April 6, 2023
IRS releases guidance on definition of energy communities for bonus IRC Sections 45 and 48 credits
In Notice 2023-29 (Notice), the IRS described what it intends to include in proposed rules on "energy communities" for purposes of the production tax credit (PTC) under IRC Sections 45 and 45Y and the investment tax credit (ITC) under IRC Sections 48 and 48E for certain clean electricity facilities. Taxpayers with qualifying projects located in energy communities can get up to a 10% increase in either credit.
According to the Notice, the rules will apply to tax years ending after April 4, 2023. Taxpayers can rely on the Notice until the proposed regulations are issued.
PTC and ITC requirements
The Inflation Reduction Act includes an increased percentage added to the PTC and ITC for clean energy facilities located in energy communities if certain requirements are met. Taxpayers may increase their IRC Section 45 and 45Y PTCs by 10% and their IRC Section 48 and 48E ITCs by 2% (or up to 10% if prevailing wage and apprenticeship requirements or certain other requirements are also met). The PTC applies to the electricity output of a qualifying facility and is calculated per kilowatt hour (kWh). The increase to the PTC is incremental, so the 10% increase would affect the amount per kWh. For example, if the taxpayer received a credit of 2.5 cents per kWh, the increased credit would result in 2.75 cents per kWh. The ITC increased credit is an outright additional 10%, so the taxpayer that received 30% would receive 40%.
The Notice defines "energy communities" to include the following categories:
Energy community categories
The Notice gives specific requirements for the three categories.
A brownfield site is defined as one that may be contaminated by pollutants as defined by IRC Section 9601 and certain mine-scarred land. The Notice provides a safe harbor for brownfield sites that (1) were previously assessed as meeting the definition under IRC Section 9601(39)(A); or (2) meet certain American Society for Testing and Materials environmental assessment guidelines.
The bonus credits are available to areas that have significant employment or local tax revenues from fossil fuels and higher than average unemployment, according to the accompanying Treasury release.
Specifically, the Notice defines areas that can receive the bonus credits as metropolitan statistical areas (MSAs) and non-metropolitan statistical areas (non-MSAs) that (1) have had at any time, after December 31, 2009, 0.17% or greater direct employment or 25% or greater local tax revenues related to fossil fuels, and (2) have an unemployment rate at or above the national average for the previous year. The Notice gives the method for determining these statistics.
Coal closure census tracts
Census tracts that may qualify as energy communities are those that contain or directly adjoin properties on which a coal mine was closed after 1999 or a coal-fired electric generating unit was retired after 2009. The Notice defined "directly adjoining" as census tracts that have boundaries that touch at any single point. "There are many cases where multiple census tracts meet at a single point. If a closed coal mine or retired coal-fired electric generating unit is located in one of the census tracts, then other census tracts sharing the single point would be considered directly adjoining," according to the Notice.
The Treasury release contains a link to the Interagency Working Group on Coal & Power Plan Communities & Economic Revitalization, which has a mapping tool to help determine statistical areas and coal closure census tracts that potentially qualify as energy communities. Links to Appendices A, B and C with lists of current statistical areas are also included.
To receive the bonus rates under IRC Sections 45 and 45Y, a qualified facility must be located in an energy community. To receive the bonus rates under IRC Sections 48 and 48E, an energy project, qualified facility or energy storage technology must be placed in service within an energy community.
Elections for the IRC Section 45 and 45Y PTC must be made separately for each applicable facility and for each tax year during the 10-year period beginning on the date the facility was placed in service. For PTCs under IRC Sections 45 and 45Y, a qualifying facility is treated as located in an energy community if it is located there for any part of the tax year. The determination whether a facility is located in an energy community must be made for each tax year separately during the 10-year period.
For purposes of IRC Sections 48 and 48E, the applicable date is the date the project was placed in service.
Beginning of construction
If a qualifying project is in an energy community on the date it begins construction, then it keeps that status for the duration of the IRC Section 45 credit period or the IRC Section 48 placed-in-service date, even if the location subsequently falls out of the energy community definition.
Energy communities must satisfy the nameplate capacity test or the footprint test to qualify for the credits. To satisfy both tests, 50% or more of the project's nameplate capacity or square footage, as applicable, must be located in an energy community.
Addressing the issue of offshore projects, the Notice gives an example of an offshore wind facility, providing that "[t]he onshore substation that conditions the Project's generated electricity for transmission, distribution, or use and that is located nearest to the point of land-based interconnection is located in an energy community. Taxpayer may attribute the Project's nameplate capacity to that onshore substation under the Nameplate Capacity Attribution Test."
For the increased credits to apply, a taxpayer's alternative energy asset must be in an energy community. Notice 2023-29 describes Treasury's methods and thresholds for designating which regions are considered energy communities. While the Notice itself is helpful, the information contained in the mapping software and accompanying Appendices A, B, and C will likely serve as the more common reference points when taking tax positions on energy communities.
The Notice also contains helpful information to address the ambiguity around projects that span multiple geographic designations, do not generate electricity (e.g., renewable natural gas), or include wind projects that are anticipated to be located offshore on the outer continental shelf.
The combined information in the Notice, as well as the accompanying tool and Appendices, should allow stakeholders to more confidently determine the amount of federal tax incentives for a particular alternative energy asset.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor