Executive summary: Treasury and IRS provide guidance on the investment tax credit for solar and wind projects in certain low-income communities.
The Department of Treasury (Treasury) and the IRS provided guidance to establish a program to allocate amounts of environmental justice solar and wind capacity limitation to qualified solar and wind facilities eligible for the investment tax credit (ITC). This program incentivizes solar and wind power in certain low-income areas under the Inflation Reduction Act of 2022 (the Act). Through this program, eligible property placed in service in connection with a solar or wind facility in certain low-income communities may qualify for a 10 or 20 percentage point increase in the ITC energy percentage. This is an allocated credit program; that is, taxpayers apply to Treasury to receive a portion of the capacity limitation from the program. The Act provided an annual capacity limitation of 1.8 gigawatts that may be allocated for calendar years 2023 and 2024.
Background
An energy investment tax credit may be claimed for placing in service certain energy property, including certain solar and wind facilities and the associated energy storage technology at these facilities. The ITC is claimed as a general business credit. The ITC is calculated by multiplying the basis of each energy property placed in service during the taxable year by the energy percentage. The Act modified the energy credit in part by allowing Treasury to allocate capacity from an overall capacity limitation of 1.8 gigawatts (as measured in direct current) to facilities in certain communities. Eligible facilities must fit within the definition of at least one of four categories of eligible communities: (1) facilities located in a low-income community, (2) facilities located on Indian land, (3) facilities part of a qualified low-income residential building project and (4) facilities part of a qualified low-income economic benefit project. The owner of such facilities, upon receiving an allocation from the capacity limitation, may be able to increase their energy percentage by 10 or 20 percentage points.
IRS and Treasury release initial guidance on solar and wind capacity limitation under section 48(e)
The IRS and Treasury recently issued Notice 2023-17 (notice) providing guidance on the section 48(e) “Low Income Communities Bonus Credit Program” (program) under the Act. The notice establishes the program, describes the allocation process and sets out the timeline for applications.
This notice provides initial guidance on the general eligibility requirements for owners of solar and wind facilities eligible for the energy credit under section 48 of the Internal Revenue Code who wish to take part in the program. Additionally, the Notice provides a description of the four statutory facility categories for which an eligible facility may request an allocation, amounts of capacity limitation reserved for each facility category, a general description of the program, goals of the program, the application review process and the proposed timeline for the application periods in 2023 based on the four different project categories.
Timing and program administration
The notice provides the IRS will accept applications for 2023 capacity allocations in two phases through 60-day application windows. The first application window is expected to open in the third quarter of 2023. The second application window will follow after, but an exact estimate was not included in the notice. For the calendar year 2023, the total annual Capacity Limitation of 1.8 gigawatts of direct current capacity will be divided among four categories.
