Inflation Reduction Act Guidance: IRS and Treasury Release Final Regulations on the New Tech-Neutral Clean Energy Tax Credits
On January 15, 2025, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) published final regulations regarding the new “clean electricity production credit” under Internal Revenue Code section 45Y (the “Tech-Neutral PTC”) and the new “clean electricity investment credit” under section 48E (the “Tech-Neutral ITC,” and together, the “Tech-Neutral Tax Credits”). The Tech-Neutral Tax Credits replace the production tax credit under section 45 (the “Legacy PTC”) and the investment tax credit under section 48 (the “Legacy ITC,” and together, the “Legacy Tax Credits”). The final regulations adopt many principles for the Tech-Neutral Tax Credits that are similar to those applicable to the Legacy Tax Credits and provide guidance regarding the novel technology-neutral aspects of the Tech-Neutral Tax Credits.
The IRS and Treasury published proposed regulations on the Tech-Neutral Tax Credits on May 29, 2024. See here for our prior update discussing those proposed regulations. The final regulations largely adopt the proposed regulations and key differences are described below.
The final regulations generally are applicable to qualified facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025. For the rules with respect to aggregation of property for purposes of the one-megawatt exception (described below), however, the final regulations are applicable to qualified facilities placed in service during a taxable year ending after January 15, 2025, and the construction of which begins after March 17, 2025.
Notable Changes and Clarifications
- Notable changes and clarifications in the final regulations include the following:
- Clarification of certain aspects of conducting the lifecycle analysis to determine the greenhouse gas (“GHG”) emissions for an electricity-generating technology;
- Addition of a limited facility-aggregation concept for purposes of qualifying for the one- megawatt exception to the prevailing wage and apprenticeship rules;
- Confirmation there is no de minimis exception to the requirement that a qualified facility for purposes of the Tech-Neutral PTC have a GHG emissions rate of not greater than zero;
- Confirmation that, for purposes of the Tech-Neutral ITC, there is no dual use concept but addition of an incremental cost rule; and
- Removal of a requirement that appeared in the proposed regulations that hydrogen storage assets would only be eligible for the Tech-Neutral ITC if the hydrogen stored is put to use in the production of energy rather than production of other products, such as fertilizer, and confirmation that hydrogen storage assets include above-ground storage equipment and liquefaction equipment.
Statutory Background – Section 45Y and 48E
The Inflation Reduction Act of 2022 (the “IRA”) extended, increased, and expanded the Legacy Tax Credits, but only for facilities that begin construction before 2025. The IRA replaced the Legacy Tax Credits with the Tech-Neutral Tax Credits for facilities placed in service after 2024.
The principal difference between the Legacy Tax Credits and the Tech-Neutral Tax Credits is in the method they use to determine whether a particular technology qualifies for the credit. The Legacy Tax Credits contain lists of technologies that qualify, e.g., wind, solar, and storage. The Tech-Neutral ITC retains storage and certain interconnection property as named qualifying technologies, but the Tech-Neutral Tax Credits otherwise simply require that a facility generate electricity and that its GHG emissions into the atmosphere in the production of that electricity be no greater than zero (the “Zero GHG Requirement”). The IRS is required by statute to publish an annual table of technologies that it has determined satisfy the Zero GHG Requirement and only those technologies are generally eligible for the Tech-Neutral Tax Credits.
The regulations include a list of technologies that are deemed included in the annual table, including wind, solar, geothermal, marine and hydrokinetic, nuclear (fission and fusion) and waste energy recovery property technologies. Taxpayers with technologies that are not included in the annual table can petition for a provisional emissions rate (“PER”) from the IRS (further details below).
To accompany the final regulations, the IRS released the first annual table of eligible technologies in Revenue Procedure 2025-14. The table lists eight technologies that currently meet the Zero GHG Requirement and qualify for the Tech Neutral Tax Credits. The technologies listed include only those technologies that are listed in the final regulations. Taxpayers may rely on the most recently published annual table in effect on the date construction began.
The Tech-Neutral Tax Credits will begin to phase out after 2032 or, if later, the year in which Treasury determines that GHG emissions from production of electricity in the United States are no more than 25% of 2022 levels of such emissions.
Clarifications Regarding Lifecycle Analysis
The final regulations clarify a few points regarding the methodology for conducting a GHG emissions lifecycle analysis (“LCA”), which is required to demonstrate that a combustion and gasification facility satisfies the Zero GHG Requirement. For example, the preamble clarifies that no offsets or offsetting activities can be included in the LCA since they are not related to the lifecycle of the fuel used to produce electricity.
The final regulations include detail about how a taxpayer can petition for a PER from the Department of Energy (“DOE”) for technologies that are not included in the annual table provided by the IRS. The taxpayer petitions the IRS by claiming the Tech-Neutral Tax Credit on its tax return and attaching the petition. The petition must include an emissions value that is supported by either a letter from the DOE or an LCA model approved by the IRS. Taxpayers must obtain a PER for each separate facility.
Limited Aggregation for Purposes of One Megawatt Exception to PWA Rules
The final regulations clarify that qualified facilities that produce electricity and energy storage assets are separate for purposes of the Tech-Neutral ITC and taxpayers are required to own, qualify, register and claim each asset separately with respect to the tax credits.
For purposes of the Legacy ITC, a single energy property will be aggregated with any other energy properties that are part of a single “energy project” for purposes of testing whether the capacity is under one megawatt to qualify for the five-times credit multiplier, i.e., the multiplier that is otherwise available only for properties that satisfy prevailing wage and apprenticeship requirements or that began construction before January 29, 2023 (the “One Megawatt Exception”).
While the tax code has no such “energy project” concept for the Tech-Neutral Tax Credits, the final regulations adopt a limited aggregation rule for this purpose. The final regulations for the Tech-Neutral PTC provide that, if a qualified facility has “integrated operations” with one or more qualified facilities, the aggregate nameplate capacity of the qualified facilities is used for determining the applicability of the One Megawatt Exception. A qualified facility is treated as having integrated operations, solely for the purpose of the One Megawatt Exception, if the facilities are: (i) owned by the same or related taxpayers; (ii) placed in service in the same taxable year; and (iii) transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user. The final regulations for the Tech-Neutral ITC provide a similar rule for the aggregation of qualified facilities and the separate aggregation of energy storage assets. For purposes of the One Megawatt Exception for the Tech-Neutral ITC, qualified facilities are not aggregated with energy storage assets. Taxpayers seeking to take advantage of the One Megawatt Exception must take these aggregation rules into account, if applicable.
No De Minimis Exception for GHG Emissions for Tech-Neutral PTC
A comment to the proposed regulations advocated that a facility qualifying for a Tech-Neutral PTC should not cease to be a qualified facility if, for a limited time or in a limited amount, it has a GHG emissions rate above zero (for example, as a result of a temporary change in fuel or feedstock). The preamble to the final regulations clarifies that there is no de minimis exception to the requirement that the qualified facility have a GHG emissions rate of not greater than zero. A facility that has a GHG emissions rate from the production of electricity that is greater than zero, even for a limited time or limited amount, cannot qualify for the Tech-Neutral PTC in the taxable year of the greater-than-zero GHG emissions. However, that does not preclude the facility from qualifying in subsequent years during the 10-year credit period after such facility is placed in service. These rules for the Tech-Neutral PTC are in contrast to those for the Tech-Neutral ITC, which by statute has an exception to recapture for qualified facilities with a GHG emissions rate of not more than 10 grams of CO2e per kWh.
No Dual Use Rule
The final regulations do not include a dual use rule for the Tech-Neutral ITC. Historically, the dual use rule in the section 48 regulations most commonly applied to energy storage property that stored energy from a qualified source and a non-qualified source (e.g., a solar battery system that charges using grid and solar energy). The IRS concluded that, because the IRA amendments treat energy storage property as a separate type of energy property, the dual use rule is no longer necessary.
Incremental Cost Rule
In the case of equipment that serves a qualifying and a non-qualifying purpose, the final regulations adopt an incremental cost rule that applied for the Legacy ITC. Incremental cost is the excess of the total cost of equipment over the amount that would have been expended for the equipment if the equipment was not used for a qualifying purpose. The regulations provide an example of a reflective roof that improves the electricity-generating capacity of the rooftop solar panels. Only the cost of the reflective roof in excess of the cost of a traditional roof is treated as eligible basis for the Tech-Neutral ITC.
Sales of Electricity to Related Persons
The Legacy PTC required a producer of electricity to sell electricity only to unrelated persons. The preamble to the final regulations clarifies that the rule in Notice 2008-60, which provided an exception that allows the producer of electricity to sell electricity to a related person for resale by the related person to an unrelated person and still qualify for the Legacy PTC, does not apply to the Tech-Neutral PTC. Rather, the Tech-Neutral PTC allows sales to related persons as long as the qualified facility has a metering device owned and operated by an unrelated person.
Qualified Interconnection Costs
Qualified facilities with a maximum net output of not greater than 5 megawatts (the “Five-Megawatt Exclusion”) may include qualified interconnection costs in the basis of the associated qualified facility for purposes of the Tech-Neutral ITC. Furthermore, qualified interconnection property is not considered part of a qualified facility and does not need to be considered when evaluating whether the facility satisfies the prevailing wage and apprenticeship requirements or is eligible for the domestic content and energy community bonus credits. The preamble confirms that the determination of whether qualified interconnection costs have been paid or incurred by the taxpayer and whether such amounts are reduced by, for example, capital reimbursements from a utility, should be based on generally applicable federal tax principles. The preamble also confirms that, for standalone energy storage, interconnection property is not includible in the basis for determining the amount of the Tech-Neutral ITC.
Facility Expansions and the 80/20 Rule
The Tech-Neutral Tax Credits include an incremental production rule, allowing certain additions to existing facilities to be treated as eligible property. The final regulations clarify that the 80/20 rule (which allows certain retrofitted facilities to be treated as newly placed in service) and these incremental production rules are distinct and separate rules. However, if a facility is retrofitted to expand capacity in a manner that satisfies both the 80/20 rule and the incremental production rule, the entire facility (and not just the components attributable to incremental production) will be treated as having been newly placed into service. The final regulations also clarify that the 80/20 rule is applied at the unit of qualified facility level and not at a project or system level or to any property treated as an integral part of the qualified facility.
For purposes of the incremental production rule (which allows certain capacity additions to be treated as eligible property), the final regulations reflect that the addition of capacity, in the case of a restarted facility, is the total capacity after it is restarted from a base of zero under certain conditions. Due to commenter concerns about abuse by ceasing operation and restarting facilities to gain the zero base, several anti-abuse rules were added with the intention of preventing such abuse, including a rule that the shutdown period must be at least one year and that the facility must be eligible for restart based on an operating license from the Federal Energy Regulatory Commission or the Nuclear Regulatory Commission.
Hydrogen Storage – No End Use Requirement
Section 48E is clear that hydrogen storage property is eligible for the Tech-Neutral ITC since hydrogen is an energy carrier. The proposed regulations included a requirement that hydrogen storage property, in order to qualify as energy storage, must store hydrogen solely for use as energy (and not for other potential uses such as production of fertilizer). The final regulations did not adopt this requirement due to the administrative burdens tracking the end use of hydrogen would cause. The final regulations also clarified that hydrogen storage property includes above-ground storage, hydrogen liquefaction equipment and does not include equipment used to store hydrogen carriers (such as ammonia and methanol).
Clarification of Thermal Energy Storage Property Definition
In response to numerous comments seeking clarification of the definition of thermal energy storage property (“TESP”), the final regulations retain the proposed definition but expand upon the related lists of property that are and are not TESP. For example, TESP includes a system that adds heat to bricks heated to high temperatures and later uses the stored energy to heat a building through the HVAC system. TESP does not include, for example, property that transforms other forms of energy to heat in the first instance.
Fuel Cells
The final regulations declined to categorize fuel cells as non-combustion and gasification equipment that satisfies the Zero GHG Requirement, creating a possible barrier to the Tech-Neutral ITC for fuel cell property, even though fuel cells were qualified property under the Legacy ITC. However, in response to comments that hydrogen fuel cell facilities do not combust the hydrogen, the final regulations narrow the definition of a combustion and gasification facility to include only those facilities that rely on combustion and gasification to produce electricity or to produce an input energy source. Under this narrower definition, a hydrogen fuel cell facility using hydrogen produced using electrolysis (versus through, for example, steam methane reforming) would not be considered a combustion and gasification facility.
What’s Next?
The Congressional Review Act requires federal agencies to submit their rules to Congress for approval before those rules can take effect. By joint resolution, Congress may disapprove such rules during a limited time period. If the President agrees, or if Congress overrides a presidential veto, the rules do not take effect. Because the final regulations were published on January 15, 2025, the final regulations will be subject to these review procedures. When President Trump first took office in 2017, Congress used these procedures to overturn several rules promulgated late during the Obama Administration.
We will continue to monitor the Inflation Reduction Act guidance initiatives from the IRS and Treasury and will provide further updates as guidance is released. In the meantime, Baker Botts would be pleased to assist you in your clean energy tax incentive matters.
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