April 7, 2025
Maximizing IRA Tax Credits: Understanding ITCs and PTCs
The Inflation Reduction Act (IRA) introduced significant updates to clean energy tax credits, expanding on the Investment Tax Credit (ITC) and Production Tax Credit (PTC). Understanding these updates is crucial to maximize value from the tax credits.
ITC and PTC: What’s the Difference?
The IRA continues to support both ITC and PTC credits while also adding bonus credits, new monetization methods (like transferability and direct pay), and heightened reporting expectations.
Investment Tax Credit (ITC): Applied to total project costs and can be claimed upfront. It requires multi-year reporting to the IRS, during which projects can lose eligibility and face penalties.
Production Tax Credit (PTC): Based on the total production of a project within a tax year and are claimed over multiple years. Since production can be metered and verified by third parties, PTCs are considered less risky and typically have higher transfer values compared to ITCs.
Choosing Between ITC and PTC
Taxpayers / Project developers must choose one of these credits to pursue. Factors influencing this decision include:
For a detailed breakdown of each factor and guidance on choosing the right credit, check out the full IRA Field Guide (linked below).
How Do Market Conditions Impact ITC and PTC?
The PTC, in particular, can drive unique market dynamics. For example, it incentivizes production even when a project faces negative market prices, so long as the PTC incentives outweigh production costs. While this may create problematic pricing cycles, many investors are focused on maximizing net present value rather than market alignment.
Key Takeaways
Understanding the nuances of ITC and PTC is critical for making strategic project decisions. Taxpayers and developers should carefully model their projects to determine the most advantageous credit pathway.
Want to dive deeper into bonus credits, proper due diligence, transaction costs, and more? Download our comprehensive IRA Field Guide for free to explore more about tax credits, compliance requirements, and strategic insights for clean energy projects.
Inside, you’ll find:
