Inflation Reduction Act deadlines and considerations for engineers

When it comes to maximizing financial opportunities through the Inflation Reduction Act (IRA) for your engineering firm and its clients, the old adage rings true: “The best time to plant a tree was 20 years ago. The second best time is now.”

Though IRA funding qualification and disbursement is now in full swing, and though several important deadlines have already passed, there remains plenty of opportunity to maximize your clients’ benefit from the nearly $500 billion in available federal funding focused on clean energy and efficiency projects for state and local governments and other public sector entities.

With nearly 78% of IRA tax credits targeting environmental/energy projects—clean fuel and vehicle credits, clean electricity incentives, clean manufacturing, etc.—and with a long list of qualifying projects including wind, solar, hydro, biomass, combined heat and power, geothermal, carbon capture, electric vehicles, charging stations, renewable/low-carbon fuels and more, the question engineers should be asking is—what do I need to do, today, to help the governmental and public sector clients I serve take full advantage of the IRA?

In short, how do I plant that tree right now?

Project planning and prioritization

When it comes to helping your public sector clients maximize their IRA tax credits—especially direct pay tax credits tied to domestic content requirements—time is absolutely of the essence. As you evaluate their list of projects (past, present or future), it’s crucial to consider both the yearly decrease in tax credit percentages and the yearly increase in qualifying requirements. As an example, consider the changes to the domestic content requirements and benefits outlined below.

First, the qualifying benchmark of domestically manufactured products increases yearly, as follows:

• 40% for projects that begin construction before 2025
• 45% for projects that begin construction in 2025
• 50% for projects that begin construction in 2026
• 55% for projects that begin construction thereafter

Additionally, if the project fails to meet the domestic content requirements, the value of the domestic content tax credit will decrease each year for projects over 1 megawatt, as follows:

• 10% if construction begins in calendar year 2024
• 15% if construction begins in calendar year 2025
• 100% if construction begins after Dec. 31, 2025

Even further, the credit deadline for projects that focus on certain biogas and combined heat and power is Dec. 31, 2024. Meaning, if these projects don’t begin construction within the 2024 calendar year, they will not be eligible for IRA tax credits or significant changes may need to occur to those projects after Section 48E implementation. 

The key takeaway: to help your municipalities and public sector entities maximize their IRA tax benefits while minimizing their requirement burdens, you must embrace prioritization in your approach to project planning and design. Prioritize projects with escalating domestic content requirements and/or end-of-year tax credit deadlines—especially those which stand to lose all tax credit incentives after Dec. 31, 2024 (like certain biogas and combined heat/power).

While opportunity abounds for your engineering firm and the communities you serve, it’s crucial to remember that the IRA tax credits may decrease with each passing year AND the various requirements for said credits (domestic content, prevailing wage, apprenticeship, etc.) grow more stringent with each passing year.

Quite simply, the longer you wait, it may result in less money and may be harder it is to attain.

Cost planning and communication

Once the project list has been prioritized (considering the timelines/requirements outlined above), it’s crucial to clearly communicate to your municipal and public sector clients about the urgency and opportunity surrounding their highest priority projects. As funding considerations often delay and/or complicate project approval, the earlier you inform your stakeholders of the abundant IRA opportunities—and their impending deadlines/requirements—the better.

To this point, the direct pay provision is a real game changer for public sector organizations. This is the first time that entities without tax liabilities, such as cities, towns, utilities, tribal governments, not-for-profit organizations and colleges and universities, can benefit from clean energy tax credits. The provision gives public sector energy project owners access to federal funding for a portion of their project thereby reducing local funding requirements.

These 70+ tax credits—the majority of which are entitlements—normally amount to 30-50% of qualifying eligible project costs. Most credits are good through 2032 (though, as noted above, several provisions might necessitate that you take quicker action) and eligibility backtracks to project completion dates beginning January 1, 2023. So, whether you’ve already completed the project, are in the middle of one or haven’t even begun to plan, the project may qualify for these direct pay tax credits.

Communicating these funding opportunities—and their ability to replace or lessen the burden of user fees/taxes, improve cost-benefit ratios and quicken payback periods—can help your stakeholders maximize their IRA advantage by equipping them for proper cost planning and project prioritization.

Next steps for engineers

If you haven’t already planted your proverbial IRA tree, today’s the day. You still have tremendous incentive to help your public sector clients begin their IRA-eligible projects sooner rather than later—not only to maximize the available IRA funding but to avoid the stricter requirements (and potential tax credit reductions) that take effect further down the line.

These steps can help you chart your path forward:

• Work with your governmental and public sector clients to review their project lists (past, current and future) and prioritize IRA-eligible projects with upcoming deadlines that could decrease tax credit opportunities and/or increase the requirement burden if not begun by the end of 2024
• Use this project review to restructure your approach to project planning and design (including timeline and costs) and begin conducting activities now to help maximize your clients’ IRA opportunities
• Begin (or increase) communication efforts with the public sector entities you serve to educate and instruct them on priority deadlines and funding opportunities
• Connect with Baker Tilly IRA specialists on unanswered questions and additional guidance about maximizing IRA tax credits