Here Comes the Sun: The Inflation Reduction Act Provides a Multitude of New Tax Incentive Opportunities for the Solar Industry

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On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA” or the “Act”) into law. The IRA, which contains several energy-related tax credits and extends and modifies some existing credits in the Internal Revenue Code of 1986 (the “Code”), is aimed at boosting clean energy initiatives. Notably, the Act provides various opportunities for solar industry participants, including producers, developers, and investors, to rack up tax incentives, while also boosting domestic production and benefiting the workforce. Although the Act extends and modifies many existing credits, this article will focus on some of the additional credits available to producers of solar energy or investors in solar energy projects, the interplay between the various credits, and practical strategies, considerations, and resources for taxpayers looking to qualify for such credits.

Code Section 45: Production Tax Credit- Increased Credits

The Code Section 45 renewable energy production credit (“PTC”) is a tax credit for a specific amount of electricity produced by the taxpayer at a qualified facility and sold to an unrelated person.

The Act provides an increased base credit for projects that meet prevailing wage and apprenticeship requirements, discussed further below. The Act gives producers a 1.5 cent base credit per kilowatt hour (“kWh”) of electricity produced for projects that meet the requirements—and a 0.3 cent per kWh base for those that do not, adjusted for inflation.

Given that the PTC is five times greater for projects meeting the prevailing wage and apprenticeship requirements, taxpayers should be interested in determining how to meet these standards.

Prevailing Wage

The prevailing wage requirement mandates that any laborer or mechanic (as defined by 29 CFR 5.2(m)) employed by the taxpayer or its contractor or subcontractor for the construction of a qualified facility be paid the prevailing rate for the construction, alteration, or repair of projects of similar character in the locality in which the facility is located, as that rate is most recently determined by the Secretary of Labor in the taxable year in which the construction, alteration or repair occurs.

What is included in the prevailing wage rate?

The Secretary of Labor’s wage rate requirements generally mandate that prevailing wage includes the basic hourly rate of pay as well as certain rates of contribution by a contractor to provide certain employee benefits (i.e., fringe benefits). These include medical care, pension, injury or illness compensation, disability, unemployment insurance, and vacation pay, where the contractor is not required by law to provide the benefits.

How does a contractor determine the rate?

The Secretary of Labor mandates that the minimum wages shall be based on the wages determined as prevailing for the corresponding classes of laborers and mechanics employed on a project of a character similar to the contractor’s work in the location the work is to be performed. In other words, the wage requirements are locally driven and will likely vary from project to project and location to location. While the Secretary of Labor maintains a website at to assist contractors in making a wage determination by inputting the given labor category and locality, contractors may also consult with an experienced attorney to determine the applicable prevailing wage for a project.

Apprenticeship Requirements

The PTC further requires that a certain percentage of total labor hours for the construction of the qualified facility be performed by qualified apprentices. A qualified apprentice is any individual employed by the taxpayer, its contractor, or subcontractor who participates in a registered apprenticeship program under the National Apprenticeship Act of 1937. The registered apprenticeship program must meet specific labor standards set by the Department of Labor.

What is a Registered Apprenticeship Program?

To meet the standards for a registered apprentice program, the program must apply for registration and be registered with the Office of Apprenticeship or a State Apprenticeship Agency. In addition, the program must meet certain training and Equal Employment Opportunity requirements. There must also be a written apprenticeship agreement. While the U.S. Department of Labor’s apprenticeship website and individual state websites contain lists of registered apprenticeship programs, a contractor may also consult with an experienced attorney to help navigate the resources.

Apprentice Labor Hour Requirements

The required amount of labor hours by a qualified apprentice for construction of a facility beginning before January 1, 2023, is 10%. The required amount of labor hours for the construction of a facility beginning after December 31, 2022, is 15%. Further, if the taxpayer or its contractor or subcontractor employs four or more individuals for the construction of the qualified facility, it must employ one or more qualified apprentices. The apprenticeship labor hours are also subject to any applicable State or local requirements for apprentice-to-journey worker ratios of the Department of Labor, the applicable state apprentice agency, or other authority having jurisdiction. Contractors should consult with the applicable state or local agency or an experienced employment attorney to ensure ratio requirements are met.

It is worth noting that a good faith exception may apply when an employer attempts to find apprentices in the project’s locality but cannot find them.

Domestic Content Bonus

The Act allows a taxpayer to increase its Section 45 credit by an additional 10% if the taxpayer certifies to the Secretary that all steel, iron, or a percentage of manufactured product which is a component of the qualified facility was produced in the United States.

The IRA requires that the iron and steel comply with the Federal Transit Administration’s “Buy America Requirements,” which sets forth the general requirements for products to be considered produced in the United States.

Any steel or iron that is a component of the qualified facility must be produced in the United States. For manufactured products, not less than 40% of the total cost of the manufactured products of the facility must be attributable to manufactured products (including components) that are mined, produced, or manufactured in the United States for projects beginning before 2025.

What does “produced in the United States” mean?

According to the Buy America Requirements, for a manufactured product to be considered produced in the United States, all the processes for manufacturing the product must take place in the United States, and all of the components of the product must be of U.S. origin. Therefore, a component is considered of U.S. origin when manufactured in the United States, regardless of the origin of its subcomponents.

All steel and iron manufacturing processes must occur in the United States, except for metallurgical processes involved in refining steel additives. Taxpayers seeking to avail themselves of the domestic content bonus should start considering how they can verify and document that the products they are purchasing from third parties (like manufacturers, distributors, and other vendors in the supply chain) satisfy the Buy American Requirements, as well as how they can mitigate and allocate risk through supplier diligence, contractual covenants, third-party certification, and other practical or legal proactive measures.


A taxpayer may be eligible to obtain an exception to the domestic content requirements and qualify for 100% of the domestic content bonus credit in certain circumstances. For instance, there is an exception to the Buy America Requirements if the materials are not produced in the United States in sufficient and reasonably available quantities or satisfactory quality (“non-availability”) or if the inclusion of a domestic item or domestic material will increase the cost of the construction of the qualified facility by more than 25%. The Buy America Requirements set forth ways for a contractor to prove non-availability or a 25% increase. A contractor should consult an experienced legal advisor to determine whether an exception may apply.

10% Increase for Applicable Energy Communities

The Section 45 credit is also increased by an additional 10% (excluding any bonus credit acquired by meeting domestic content rules) if the qualified facilities are located in applicable energy communities. Applicable energy communities include certain brownfield sites, a metropolitan or non-metropolitan statistical area which has 0.17% or greater direct employment or 25% or greater local tax revenues related to the processing of coal, oil, or natural gas and has an unemployment rate at or above the national average unemployment rate for the previous year, or a census tract in which certain coal generation has been closed or retired. A taxpayer wanting to know the national average unemployment rate is for an applicable period can obtain this information by visiting the U.S. Department of Treasury website or consulting with an experienced attorney.

Code Section 48: Investment Tax Credit

The provisions of the IRA amending the Code Section 48 investment tax credit (“ITC”) for owners of commercial qualifying property (not just producers for the sale of energy) and their transferees extends the existing credit and expands the definition of qualifying property. In addition, the changes to the law in the Act include additional credits if the taxpayer meets specific requirements.

Before the Act, taxpayers could claim a credit of up to 26% of the basis of solar property placed in service during the taxable year for projects placed in service before January 1, 2023, subject to phase out rules. The Act modifies the base credit to 6% for many types of property, including solar and storage property, but the credit percentage will be raised to 30% if one of three conditions are met (i.e., the “Credit Increase Conditions”):

  1. The project meets the prevailing wage and apprenticeship requirements discussed above.
  2. The project has a net output of electrical or thermal energy of less than 1 megawatt: or
  3. The project begins more than 60 days before the IRS issues guidance about prevailing wage and apprenticeship requirements.

The base credit is 2% for all other types of energy property but is raised to 10% if one of the above requirements is met.

Additional Credits Under Code Section 48

Code Section 48 now provides an additional 10% domestic content bonus for projects that meet both the domestic content requirements discussed above and one of the Credit Increase Conditions discussed above. Conversely, the domestic content bonus is lowered to 2% for projects that do not meet the Credit Increase Conditions.

The Act also affords a similar bonus credit increase of 10% for energy projects placed in service within an energy community as defined in Section 45 and discussed above, which meets one of the Credit Increase Conditions. Likewise, this credit increase is only 2% for projects that do not meet any of the Credit Increase Conditions.

Low-Income Community Credit

The changes to the ITC in the Act provide an additional 10% credit for property that uses solar energy to generate electricity to heat or cool or provide hot water for use in a structure or to provide solar heat (except property used to generate energy for purposes of heating a swimming pool), qualified fuel cell property or qualified microturbine property, which has an output of fewer than 5 megawatts and is located in a low-income community. Generally, a low-income community is one where the poverty rate is 20% of, or the median family income does not exceed, 80% of statewide or metropolitan area median family income (or that of Indian lands).

The Act also amends the Code Section 48 ITC to provide an additional 20% credit for a facility which:

  • is part of a low-income residential building project. That is, the facility is installed on a residential rental building that participates in a qualified housing program, and the financial benefits of the electricity produced by the facility are allocated equitably among the occupants of the dwelling units of the building, or
  • is part of a qualified low-income economic benefit project. That is, at least 50% of the financial benefits of the electricity produced by the facility are provided to households with income of less than 200% of the poverty line or less than 80% of the area median gross income.

This provision takes effect on January 1, 2023, and only applies to calendar years 2023 and 2024.

Lastly, while it is important to note that taxpayers eligible for the Code Section 45 and Code Section 48 credits must choose one or the other, the addition of various bonus credits makes solar energy and storage an attractive investment for businesses and investors.

Overall, the Act has implemented positive measures benefiting commercial producers and investors and we are optimistic these measures will help spur the growth of critical renewable energy sources domestically and reduce our nation’s dependence on fossil fuels.


This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, contact us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

Unless expressly provided, this alert does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.