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Proposed Regulations Issued Regarding Section 48 Investment Tax Credit

Client Updates

On November 22, 2023, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) published proposed regulations regarding the energy credit under Section 48 of the Internal Revenue Code, commonly referred to as the investment tax credit (“ITC”).  The ITC is a key incentive for investment in clean energy facilities and energy storage technology.

The proposed regulations provide guidance on amendments to Section 48 under the Inflation Reduction Act of 2022 (the “IRA”).  The proposed regulations also incorporate familiar concepts from existing regulations under Section 48, initially issued in 1981, and IRS notices regarding beginning of construction.

Comments on the proposed regulations are due by January 22, 2024, and a public hearing on the proposed regulations is scheduled for February 20, 2024.


Section 48 provides an ITC in an amount generally equal to 30% of a taxpayer’s basis in “energy property” placed in service during the taxable year.  Section 48 was initially enacted in 1961 and has been subject to a series of amendments over the years, including most recently by the IRA.  

The IRA amended Section 48 in several important ways, including by making additional types of energy property eligible for the ITC and providing bonus credits for domestic content (discussed by us here), energy communities (discussed by us here), and low-income communities (discussed by us here).  The IRA also decreased the starting ITC percentage (from 30% to 6%) and allowed taxpayers to be eligible for the 30% ITC only by satisfying certain “prevailing wage and apprenticeship requirements” (discussed by us here) or qualifying for an exception.

For our previous alerts relating to the clean energy provisions of the IRA, see here and here.

Effective Date

The proposed regulations are generally proposed to be effective for energy property that is placed in service in a taxable year beginning after the date final regulations are published in the Federal Register.  Taxpayers generally may rely on them prior to such time with respect to property placed in service after 2022, provided the taxpayers follow the relevant portions of the proposed regulations in their entirety and in a consistent manner.  Portions of the proposed regulations relating to the application of the prevailing wage and apprenticeship multiplier are generally effective for property that begins construction after the date final regulations are published, with a similar ability to rely on the proposed rules prior to that time.  A proposed rule setting a hair-trigger standard for aggregating multiple energy properties into an energy project for purposes of the prevailing wage and apprenticeship multiplier and the domestic content and energy community bonus credits is proposed to apply to energy projects that begin construction after November 22, 2023.

Proposed Regulations Overview

The proposed regulations address amendments by the IRA to Section 48 and provide additional requirements and rules generally applicable to energy property.  The proposed regulations include rules addressing:


  1. The types of “energy property,” including energy storage technology and qualified biogas property;
  2. The scope of energy property, including rules on property that is a “functionally interdependent” part of an energy property or an “integral part” of the energy property;
  3. Application of an “80/20 Rule” to retrofitted energy property;
  4. “Dual use” property;
  5. Property that could be eligible for multiple federal income tax credits;
  6. Separate ownership of components of an energy property;
  7. Electing ITC in lieu of the production tax credit under section 45; and
  8. Qualified interconnection property


In addition, the proposed regulations withdraw and repropose portions of proposed regulations on the prevailing wage and apprenticeship requirements, initially issued on August 30, 2023 (discussed by us here), and supplement proposed regulations on the credit transfer rules under Section 6418, initially issued on June 21, 2023 (discussed by us here).  Among other things, the proposed regulations clarify the application of the new credit transfer rules under Section 6418 to the energy credit recapture rules applicable to failures to satisfy the prevailing wage requirements and provide notification requirements for eligible taxpayers.

Selected Issues 

The proposed regulations provide guidance on several important issues relating to the ITC.

Scope of Energy Property
The proposed regulations provide that property is generally part of an “energy property” if it is a “functionally interdependent” part of the energy property or an “integral part” of the energy property.  These functional definitions, derived in part from prior “beginning of construction” guidance, are intended to be more technology-neutral than the lists of components included in prior Section 48 regulations.  The proposed regulations provide, as examples, that power conditioning equipment, transfer equipment , and onsite roads used for operation and maintenance (as distinct from visitor or employee roads), are in each case an “integral part” of the energy property and are therefore ITC-eligible.

Relatedly, the proposed regulations provide that power conditioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or shared by a qualified facility under Section 45, so long as the total cost basis of the integral property is properly allocated across the energy property and qualified facility that share such property.  The preamble to the proposed regulations suggests that there is a broader principle that allows a taxpayer to claim the ITC on energy storage technology that is co-located with a qualified facility (such as a wind facility) with respect to which the taxpayer claims the production tax credit under Section 45 (the “PTC”).

The proposed regulations provide that a taxpayer electing the ITC in lieu of the PTC for a wind facility is eligible to claim the ITC on property beyond the bare turbines, towers and pads described in Rev. Rul. 94-31 as comprising the “qualified facility” for PTC purposes.

Energy Project
Under Section 48, the prevailing wage and apprenticeship requirements, and the domestic content and energy community bonus credits, in each case apply to the collective “energy project” rather than to each unit of energy property.  Under Section 48, an “energy project” is a project consisting of one or more energy properties that are part of a single project.

The proposed regulations incorporate familiar concepts from IRS notices on the beginning of construction in determining the scope of an “energy project.”  Under proposed regulations, multiple energy properties would be treated as one energy project, if at any point during the construction of the multiple energy properties, they are owned by a single taxpayer (subject to rules on related taxpayers) and any two or more of the following factors are present:


  1. The energy properties are constructed on contiguous pieces of land;
  2. The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
  3. The energy properties have a common intertie; 
  4.  The energy properties share a common substation, or thermal energy off-take point;
  5. The energy properties are described in one or more common environmental or other regulatory permits;
  6. The energy properties are constructed pursuant to a single master construction contract; or
  7. The construction of the energy properties are financed pursuant to the same loan agreement.


It is unclear why the proposed regulations opt for a strict two-or-more-factor approach for determining the existence of an “energy project,” when Notice 2018-59 instead applies the above factors on a facts-and-circumstances basis for begun construction purposes.  The approach in the proposed regulations could inadvertently create an “energy project” that was not intended by the taxpayer.  As a result, taxpayers should use caution in determining their compliance with prevailing wage and apprenticeship requirements, and their eligibility for the domestic content and energy community bonus credits, to ensure their determination is applied to the correct grouping of energy properties.  As discussed above, the proposed regulations covering this specific point are proposed to be effective for property that begins construction after November 22, 2023.

The principle described above in the preamble to the proposed regulations that a taxpayer could elect to claim the PTC with respect to a generation asset and ITC with respect to a co-located storage asset provides taxpayers with a potential planning opportunity.  If storage assets would qualify for the adder on their own but including them in the same ITC “energy project” with the generation assets would make the entire project ineligible for the adder, an election to claim the PTC on the generation assets would remove them from the energy project and allow the domestic adder test to be applied separately to the storage assets.

Dual Use Property
Under the existing Section 48 regulations, certain  property (such as storage assets) associated with solar energy property, wind energy property, and geothermal equipment are eligible for the ITC to the extent of the property’s basis or cost allocable to its annual use of energy from a qualified source, provided the use of energy from “non-qualifying” sources does not exceed 25 percent of the total energy input of the property during an annual measuring period (the “Dual Use Rule”).  For example, in the case of a battery co-located with a solar energy facility, the battery could be ITC eligible in proportion to its storage of solar energy, provided that at least 75% of the energy stored on the battery is solar energy (and not energy from the grid). 

The preamble to the proposed regulations clarifies that the Dual Use Rule is “no longer relevant” to determining the eligibility of energy storage technology placed in service after December 31, 2022.  Such energy storage technology is “energy property” under the IRA, regardless of whether it is charged from the grid or clean energy or whether it is co-located (or not) with other energy property.  In addition, the proposed regulations prospectively incorporate a modified version of the Dual Use Rule for other traditionally dual use property (other than energy storage technology), but reduce the “cliff” from 75% to 50%.

Hydrogen Storage
As revised by the IRA, Section 48 includes energy storage technology in the definition of energy property.  Energy storage technology is defined to mean property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, that stores energy) and has a nameplate capacity of not less than 5 kWh.   Accordingly, hydrogen energy storage property is eligible for the investment tax credit.

Prop. Treas. Reg. section 1.48-9(e)(10)(iv) provides that hydrogen energy storage property must store hydrogen that is solely used for the production of energy and not for the production of end products, such as fertilizer.  The preamble to the proposed regulations provides that this would include, but is not limited to, hydrogen used to produce heat, to generate electricity, or to be used in a fuel cell vehicle.  The preamble asks for comments as to the documentation that would be needed to demonstrate that property was used to store hydrogen solely used for the production of energy.  A rule that turns on the use made of the hydrogen will be difficult for taxpayers to apply and the IRS to administer: in many cases the seller of hydrogen will not know or cannot control the use made of the hydrogen it sells.

The proposed regulation also states that hydrogen energy storage property includes, but is not limited to, a hydrogen compressor and associated storage tank and an underground storage facility and associated compressors. However, there is no mention of piping, valves or equipment to measure or monitor the stored hydrogen.

The proposed regulation does not speak directly to whether property that stores hydrogen carriers, such as ammonia and methanol, qualifies as energy storage property.  However, the preamble to the proposed regulations states that “the type of storage medium (for example, physical based or material based), is not limited,” which suggests that property that stores ammonia, methanol or other similar hydrogen carriers would qualify as hydrogen energy storage property.  
The proposed regulations also provide the formula by which the megawatt equivalent for hydrogen may be determined for purposes of exceptions based on the amount of electricity production.

Biogas Property
The IRA added qualified biogas property to the definition of energy property in Section 48, defining it as property comprising a system that converts biomass into a gas that consists of not less than 52 percent methane by volume and including any property that is part of such system that cleans or conditions such gas.  The proposed regulations would provide that components of property are considered qualified biogas property if they are functionally interdependent, citing components such as a waste feedstock collection system, a landfill gas collection system, mixing equipment and anaerobic digesters.  Although the statute provides that cleaning and conditioning equipment is qualified biogas property, the proposed regulations exclude “upgrading equipment” from qualified biogas property, which may have material implications for some biogas producers.  The proposed regulations, however, do not specify how one differentiates upgrading equipment from cleaning equipment.  The proposed regulations do not include a de minimis exception for gas flaring, and the preamble asks for comments on the need for such an exception.  With respect to the requirement that gas must be tested for 52% or greater methane content, the proposed regulations provide that the measurement is to occur at the point at which the biogas exits the production system (i.e., the anaerobic digester or the landfill gas collector).  This rule may have a disparate impact on landfill gas producers versus digesters due to the difference in their methane concentrations.  

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 analysis of the IRA and other clean energy tax incentive matters, including any comments you might wish to make to the proposed regulations.


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