Executive summary: Energy community bonus credits
The Department of the Treasury and IRS issued two notices on June 15, 2023, updating guidance to assist taxpayers in determining 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 production tax credits or investment tax credits available under sections 45, 45Y, 48 or 48E.
The new notices clarify guidance in Notice 2023-29 previously released on April 4, 2023 and modified on April 7, 2023,including:
- Updates regarding the special rule for beginning of construction (online update)
- Brownfield site safe harbor
- Statistical area category
- Coal closure category
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 described in sections 3 through 6 of Notice 2023-29 as previously modified by the online update and clarifications in Notices 2023-45 and 2023-47. RSM previously covered initial guidance on the energy communities bonus credit.
Energy communities: An overview
The Inflation Reduction Act 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.
Notice 2023-29 released April 4, 2023 and modified on April 7, 2023, identified three location-based categories that qualify as energy communities for purposes of sections 45, 45Y, 48 and 48E: brownfield category, statistical area category, and coal closure category. The guidance also created a safe harbor that provided a site would be accepted as a brownfield site if it satisfied certain requirements. One of the safe harbor requirements in Notice 2023-29 provided that a site with a nameplate capacity of not greater than 5MW (AC) will be accepted as a brownfield site for projects if an ASTM E1527 Phase I Environmental Site Assessment has been completed with respect to the site. This safe harbor rule is the subject of a correction in Notice 2023-45.
Notice 2023-45
Notice 2023-45 updates the above safe harbor rule in Notice 2023-29 such that a taxpayer would satisfy the safe harbor for brownfield sites only if the Phase I Environmental Site Assessment identifies the presence or potential presence of a hazardous substance, or a pollutant or contaminant. If a site’s Phase I Assessment fails to identify the presence or potential presence of a hazardous substance, pollutant or contaminant, the taxpayer would not meet the safe harbor for brownfield sites.
Notice 2023-45 also addresses a prior modification of the special rule for beginning of construction (BOC). The energy community beginning of construction safe harbor applies only to projects the construction of which begins on or after Jan 1, 2023. A prior version of Notice 2023-29 did not provide a date.
Notice 2023-47
Notice 2023-47 includes three appendices containing updated lists of information to assist taxpayers in determining whether they meet certain requirements under the Statistical Area Category or the Coal Closure Category for purposes of qualifying for energy community bonus credit amounts or rates under sections 45, 45Y, 48 and 48E. Appendices 1 and 2 to the notice pertain to the Statistical Area Category, and Appendix 3 of the notice pertains to the Coal Closure Category. At the time of publishing Notice 2023-29, the most up to date information from the Census Bureau, Bureau of Labor Statistics and additional coal closure data had not been released.
Appendix 1 to Notice 2023-47 should be combined with Appendix B to Notice 2023-29 to provide the full list of metropolitan statistical areas (MSAs) and non-MSAs that meet the Fossil Fuel Employment threshold applicable to the period beginning on Jan. 1, 2023 and continuing until the Treasury Department and the IRS issue an updated list based on 2022 County Business Patterns data published by the Census Bureau.
Notice 2023-29 did not identify MSAs and non-MSAs that qualified as energy communities due to Local Area Unemployment Statistics from the Bureau of Labor Statistics not being available. Therefore, Appendix 2 to Notice 2023-47 provides a list of MSAs and non-MSAs that qualify as energy communities because they meet the Fossil Fuel Employment threshold and have an unemployment rate at or above the national average unemployment rate for calendar year 2022.
Appendix 3 to Notice 2023-47 lists the additional census tracts that have ever had, since Dec. 31, 1999, a coal mine closure or have ever had, since Dec. 31, 2009, a coal-fired electric generating unit retirement, and census tracts that directly adjoin either of these census tracts. Appendix 3 to Notice 2023-47 should be combined with Appendix C to Notice 2023-29 to provide the full list of coal closure census tracts.
Appendices A, B and C to Notice 2023-29 and Appendices 1, 2 and 3 to Notice 2023-47 may not be used for purposes of the qualifying advanced energy project credit determined under section 48C.
Washington National Tax Takeaways
The notices and appendices issued by the IRS offer clarification on the new energy communities bonus credit rules added by the Inflation Reduction Act. Project developers who are modeling the economics of projects and beginning construction on facilities and projects in locations that are currently energy communities should carefully consider these new rules to determine eligibility for the energy communities bonus credit.
As employment data changes, and as additional census tracts qualify for the coal closure category, changes to designated energy communities are anticipated and taxpayers will need to keep apprised of these changes. Beginning in 2024, the IRS generally anticipates issuing additional guidance each May. To assist with this the Department of Energy has updated their searchable mapping tool to include the newest appendices and help identify areas that may be eligible for the energy communities bonus credit rate.
In addition, the IRS has published a web page with frequently asked questions for Energy Communities to provide detail on how areas may qualify as an energy community, how to determine whether a project is located in an energy community and brownfield sites for purposes of the Energy Community Bonus Credit.
For more information, please consult with your RSM tax advisor.
