20 February 2023 IRS issues initial guidance on credits for solar and wind facilities in low-income communities
In Notice 2023-17 (Notice), the IRS establishes the Low-Income Communities Bonus Credit Program (program), which increases the investment tax credits (ITCs) under IRC Section 48(e) for certain solar and wind facilities placed in service in low-income communities. Taxpayers can obtain increased credits by applying and being granted a portion of the annual capacity limitation (set at 1.8 gigawatts per year for calendar years 2023 and 2024), which will be divided among four categories of facilities. The Notice gives initial information on the program, application process and criteria for receiving an allocation. Further guidance will be issued on the specific application procedures. According to the Notice, "the allocation program's broad goals are to increase adoption of and access to renewable energy facilities in low-income and other communities with environmental justice concerns; encourage new market participants; and provide social and economic benefits to individuals and communities that have been historically overburdened with pollution, adverse human health or environmental effects, and marginalized from economic opportunities." The IRS also released guidance on a new IRC Section 48C(e) program, which will eventually allocate $10 billion of credits for investments in eligible qualifying advanced energy projects (see Tax Alert 2023-0308). The Inflation Reduction Act (IRA) changed the way that ITCs are calculated by creating a base and bonus ITC system with a number of potential "adders" (see Tax Alert 2022-1236). Taxpayers can automatically receive an ITC rate of up to 50% as follows:
Under IRC Section 48(e), taxpayers can receive an additional 10-20% in ITCs through the application process for certain solar and wind facilities with a net output of less than five megawatts placed in service in connection with low-income communities:
Bonus credits under this program differ from the bonus credits for Energy Communities under IRC Sections 45 and 48, which base their criteria on the economic factors in the community in which the project is located.Additionally, this program requires a certain percentage of the financial benefits of the eligible project to flow to residents or community members. Future guidance is expected to outline the financial benefits' parameters. The Notice specifies that a total annual capacity limitation of 1.8 gigawatts of direct current capacity will be allocated for calendar years 2023 and 2024. To qualify, an individual project cannot exceed five megawatts. The annual capacity limitation will be divided among four categories:
In determining how to allocate capacity limitation within categories, the program may also consider criteria such as whether the facility is owned or developed by a community-based organization, provides substantial benefits to a low-income community and has a higher degree of commercial readiness. Only the owner of a facility may apply for an allocation of capacity limitation. Property must be placed in service within four years after the date the applicant was notified of the allocation. Applications will be accepted in two phases for calendar year 2023, with 60-day application windows. Treasury and IRS anticipate that applications will be accepted for Category 3 and 4 facilities in the third calendar quarter of 2023, and on a future date for Category 1 and Category 2 facilities. Bonus ITCs under the Low-Income Communities Benefit Program must be allocated and are subject to an annual limit, based on the annual capacity limitation. This differentiates the bonus ITCs from other production tax credits and ITCs, which, along with the other adders, are credit-by-right and are guaranteed for taxpayers that meet the requirements. The Notice, which provides how the annual limit will be divided, is helpful in evaluating whether a taxpayer's project is likely to get an award.
Document ID: 2023-0333 | ||||||||||||||||||||
