The following is a primary on some of the key IRA incentives that hospitals should explore before undertaking any clean energy or energy efficiency projects.
- Background on the Inflation Reduction Act (IRA)
The IRA was enacted on August 16, 2022. The purposes of the IRA include overhauling the domestic clean energy industry, transitioning away from fossil fuel consumption, and reducing greenhouse gas emissions. To incentivize both public and private entities to help the federal government achieve its energy and emissions goals, the IRA drastically expanded the scope and weight of certain pre-existing energy tax credits and deductions. The IRA created a direct payment mechanism for tax-exempt and governmental entities to monetize the value of tax credits while also creating an energy marketplace for private entities to monetize the value of any tax credits they do not realize as credits for themselves. Additionally, the IRA drastically expanded the scope and power of the energy-efficient commercial building deduction for newly constructed or retrofitted commercial buildings.
Historically, energy tax credits have been useless to entities who did not have any tax liability to offset. The IRA changes this by creating a new mechanism – direct payment – that provides a way for tax-exempt entities to obtain value from energy tax credits. The direct payment mechanism allows for eligible entities to construct and operate clean energy-generating or consuming assets and then receive a cash payment in an amount equal to the value of the tax credit that the asset creates. In addition to the direct payment mechanism for tax-exempt entities, the IRA established a new energy tax credit marketplace where taxable entities can sell the value of their tax credits to other unrelated taxpayers for cash instead of realizing the value of the credit as a tax credit on their annual returns. These powerful new tools make owning and operating clean energy projects much more affordable and enticing than ever before!
- Types of IRA Incentives for Hospitals
There are three main types of incentives under the IRA which non-profit hospital systems can receive direct cash payments for: (1) investment tax credits (ITC), (2) qualified commercial clean vehicles credits, and (3) alternative fuel vehicle refueling property credits. For-profit hospitals can transfer the tax credits for two of those incentives to other taxpayers in return for cash payments: (1) investment tax credits, and (2) alternative fuel vehicle refueling property credits.
Investment tax credits currently exist for defined categories of energy property, which include solar property, geothermal energy systems property, ground-source thermal energy systems property, and energy storage property. Beginning in 2025, the ITC transitions from defined categories of energy property to a technology-neutral tax credit for investment in facilities that generate clean electricity. There are 2 potential base rates for the ITC depending on the size of a project. If a project’s output is over 1 MW (AC), or an equivalent metric, the base rate is 6% of the upfront eligible costs of installing the project. If a project’s output is less than 1 MW (AC), or an equivalent metric, the base rate is 30% of the upfront eligible costs of installing the project. There are bonus incentives that stack on top of the base rate for the ITC that can raise the value of the credit to as high as 50% to 70% of the upfront eligible costs of the project.
- Qualified commercial clean vehicles credits
For any hospital systems that wish to transition their vehicle fleets to electric, hybrid, or some other clean energy fuel source, there is the ability to receive a tax credit for the purchase of qualified commercial clean vehicles. The value of this credit is capped at $7,500 for vehicles that weigh less than 14,000 pounds and $40,000 for vehicles whose weight exceeds 14,000 pounds. Non-profit hospital systems can receive the value of this credit as a direct payment for any qualified vehicles that are purchased. However, for-profit hospital systems cannot transfer the value of this credit for cash. For-profit hospital systems can only monetize the value of this incentive by utilizing it as a tax credit.
- Alternative fuel vehicle refueling property credits
If a hospital system plans to purchase any hybrid or clean energy-powered vehicles, then it will also need to install charging stations for those vehicles. Non-profit hospitals can elect to receive a direct payment (or for-profit can elect to transfer for cash) for the installation of vehicle refueling and charging property in geographic regions that are comprised of low-income and non-urban areas. Alternative fuels include but are not limited to, electricity, ethanol, natural gas, hydrogen, and biodiesel. The base rate of the credit is an amount equal to 6% of the eligible upfront costs of installing the charging station. There is an ability to increase the base rate by five times to 30% of the upfront eligible costs if certain prevailing wage and apprenticeship requirements are met during the installation of the charging station property.
- Energy-efficient commercial building deduction
The IRA completely overhauled the energy-efficient commercial building deduction that is found under Section 179D of the Internal Revenue Code. The maximum value of the deduction was increased to $5.00 per square foot (with adjustments for inflation) if prevailing wage and apprentice requirements are met during the construction or retrofitting of the commercial building. The IRA removed the restriction that the 179D deduction could only be claimed once over the whole life span of a commercial building. The IRA greatly expanded the list of tax-exempt entities that can allocate the value of the tax deduction over to the design professional responsible for designing the building, who can monetize the value of the deduction, unlike the tax-exempt entity. Lastly, the IRA created an additional and alternative methodology to calculate the reduction in the energy use intensity during the retrofitting of a commercial building to establish the rate per square foot attributable to the deduction.
- Conclusion
These are just a few of the most lucrative incentives that are applicable to hospital systems across the country thanks to the IRA. There are many additional incentives that could be applicable to your hospital under the IRA besides the incentives mentioned in this article.
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