Qualified Biogas Property and the Investment Tax Credit

The Inflation Reduction Act of 2022 introduced tax incentives for clean energy, including for qualified biogas property. This property includes equipment used to convert organic waste, or biomass, into a methane-rich gas suitable for productive use. The availability of a federal investment tax credit for these assets has created new opportunities for farms, wastewater treatment facilities, and other operations that produce biogas.

Defining Qualified Biogas Property

Qualified biogas property is defined as a system that transforms biomass into a gas that contains at least 52% methane by volume. This definition also includes property that is part of a system designed to clean, condition, or upgrade the gas. Gas upgrading equipment, which further processes biogas into renewable natural gas (RNG) for injection into a commercial pipeline, is considered an integral part of the qualifying property. This distinction allows the upgrading equipment to be owned by a different entity than the production facility and still qualify for the credit.

The definition encompasses a range of functionally interdependent components. Qualifying property includes waste feedstock collection systems, landfill gas collection systems, anaerobic digesters, and mixing or pumping equipment. It also includes components for conditioning the gas, such as scrubbers that remove impurities, as well as compressors and pressurization equipment.

The Investment Tax Credit Calculation

The value of the Investment Tax Credit (ITC) is calculated as a percentage of the taxpayer’s cost basis in the eligible property. For projects that began construction before the end of 2024, the credit falls under Section 48 of the Internal Revenue Code. Projects starting in 2025 or later will be subject to the new technology-neutral Section 48E clean electricity credit, which has different requirements.

The ITC calculation begins with a base credit rate of 6% of the qualified investment. If a project meets specific prevailing wage and apprenticeship (PWA) requirements, the credit jumps to 30%. The prevailing wage component requires that all laborers and mechanics are paid wages at rates no less than the prevailing local rates for similar work, as determined by the Department of Labor. The apprenticeship requirement mandates that a certain percentage of total labor hours, 15% for projects starting in 2024 or later, are performed by qualified apprentices.

Beyond the 30% rate, developers can stack two additional 10% bonus credits, potentially bringing the total ITC to 50%. The first 10% bonus is for meeting domestic content requirements, which involves using a specified percentage of U.S.-produced steel, iron, and manufactured products. The second 10% bonus is available for projects located in designated “energy communities.” An energy community can be a brownfield site, an area with significant historical employment in fossil fuels and high unemployment, or a census tract where a coal mine or power plant has recently closed.

Claiming the Credit and Required Documentation

The total cost basis of the eligible property, which includes the purchase price and any other costs required to place the asset into service, must be documented. The placed-in-service date is also needed, as it determines the tax year for which the credit is claimed. To claim the 30% credit, taxpayers must maintain payroll records demonstrating that prevailing wage standards were met. Documentation must also show compliance with the apprenticeship labor hour and ratio requirements, including evidence of any “good faith effort” exceptions.

For bonus credits, taxpayers need to secure certifications for domestic content and provide precise location details, such as census tract numbers, to validate the project’s placement in an energy community. The claim for the ITC is made by filing IRS Form 3468, Investment Credit, with the taxpayer’s annual federal income tax return. The calculated credit from Form 3468 then flows to the general business credit form and reduces the taxpayer’s total tax liability.

Credit Monetization and Recapture Rules

The Inflation Reduction Act provides new mechanisms for monetizing the credit’s value, which is particularly beneficial for entities with little or no tax liability. The two primary options are “Direct Pay” and “Transferability.” Direct pay allows certain tax-exempt entities like state and local governments, tribal governments, and rural electric cooperatives to receive the credit’s value as a direct cash payment from the IRS. For-profit entities can use transferability, which permits an eligible taxpayer to sell all or a portion of their earned tax credits to an unrelated third-party buyer for cash. This creates a market for tax credits, allowing developers to receive immediate capital while buyers use the credits to lower their own tax liability.

Claiming the ITC comes with a long-term compliance obligation known as the recapture rules. The credit is subject to a five-year vesting period, meaning the property must remain in qualifying use for five full years after it is placed in service. If the property is sold, disposed of, or ceases to be qualifying property during this five-year window, a portion of the credit must be paid back to the IRS. The recapture is 100% of the credit if the event occurs in the first full year, 80% in the second, 60% in the third, 40% in the fourth, and 20% in the fifth. Taxpayers report and pay any recaptured amount using Form 4255, Recapture of Investment Credit.