In the growing U.S. clean energy industry, tax credits such as the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have emerged as the driving forces for innovation, project development, and domestic manufacturing. With developers, manufacturers, and buyers of tax credits making smart investment choices, it is important to know how these two credits differ from each other and when to leverage them.
Read on for a comprehensive discussion on ITC vs PTC.
Understanding ITC
The ITC offers a one-time, upfront tax credit equal to a percentage of the total capital investment in the project. For clean energy projects, this translates into a dollar-for-dollar reduction in federal income taxes against the project’s eligible costs. The base credit is:
- For projects less than 1 MW: 30%
- For projects more than 1 MW: 6%
- Expandable up to (by using domestic content or constructing in low-income communities): 50%
Producers of clean energy components also stand to gain from the ITC under the Section 48C Advanced Energy Credit.
Understanding PTC
The PTC incentivizes consistent electricity generation from renewable sources with a per-kilowatt-hour (kWh) tax credit, available for 10 years from the start of a project’s service. PTC ultimately creates a long-term income source that can be turned into financial models.
ITC vs PTC
There are various parameters to consider before jumping to a conclusion regarding ITC vs PTC.
1. Calculation Method
ITC is a tax benefit upfront that can be applied to the cost of acquiring and installing qualified equipment. For instance, a project of less than 1 MW in size would qualify for a 30% credit. Bigger projects are also eligible for the full 30% rate if they satisfy certain labor standards. Even higher increases are available up to a limit of 50% of qualifying costs by including domestic content, setting up in energy communities, or investing in low-income communities.
On the contrary, the PTC offers a performance-based credit, paying back projects over time for their energy production. Base rates start at 0.6 cents per kWh (or 0.3 cents for some technologies) but rise up to 3 cents or 1.5 cents per kWh if labor standards are achieved. Bonus incentives are also applicable.
2. Eligible Projects
Developers may claim the ITC for solar energy systems, energy storage systems, microturbines, fuel cells, and other eligible technologies. Manufacturing eligibility is for investments in facilities that produce clean energy components, such as inverters, fuel cells, carbon capture equipment, and electric vehicle components.
PTC eligibility initially focused on wind power but has since expanded to a broad range of technologies, including biomass, geothermal, renewable natural gas, and hydropower. If manufacturers produce qualifying solar or wind components, critical minerals, or battery parts, they can be eligible for PTC.
3. Project Scale and Financial Implications
Project scale plays a crucial role in determining the financial implications of the ITC vs PTC. ITC’s instant cash flow can prove to be advantageous for large projects. On the other hand, PTC can be more beneficial for smaller projects over time.
4. Duration and Expiration of Credits
The ITC is claimed as a one-time benefit in the year a project goes into service. The credit is presently valid until 2032, with the percentage dropping in the subsequent years. Note that, beginning in January 2025, the 48E ITC replaced the old Section 48 credit.
The PTC is eligible for a 10-year timeframe. Section 45X-manufactured PTCs are also claimed annually, but only for sales of eligible products. Note that starting in 2025, the 45Y clean electricity PTC replaced the standard Section 45 credit for new projects.
Summing Up!
Tax credits offer great financial benefits and also contribute to the aim of sustainable energy. Multiple tax credits are available to benefit from. In relation to ITC vs PTC, it is crucial to remember that both offer significant advantages. It is just a matter of comparing offerings and eligibility and finding the most suitable one for the respective taxpayer.
