because a new component versus a new “original use” component could be defined as two different costs.

These discussions and suggestions aim to provide clearer guidelines and ensure consistency across the regulations, ultimately helping taxpayers navigate the complexities of qualifying for clean electricity credits.

If you need further details or have specific questions about any section, feel free to ask!

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• Based on IRS Notice (2023-63), companies might not be capturing all costs for 174 
• 174 costs includes Overhead Labor, Depreciation allowance, and others.  
• 174 deduction excludes costs from Administrative Departments. 

A lot of companies had their first introduction filing the 174 R&D deduction (“174”) this past year. If a company had software development or wanted to claim the R&D Credit, they did not have a choice. The Tax Cuts and Jobs Act required all taxpayers with research expenses to capitalize and amortize these expenses over a 5- or 15-year period, depending on whether the expenses were domestic or foreign.  

Although the 174 deduction is intricately connected with the R&D credit, what qualifies for the 174 deduction is broader, both in qualification and the scope of expenses. As with the R&D Credit, there is a level of judgement needed to determine what activities should be qualified under the 174 deduction. Initially there was a surprise in the level of unambiguity about which expenses should be included.  

The Internal Revenue Service stepped in to help and gave some much-needed guidance (Notice 2023-63) on many things surrounding the 174 deduction, one of which was the scope of expense to include. From the IRS notice, they helped specify which 174 costs should and should not be included. The notice categorizes expenses that are “incident to the development or improvement of a product, a component of a product, or subcomponent of a product,” which is a key definition found in the R&D deduction regulation.  

Based on the guidance the IRS gave, in the initial year most companies did not capture all the expenses for the 174 deduction.  This will most likely lead to adjustment in the next year to the scope of expenses included for the 174 deduction.  Also, this article does not cover software development, which is also included in the notice and required to be included under 174.    

R&D Deduction Cost Categories 

Any company that has research activities needs to review and make sure they examine whether they had any of the expense categories the IRS specified. Here are categories the IRS wants companies to review and add to their R&D deduction expenses: 

Overhead Labor Costs:  

In addition to wages, companies need to pick up all elements of compensation including stock-based compensation, overtime pay, vacation pay, holiday pay, sick leave pay, payroll taxes, pension costs, employee benefits, and payments to a supplemental unemployment benefit plan. A surprise is companies do not have to account for severance compensation. Yet, aside from this exception, companies should include all fringe benefits expenses that are attributed to qualified employees.  

Overhead Materials and Supply Costs:  

If there were materials and supplies, including tools and equipment that were used and consumed in qualified activities these should be part of the 174 expenses. Similar to the R&D Credit, these should be only tangible items, software or software licenses would be excluded.  Software is included in 174 but addressed separately in the notice and not addressed in this article.   

Cost Recovery Allowances:  

This would be property that is depreciated and amortized for a company. It should only be depreciated property that was necessary in qualified activity. The notice gave the example of a “test bed” for research as property costs that should be included. 

Patent Cost:  

These costs connected with obtaining a patent, such as attorneys’ fees expended in making a patent application. 

Travel:  

Any travel expenses related to the direct involvement or support of qualified activities.  

Operational Costs:  

Certain operation or management expenses should be included, including costs that were a part of maintaining facilities and equipment used for qualified activities. The IRS notice highlights rent, utilities, insurance, taxes, repairs and maintenance and security costs as expenses that fit into the category. 

Excluded R&D Deduction Costs 

The IRS does make clear certain types of expenses that should be excluded, which provides clarity for 174.  

In the notice, the IRS stated any costs from general or administrative departments should not be treated as 174 expenses. There are many departments that only indirectly support or benefit qualified activities. Payroll, Human Resources, and Accounting were all departments called out as excluded in the notice. This gives companies an important boundary around qualified expenses. Not all expenses that could relate to qualified activities are qualified expenses. There is a clear fence that stops administrative departments from being included in R&D deduction.  The notice also excludes debt interest, software costs after development and website content costs as also excluded from 174.   

Some more guidance? 

Although this notice is welcomed, companies should be aware more could be coming. The IRS stated companies should have confidence with their areas in which they clarified, but more clarification—and possible expansion to expenses—could be given. Yet with this new guidance from the IRS, companies should have a better understanding as to what expenses should be in their 174 deductions, and most importantly, what should not. The expenses that should be included might be more than companies initially thought, but it is important to note that there were also limits given on the scope of 174 expenses. 

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.