Executive summary: Additional guidance on low-income communities bonus credit program
The Department of the Treasury and IRS issued a notice of proposed rulemaking on May 31, 2023 for applicants investing in certain solar and wind powered electricity generation facilities. Under this program, applicants investing in certain solar and wind facilities may apply for an allocation of capacity limitation to increase the amount of an energy investment credit in the year the facility is placed in service. Taxpayers that receive a capacity limitation allocation may increase their energy investment credit rate by 10 or 20 percentage points. The guidance describes proposed definitions and requirements that would be applicable for the program.
As discussed in our previously issued alert, the Department of the 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). An energy investment tax credit (energy ITC) may be claimed for placing in service certain energy property, including certain solar and wind facilities and the energy storage technology installed in connection with these facilities. The energy ITC is calculated by multiplying the basis of each energy property placed in service during the taxable year by the energy percentage.
IRS issues proposed regulations for low-income community energy credit
On May 31, 2023, Treasury and the IRS released a notice of proposed rulemaking that provide additional detail on the procedures and criteria for taxpayers to apply for capacity limitation allocations to be able to receive increased tax credits for solar and wind facilities in low-income communities under section 48(e) of the Internal Revenue Code. The proposed regulations follow initial guidance that was released by the IRS and Treasury in February.
The Act created bonus investment tax credits for certain projects in low-income communities that meet certain criteria. Projects that meet this criterion, have the potential to receive increased credit amounts of 10 or 20 percentage points. The tax credit program has an annual limitation of 1.8 gigawatts of direct current capacity in both 2023 and 2024. In order to receive the increased tax credit, companies will need to apply for capacity limitation.
The proposed rules define key terms related to the program, provide information about the application process, and provide guidance on post-allocation compliance that would be required for applicants for 2023 allocations. Notably, in the proposed rules, Treasury and the IRS state that they plan to issue further guidance later this year that provides thorough procedures for 2023 applicants. The proposed rules describe the selection process and the procedures the IRS intends to implement to ensure that allocations are efficiently awarded to facilities that advance the program’s goals.
With respect to the defining of key terms, the proposed rules define energy storage technology installed in connection with a solar or wind facility, ’financial benefits’ that projects need to provide to tenants and low-income households in order to qualify for the potential 20 percentage point bonus credit, and what it means for a project to be located in a low-income community or on tribal land.
The proposed rules also define what a ’qualified solar and wind facility’ eligible for the bonus credit is. The program rules require eligible projects to have a maximum net output of less than 5 megawatts (as measured in alternating current). In the proposed rules, however, Treasury and the IRS expressed their reservations stating their concerns as to how applicants might attempt to get around this limit by dividing large projects into multiple facilities. As such, as a way to circumvent this from happening, Treasury and the IRS are proposing that multiple solar or wind energy properties or facilities that are operated as part of a single project would be aggregated and treated as a single facility.
Similar to the February guidance, Treasury and the IRS provide that projects that were placed in service before receiving an allocation would be ineligible for the bonus credit. While some major solar industry groups have expressed concern about this requirement, Treasury and the IRS defended the requirement in their explanation of the proposed rules, saying that ’facilities that were placed in service prior to the allocation process do not increase adoption of and access to renewable energy facilities as compared to the absence of the Low-Income Communities Bonus Credit Program.’
Washington National Tax takeaways
With the issuance of the proposed regulations, taxpayers pursuing wind and solar projects in an eligible low-income community should carefully consider all of the guidance released in efforts to qualify for the program. Notably, both Treasury and the IRS have stated they are interested in comments from taxpayers about whether definitions and requirements in the proposed rules should apply to subsequent years in addition to 2023. These comments are due no later than June 30th, 2023.
For more information, please consult with your tax advisor.