Energy Tax Credits - Recent Developments Bring New Guidance and Questions

The month of May was a busy one for the IRS, as the agency has been hard at work releasing new guidance and rules regarding energy tax credits. In Notice 2023-38, the IRS provides detail on how the “domestic content” tax credit rate adder can be satisfied. Notice 2023-44 offers guidance on the application process for the advanced energy project tax credit outlined in Section 48C. These notices are both intended to provide interim guidance until the IRS can publish proposed regulations on these topics. Finally, proposed rules (REG-110412-23 RIN 1545-BQ81) have been introduced to further clarify the procedures and criteria for applying for allocations to receive increased tax credits for solar and wind facilities in low-income communities. Despite the push, there are still a number of energy tax credit issues that remain outstanding, which range from the ministerial (e.g., publication of unemployment rates for the purposes of complying with the “energy community” adder) to those issues that are highly material to the success of the legislative goals intended by the Inflation Reduction Act (e.g., publication of guidance as to transferability of tax credits).

Domestic Content Adder – Additional Guidance via Notice 2023-38

Notice 2023-38 addresses the “domestic content” tax credit rate adder, which allows taxpayers to increase the base energy tax credit by 2% or 10% — assuming certain prevailing wage and apprenticeship requirements are met — for certain energy-related production and investment tax credits under Section 45, 45Y, 48, and 48E. Generally speaking, the domestic content adder is satisfied if (1) 100% of any steel or iron used in a project and at least 40% — or 20% if off-shore wind projects — of any manufactured product which is a component of a project, as of the completion of construction, was produced in the U.S. (the “Domestic Content Requirement”) and (2) certification as to compliance with the Domestic Content Requirement is timely and properly filed with the IRS. The notice provides guidance on the specific criteria that must be satisfied to meet the Domestic Content Requirement, with some of the more notable clarifying items listed below:

  • Clarification as to what types of components qualify for the Steel or Iron Requirement (e.g., steel/iron materials that are structural in function, as opposed to non-structural functions of manufactured product components such as nuts and bolts).
  • Clarification and examples as to how the “Adjusted Percentage Rule” applies with respect to the Manufactured Product Requirement when an applicable project contains both U.S. Manufactured Components and Non-U.S. Manufactured Components — and how to determine if a manufactured product is of U.S. origin.
  • A Safe Harbor for categorizing common project components is subject to either the Steel or Iron Requirement or the Manufactured Product Requirement.
  • Guidance as to how retrofitted projects can nonetheless satisfy the Domestic Content Requirement by following the “80/20 Rule” (i.e., the fair market value of the used property is not more than 20% of total value and the new property otherwise satisfies the Domestic Content Requirement).

Notice 2023-38 also provides guidance as to the certification requirement. An initial certification, dated as of the date the project is placed in service, must be attached to the Taxpayer’s Form 8845 or 3468 — as applicable — for the first year the domestic content adder is being sought and must be included in the taxpayer’s tax return each subsequent year in which the adder rate is being applied. While no form of “Domestic Content Statement” was provided, the Notice does provide for minimum criteria that must be included in the statement to substantiate the bonus.

Advanced Energy Project Tax Credit (Section 48C) – Application Criteria Updates

Notice 2023-44 focuses on the advanced energy project tax credit set forth in Section 48C. This tax credit aims to incentivize investments in the development and manufacture of advanced energy property, such as solar panels, wind turbines, and other property designed to produce energy conservation technologies. The notice provides instructions on the application process, including eligibility requirements, application deadlines, and the necessary documentation to support claims for the tax credit. By providing this guidance, the IRS aims to streamline the application process and encourage more businesses to pursue advanced energy projects.

If a taxpayer intends to pursue the energy credit under Section 48C, the taxpayer must submit a concept paper for Department of Energy (DOE) review and, subsequently following DOE’s recommendation, an application for IRS review. Each of these must be submitted through the “eXCHANGE portal” as described in the Notice. The Notice provides significant detail as to the content requirements for both the concept paper and the application and template files for submitting this information will be available through the portal. Taxpayers should use the requirements of the concept paper and the application as a guide to determine whether the credits may be a viable option worthy of pursuing further.

Taxpayers must submit the concept paper prior to 12 p.m. on July 31, 2023, or they will be foreclosed from pursuing the credit for Round 1. DOE will review the concept paper and provide the taxpayer with a letter either encouraging or discouraging the submission of the formal application. In making its recommendation, DOE will evaluate the concept papers based upon four criteria: (i) commercial viability, including project schedule and time; (ii) greenhouse gas emissions impacts; (iii) the strengthening of U.S. supply chains for domestic production of clean energy products; and (iv) workforce and community engagement, including the number of domestic jobs created.

Even if the taxpayer receives a letter of discouragement from DOE, the taxpayer is not prohibited from submitting an application, but the taxpayer must weigh the administrative costs of submitting the application against the likelihood of success of the application.

To date, application submission dates have not been finalized but will be conveyed in the portal at a later date. Based on the Notice, it is expected that the deadline for applications will be in the fall/winter 2023-2024 time frame.

The IRS makes a final decision on the application based upon DOE’s recommendation and ranking of all the applications. The IRS will make decisions on Round 1 applications by March 31, 2024, and will provide either an acceptance letter (Allocation Letter) or a denial letter to the taxpayer. Taxpayers should be cautioned that eligible property placed into service prior to being awarded an allocation of the Section 48C credit (i.e., prior to receiving the Allocation Letter) will not be eligible for the credit.

The Notice also addressed the interaction between the Section 48C credit and the Section 45X credit. A taxpayer cannot claim a Section 45X credit and Section 48C credit for products produced at the same “facility.” However, Notice 2023-44 stated that “[f]or purposes of the § 45X credit, all tangible property that comprises an independently functioning production unit that produces one or more eligible components will be treated as a single facility (§ 45X Facility).” Thus, a facility with multiple independently functioning production units could claim the Section 45X credit for production units that are not already receiving the Section 48C credit. The Treasury Department and IRS intend to further define the term “production unit” in forthcoming guidance.

Low-Income Community Solar and Wind Credits – Updated Proposed Regulations

In line with the ongoing efforts to promote renewable energy in low-income communities, the proposed rules (REG-110412-23 RIN 1545-BQ81) expand on previous guidance related to tax credits for solar and wind facilities in these communities. The rules offer additional clarification on the allocation process for receiving increased investment tax credits under IRC Section 48 and specify the criteria for determining eligibility. This development is intended to be a positive step towards addressing the environmental and social challenges faced by underserved communities, allowing them to benefit from renewable energy projects and the associated tax incentives.

The low-income communities bonus credit investment program is a limited bonus credit that requires application to, and approval from, the IRS. The amount of bonus credit available for a specific project depends on the project’s category.

  1. Category 1 facilities located in a low-income community are eligible for a 10% bonus credit.
  2. Category 2 facilities located on Indian land are eligible for a 10% bonus credit.
  3. Category 3 facilities that are part of a qualified low-income residential building project are eligible for a 20% bonus credit.
  4. Category 4 facilities that are part of a qualified low-income economic benefit project are eligible for a 20% bonus credit.

The proposed regulations provide guidance to verify eligibility for Category 3 and Category 4 projects. The proposed rules also set forth additional ownership and geographic criteria for selecting the credits.

Allocation awards will be made on an annual basis, subject to the statutory annual capacity limitations. (Under Section 48(e)(4)(C), the total annual Capacity Limitation is 1.8 gigawatts of direct current capacity for each of the calendar years 2023 and 2024.) The Treasury Department and IRS will provide additional information on the application process and timelines in forthcoming guidance.

The release of these notices and proposed rules provide much-needed clarity and guidance to taxpayers who are considering or involved in energy projects eligible for tax credits. However, while they offer valuable information, they raise new questions and complexities that developers, manufacturers, purchasers, and equity investors of energy tax credits will need to work through when engaging in tax credit financed transactions. As the energy landscape continues to evolve, staying informed and adapting to these developments will be crucial for businesses and individuals looking to take advantage of the tax incentives available to them.

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