Biogas IRA Tax Credit Changes for Municipal Utilities in 2025

Authored by Baker Tilly’s Doug Baldessari

The Inflation Reduction Act (IRA) has opened significant opportunities for municipal utilities to capitalize on biogas projects through substantial Investment Tax Credits (ITCs). These tax credits, under the Section 48 tax regime, have provided financial incentives for biogas energy properties, including digesters and biogas cleaning equipment. With the transition to the new Section 48E tax regime for projects that begin construction on or after January 1, 2025, the focus has shifted to electricity production and net-zero requirements. This change has important implications for municipal utilities, but the continued availability of direct pay provisions and the importance of timely project initiation remain crucial for maximizing these benefits.

Municipal utilities have had the ability to get very large tax credit incentives for eligible biogas projects through the IRA in the form of ITCs which can range from a few hundred thousand dollars to tens of millions of dollars. The base ITC percentage for eligible biogas energy property is 6% with the total ITC percentage normally ends up ranging from 30% - 50% of eligible biogas energy property costs when the prevailing wage and apprenticeship, domestic content and energy community requirements are met.

ITC Eligible projects that began construction by Dec. 31, 2024

These ITCs have been under the Section 48 tax regime which is energy property based for projects which began construction (meeting IRS “begun construction” rules) by Dec. 31, 2024. Under Section 48 these biogas-eligible assets for the ITC include all assets integral to the production of biogas, including digesters, biogas cleaning equipment and other improvements. Qualifying biogas assets under Section 48 which could be used in the treatment process, produce energy, and be piped and sold to a nearby gas utility resulting in significant additional revenues for municipal utilities for the foreseeable future. Baker Tilly has been assisting with many municipal utilities to maximize ITCs for these and other qualifying ITC projects.

ITC Eligible projects which begin construction on and after Jan. 1, 2025

Projects which begin construction on and after Jan. 1, 2025, will no longer be energy property based; instead, they will need to produce electricity and meet net-zero requirements to qualify for ITCs. Therefore, projects that generate biogas and are piped and sold to nearby utilities will no longer be eligible. The Section 48 final regulations (released on Dec. 4, 2024) made it clear that biogas assets such as digesters and gas cleaning equipment will no longer be eligible under Section 48E; this will significantly reduce the ITC dollar value for many municipal utility projects. Nevertheless, meeting the IRS 80/20 rule for replacement or improvements to qualifying biogas projects has likely gotten easier to meet under the Section 48 final regulations.

What’s ahead for biogas ITCs for municipal utilities?

Under the new Section 48E tax regime, significant ITCs are still available for biogas projects producing electricity and meeting the IRA requirements which will now include net-zero requirements by having prepared a zero-greenhouse gas emissions report. The direct pay provision continues to be available for IRA ITCs which will feel much like a reimbursable grant for municipal utilities.

Don’t miss out on your opportunity to obtain these direct pay incentives for your municipal utility. Remember ITCs are entitlements when you meet the requirements of the IRA and are not subject to a competitive process. Timing can be a concern with possible changes to the IRA in the next couple of years, so it’s a good idea to move projects forward as quickly as possible.

If you have any questions or believe you have a qualifying biogas project, Baker Tilly is here to help you navigate the process and maximize your credits.

For more information, connect with a Baker Tilly specialist.