The Extension and Phase-down of Production Tax Credits for Cleantech

Esfer John Pamintuan

Senior Manager, Tax

The Extension and Phase-down of Production Tax Credits for Cleantech

For cleantech businesses, the Production Tax Credit (PTC) has operated as a performance-based subsidy for renewable energy producers. The PTC rewards clean energy projects—such as wind, solar, or geothermal facilities—based on the kilowatt-hours (kWh) of electricity they produce and supply to the grid over their first decade of operation.


Established under Section 45 of the U.S. tax code, the PTC has supported large-scale projects by reducing federal tax liabilities in proportion to energy output, with higher credits for technologies like wind and closed-loop biomass. By linking financial benefits directly to production, the PTC encourages efficient, long-term operation of renewable infrastructure rather than upfront investment.


Following the introduction of the Inflation Reduction Act of 2022, the traditional landscape of clean energy tax incentives is undergoing a significant transformation. According to the EPA, “Starting January 1, 2025, the Inflation Reduction Act replaces the traditional PTC with the Clean Energy Production Tax Credit (§1 3701) and the traditional ITC with the Clean Electricity Investment Tax Credit (§ 13702).


These tax credits are functionally similar to the ITC/PTC but are not technology-specific. The IRA has extended the PTC and ITC, introduced new provisions, and created sections 45Y for PTC and 48E for ITC, which include additional provisions for clean energy investments.


In this article, we’ll cover the changes that affect Production Tax Credits (PTC). Information about the changes to Investment Tax Credits can be found in the companion article The Extension and Phase-down of Investment Tax Credits for Cleantech.


Key Changes and Extensions in the Production Tax Credit

The key changes in the PTC that cleantech businesses need to be aware of are:

  • Extension of Transition Process for Elective Payment Phaseouts: RS Notice 2024-84 extends the transition process for claiming statutory exceptions to the elective payment phaseouts for clean energy projects that fail to satisfy domestic content requirements. This extension allows attestations to be submitted for construction projects that begin before January 1, 2027, instead of the previous deadline of January 1, 2025.
  • Clarification and Modification of Beginning of Construction Requirements: IRS Notice 2021-41 clarifies and modifies the beginning of construction requirements for the renewable electricity production tax credit. This includes extending the Continuity Safe Harbor for projects affected by COVID-19, allowing projects that began construction in 2016 through 2020 to qualify if placed in service within six years (five years for projects starting in 2020).
  • Proposed Regulations on Energy Credit: IRS Proposed Regulations REG-132569-17 update the types of energy property eligible for the energy credit, clarify the application of new credit transfer rules, and include qualified interconnection costs on the basis of some lower-output energy properties. These regulations also address the increased credit amount available if prevailing wage and registered apprenticeship requirements are met.

Specific Provisions and Requirements

  • Domestic Content Requirements: Projects must meet domestic content requirements to qualify for certain bonus credits. The IRS has provided safe harbors and specific guidelines for determining the domestic content of project components.
  • Energy Community Bonus Credit: The IRS has expanded the rules for determining whether a facility, energy project or energy storage technology is in an energy community that qualifies for increased credit amounts or rates.
  • Prevailing Wage and Apprenticeship Requirements: Projects must meet prevailing wage and apprenticeship requirements to qualify for higher alternative credit amounts. The IRS has issued detailed guidance on these requirements, including the conditions under which projects can be eligible for the increased credit amounts.

What are the Critical Deadlines for Changes in the PTC?

Each extension or provision has specific rules related to timing and deadlines:

  • Commencement of Construction Requirement:
    Notice 2021-41 clarifies and modifies the beginning of construction requirement for the PTC. The notice extends the Continuity Safe Harbor for projects that began construction in 2016 through 2020, allowing them to be placed in service by the end of a calendar year that is no more than six calendar years after the year construction began. For projects that began construction in 2020, the Continuity Safe Harbor is extended to five calendar years.
  • Placed-in-Service Deadlines:
    Credits apply once facilities are placed in service, with standard rules for solar, wind, geothermal, and other eligible technologies.
    New technology-neutral credits phase out by 2032 or when U.S. electricity sector emissions fall by 75% from 2022 levels, whichever comes later.
  • Bonus Credit Conditions:
    Prevailing Wage and Apprenticeship Requirements: Full credit values apply to projects starting construction on or after January 29, 2023, if these labor conditions are met.
    Domestic Content Bonus: Applies to projects initiated after May 2023, offering up to 10% additional credit.
  • Transition to Technology-Neutral Credits:
    From 2025, facilities will qualify under new frameworks if they achieve zero greenhouse gas emissions, broadening eligibility to various technologies.
  • Direct Pay and Transferability Elections:
    Eligible entities (e.g., tax-exempt organizations) must elect the Direct Pay or Transferability option during the first year they claim the credit to monetize the incentives efficiently.



What should cleantech businesses be doing to prepare for changes in PTC?

At Scrubbed, we are working with cleantech clients to prepare for the changes in the requirements. Our advice is that affected firms follow several steps:

  • Assess Eligibility and Compliance with New Requirements:
    Starting in 2025, the PTC will transition to a technology-neutral model (Section 45Y), so cleantech businesses should ensure their projects meet the emissions standards for zero-emission criteria. Projects should also evaluate the use of domestically produced materials to qualify for additional credits.
  • Focus on Labor Standards and Apprenticeship Programs
    Companies must meet prevailing wage and apprenticeship requirements for projects initiated after January 2023 to qualify for the full value of the credit. This may require partnerships with apprenticeship programs and compliance with labor standards.
  • Engage with Energy Communities
    Cleantech businesses should explore developing projects in energy communities—areas impacted by the decline of the fossil fuel industry or that meet certain economic distress criteria. Projects in these areas can receive up to a 20% bonus.
  • Utilize Direct Pay and Transferability Options:
    The IRA allows Direct Pay for tax-exempt entities and enables the transfer of credits to other taxpayers. Cleantech businesses should explore these options, especially if their projects involve non-profits or local government entities.
  • Plan for the Long-Term Phaseouts
    The new PTC and ITC incentives are scheduled to phase out by 2032 or when the U.S. electricity sector reduces emissions by 75%, whichever comes first. Cleantech companies should prioritize projects that will be eligible for the full benefit before this phaseout occurs.
  • Monitor and leverage IRS/State Guidance and Regulatory Changes
    Reassess project financing strategies considering PTC changes. Projects with higher credits could be more attractive to investors or lenders. Work with financial professionals to update projections and financing models based on the impact of the PTC.

Impact Across Sectors

The changes to the PTC will affect different industries in different ways. Some of the expected impacts include:

  • Energy Production: The transition mainly affects energy producers, who must ensure their facilities meet strict zero-emission requirements. The framework includes provisions for facility expansion and incremental production capacity.
  • Manufacturing and Supply Chain: Manufacturers must adapt to domestic content requirements and new supply chain considerations. This especially impacts EV manufacturers who are dealing with critical minerals requirements.

Opportunities for Cleantech Companies

The new production and investment credits significantly enhance project valuations and financial viability. The ability to transfer credits or receive direct payments provides additional flexibility for project financing.


Looking Ahead

The phaseout of these credits is scheduled for 2032 or when U.S. electricity sector emissions fall by 75% from 2022 levels, whichever occurs later. Companies should plan their project timelines accordingly to maximize available benefits.


The transformation of clean energy tax credits represents a significant shift toward technology-neutral, emissions-based incentives. Success in this new framework requires careful planning, thorough documentation, and strategic positioning of clean energy projects.


How Scrubbed Can Help

This article outlines the changes and potential opportunities brought about by the new framework, but it isn’t comprehensive, and each business will have to evaluate its own eligibility for the revised credit. At Scrubbed, we have deep experience in the cleantech and renewable energy industries, and we also provide real estate accounting solutions and technical accounting support to help clients establish a firm financial foundation and maximize credits and incentives.


Contact us to discuss how we can help your cleantech business prepare for the changes to the PTC, including guidance on nonprofit financial reporting when applicable.


Key Takeaways

Production Tax Credits (PTC) are Changing: The traditional PTC for cleantech businesses operates as a performance-based subsidy for renewable energy producers, rewarding projects based on the kilowatt-hours (kWh) of electricity they generate and deliver to the grid over their first decade of operation.


Significant Changes and Extensions:

  • Extension of Transition Processes: The transition process for claiming statutory exceptions to the elective payment phaseouts for clean energy projects has been extended to January 1, 2027.
  • Clarification of Construction Requirements: The beginning of construction requirements for the renewable electricity production tax credit has been clarified and modified, including extensions for projects affected by COVID-19.
  • Domestic Content Requirements: New elective safe harbors simplify compliance by providing predefined cost percentages for various components.
  • Energy Credit Regulations: Updates to the types of energy property eligible for the energy credit and new credit transfer rules have been proposed.

Specific Provisions and Requirements:

  • Domestic Content Requirements: Projects must meet domestic content requirements to qualify for certain bonus credits.
  • Energy Community Bonus Credit: Expanded rules for determining whether a facility qualifies for increased credit amounts or rates.
  • Prevailing Wage and Apprenticeship Requirements: Detailed guidance on these requirements to qualify for higher alternative credit amounts.


Critical Deadlines:

  • Commencement of Construction Requirement: Extended Continuity Safe Harbor for projects that began construction in 2016 through 2020.
  • Placed-in-Service Deadlines: Credits apply once facilities are placed in service, with standard rules for various technologies.
  • Bonus Credit Conditions: Full credit values apply to projects starting construction on or after January 29, 2023, if labor conditions are met.
  • Transition to Technology-Neutral Credits: From 2025, facilities will qualify under new frameworks if they achieve zero greenhouse gas emissions, broadening eligibility to various technologies.
  • Direct Pay and Transferability Elections: Eligible entities (e.g., tax-exempt organizations) must elect the Direct Pay or Transferability option during the first year they claim the credit to monetize the incentives efficiently.

Looking Ahead: The phaseout of these credits is scheduled for 2032 or when U.S. electricity sector emissions fall by 75% from 2022 levels, whichever occurs later.


Further Guidance and Updates

  • Detailed Regulations and Guidance: The IRS and Treasury are expected to issue further detailed regulations and guidance on various aspects of sections 45Y and 48E, including the calculation of emissions rates, the specifics of the direct pay and transfer options, and the procedures for petitioning for provisional emissions rates.
  • Public Comments and Hearings: The IRS has requested public comments on the implementation of these credits and has scheduled public hearings to gather input from stakeholders. This ongoing dialogue may result in further refinement to the regulations.
  • Annual Updates to Emissions Rates: The annual publication of emissions rates for different facility types will be a critical component of the ongoing implementation of these credits, providing taxpayers with the necessary information to determine their eligibility


Sources:

IRS Guidance on Inflation Reduction Act

U.S. Treasury IRA Resource Hub

Section 45

Section 48

Section 45Y

Section 48E

https://www.taxnotes.com/tax-notes-federal/code-and-regulations/itc-proposed-regs-bring-sweeping-updates-and-new-questions/2023/12/18/7hp39

https://www.taxnotes.com/tax-notes-federal/credits/what-will-tech-neutral-credit-regs-look/2024/03/18/7j9l8

https://www.taxnotes.com/tax-notes-federal/credits/tech-neutral-energy-credits-get-jolt/2024/06/10/7k986

https://www.taxnotes.com/tax-notes-federal/energy-taxation/irs-guidance-amps-clean-electricity-tax-credit-flexibility/2024/06/03/7k80q

https://www.irs.gov/pub/irs-drop/n-24-48.pdf

https://www.federalregister.gov/documents/2024/06/03/2024-11719/section-45y-clean-electricity-production-credit-and-section-48e-clean-electricity-investment-credit

https://www.irs.gov/pub/irs-drop/n-22-49.pdf

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