This alert was originally published on April 10, 2023 and was updated in April 19, 2023. This alert has been revised to reflect an update published by the Internal Revenue Service. The energy community beginning of construction safe harbor applies only to projects the construction of which begins on or after Jan. 1, 2023.
Executive summary: Energy community bonus credits
The Department of the Treasury and IRS issued guidance on April 4, 2023, to help taxpayers determine whether energy projects and facilities qualify for the energy community bonus tax credit. Qualifying projects and facilities located in energy communities may be eligible for up to a 10% increase in one of the credits. Additionally, the section 48C application-based qualifying advanced energy project credit provides preferential treatment to applicants in coal closure energy communities.
Treasury and the IRS intend to propose regulations that would apply to taxable years ending after April 4, 2023. Until such proposed regulations are issued, taxpayers may rely on the guidance in this notice.
The notice provides definitional and procedural guidance on enhancements to credit claims by addressing the following topics:
- Categories of energy communities
- Rules for determining whether location requirement is met
Several electronic tools are offered in this notice to assist taxpayers in their efforts to confirm eligibility for energy community bonus tax credits.
Comments addressing possible data sources, revenue categories and procedures to determine whether a metropolitan statistical area or non-MSA qualifies should be submitted no later than May 4, 2023.
Energy communities bonus credit: New guidance clarifies eligibility
Energy communities: An overview
The Inflation Reduction Act of 2022 (IRA) amended sections 45 and 48 to provide increased, or bonus, credit amounts if certain energy projects are located in or placed in service within an energy community. The IRA also added new sections 45Y and 48E, which allow for increased bonus credit rates for certain qualified facilities, energy projects or energy storage technologies that comply with similar requirements and are placed in service after Dec. 31, 2024.
The energy communities bonus credit is a 10% increase to one of those four credits if certain prevailing wage and apprenticeship requirements are met. If such requirements are not met, the energy communities bonus credit is reduced to a 2% credit increase.
Three categories of energy communities
Notice 2023-29 identifies three location-based categories that qualify as energy communities for purposes of sections 45, 45Y, 48 and 48E:
- Brownfield Category
- Statistical Area Category
- Coal Closure Category
I. Brownfield Category
For purposes of the Brownfield Category, a brownfield site is real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant and certain mine-scarred land.
The guidance creates a safe harbor that provides a site will be accepted as a brownfield site if it satisfies at least one of three conditions:
- The site was previously assessed through federal, state, territory or federally recognized Indian tribal brownfield resources as meeting the definition of a brownfield site under 42 U.S.C. section 9601(39)(A)
- An ASTM E1903 Phase II Environmental Site Assessment has been completed, and the Phase II Assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. section 9601(14) or a pollutant or contaminant as defined under 42 U.S.C. section 9601(33); or
- For projects with a nameplate capacity less than 5MW (AC), an ASTM E1527 Phase I Environmental Site Assessment has been completed with respect to the site.
II. Statistical Area Category
For purposes of the Statistical Area Category, statistical areas that may qualify include MSAs and non-MSAs that have, at minimum, 0.17% direct unemployment, or at least 25% local tax revenues related to the extraction, processing, transport or storage of coal, oil or natural gas. In addition, these MSAs and non-MSAs must have an unemployment rate at or above the national average unemployment rate for the previous year.
MSAs are determined by the Office of Management and Budget, and non-MSAs are identified by the U.S. Bureau of Labor Statistics. Appendix A and B of the notice provide further information regarding Treasury- and IRS- defined MSAs and non-MSAs for the IRA energy community tax credit bonus and the fossil fuel employment threshold.
The Statistical Area Category may also include MSAs and non-MSAs based on fossil fuel tax revenue. The notice invites public comments regarding this determination method, as it presents certain challenges created by lack of data available from public sources.
III. Coal Closure Category
For purposes of the Coal Closure Category, the energy community bonus credits are available for coal closure sites that are census tracts in which, after Dec. 31, 1999, a coal mine has been closed or, after Dec. 31, 2009, a coal-fired electric generating unit has been retired.
Census tracts that directly adjoin, meaning their boundaries touch at any single point, one of these coal closure sites will also qualify as an energy community. The notice excludes closed coal mines and retired coal-fired electric generating units from the coal closure category if they have irregular location information.
Taxpayers must coordinate with the U.S. Department of Labor’s Mine Safety and Health Administration or the U.S. Energy Information Administration to address specific issues with irregular location information. Appendix C of the proposed guidance provides a list of census tracts and adjoining tracts that qualify as part of the coal closure sites.
Rules for determining whether location requirements are met
The notice outlines several rules for determining whether location requirements are met to qualify for the bonus credit amounts. For purposes of sections 45 and 45Y, the qualified facility must be located in an energy community to qualify for the bonus rates. This eligibility is determined separately each taxable year of the facility’s 10-year credit period. If the qualified facility is located in an energy community during any part of the taxable year, it will be deemed as located in an energy community during the entire taxable year.
For purposes of sections 48 and 48E, an energy project, qualified facility or energy storage technology must be placed in service within an energy community to qualify for the bonus credit amounts. Eligibility for the bonus rates under sections 48 and 48E are determined as of the placed-in-service date.
If a taxpayer begins construction of a project in an energy community on or after Jan. 1, 2023, the location will continue to be treated as an energy community for the duration of the credit period, for sections 45 and 45Y, or on the placed-in-service date, for 48 and 48E, with respect to that specific project.
Nameplate Capacity Test and Footprint Test
A project is considered located in or placed-in-service within an energy community if it passes one of two tests explained in the proposed guidelines. The project must satisfy either the Nameplate Capacity Test or the Footprint Test in order to qualify.
Energy community projects with a nameplate capacity must use the Nameplate Capacity Test. If a project has 50% or more of its nameplate capacity located in or placed in service in an area that qualifies as an energy community, then the project is treated as located in or place in service in an energy community.
Nameplate capacity is calculated by dividing the nameplate capacity of the project’s energy generating units that are located within an energy community by the total nameplate capacity of the energy generating units of the entire project.
The notice also introduces a Nameplate Capacity Attribution Test that may open opportunities for offshore projects. If an offshore energy-generating project has nameplate capacity but none of the energy generating units on the project are located in a census tract, MSA or non-MSA, then the Nameplate Capacity Test would apply by attributing all the nameplate capacity of the project to the land-based equipment that conditions the energy for transmission, distribution or use and that is closest to the point of interconnection.
If a project does not have nameplate capacity, then the Footprint Test is applied. The project is considered located or placed in service within an energy community under the Footprint Test if at least 50% of its square footage is in an area that qualifies as an energy community. The Footprint Test percentage is determined by calculating the square footage of the project located in the energy community divided by the total square footage of the entire project.
Connection to qualifying advanced energy project credit
Although the section 48C qualifying advanced energy project credit is not mentioned in this notice, the guidance on energy communities is also relevant for business taxpayers pursuing such credit. The qualifying advanced energy project credit is an application-based credit that incentivizes certain renewable energy projects. The Inflation Reduction Act provided $10 billion of funding to be allocated to applicants. Of this pool of funding, at least $4 billion must be allocated to projects located within a coal closure energy community that has not previously had a project that received a certification and allocation of the section 48C credit. This notice will help taxpayers determine whether they are eligible for allocations of funding partially designated for energy communities.
To claim the increased tax credit rate for meeting energy community bonus credit requirements, the taxpayer must meet the general recordkeeping requirements under section 6001 to substantiate that a qualifying project is located in or has been placed in service within an energy community. Failure to do so could put the taxpayer at risk in the event of an IRS examination. To date, the IRS has not issued additional forms to claim the energy community bonus credit.
Washington National Tax Takeaways
Although not comprehensive, the notice and associated guidance issued by the government offers clarification on the new energy communities rules added by the IRA.
- In conjunction with the issuance of the notice, the Department of Energy (DOE) provided a searchable mapping tool that helps with identifying areas that may be eligible for the energy communities bonus credit rate. White this map does not currently include data for brownfield sites, location of some brownfield sites may be determined by viewing the Environmental Protection Agency’s ‘Cleanups in My Community’ webpage or on similar webpages maintained by states, territories or for federally recognized Indian tribes.
The notice provides certainty to project developers who are modeling the economics of projects and planning and beginning construction on facilities and projects in locations that today are energy communities. Under the rules, if the location of the project or facility is an energy community when construction begins, it will qualify for the bonus credit when placed in service (for investment tax credits) or throughout the qualified production period (for production tax credits). Further, if construction begins in a location that is not an energy community but becomes one by the time the project is placed in service (or during the production period), it appears the project could qualify for the bonus credit at that time.
As employment data changes, and as additional census tracts qualify for the coal closure category, changes to designated energy communities are anticipated. The Energy Communities website does state that an updated map will be released in May 2023. In the meantime, taxpayers may use definitions and examples in the guidance to determine their eligibility for the bonus credit rate with regard to energy communities. Where ambiguity remains, taxpayers should be prepared to submit public comments to guide Treasury in constructing proposed and final regulations.
While not mentioned in the Notice 2023-29 guidance, in conjunction with the release of guidance on energy communities, the DOE announced $450 million in funding from the Infrastructure Investment and Jobs Act for clean energy projects on current and former mine lands on April 4, 2023. Mine land sites constitute approximately 1.5 million acres in the United States. As certain mine lands are considered brownfield sites, this funding may allow for even further development of clean energy projects and more opportunities to qualify for the energy community bonus credit rates.
Additionally, the DOE announced the release of a Coal Power Plant Redevelopment Visualization Tool, enabling stakeholders to identify opportunities for redevelopment of shuttered coal power plants and community reinvestment. The tool serves as a public database and map that identifies coal power plants that have been closed or set to retire, alongside key infrastructure characteristics that are relevant for potential redevelopment opportunities.