Section 48C: Credit opportunities for the energy and manufacturing industries

The Inflation Reduction Act (IRA) Section 48C is a competitive tax credit that can provide a transferable tax credit of up to 30% of your capital investment in a qualified advanced energy project in three major areas; clean energy property manufacturing and recycling, industrial decarbonization and critical materials processing. The program’s total funding was $10 billion of which $4 billion was allocated in March of this year, with another $6 billion being allocated in Round 2. The two-step process begins with the submission of a concept paper and that process is starting this month and will be open for 30 days.  After review by the Department of Energy (DOE) and Treasury, some concept papers will be encouraged to submit a full application, with the goal of having allocation letters out no later than Jan. 5, 2025. It is important to know that only companies that submit a concept paper are eligible to submit a full application.

Are you ready for the final round?

Round 2 has a very aggressive schedule to meet the final allocation deadline and includes some changes in the priority areas which create new opportunities for companies looking at project eligibility. Below are some examples of advanced energy property projects.

Clean energy manufacturing and recycling

• Re-equipping, expanding, or establishing an industrial facility that manufactures or recycles advanced energy properties specified by the IRS code.
• Example projects include solar glass, specialized steel, and grid modernization components.
• New rules allow for projects that reduce the carbon intensity of an output product by 30% on a lifecycle basis, with specific reference to low-carbon cement, iron, steel, aluminum, pulp and paper, and glass. This is different from emissions reduction projects developed in the industrial decarbonization.

Industrial decarbonization

• Retrofitting existing industrial or manufacturing facilities, especially in energy-intensive sectors like cement, iron, steel, aluminum, and chemicals, reducing green house gas (GHG) by at least 20%. Note this category does not accommodate new facilities or facility expansions.
• Example projects include retrofitting a facility to be suitable for electrolyzer manufacturing.

Critical materials

• Re-equipping, expanding, or establishing an industrial facility for processing, refining or recycling critical materials.
• Examples of eligible projects include lithium-related recyclers, electrical steel makers, and battery recyclers that received an allocation in the first round.

48C has a definitive timeline for the application process and the graphic below describes the overall timeline, showing key milestones from concept paper through credit claiming.

Time is also crucial to the design of your development project, as you must place in service no longer than four years from the date you receive a notice of allocation, but you may not place in service before getting notice of receiving a credit allocation.  Failure to meet these timeline limitations may result in forfeiture of the credit.

To prepare for round 2 we suggest you ask yourself these five questions about your project:

1. What is the project's eligibility and is it aligned to the requirements?
2. Were your labor costs calculated with the PW&A rules?
3. Do you have a solid capital investment?
4. Do you have the internal resources and management committed to responding?
5. Do you have an established location or one in mind?

Round 1 lessons learned

Below are the three important lessons we have learned from the first round of the Section 48C application process:

1. Present a complete project: Make sure your project is highly aligned to a particular area with specific reference to eligibility in the guidance.
    
   The project must have a clear community benefits and workforce engagement plan, while commercial plans should include market cost, competitor positioning and show how you will be a cost-effective provider going forward.        
   
   Maximize the domestic supply chain for your inputs and outputs. If you are going to be a domestic manufacturer but all of your inputs, come from elsewhere in the world, take the time to look at the U.S. supply chain and figure out if you can find a competitive U.S. supplier.
   
2. Base your costs on Prevailing Wage & Apprenticeship (PW&A): PW&A is a set of rules around how you hire, how you pay and how you use apprentices on your projects. PW&A unlocks the 30% tax credit allocation but if you do not comply you could only get 6%. You cannot go back for more, so it’s important to allocate the PW&A costs correctly or the project will absorb the cost. Another key aspect is that PW&A must be monitored for five years after the project is placed in service.
   
3. Don’t stop working between the concept paper and the application: Your chances of receiving encouragement are quite high if you abide by the requirements, but developing the materials to meet those requirements can be very time-consuming. Use the time in between concept paper and application to develop real commercial offtake agreements, create credible full project life financials and develop a real community and workforce engagement program that will pay off in the long run.

Although there is an aggressive schedule for Section 48C round 2, Baker Tilly’s specialized IRA team can help simplify this process and guide you through the application process. We can help you build your concept paper feedback, work with you in the interim to prepare a full application, review your letters of encouragement, then manage the full application process and provide content editing to help you put your best foot forward. Baker Tilly has designed a portal to help accumulate and organize information for the submission of concept papers and section 48C credit applications.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.