What You Need to Know About the Hydrogen Tax Credit
The hydrogen production tax credit, established under the Inflation Reduction Act (PL 117-169), represents a significant step toward reducing dependence on fossil fuels and supporting the shift towards sustainable energy solutions like clean hydrogen.
This policy is designed to accelerate the transition to a net-zero emissions future, by fostering the development of hydrogen infrastructure, encouraging hydrogen developers to utilize renewable energy sources, and implementing advanced clean energy technologies for green hydrogen production.
Understanding the hydrogen production tax credit
The hydrogen tax credit, detailed under the Internal Revenue Code section 45V, and Treasury released proposed regulations in December 2023 (REG-117631-23), offers financial incentives to energy companies engaging in hydrogen production. While it applies broadly to clean hydrogen, it specifically incentivizes the transition from gray (conventional) hydrogen (produced from natural gas without CCS) to blue or green hydrogen. This aligns with broader low-emissions goals, aiming to bolster energy security, enhance energy efficiency in the power sector, and support the burgeoning hydrogen demand in various industrial sectors.
By offering tax credits based on the carbon intensity and greenhouse gas emissions of the hydrogen produced, the legislation encourages the adoption of carbon capture and storage technologies, aiming to produce qualified clean hydrogen with minimal environmental impact. This not only supports the clean power transition but also ensures that hydrogen incentive strategies implemented align with minimizing emissions and bolstering the clean energy economy.
Moreover, the hydrogen production tax credit integrates with existing clean generation efforts, promoting cleaner hydrogen storage solutions, thereby enhancing the clean hydrogen infrastructure. It also fosters the energy transition by encouraging hydrogen developers to focus on reducing emissions intensity, leveraging critical technologies, and ensuring that the production tax credit aids in delivering hydrogen that meets the rigorous standards of clean energy production.
In sum, this tax credit scheme is pivotal for energy companies and hydrogen developers aiming to align with net-zero goals and clean energy principles, marking a crucial step in the United States' energy transition and green hydrogen goals (ie. clean production efforts).
Decoding the rules: Basics
The hydrogen production tax credit is considered a business tax credit under the general business tax credits defined by IRC section 38, however, IRC section 45V provides the statutory provisions for the tax credit. Per section 38 and section 45V, the tax credit is available for businesses for the 10-year period a qualified facility is placed into service. The credit is not available for individuals.
From there the IRC sets out a credit rate of $0.60 multiplied by an applicable percentage, which is inflation adjusted. There are 4 tranches of applicable percentages based on the amount of greenhouse gas emissions produced: 20%, 25%, 33.4%, and 100%. The less carbon dioxide equivalent (CO2e) emitted during hydrogen production, the higher the applicable percentage as follows:
To qualify for the 20% tranche, a taxpayer must produce hydrogen that has an emissions rate of no greater than 4 kilograms of CO2e per kilogram of hydrogen, and not less that 2.5 kilograms of CO2e per kilogram of hydrogen.
In order to qualify for the 25% tranche, a taxpayer must produce hydrogen that has an emissions rate of less than 2.5 kilograms of CO2e per kilogram of hydrogen, and not less than 1.5 kilograms of CO2e per kilogram of hydrogen.
In order to qualify for the 33.4% tranche, a taxpayer must produce hydrogen that has an emissions rate of less than 1.5 kilograms of CO2e per kilogram of hydrogen, and not less 0.45 kilograms of CO2e per kilogram of hydrogen.
In order to qualify for 100% tranche taxpayer, a taxpayer must produce hydrogen that has emissions of less than 0.45 kilograms of CO2e per kilogram of hydrogen.
Prevailing wage standard and apprenticeship requirements
To receive the full credit, hydrogen facilities must also promote good-paying jobs by following prevailing wage standards and apprenticeship requirements, which are issued by the Department of Labor.
Currently the wage standard for the clean hydrogen credit is the wage paid to at least 30% of workers doing a job in particular locality. The prevailing wage is an hourly compensation of a majority of workers, laborers, and mechanics within a particular area. There are job specific classifications in specific geographic areas to ensure that employers do not hire foreign workers at lower wages thus undercutting wages of U.S. workers.
Modification of existing facilities
Facilities that were in service prior to 1 January 2023 and have since been modified to produce qualified clean hydrogen are applicable to qualify for the credit. Such facilities will be deemed to have been originally placed in service as of the modification. Once modified, also called a retrofit, the amounts paid or incurred must be attributable to the taxpayer.
Use with other credits?
The hydrogen production credit is not allowed to be stacked with the carbon capture and sequestration tax credit under IRC section 45Q. However, the credit may be stacked with the renewable energy production tax credit under IRC section 45 and the zero-emission nuclear credit under IRC section 45U.
The stacking of tax credits allows businesses to utilize multiple credits to go toward a single project. For example, a clean hydrogen production credit take under IRC section 45V can also be taken with the renewable energy production tax credit under IRC section 45 - this allows the taxpayer's liability to be reduced or completely eliminated.
Refundable and transferability
The clean hydrogen production tax credit is refundable allowing taxpayers to claim the credit against a taxpayer's income tax liability. For example, if a taxpayer has a $2,000,000 tax liability and $2,100,000 in hydrogen credits the taxpayer can eliminate their tax bill and also have $100,000 sent back to them via a refund.
Taxpayers can transfer all or part of their credit amount to an unrelated third-party buyer in exchange for cash. The IRS has established a pre-filing registration process on its website that eligible taxpayers must complete prior to electing payment or transfer of their credit amount.
How to claim
Taxpayers must complete IRS Form 8835 in accordance with corresponding instructions to claim the credit.
IBFD's integration of hydrogen production tax credit
IBFD offers up-to-date federal corporate income tax information - including details on clean energy incentives like the hydrogen production tax credit - to assist energy companies in navigating the complex tax landscape associated with clean energy projects.
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