What the Inflation Reduction Act means for oil and gas
With the passing of the Inflation Reduction Act (IRA), oil and gas entities gained access to nearly $500 billion in new federal funding and tax credits. The IRA created game-changing opportunities through energy incentives and tax credits for oil and gas entities to build infrastructure that existed for clean energy generation and production.
In the year since the IRA was signed into law, there have been significant updates in guidance and regulations. Watch this webinar to learn about the latest updates and the steps oil and gas companies can take to maximize the potential value of eligible IRA tax credits.
- Briefly review the Inflation Reduction Act
- Discuss relevant updates and guidance related to domestic content, energy communities, transferability and prevailing wage and apprenticeship
- Share real-world learnings from oil and gas clients
- Recommend next steps for oil and gas companies
The Section 48C and 45X tax credits have been in force for almost 15 years but the IRA supercharged those incentives by broadening the types of entities that are eligible for these tax credits. It also introduced new features to those incentives, particularly what's called transferability. The IRA opened up the opportunity for a taxpayer to transfer a tax credit to someone who can better utilize it. This is an important feature particularly for oil and gas because taxable income in the upstream sector can vary broadly and, in some cases, you have longstanding write-offs for taxable income. Both tax credits offer substantial advantages for oil and gas companies, supporting their transition to cleaner energy and contributing to economic growth.
Congress and policymakers recognize that a transition toward cleaner energy sources broadly benefits air quality but disproportionately hurts communities where oil, gas and coal fuels are historically produced. The IRA seeks to boost clean energy investment into fossil energy communities and includes a special 10% tax credit bonus for these regions.
Three ways a location may qualify as being within an energy community:
- Brownfield category- A brownfield site, which is a site that contains or potentially contains a qualifying hazardous substance, pollutant, or contaminant that could impact development
- Statistical area category (fossil fuel region)- Statistical areas with significant fossil fuel employment or significant fossil fuel tax revenue, combined with higher-than-average unemployment rates in the previous year
- Coal closure category- A site located in a census tract where a coal mine has closed after 1999 or where a coal-fired generating unit was closed after 2009, as well as any directly adjacent census tracts
A location must meet at least one of these criteria to be considered an energy community and eligible for the energy community bonus credit. Check out our energy community mapping tool to see if you would benefit from this tax credit or contact us to get started today.
The prevailing wage and apprenticeship credit is the largest available bonus for the IRA tax credits and drives a lot of value for maximizing the potential tax credit incentives available. It’s a five times multiplier of the base credit and to satisfy prevailing wage requirements you must maintain and preserve sufficient records along the way.
For example, to implement a solar installation to drive electric generation in an oilfield, it’s imperative to make sure the contractors and subcontractors you would employ to design, build and operate the facility understand the prevailing wage requirements they need to comply with. Vendors and subcontractors are often required to provide bi-weekly or monthly certified payroll reports.
Baker Tilly has begun to develop a compliance service that is meant to be a dashboard tracking tool for capital projects looking to make sure they comply with the prevailing wage and apprenticeship requirements.
*Note: Prevailing wage requirements do not apply for projects less than one megawatt in size nor for those that began construction before Jan. 29, 2023.
To claim a domestic content bonus credit amount, a taxpayer must satisfy the domestic content requirement for each applicable project and submit timely certifications to the IRS.
This credit may be applicable in the oil and gas industry if there are in-field generation assets that companies want to put in place to lower their electric costs in an oilfield or if they're looking at other equipment like combined heat and power. When you're doing your procurement for your clean energy infrastructure project, this is meant to promote American manufacturing but also recognizes that some equipment in the energy industry is largely currently manufactured abroad.
Take away
Starting your Inflation Reduction Act-eligible projects sooner rather than later can allow you to maximize the available IRA funding but also help you avoid the stricter requirements (and potential reductions in tax credits) that may come into play down the road.
For more information on this topic, connect with a Baker Tilly specialist.
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.
