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In Notice 2020-88, the IRS announced Round 3 of credit allocations for qualified investment in coal projects that have reduced carbon dioxide emissions under the IRC Section 48A Phase III Program, with more than $2 billion available.

The last round of credit allocations was in 2015 (see Tax Alert 2015-0390).

Background

The Energy Policy Act authorized $1.3 billion in allocable credits for a program now known as the IRC Section 48A Phase I program. The credit was 15% or 20% of the qualified investment in the coal project, depending on the technology involved. Taxpayers seeking a credit allocation were required to file an application with the Department of Energy (DOE) and the IRS. Credits under the Phase I program were allocated in three annual rounds and one special allocation round (ending with the 2008–2009 annual round).

The Energy Improvement and Extension Act of 2008 authorized an additional $1.25 billion in the IRC Section 48A Phase II program. The Phase II credit was 30% of the qualified investment. Credits under the Phase II program were allocated in three annual rounds (ending with the 2011-12 annual round). In Notice 2012-51, the IRS announced that $658.5 million of Phase I credits were available for reallocation under the IRC Section 48A Phase III program.

In Notice 2015-14, the IRS announced a second Phase III allocation round with about $1.1 billion of IRC Section 48A credits available for reallocation because of forfeitures of previously allocated credits from Phases I and II and unallocated credits from Phase II (see Tax Alert 2015-0390). As in the first round of the Phase III program, the credits were not separated into pools based on the type of projects (integrated gasification combined cycle (IGCC) or other advanced coal-based generation technologies) as was done in Phase I or the type of primary feedstock (bituminous, subbituminous or lignite), as was done in both Phases I and II.

Under the 2015 round, the credit equaled 30% of the qualified investment for that tax year in a qualifying advanced coal project. Only projects that captured and sequestered 70% or more of the plant's CO2 emissions were considered for DOE certification, with the highest rankings being given to projects with the greatest separation and sequestration percentages of total CO2 emissions.

Round 3 program

In Notice 2020-88, the IRS said that, after Round 2 of the IRC Section 48A Phase III program in 2015, it determined that about $2 billion of IRC Section 48A credits were available for reallocation due to forfeitures of previously allocated IRC Section 48A credits. As a result, the IRS implemented Round 3 of the IRC Section 48A Phase III program to be conducted with substantially the same procedures as described in Notice 2012-51.

As in previous rounds, the credits will not be separated into pools based on the type of projects (IGCC or other advanced coal-based generation technologies) or the type of primary feedstock (bituminous, subbituminous or lignite). The credit will be 30% of the qualified investment for that tax year in a qualifying advanced coal project.

Taxpayers must submit the application to the IRS and the DOE within 90 days of the Notice's publication in the Federal Register (Appendix A of the Notice gives detailed instructions on what to include in the DOE application). The DOE must then certify and rank the project within 120 days of the date of initial publication. The IRS will then notify the taxpayer within 150 days of publication. If the IRS grants a credit to the taxpayer's project, the taxpayer must then execute an agreement (provided in Appendix A of the Notice) within 180 days of publication and the IRS will execute and return the agreement within 240 days of publication.

Implications

The small subset of taxpayers eligible for this program will need to meet the requirements of IRC Section 48A before the IRS will allocate credits to them. Satisfying these requirements will mean following very specific rules and meeting very specific timelines.

It is unclear if and when another round of credits will be offered (the last allocation process was five years ago).

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