Executive summary Additional guidance for 48C credit allocation program
The Department of the Treasury (Treasury) and the IRS issued additional guidance for the qualifying advanced energy project credit allocation program under Internal Revenue Code section 48C (the section 48C(e) program) on May 31, 2023. Notice 2023-44 (new notice) provides additional rules to modify and clarify Notice 2023-18 (initial notice), which was released Feb. 13, 2023 to establish the section 48C(e) program. RSM previously covered the notice that established the section 48C(e) program. The qualifying advanced energy project credit under section 48C is an application-based credit program that permits Treasury to allocate up to $10 billion dollars of credits for qualified investments in qualifying advanced energy projects. Notice 2023-44 further clarifies the process and rules for the first allocation round (Round 1) and provides certain definitions. Using the new guidance issued May 31, taxpayers may submit concept papers for Round 1 allocations no later than June 30, 2023. Concept papers (the submission of which is the first step of the application process) must still be submitted no later than by noon EST on July 31, 2023. The new notice’s clarifications and modifications to the 48C(e) program are essential for taxpayers planning compelling applications for a process that is expected to be competitive.
Treasury issues additional guidance on the qualifying advanced energy project credit allocation program
The Inflation Reduction Act (the Act) was signed into law Aug. 16, 2022 and included amendments to section 48C to further incentivize the deployment of clean energy projects, the creation of energy-related jobs, and improvement of energy security. The Act modified the section 48C credit by allowing Treasury to allocate up to $10 billion to qualified investments in qualifying advanced energy projects, 40% of which is earmarked for facilities located in certain energy communities (section 48C energy communities census tracts). For qualifying investments in a taxable year, the credit is 30%, however, it is reduced to 6% if certain prevailing wage and apprenticeship requirements are not met. Taxpayers must adhere to the application process to be allocated and claim the section 48C credit.
The notice provides additional guidance on the section 48C(e) program including:
- Application content requirements, judging criteria, process, and timeline
- How section 48C and section 45X can interact
- Information regarding Section 48C(e) Energy Communities Census Tracts
- Information disclosure
Application content requirements, judging criteria, process, and timeline
As stated in the initial notice, Treasury and IRS expect to provide at least two allocation rounds of funding under the section 48C(e) program. However, the new notice states that the acceptance of concept papers for Round 1 will begin no later than June 30, 2023, though the deadline for submitting concept papers to the Department of Energy (DOE) remains July 31, 2023, at noon EST. The first step in the application process is for a taxpayer to submit a concept paper for each project in which it seeks a section 48C(e) program allocation. The purpose of the concept paper is for DOE to provide an initial assessment.
Following the DOE’s review of taxpayer concept papers for compliance and eligibility, the DOE expects to respond to each concept paper with a letter encouraging or discouraging the applicant to continue in the Round 1 application process. A letter of encouragement begins the DOE’s process for accepting a formal section 48C(e) program application. No later than 52 days after the date on the letter of encouragement, taxpayers that receive such a letter must submit their application program application to remain eligible for a credit allocation. A letter of discouragement does not preclude the taxpayer from applying for credits under section 48C. A letter of discouragement represents DOE’s feedback that the project as submitted is unlikely to receive a recommendation based on the information provided in the concept paper.
It is important to note, 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 application’s overall scope must be consistent with the concept paper in order to be considered.
Eligible projects under the section 48C(e) program will be classified into three primary categories: clean energy manufacturing and recycling projects, greenhouse gas emission reduction projects, and critical mineral projects. Prior to completing the application, applicants must establish which category is most applicable to their project. Appendix B of the new notice provides a table to assist taxpayers in their determination of project category. Appendix B also contains content requirements and technical review criteria specific to each project category. Additionally, Appendix B explains the process that DOE will use to review and recommend section 48C(e) projects. There will be three steps of review.
First, a compliance and eligibility review will confirm whether a project meets the definition of a qualifying advanced energy project. In this first step, the DOE will evaluate whether:
- The eligibility requirements have been met;
- The required information has been submitted;
- The proposed project is technically valid; and
- All mandatory requirements of Notice 2023-44 are satisfied.
Second, a technical review will develop scores for ranking applications and determining the merit of each proposed project. The DOE technical review has four major priority areas.
- Criterion 1: Commercial viability
- Criterion 2: Greenhouse gas emissions impacts
- Criterion 3: Strengthening U.S. supply chains and domestic manufacturing for a net-zero economy
- Criterion 4: Workforce and community engagement
Third, a due diligence review may be performed to determine whether an applicant has a connection with a country of risk that could jeopardize the section 48C(e) program’s goals.
Concept paper application materials are currently available for prospective applicants to download from the eXCHANGE portal. Taxpayers must submit all application materials through the eXCHANGE portal in order to be considered. Due to final configuration changes for the eXCHANGE portal, applicants who registered on the eXCHANGE portal prior to May 31, 2023, must register again on or after the date the portal opens for registration and submission of concept papers. Specific concept paper format and submission requirements can also be found in the notice and on the eXCHANGE portal.
The section 48C(e) program has rigid timing requirements. A taxpayer that receives an allocation letter from the IRS must notify the DOE within two years of 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 receives 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. If the taxpayer has placed the section 48C facility in service within the required two-year period and has appropriately notified the DOE, then the taxpayer would claim the credit on their federal income tax return for the taxable year in which the qualifying facility was placed in service.
The notice emphasizes that eligible property placed in service prior to being awarded an allocation of section 48C credits under the section 48C(e) program will not be eligible to receive such an allocation.
Interaction of section 48C and section 45X
The section 45X advanced manufacturing production credit is allowable for the production and sale of “eligible components” which are certain components used in energy projects and applicable critical minerals. Eligible components do not include any property produced at a facility if the basis of any property which is part of such facility is taken into account for purposes of a credit allowed under the section 48C after Aug. 16, 2022. The credits under sections 48C and 45X incentivize similar investments and production activities. Accordingly, taxpayers eligible for both credits may be forced to contemplate which credit to pursue. Notice 2023-44 provides clarification on the overlap of section 48C and 45X facilities.
The new notice indicates that a section 45X facility is all the tangible property that comprises an independently functioning production unit that produces one more eligible components. So, a section 48C and 45X facility could be housed in the same manufacturing site in some circumstances.
Section 48C(e) Energy Communities Census Tracts
At least $4 billion dollars of the Act’s funding for the section 48C(e) program are allocated to qualified investments located within certain energy communities census tracts (section 48C(e) Energy Communities Census Tracts). These section 48C(e) Energy Communities Census Tracts are not necessarily the same census tracts eligible for the energy communities bonus credit program under sections 45, 45Y, 48, and 48E. The section 48C(e) program provides preferential treatment to these applicants. During the Round 1 allocations, the IRS is expected to award approximately $1.6 billion dollars (or 40% of the $4 billion expected to be allocated in Round 1) in funding to these energy communities census tract projects.
The notice states that a section 48C facility is treated as located within a section 48C(e) Energy Communities Census Tract if the facility satisfies the Footprint Test. The Footprint Test provides that the project is considered located within a 48C(e) energy community census tract under the Footprint Test if at least 50% of its square footage is in an area that qualifies as a section 48C(e) Energy Communities Census Tract. The Footprint Test percentage is determined by calculating the square footage of the project located in such a census tract divided by the total square footage of the section 48C facility.
Appendix C of the notice contains a list of section 48C(e) Energy Communities Census Tracts to assist taxpayers in determining whether its project is located in a qualifying census tract. Additionally, the DOE has provided a map of section 48C(e) Energy Communities Census Tracts.
The notice provides that the determination of whether a project is located in a 48C(e) energy communities census tract will be made at the time that the DOE provides recommendations to the IRS and will not be redetermined.
The IRS is required to publish section 48C(e) program Round 1 allocation results, including the identities of the taxpayers allocated credits and the amount of the credits allocated to those taxpayers with respect to projects that have been awarded a section 48C credit and have received a certification. The eXCHANGE portal will ask the recipient taxpayer if they consent to disclose additional information not required to be disclosed by statute. The additional information may include the location of the taxpayer’s section 48C facility along with a brief description. The notice states that the taxpayer’s decision whether to authorize the disclosure of any additional information will not impact the determination of the taxpayer’s section 48C credit allocation.
Summary of key dates and deadlines for Round 1 allocations
- Concept papers must be submitted to the DOE beginning no later than June 30, 2023 and by July 31, 2023 at noon EST.
- The DOE will host an informational webinar for potential applicants on June 27, 2023 at 2 P.M. EST.
- The DOE will respond to concept papers with letters of encouragement or discouragement. Taxpayers that receive a letter of encouragement may submit a section 48C(e) program application. Taxpayers may submit such application beginning 7 days after the date on the letter of encouragement (the date on which the DOE begins the application acceptance period). No later than 45 days after the beginning of the DOE application acceptance period, taxpayers must submit their section 48C(e) program application (i.e., no more than 52 days after the date on the letter of encouragement).
- All Round 1 allocation decisions will be made by Mar. 31, 2024.
- 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
Taxpayers that are interested in applying for the credits under the section 48C(e) program should be aware that Round 1 concept papers are due to the DOE in less than sixty days. This notice provides essential information regarding the rules and requirements for the application process and subsequent allocation and certification process. Taxpayers should carefully consider all program requirements, especially submission and technical review requirements, to submit a complete and competitive application.
It is important for those considering applying for an allocation of credits under section 48C to register (or reregister for taxpayers who registered prior to May 31, 2023), to use the eXCHANGE portal when it opens for registration and submission. The IRS will not accept an application unless the taxpayer is registered and uses the eXCHANGE portal. The DOE will open the eXCHANGE portal for user registration for any interested applicants and concept papers submissions no later than June 30, 2023. If taxpayers are still evaluating whether to apply for a credit allocation under section 48C, the application process does not prohibit taxpayers from later withdrawing their application and taking an alternative credit that may better suit their specific circumstances. Withdrawal, which can be done at any time, of an application requires a formal withdrawal procedure through the eXCHANGE portal.
Projects placed in service prior to receiving a credit allocation are ineligible for retroactively receiving allocations. When considering whether to apply for the section 48C(e) program, taxpayers should carefully examine their project’s completion timeline.
Taxpayers modeling potential benefits under sections 45X and 48C should revisit their assumptions using this updated guidance on the terms section 45X facility and section 48C facility.
For more information, please consult with your tax advisor.