On May 31, 2023, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) released proposed rules relating to the Low-Income Communities Bonus Credit Program under Section 48(e) (Reg 110412-23) and additional guidance relating to the advanced energy project tax credit available under Section 48C (Notice 2023-44). The Treasury and IRS have requested comments to the Section 48(e) proposed rules (the "Proposed Section 48(e) Rules"), which must be received by June 30, 2023. Both these releases follow up on guidance on these rules issued earlier this year that we discussed here.
ITC for Solar and Wind Projects in Low-Income Communities
Section 48(e) provides for an additional 10% to 20% investment tax credit (“ITC”) for certain projects that are awarded an allocation of environmental justice solar and wind capacity limitation (the “Capacity Limitation”). The additional ITC amount is 10% for facilities located in either Category 1 or 2 (described below) and 20% for facilities located in either Category 3 or 4 (also described below). The aggregate annual Capacity Limitation for such projects is 1.8 gigawatts, with any excess allocation remaining in 2023 being carried forward to 2024.1
Previously, Notice 2023-17, issued February 13, 2023, had allocated the annual Capacity Limitation among four categories (“Categories 1-4”) based on the facility’s location: (1) in a Low-Income Community (700 MW); (2) on Indian Land (200 MW); (3) as part of a Qualified Low-Income Residential Building Project (200 MW); or (4) in a Qualified Low-Income Economic Benefit Project (700 MW).
Pursuant to the Proposed Section 48(e) Rules, the 700 MW Capacity Limitation allocated to Category 1 (Low-Income Community) is proposed to be suballocated between eligible residential “behind the meter” facilities, such as rooftop solar, (540 MW) and “front of the meter” facilities (140 MW). The 200 MW Capacity Limitation allocated to Category 3 (Qualified Low-Income Residential Building Project) would be suballocated based on the type of financial benefit provided.
Most notably, the Proposed Section 48(e) Rules modify the selection criteria proposed in Notice 2023-17 and set an initial application window in which all applications received by a certain date would be evaluated together, followed by a rolling application process only to the extent any Capacity Limitation remains. Facilities that meet one or both of the ownership criterion and geographic criterion (together, the “Additional Selection Criteria”) described below would be granted priority to receive an allocation of the Capacity Limitation. For the allocation grants within the initial application window, at least 50% of each category’s allocation would be reserved for facilities satisfying at least one of the Additional Selection Criteria.
The IRS will prioritize allocation awards to facilities that meet both Additional Selection Criteria, then to facilities meeting only one of the Additional Selection Criteria, and, finally, to facilities that meet neither Additional Selection Criteria. Allocation decisions may not be challenged.
One of the Additional Selection Criteria is the ownership criterion. To satisfy this criterion, the solar or wind facility must be owned by one of the following: (i) Tribal Enterprise (majority owned or controlled by an Indian Tribal government), (ii) Alaska Native Corporation, (iii) renewable energy cooperative, (iv) qualified renewable energy company (that is, a small entity that serves low-income communities and provides pathways for the adoption of clean energy by low-income households), or (v) qualified tax-exempt entity.
The other criterion is the geographic location of the facility. A facility satisfies the geographic criterion if it is placed in service in either a Persistent Poverty County or a census tract designated in the Climate and Economic Justice Screening Tool as disadvantaged. A facility placed in service in one of these geographic locations at the time of the application would be considered to continue to meet the geographic criterion for the duration of the tax credit recapture period (generally, 5 years from when placed in service), unless the facility location is moved.
The IRS and Treasury expect the program to be oversubscribed in that there will be more applicants than Capacity Limitation available. Accordingly, the IRS and Treasury may reallocate Capacity Limitation across the four categories.
Any facilities placed in service prior to being awarded an allocation of the Capacity Limitation would not be eligible for the bonus credit.
Additionally, the Proposed Section 48(e) Rules clarified several definitional terms and discuss when multiple projects should be aggregated as a single project for purposes of Section 48(e) to avoid abuse of the 5 megawatt limitation, when energy storage technology is deemed to be installed in connection with a solar or small wind facility, how to assess whether financial benefits are provided in connection with Category 3 and Category 4 credit allocations, and the process to determine when a property is placed in a certain location (i.e., one of the four categories). The proposed rules also provide for recapture of the additional credit to the extent certain criteria for qualification for the additional credit do not continue to be satisfied during the five years after the facility is placed in service.
All applicants that are requesting an allocation of the Capacity Limitation must provide certain documentation and attest to certain facts as more fully described in the Proposed Section 48(e) Rules. The documentation and attestation requirements are to occur at the time of the application submission and upon confirming that the qualified facility is placed in service. The IRS and the Treasury intend to release final rules related to the 2023 program prior to applications opening later this year.
Section 48C Advanced Energy Project Credit Applications
Section 48C, as resurrected under the Inflation Reduction Act of 2022, was appropriated $10 billion in tax credits to be allocated to facilities that are qualified advanced energy projects (“Advanced Energy Projects”). The Section 48C tax credit is equal to 30% (assuming prevailing wage and apprenticeship requirements are met) of the taxpayer’s qualified investment in an Advanced Energy Project.
The allocation of the Section 48C Credits will occur in multiple tranches. The first round will allocate $4.0 billion in 48C Credits, with approximately $1.6 billion of that amount earmarked for Advanced Energy Projects located in census tracks with a recent coal facility closure (“coal community”). The first allocation round opened on May 31, 2023. A second allocation round would begin in 2024.
Notice 2023-44 amplifies and, in some respects, modifies Notice 2023-18 issued earlier this year. Notice 2023-44 (i) clarifies certain definitions and examples of the types of facilities that may qualify as an Advanced Energy Project (see Appendix A to Notice 2023-44), (ii) provides the submission requirements and technical review criteria that are to be used by the IRS and the Department of Energy (“DOE”) for concept papers and applications, including details regarding the length, font size and typeface to be used (see Appendix B to Notice 2023-44), and (iii) provides the census tracts that qualify as a coal community (see Appendix C to Notice 2023-44).
Further, Notice 2023-44 provides a taxpayer-favorable rule and example as to the interaction of tax credits available under Sections 48C and 45X for a single manufacturing site. If the manufacturing site has two separate production units that each produce a different, but interconnected, eligible component, then receipt of a tax credit under Section 48C or 45X by one of the production units would not disqualify the other production unit from receiving a tax credit under one of these sections.
Generally, the first-round allocation process will follow these steps:
- To be considered for the first allocation round, a taxpayer must submit a concept paper to the IRS no later than 12:00pm ET on July 31, 2023.
- Following a timely submission, the DOE will review the concept paper and issue a letter of encouragement or discouragement.
- Upon receipt of a letter of encouragement or discouragement, the taxpayer may then submit a Section 48C Credit application. Only taxpayers that submit a timely concept paper may submit an application for allocation of Section 48C Credits. A taxpayer may submit a full application regardless of whether it receives a letter of discouragement or encouragement.
- A taxpayer that intends to submit a Section 48C Credit application must do so no earlier than 7 days after the date of the encouragement or discouragement letter and the application must be submitted no later than 45 days thereafter.
- The DOE will recommend and rank the submitted Section 48C Credit applications for the IRS, which will then accept or reject the applications based on DOE’s ranking. All first-round allocation decisions will be made by March 31, 2024.
The Section 48C Credit application must propose a qualifying energy project as described in Appendix A and strictly adhere to the instructions provided in Appendix B. If the application requirements are not met, then the DOE may reject the application or request the taxpayer resubmit the application with the missing information. The IRS will only consider Section 48C Credit applications that the DOE recommends.
The DOE will recommend and rank applications based on four technical review criteria: (1) commercial viability, (2) greenhouse gas emissions impacts, (3) strengthening U.S. supply chains and domestic manufacturing for a net-zero economy, and (4) workforce and community engagement.
Any property placed in service before an Advanced Energy Project is allocated a Section 48C Credit would no longer qualify as eligible property and will be excluded in the computation of a taxpayer’s qualified investment for determining its Section 48C Credit allocation.
After receiving an allocation letter approving Section 48C Credits for an Advanced Energy Project, a taxpayer must make certification requirements to the DOE based on certain milestones achieved (e.g., when facility is placed in service) or lapse of time.
The qualifying advanced energy project category, the specified advanced energy property, and the scope of the overall project must be consistent between the taxpayer’s concept paper and 48C Credit application. Taxpayers applying for the Section 48C credits in the Clean Energy Manufacturing and Recycling Product category or Critical Materials Project category may submit more than one application covering the same facility. For applicants applying under the Greenhouse Gas Emission Reductions Project category, the applicant may submit only one application at the same facility.
The DOE also released an updated map reflecting the designated coal community census tracts so that taxpayers may readily determine whether their projects are located in an area receiving priority for allocations. Notice 2023-44 applies the footprint test to determine whether the Advanced Energy Project is located within a coal community. The determination of whether an Advanced Energy Project is located within a coal community is made at the time DOE provides its recommendation to the IRS and will not be redetermined.
The DOE and Treasury will host an informational webinar on June 27, 2023 for applicants that may submit a concept paper. The registration link for the webinar is expected to be available here no later than June 12, 2023.
Baker Botts will continue to monitor IRA guidance and will provide further updates as guidance is released. In the meantime, we would be pleased to assist you in your applications for allocation of the above-described credits, analysis of the IRA and other clean energy tax incentive matters.
1While the proposed rules will govern the allocation of the Capacity Limitation for calendar year 2023, we expect that the rules set forth therein will inform guidance for subsequent program years (see Section 48E(h) which provides for a similar program for property placed in service after 2024).
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