Executive summary: Initial guidance establishes the section 48C credit allocation program
The Inflation Reduction Act of 2022 (the Act) incentivized renewable energy projects and the creation of energy-related jobs in part by allowing the Department of the Treasury to allocate up to $10 billion dollars of credits for qualified investments in eligible qualifying advanced energy projects. The qualifying advanced energy project credit, under section 48C of the Internal Revenue Code, is an application-based credit program. The IRS released Notice 2023-18 to establish the credit allocation program. The notice provides information on the process for the first allocation round (Round 1), sets the timeline for Round 1, and provides certain definitions. The IRS intends to issue an additional notice and appendices by May 31, 2023. Round 1 begins on May 31, 2023 and concept papers (the first step of the application process) must be submitted by July 31, 2023.
Treasury issues initial guidance establishing qualifying advanced energy project credit allocation program
Notice 2023-18, released Feb. 13, 2023, establishes the qualifying advanced energy project credit allocation program pursuant to section 48C(e) of the Internal Revenue Code (the section 48C(e) program). The Act modified the section 48C credit by allowing Treasury to allocate up to $10 billion to qualified investments in eligible qualifying advanced energy projects, forty percent of which is earmarked for facilities located in certain energy communities. For qualifying investments for a taxable year, the credit is 30% but is decreased to 6% if certain prevailing wage and apprenticeship requirements are not met. Taxpayers must adhere to the application process to claim the section 48C credit.
The notice provides initial guidance on the section 48C(e) program, including:
- Application process and timeline
- Methodology of Round 1 funding allocations
- Definitions and explanations of key terms
Application process and timeline
The notice states that the Treasury and IRS expect to provide at least two allocation rounds of funding under the section 48C(e) program. The application period for Round 1 begins on May 31, 2023. The first step in the application process is a taxpayer’s submission of a 'concept paper' for each project for which it seeks a section 48C(e) program allocation to the Department of Energy (DOE). The purpose of a concept paper is for DOE to provide an initial assessment. All concept papers for Round 1 allocations must be submitted to the DOE by July 31, 2023.
Once a concept paper is reviewed, the DOE will respond to each concept paper with a letter of encouragement or discouragement. It is important to note that a letter of discouragement does not preclude the taxpayer from applying for credits under section 48C, the letter of discouragement represents DOE’s feedback that the project is unlikely to receive a recommendation based on the information provided in the concept paper. Notably, a taxpayer cannot submit an application unless they submitted a concept paper by the specified deadline. A section 48C(e) program application is the second step in the process after the submission of a concept paper. The notice encourages taxpayers to defer the application process until after receiving the encouraging or discouraging letter from the DOE.
Concept papers may be submitted as early as May 31, 2023. While concept papers must be submitted by July 31, 2023, the date that ends the application period has not yet been published by the IRS. Notice 2023-18 provides that additional section 48C(e) program guidance will announce such date. Applications submitted after May 31, 2023, and on or before the date that ends the application period will be deemed to be submitted on the date that ends the application period. Taxpayers must submit all application materials through the eXCHANGE portal.
The DOE will review each application and determine whether to recommend the project to the IRS for certification. The DOE will also rank recommended projects. Upon acceptance, the IRS will send either allocation or denial letters to the applicants. A taxpayer who receives a denial letter from the IRS may be eligible to request a debriefing for an explanation of the rejection. Debriefings will not be available to those taxpayers who received a letter discouraging the project from applying for the credit.
A taxpayer that receives an allocation letter must notify the DOE within two years of such letter’s receipt that the certification requirements have been met. Failure to submit a certification notice within two years of receiving an allocation letter will result in the forfeiture of the allocated credits. If the certification requirements have been met, the DOE will notify the IRS. In response, the IRS will send a certification letter to the taxpayer.
A taxpayer that received a certification letter has two years from receipt of such letter to place the project in service. Failure to place the project in service and notify the DOE during this two-year period will result in forfeiture of the allocated credits.
Methodology of Round 1 funding allocations
The notice states that the Treasury and IRS expect to provide at least two allocation rounds of funding under the section 48C(e) program. The Round 1 allocation will begin on May 31, 2023. Applications must be submitted by the due date that is to be determined in additional IRS guidance. In this first round, the IRS anticipates allocating $4 billion of the total $10 billion allocated for the section 48C(e) program. The IRS expects approximately $1.6 billion of these initial funds to be allocated to projects located in certain energy communities. The notice informs taxpayers that although not less than $4 billion of the total $10 billion allocated will be allocated to projects located in certain energy communities, the initial Round 1 allocations to such projects may not be exactly forty percent (or $1.6 billion), depending on applications received. An allocation round(s) may begin after Round 2 if allocations from Round 1 and/or Round 2 are unused, returned or later revoked.
The notice provides insight into the DOE’s process for making recommendations to the IRS and for ranking such recommended projects. The DOE’s recommendation to the IRS will include a ranking of projects in descending order (i.e., first, second, third, etc.). The amount of credit allocated to a project will reduce the amount of credits remaining in the pool of funding for remaining allocations in an allocation round. For example, the project ranked first in the first allocation round will reduce the $4 billion allocation for Round 1. Any remaining amount ($4 billion less the allocation to the project ranked first) will be applied to the project ranked second and so on.
Part of the DOE’s recommendations will include a determination whether projects are located in section 48C(e) Energy Communities Census Tracts. Such a determination would confirm whether a project is eligible for an allocation from the $4 billion of section 48C credits that are available only for projects in such a census tract. Therefore, a project’s location in a section 48C Energy Communities Census Tract may impact the DOE’s recommendation with respect to such project. The notice provides that a census tract mapping tool will be provided with additional section 48C(e) program guidance.
Definitions and explanations of key terms
The notice provides definitions and examples of various key terms for purposes of the section 48C(e) program. Definitions and examples include:
- Qualifying advanced energy project
- Specified advanced energy property
- Placed in service
- Industrial facility
- Manufacturing facility
- Recycling facility
- Eligible and ineligible property
- Concept papers, section 48C(e) program applications and the correspondence between the IRS, DOE, and taxpayers
Summary of key dates and deadlines for Round 1 allocations
- The section 48C(e) program was established by Notice 2023-18 on Feb. 13, 2023.
- The application period for Round 1 begins on May 31, 2023.
- Concept papers must be submitted to the DOE on or after May 31, 2023 and by July 31, 2023.
- The date that ends the Round 1 application period will be published with additional section 48C(e) program guidance.
- Taxpayers have two years after receiving an IRS acceptance (via an allocation letter) to notify the DOE that the certification requirements have been met. If such requirements have been met within the two-year timeframe, the IRS will respond with a certification letter.
- Taxpayers have two years from the date of receiving such certification letter to notify the DOE that the project has been placed in service.
Washington National Tax takeaways
For those taxpayers that were interested in applying for an allocation of credits under section 48C, the clock is now ticking. This notice provides critical information that sets forth the rules and requirements in order to begin applying for an allocation from the credit pool.
The IRS will issue additional guidance providing details on the concept paper requirements, when to submit the section 48C(e) program application deadline and subsequent rounds of funding allocations.
It is important for those considering applying for an allocation of credits undersection 48C to immediately register to use the eXCHANGE portal. The IRS will not accept an application unless the taxpayer is registered and uses the eXCHANGE. If taxpayers are still evaluating whether to apply for a credit allocation under section 48C or a credit under sections 48, 48A, 48B, 48E, 45Q, 45V or 45X, the application process does not preclude taxpayers from later changing their mind and taking an alternative credit. If a taxpayer subsequently determines they are better off on an alternative provision, the taxpayer can revoke their application at a later time.
For more information, please consult with your tax advisor.