It’s imperative now more than ever that businesses understand how to efficiently manage their sustainability investments. The sustainability funding landscape has a plethora of new and enhanced tax credits, loans and grants to help businesses invest in ways that can help them effectively reach their decarbonization, environmental and social goals. These benefits are not limited to companies directly producing clean energy — this funding is intended to drive sustainability-related investment decisions for businesses of all kinds.
The Inflation Reduction Act is a recent and prime example of U.S. legislation with vast funding opportunities. The law introduced $370 billion in climate and energy funding through a combination of tax credits, grants, loans, and other incentives. Beyond the IRA, companies can also receive sustainability funding through a variety of avenues, including other federal, state and local government incentives, grants, loans, impact investors, green banks and more.
While companies can certainly apply for and receive these benefits piecemeal, a more structured approach may increase the amount of tax-related and other benefits a company can receive. There are many opportunities to pair these tax benefits with other non-tax programs.
We refer to this approach of combining multiple sources of sustainability incentives as “stackable” funding, which is a method tax departments can use to help align overall business decisions with the company’s sustainability goals. Some elements to consider include choices around site locations and labor qualifications, monetizing generated credits, and leveraging both grants and tax incentives simultaneously to increase financial support and return-on-investment for ESG-related efforts. These often-unexplored funding options are helpful to unlocking strategic funding and creating more funding accessibility for a wide array of stakeholders, particularly when paired with non-tax programs.
The new American-made green economy
For decades, much of the investment in sustainability efforts has been driven by funding for traditional or non-novel technologies. However, legislation enacted over recent years is driving a new wave of domestic investment within the industry, such as green energy, energy efficiency, advanced manufacturing, advanced fuels, semiconductor chips, batteries and more. The broad scope of available benefits is aimed at launching an economy-wide transformation to lay the groundwork for a new, American-made green economy.
New laws continue to provide ways for nontraditional investors to play a major role in ESG-related business investments. Historically, tax credit-driven investment was controlled by major financiers that put in place complex tax-equity structures, resulting in a smaller group of interested investors. Now, these new laws are providing mechanisms to monetize certain tax credits by transferring (i.e., selling) the credit to another entity or, in limited circumstances, electing a direct payment of the credit in lieu of reducing the credit-holder’s tax liability. Monetization of the credits can occur via a “tax credit marketplace” that can connect credit sellers with buyers.
Additionally, provisions in recent law provide additional or boosted funding for businesses that choose to employ labor that meets prevailing wage standards and qualified apprenticeship program rules. By complying with these additional labor requirements, companies can earn five times the baseline value of tax credits for IRA-qualified projects.
Even greater benefits are available for locating investments in certain designated areas known as “energy communities.” Qualifying for these enhanced tax credits will require ongoing monitoring and compliance to ensure all labor-related requirements are met during the build phase and after projects become operational.
Putting stackable funding into practice
With such a wide range of offerings, businesses would be wise to discuss the idea of stackable funding with their tax departments. To start, CFOs and tax teams should look at what benefits might be available for a company’s production or manufacturing, including those that can be combined with existing benefits. For example, research and development incentives or expensing for capital investments that are already on the books could be eligible for “stacking,” ultimately enhancing returns on sustainability-related investments. For certain operations or investments, one tax incentive could be more beneficial to the company than another incentive for which the same operations may qualify. Tax teams should view and evaluate these multiple funding sources through the lens of their companies’ larger operating and sustainability goals to determine which funding to pursue.
Secondly, tax teams should take steps to confirm that they are making smart “siting” decisions, especially in areas where states and localities might also be providing incentives to host facilities or have indicated a desire to drive community investment to achieve environmental and clean energy goals. Deploying a comprehensive approach to capital investment may help increase ROI on an annual basis by potentially reducing operational, tax and financial costs.
Lastly, in hiring decisions, a workforce that does not meet certain wage and apprenticeship requirements could result in the loss of significant funding when it comes time to calculate the tax bill. Companies should carefully analyze hiring decisions, cash flows and ROI to evaluate whether securing and monetizing tax credits in the short-term is a more economically resourceful option to achieve medium- and long-term sustainability goals.
Making good use of the ample funding opportunities available to help build sustainable energy infrastructure, supply chains and economies will continue to be a top priority for businesses. As this landscape grows increasingly complex, prioritizing the value tax can bring will be critical to companies seeking to avail themselves of available sustainable funding opportunities.
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