On April 4, 2023, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) published Notice 2023-29, Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022 (the “Notice”). The Notice provides guidance on the requirements that taxpayers must satisfy in order to qualify for the energy community bonus credit for certain clean energy tax credits as established by the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). The Notice also announces that the IRS and Treasury intend to issue proposed regulations on the energy community bonus credit, expected to be effective for tax years ending after April 4, 2023. In the meantime, taxpayers are entitled to rely upon the Notice.
In connection with the Notice, the Interagency Working Group on Coal & Power Plant Communities & Economic Revitalization has released a mapping tool, with currently available data regarding the Fossil Fuel Employment requirement and the Coal Closure Category (each defined below), and frequently asked questions, which includes content similar to that in the Notice.
The IRS and Treasury have previously issued other guidance under the Inflation Reduction Act, including with respect to prevailing wage and apprenticeship requirements (discussed by us here) and the low-income community bonus credit (discussed by us here). The IRS and Treasury have not yet issued guidance on the domestic content bonus credit, although we expect that such guidance is forthcoming.
Energy Community Bonus Credit: Three Categories
For the production tax credit (“PTC”) under I.R.C. § 45 and the investment tax credit (“ITC”) under I.R.C. § 48 (and the clean energy tax credits under I.R.C. §§ 45Y and 48E beginning in 2025), the Inflation Reduction Act provides for an enhancement to the credit amount (up to an additional 10% credit for the ITC or a 10% increase in the credit for the PTC) for qualified facilities, energy projects, or energy storage technology (referred to in the Notice and herein as “EC Projects”) that satisfy certain requirements regarding “energy communities.”
For this purpose, an “energy community” is a location that falls into one of three categories (as named in the Notice and used herein):
(i) “Brownfield Category,” consisting of any “brownfield site,” as defined in certain subparagraphs of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”),
(ii) “Statistical Area Category,” consisting of a metropolitan statistical area (“MSA”) or a non-metropolitan statistical area (“non-MSA”) that (A) has (or at any time after 1999 had) 0.17% or greater direct employment, or 25% or greater local tax revenues, related to the extraction, processing, transport, or storage of coal, oil or natural gas (respectively, the “Fossil Fuel Employment” requirement and “Fossil Fuel Tax Revenue” requirement) and (B) has an unemployment rate at or above the national average unemployment rate for the previous year (the “Unemployment Rate” requirement), or
(iii) “Coal Closure Category,” consisting of a census tract (or a directly adjoining census tract) where a coal mine closed after 1999 or a coal-fired electric generating unit was retired after 2009.
The Notice provides guidance on each of these categories, as summarized below.
The Notice provides a safe harbor for certain locations that have been identified by a governmental authority as satisfying the statutory requirements for a “brownfield site” under CERCLA. This safe harbor includes, for example, potential sites listed under the category of Brownfield Properties on the EPA’s Cleanups in My Community webpage.
Statistical Area Category
The Notice describes resources that may be relied upon in establishing satisfaction of the various components of the Statistical Area Category definition. In particular:
1. Appendix B of the Notice lists those MSAs or non-MSAs that satisfy the Fossil Fuel Employment requirement (but not necessarily the Unemployment Rate requirement) of the Statistical Area Category.This information is based on certain specified North American Industry Classification System (NAICS) industry codes and data published by the Census Bureau. For a complete list of all MSAs and non-MSAs (regardless of qualification under the Statistical Area Category), see Appendix A of the Notice.
2. The Fossil Fuel Tax Revenue requirement is under review by Treasury and the IRS because of the challenges inherent in determining the level of Fossil Fuel Tax Revenue for a given MSA or non-MSA.The Notice requests comments for identifying MSAs or non-MSAs based on Fossil Fuel Tax Revenue.
3. The IRS and Treasury intend to publish a list (likely this May 2023) identifying the MSAs and non-MSAs that qualify in the Statistical Area Category based on satisfaction of the Fossil Fuel Employment requirement and the Unemployment Rate requirement.The initial list will apply to the period beginning January 1, 2023 and will remain in effect until the next annual list is published (likely in May 2024).Each subsequent annual release will apply for the 12-month period starting in May through April of the following year.Such lists will be based on employment data published by the Bureau of Labor Statistics.While such lists will effectively supersede Appendix B, we think Appendix B will remain useful as a planning tool because it provides a stable list of potentially qualifying locations, even though inclusion on Appendix B is not alone sufficient to qualify under the Statistical Area Category.
Coal Closure Category
Appendix C of the Notice lists the census tracts (including directly adjoining census tracts) in the Coal Closure Category. This information is based on data published by the U.S. Department of Labor’s Mine Safety and Health Administration (MSHA) in the Mine Data Retrieval System (MDRS) and by the U.S. Energy Information Administration (EIA) of the U.S. Department of Energy. Census tracts are determined based on the 2020 Decennial Census.
For purposes of the Coal Closure Category:
- A closed coal mine means a coal mine classified as a surface or underground mine that has ever had for any period of time, since December 31, 1999, a mine status of abandoned or abandoned and sealed in the MDRS.
- A retired coal-fired electric generating unit means an electric generating unit classified as retired at any time since December 31, 2009, by the EIA in the Preliminary Monthly Electric Generator Inventory (EIA Form 860M) or the Electric Generator Inventory (EIA Form 860).
Timing for Determination of Energy Community Status
The Notice provides that, generally, the determination of energy community status is to be made annually during the 10-year credit period for the PTC and § 45Y credit, and on the placed-in-service date for the ITC and § 48E credit. However, the Notice provides a welcome safe harbor for new construction: if a taxpayer begins construction of an EC Project in a location that is an energy community as of the beginning of construction (“BOC”) date, then with respect to that EC Project, the location will continue to be considered an energy community for the duration of the 10-year credit period (for §§ 45 and 45Y) or on the placed-in service date (for §§ 48 and 48E). Long-standing begun construction guidance (discussed by us here) is applicable for determining the BOC date.
Tests for Determining Where EC Project is Located
Assuming a location meets the definition of energy community, the taxpayer must determine whether its EC Project is located in that energy community, particularly where a portion of the EC Project spans beyond the boundaries of the energy community. The Notice provides two alternate tests for determining where an EC Project is located. An EC Project that has a nameplate capacity will be considered located in an energy community if 50% or more of the EC Project’s nameplate capacity is in an area that qualifies as an energy community. An EC Project without a nameplate capacity will be considered as located in an energy community if 50% or more of its square footage is located in an energy community. For offshore EC Projects, the nameplate capacity of an offshore EC Project may be attributed to the land-based power conditioning equipment that conditions energy generated by the EC Project for transmission, distribution, or use and that is closest to the point of interconnection.
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 analysis of the Inflation Reduction Act and other clean energy tax incentive matters.
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