How-to guide: Understanding and navigating the Inflation Reduction Act (USA)

Introduction

This guide will assist in-house counsel, private practice lawyers, and compliance personnel in understanding, navigating, and complying with the Inflation Reduction Act’s (the IRA) requirements for businesses. Understanding and navigating the IRA benefits businesses by providing access to tax credits, and by reducing energy costs, enhancing competitiveness, promoting sustainability, and fostering innovation.

The IRA’s investments are aimed at enhancing the market for clean energy, clean manufacturing, and zero-emission transportation, helping companies achieve their net-zero targets.

This guide is a general overview of the business-related tax provisions of the IRA. It is important to seek the advice of a tax professional when making a claim under the IRA.

Developments in 2025, especially the enactment on July 4, 2025 of the One Big Beautiful Bill Act (OBBBA), have changed or eliminated many provisions of the IRA. In particular, provisions relating to clean energy have been repealed or scaled back dramatically. It is essential for businesses to stay informed and prepare for potential impacts on their operations and strategic planning..

This guide covers:

Overview of tax credits
IRA eligibility and compliance requirements
Tax credits under the IRA
Emissions reductions
Steps to take to comply with the IRA

This guide can be used in conjunction with Quick view: Laws and regulations promoting green energy through incentives and disincentives.

Section 1 – Overview of tax credits

Tax credits are subtractions from the amount that taxpayers owe. The credits are put in place to make certain activities less costly to the taxpayer. They differ from tax deductions, in that they lower tax liability directly, while deductions lower tax liability indirectly, by decreasing a taxpayer’s taxable income. The value of a tax credit varies based on the type of credit. Some credits are made available only to specific individuals or businesses based on location, classification, or industry. Governments at both federal and state level offer tax credits to encourage behaviors that benefit the economy, environment, or other important areas. Tax credits are more advantageous than deductions because they reduce tax liability dollar for dollar.

The IRS lists 17 business-related tax credits enacted by the Inflation Reduction Act:

Advanced energy project credit
Advanced manufacturing investment credit
Advanced manufacturing production credit
Clean electricity investment credit
Clean electricity production credit
Clean fuel production credit
Cost recovery for qualified clean energy facilities, property and technology
Credit for builders of energy-efficient homes
Credit for carbon oxide sequestration
Credits for new clean vehicles purchased in 2023 and after
Credits for new electric vehicles purchased in 2022 and before
Commercial clean vehicle credit
Incentives for biodiesel, renewable diesel and alternative fuels
Research credit against payroll tax for small businesses
Second generation biofuel incentives
Sustainable aviation fuel credit
Zero-emission nuclear

The eligibility for these credits varies. For example the credit for new electric vehicles purchased in 2022 and before applies only to vehicles that undergo final assembly in North America, whereas the credit for commercial clean vehicles is available only for vehicles made by an approved manufacturer, with no limitations on the place of final assembly. The clean and electric vehicle credit expires on September 30, 2025.

In general, the Internal Revenue Code sets out three main types of general tax credits:

nonrefundable – reduce tax liability to zero but do not result in a refund if they exceed the tax owed, and are applicable only in the year claimed and cannot be carried forward;
refundable – fully paid out, allowing taxpayers to receive a refund if the credit exceeds their tax liability; and
partially refundable – have a limit on the amount of the credit that will be refundable.

To claim a tax credit in general, the steps to be followed are:

Identify eligible tax credits by determining which tax credits will be claimed.
Gather all necessary documentation to support the claim. This may include receipts, invoices, proof of purchase, and any other relevant records that substantiate eligibility for the credit.
Complete relevant forms by using the appropriate IRS form to claim the tax credit. For environmental taxes, it may be necessary to complete Form 6627, which involves calculating taxes related to petroleum, ozone-depleting chemicals, and other taxable substances.
Calculate the tax credit by accurately calculating the amount of tax credit the company is eligible for. Ensure that calculations are correct and reflect the current rates and regulations.
File the company’s tax return and include the completed form with the tax return. Ensure that all information is accurate and complete to avoid delays or issues with processing.
Keep records by maintaining a copy of the filed tax return and all supporting documents. This is important for verification purposes and in case of an audit.

In addition to federal tax credits, many states and local governments offer additional incentives that complement federal programs or that address different policy concerns. These incentives may include tax credits, rebates, grants, or reduced interest loans for activities such as energy efficiency improvements, renewable energy installations, or environmentally friendly business practices. For example, Texas has implemented a robust solar or wind power property tax exemption. When a company installs a new solar power system on its property, any increase in the property’s value from that installation is fully exempt from property tax increases.

Investing in projects that qualify for tax credits can lead to substantial long-term financial benefits. Beyond any immediate tax savings, these investments can lower operating costs, increase property values, and improve energy efficiency, leading to sustained savings over time.

Section 2 – IRA eligibility and compliance requirements

The IRA marked a historic level of support for clean energy technologies in the US. It allocated nearly $400 billion in federal incentives for developing clean energy projects, such as solar photovoltaics (PV) and battery energy storage systems, onshore and offshore wind, and carbon capture and storage aiming to reduce carbon emissions through 2032. The long-term availability of these credits also signals market stability. According to Princeton University’s REPEAT Project, this legislation was expected to generate $4.1 trillion in cumulative capital investment in the US energy infrastructure over the next decade.

As noted in section 1, businesses can benefit from various credits, such as the advanced energy project credit (added on May 31, 2023), advanced manufacturing investment credit (added September 10, 2024), and the advanced manufacturing production credit. Additional credits include those for clean electricity investment and production, clean fuel production, and the construction of energy-efficient homes (added August 31, 2023, and in effect until December 31, 2025). Until September 30, 2025, businesses can also receive credits for the purchase of new clean vehicles, as well as commercial clean vehicle credits and incentives for biodiesel, renewable diesel, and alternative fuels. A credit against payroll tax for research expenses for small businesses was also added on October 4, 2024. These programs were enacted to encourage the adoption of clean energy and environmentally sustainable practices across various sectors of the economy, providing financial incentives to support the transition to a greener economy.

The IRA tax credits and deductions are applicable only to eligible technologies: multiple solar and wind technologies, municipal solid waste, geothermal (electric), tidal, energy storage technologies, microgrid controllers, fuel cells, geothermal (heat pump and direct use), combined heat & power, microturbines, interconnection, biomass, landfill gas, hydroelectric, marine and hydrokinetic (see Environment Protection Agency, Summary of Inflation Reduction Act provisions related to renewable energy).

The IRA has additional compliance requirements for businesses in order to qualify for specific tax credits:

Prevailing wage: companies must pay all laborers and mechanics working on eligible projects at least the prevailing wage rate established by the Department of Labor for the specific geographic area and type of construction.
Apprenticeship requirements: a portion of the labor hours on a project must be performed by qualified apprentices from registered apprenticeship programs.
Recordkeeping: companies must maintain detailed records that demonstrate compliance with all of applicable requirements, including worker classifications, hours worked, wage rates paid, and documentation of apprenticeship participation.
Contractual obligations: companies should include provisions in their contracts with contractors and subcontractors requiring them to comply with IRA prevailing wage and apprenticeship standards.
Domestic content requirements: for certain clean energy technologies like electric vehicles, a percentage of the components must be sourced from within the US to qualify for tax credits.
Environmental justice considerations: some IRA provisions may prioritize projects located in disadvantaged communities or that provide significant environmental benefits to these areas.

Since the signing of the IRA on August 16, 2022, the US Government has implemented billions of dollars in grants, loans, and other investments for clean energy and climate action (see Investing in America).

Examples of companies taking advantage of the IRA incentives

In 2023, Ford Motor Company announced a $3.5 billion investment to build a lithium iron phosphate (LFP) electric vehicle battery plant in Marshall, Michigan. During their Q3 2022 earnings call, Ford CEO Jim Farley highlighted the advanced manufacturing production credit of $45 per kilowatt-hour as the company’s biggest opportunity under the IRA (see Ford news, Ford Taps Michigan for New LFP Battery Plant; New Battery Chemistry Offers Customers Value, Durability, Fast Charging, Creates 2,500 More New American Jobs ).
Foreign manufacturers of wind power components are also increasing US investments to leverage IRA incentives. Siemens Gamesa, a Spanish-German company, announced a $500 million investment for a wind turbine nacelle manufacturing plant in New York (see Siemens Gamesa press release, Siemens Gamesa intends to establish an offshore wind turbine nacelle facility in New York).
Nikola Corporation outlined how the IRA provisions would benefit their vehicle and component production. The Advanced Energy Project Credit will assist in expanding their facilities for heavy-duty battery electric vehicles (EVs) and fuel cell electric vehicles (FCEVs). Nikola could also benefit from a $10 per kilowatt-hour credit if they start producing battery modules in-house (see PR Newswire, Nikola Highlights Benefits to Integrated Truck and Energy Business Model from The Inflation Reduction Act).

Section 3 – Tax credits under the IRA

With the IRA, tax credit investments and climate and energy policies were set to drive $380 billion into renewable energy and technology, creating new tax credit opportunities in areas like EV charging, bio-gas, green hydrogen, battery storage, and nuclear energy.

A key IRA change was making renewable energy tax credits refundable and transferable. Transferable credits allow companies to sell them for cash, while refundable credits provide cash payments if the tax owed is below zero.

The IRA introduced a two-tiered system for renewable energy tax credits: a base credit of 20 percent and a bonus credit of 80 percent, contingent on prevailing wage and apprenticeship requirements (see section 2 above). Additionally, there are three other credits for:

meeting domestic content requirements;
locating projects in defined energy communities; and
engaging in low-income solar activities.

By targeting rural areas for solar investments, the IRA aimed to boost local economies through tax equity. Community solar projects offer further social benefits by selling over 50 percent of their electricity to low-income families at reduced rates.

3.1 Investment tax credits (ITCs)

ITCs enable taxpayers to reduce their tax liability based on a percentage of eligible investment costs. The IRA extended the energy ITC (Internal Revenue Code (IRC) section 48) for facilities installing certain energy or electricity equipment that begin construction before 2025. Eligible technologies include hydropower, pumped storage with a capacity of 5 kilowatt-hours or more, and marine and hydrokinetic projects.

This technology-specific ITC concluded in 2024 for most technologies and transitioned to a new technology-neutral clean electricity ITC (IRC section 48E) starting in 2025. The clean electricity ITC is available to commercial taxpayers installing or expanding clean electricity or energy storage facilities. Taxpayers must choose between a production tax credit (PTC) (IRC section 45Y) and an ITC (IRC section 48E). To qualify, projects must generate electricity, be operational by 2025 or later, and have zero or net-negative lifecycle emissions.

The energy ITCs enacted by the IRA will, however, be phased out, pursuant to the OBBBA. Solar and wind projects will receive the credit only if construction on the project begins by July 4, 2026, or if the project is placed in service no later than December 31, 2027. Other clean energy technologies, such as energy storage batteries, will receive a 100% credit if construction begins by 2033, or a 75% for construction beginning in 2034, or 50% for construction beginning in 2035. No credit will be available for projects that start after 2035.

3.2 Production tax credits (PTCs)

PTCs allow taxpayers to reduce their tax liability based on the electricity they generate. The IRA extended the renewable electricity PTC (IRC section 45) for facilities that began construction before 2025. Hydropower was made eligible for the full PTC value, with the threshold for eligibility reduced from 150 kilowatt hours (kWh) to 25 kWh. Eligible technologies include hydropower and marine and hydrokinetic projects, but exclude pumped storage hydropower. This technology-specific PTC ended in 2024, transitioning to a new technology-neutral PTC (IRC section 45Y) in 2025. Hydropower and marine energy facilities that generate electricity, are operational in 2025 or later, and have zero or net-negative lifecycle emissions may qualify for the clean electricity PTC. The IRS will publish a final determination on eligible technologies.

3.3 Clean vehicles

President Trump made repealing this tax credit a priority and its repeal was included in the OBBBA. As a result, the credit is not available for vehicles purchased after September 30, 2025.

With regard to vehicles purchased before September 30, 2025, a taxpayer – either individual or business – could qualify for a credit up to $7,500 under IRC section 30D if they brought a new, qualified plug-in EV or FCEV. The IRA revised the rules for this credit for vehicles purchased from 2023 to 2032. To qualify, the taxpayer must buy the vehicle for their own use (not for resale) and primarily use it in the United States. The credit is nonrefundable.

The credit amount depends on when the vehicle is placed in service. For vehicles placed in service from January 1 to April 17, 2023, the credit includes a $2,500 base amount, plus $417 for a vehicle with at least 7 kilowatt-hours of battery capacity, and an additional $417 for each kilowatt-hour beyond 5 kilowatt-hours, up to a total of $7,500. Generally, the minimum credit will be $3,751 for a vehicle with the minimum battery capacity. For vehicles placed in service on or after April 18, 2023, the vehicles must meet additional critical mineral and battery component requirements for a credit of up to $3,750 each, or $7,500 if both requirements are met. Vehicles not meeting either requirement are ineligible for the credit.

To be eligible, a vehicle must have a battery capacity of at least 7 kilowatt-hours, a gross vehicle weight rating under 14,000 lbs, be produced by a qualified manufacturer, undergo final assembly in North America, and meet critical mineral and battery component requirements as of April 18, 2023.

3.4 Advanced manufacturing production credits

The IRA enacted new advanced manufacturing production credits for companies that manufacture and sell clean energy equipment in the United States. This initiative covered manufacturing of various wind energy components, including specific wind energy parts, distributed wind inverters, critical minerals, and offshore wind vessels.

The credit for wind turbine components will terminate as of December 31, 2027. The amount of the credit varies based on the type of component. It is calculated by multiplying the credit rate by the rated capacity of the turbine in watts. Specifically, the allowable credits are as follows:

blades receive a credit of 2 cents per watt of rated capacity;
nacelles are credited at 5 cents per watt;
towers earn a 3-cent credit per watt;
fixed-bottom offshore wind energy platforms receive a 2-cent credit per watt;
floating offshore wind energy platforms are credited at 4 cents per watt; and
distributed wind inverters qualify for a credit of 11 cents per watt.

For critical minerals, the credit is set at 10 percent of the production cost. Offshore wind vessels are eligible for a credit amounting to 10 percent of the vessel’s sale price.

3.5 Advanced manufacturing ITCs

The IRA reinstated a 30 percent advanced manufacturing ITC, allocating $10 billion in credits to be competitively awarded for investments in properties designed for the production or recycling of clean energy components. This includes facilities and major tooling, with a requirement that at least $4 billion of these credits be directed toward investments in energy communities. The full credit is contingent upon meeting specific apprenticeship and prevailing wage requirements.

It is important to note that components produced in facilities that have received the manufacturing ITC are not eligible for advanced manufacturing production tax credits.

3.6 Penalties

The IRA introduced penalties for emissions from certain facilities, marking the first time the US federal government attempted to impose direct costs on greenhouse gas emissions. The Act includes methane fees starting at $900 per metric ton, increasing to $1,500 per metric ton over two years. The OBBBA, however, delays the imposition of these penalties until 2034.

The IRA also offers incentives for carbon capture and removal. The section 45Q provision increases tax credits for carbon capture, utilization, and storage (CCUS).

3.7 Environmental justice

The legacy of environmental racism has long affected America’s lower-income, Black, Brown, and Indigenous communities, leaving them disproportionately impacted by polluted air and water and vulnerable to extreme weather events (see NDRC, What Is Environmental Racism?). In response, the Environmental and Climate Justice Program was created by the IRA to provide funding for financial and technical assistance to carry out environmental and climate justice activities. These activities would be designed to benefit disadvantaged communities. The initiative was expected to create hundreds of thousands of well-paying jobs nationwide, while also supporting workforce development.

Shortly after taking office, President Trump revoked all environmental justice orders (see EO: Ending Illegal Discrimination and Restoring Merit-Based Opportunity). In March 2025, the Trump administration decided to close the EPA’s regional environmental justice offices that were established to address pollution in disadvantaged communities around the country (NPR news: Trump slashes environmental programs in Chicago that protect poor communities). The OBBA continued on this path, by rescinding funding from environmental justice efforts, and generally dismantling environmental justice programs.

Section 4 – Emissions reductions

Before the IRA was passed, the US had already made progress in reducing greenhouse gas (GHG) and air pollutant emissions. Between 2005 and 2021, US CO2 emissions decreased by 9.1 percent, from 6.6 Gigatons (Gt) to 5.6 Gt (see National Library of Medicine, The Inflation Reduction Act – implications for climate change, air pollution, and health). Similarly, from 2000 to 2021, the average annual PM2.5 pollution level dropped by 37 percent, from 12.8 μg/m³ to 8.5 μg/m³.

The IRA aimed to accelerate this progress by mandating emission reductions in power generation, industry, and transportation – the three sectors responsible for most GHG emissions – and by requiring the oil and gas industry to cut methane emissions.

The OBBBA repealed these mandated reductions. The Act also incentivizes the use of fossil fuels for power generation.

4.1 Methane emission reduction program

The IRA provides for new authorities to tackle methane emissions from the oil and natural gas sector through the creation of the Methane Emissions Reduction Program (MERP). This program will help reduce emissions of methane and other greenhouse gas from the oil and natural gas sector. Various agencies of the federal government are partnering to provide up to $1.36 billion in financial and technical assistance through an interagency agreement to improve methane emissions monitoring, detection, measurement, and quantification and also reduce methane and other greenhouse gas emissions from the oil and natural gas sector. Penalties that the IRA would have imposed on methane gas emitters have been delayed until 2034.

4.2 Carbon management

The IRA enacted expanded incentives for the deployment of carbon management technologies, such as carbon capture, direct air capture, and the conversion of captured carbon emissions into useful products (IRC section 45Q). The OBBBA kept or increased many of those credit values. For example, the credit values for carbon reuse projects that convert carbon into other, useful products, such as fuel, industrial chemicals, or other products, was increased from $60 per metric ton of carbon emissions captured to $85 per metric ton captured from industry and power production.

4.3 Agriculture and forestry

The IRA included funding for agricultural conservation. It added over $18 billion in additional funding for existing farm bill conservation programs. These programs provided financial and technical assistance to private landowners to voluntarily implement conservation practices on agricultural land. The IRA also included funding for forest management, planning, and restoration activities for federal and non-federal forests, including finding to support grants and other financial assistance for non-federal forest management, such as urban and community forestry programs.

The OBBBA provides long-term funding for agriculture and forestry conservation programs, such as the Environmental Quality Incentives Program and the Conservation Stewardship Program. Funding for these programs is provided through 2031. Funds were made available by rescinding unobligated IRA funding that was specifically earmarked for climate-smart practices, and by rescinding unobligated IRA funds for forestry programs.

Section 5 – Steps to take to comply with the IRA

Complying with the IRA, and being able to take advantage of the programs offered, involves several steps.

5.1 Assess which programs the company can take advantage of

The first step in taking advantage of the IRA is to identify what tax credits, grants, and subsidies remain available. The IRA programs tend to be focused on environmental goals, and may have been discontinued, or will be discontinued in the near future. In addition, before proceeding, the company should engage in a cost-benefit analysis. Are the savings or benefits that a program offers worth the cost of compliance?

5.2 Monitor guidelines from Washington

The presidential administration that took office in 2025 has different policy priorities from its predecessor. Some programs were discontinued, or will be allowed to expire.

5.3 Update corporate policies, and monitor the changes made

The IRA was built around the national need the need for environmental protection. Compliance with the IRA called for companies to incorporate sustainability goals, emissions reduction targets, and renewable energy commitments in their corporate policies. While subsequent legislation does not necessarily prohibit companies from working towards those goals, efforts in that direction may not be as financially beneficial as they would have been under the IRA.

5.4 Monitor changes made due to those policies

As with any change in corporate practices, it is necessary to Implement a monitoring system to gauge the effectiveness of the program. Some programs will require technical and scientific monitoring; for example, emissions reductions will need to be monitored to ensure compliance. For businesses involved in manufacturing, the Environmental Defense Fund has published a useful roadmap to assist companies in getting started with compliance with the advanced manufacturing production credit and advanced energy project credit. See the IRA Activation Guide: Advanced Manufacturing.

Additional resources

IRS, Inflation Reduction Act of 2022
DoE, Inflation Reduction Act of 2022
CMS.GOV, Inflation Reduction Act and Medicare
GSA, Inflation Reduction Act
Center on Global Energy Policy, Assessing the Energy Impacts of the One Big Beautiful Bill Act

Filed under

Laws

Inflation Reduction Act 2022 (USA)