June 6, 2023
IRS releases additional guidance on claiming credits under IRC Section 48C for qualifying advanced energy projects
The IRS has released additional guidance (Notice 2023-44) on the IRC Section 48C(e) program to allocate $10b in credits for investments in eligible qualifying advanced energy projects, of which at least $4b will be for projects located in energy communities census tracts. Notice 2023-44 clarifies and modifies Notice 2023-18 (see Tax Alert 2023-0308) by giving detailed information on the process for submitting concept papers and program applications, as well as the criteria the IRS and DOE will consider in allocating credits. In addition, Notice 2023-44 gives information on "energy communities census tracts" and includes a complete list of eligible census tracts in Appendix C, as well as a link to an updated mapping tool.
IRC Section 48C, which was extended by the Inflation Reduction Act (IRA), provides an investment tax credit for advanced energy projects. The IRC Section 48C credit has a base amount of 6% (which can go up to 30%, assuming the prevailing wage and apprenticeship requirements are met (see Tax Alert 2022-1832)).
Notice 2023-18 established the IRC Section 48C(e) program to allocate the IRC Section 48C credits. Notice 2023-18 defined an advanced energy project as one that:
The requirements and scoring criteria will vary by each category. Notice 2023-18 also described the prevailing wage and apprenticeship requirements and provided initial information on submitting concept papers and applications.
Interaction of IRC Section 48C and IRC Section 45X credits
A facility receiving an IRC Section 48C credit generally cannot also receive an IRC Section 45X manufacturing production tax credit. However, Notice 2023-44 defines a "facility" as all tangible property that makes up an independently functioning production unit. Thus, a facility with different independently functioning production units could claim the IRC Section 45X tax credit for units that are not receiving the IRC Section 48C credit.
The first round of allocations will consist of $4 billion of qualifying advanced energy project credits with at least $1.6 billion allocated to projects located in energy communities census tracts.
The application process consists of two steps — submitting a concept paper and then an IRC Section 48C(e) program application to the DOE. The process is outlined in detail in Appendix B of Notice 2023-44. Materials for submitting information for the concept paper can be obtained from the IRS's eXCHANGE portal beginning May 31, 2023. The DOE will open up the application portal no later than June 30, 2023, and applications can be submitted until 12 PM EST on July 31, 2023.
After reviewing the concept paper, the DOE will provide applicants with a letter either encouraging or discouraging them from completing a full application. Each letter may also include feedback on areas needing improvement. All applicants can still choose to submit the IRC Section 48C(e) program application regardless of the DOE's recommendation.
Applicants will be able to submit their full applications starting seven days after they receive the DOE's encourage/discourage letter. Full applications must be submitted within 45 days after the DOE begins the acceptance process for each specific application. After DOE reviews the IRC Section 48C(e) program applications, it will submit recommendations and rankings of the projects to the IRS.
When evaluating the IRC Section 48C(e) applications, the DOE will first apply the selection criteria listed in Notice 2023-44 to determine which projects will have the greatest impact on domestic jobs, avoiding or reducing pollutants, and lowering energy costs, among other factors.
The DOE will then evaluate whether a project merits its recommendation based on the four technical review criteria: (1) commercial viability, (2) greenhouse gas emissions impacts, (3) strengthening US supply chains and domestic manufacturing for a net-zero economy, and (4) workforce and community engagement.
After the DOE submits its recommendations and rankings, the IRS will make its allocation decisions. The IRC Section 48C credits will be allocated to a project based on the taxpayer's qualified investment in the qualifying advanced energy project and whether the taxpayer intends to apply for IRC Section 48C credits calculated at the 30% credit rate.
The IRS will the notify applicants of allocations by March 31, 2024.
Taxpayers have up to two years after receiving the allocation letters to confirm they have met the certification requirements by submitting the information through the eXCHANGE portal, after which the IRS will certify the project. To receive a certification for an awarded project, applicants must provide evidence that they have met all of the requirements for certification, including obtaining the necessary permits to commence construction and documentation demonstrating that any other commitments or claims in the application have been met.
Taxpayers that place a qualifying project in service within two years of certification and notify the DOE may claim the IRC Section 48C credit on their income tax return for the tax year in which the project was placed in service (subject to certain exceptions for qualified progress expenditures).
Taxpayers that do not place the project in service within two years or notify the DOE will forfeit their allocation. Forfeited allocations will likely be made available in future rounds of funding.
Projects that are placed in service before being allocated IRC Section 48C credits under the IRC Section 48C(e) program are not eligible to receive the allocation.
Energy communities census tracts
The IRS has earmarked $1.4b from the first round of allocations for projects located in energy communities census tracts. According to Notice 2023-44, the determination of whether a project is located in an IRC Section 48C(e) energy communities census tract will be made at the time that DOE provides recommendations to the IRS and will not be redetermined.
A facility is treated as located in an energy communities census tract if 50% or more of its square footage is in an area that qualifies as an energy communities census tract. This percentage is determined by dividing the square footage of the facility that is located in the energy communities census tract by the total square footage of the facility.
Taxpayers can refer to Appendix C of Notice 2023-44 or DOE's website at www.energy.gov/infrastructure/48C for a list of energy communities census tracts.
Notice 2023-44 provides important guidance on the first round of IRC Section 48C(e) program allocations, while also providing clarity on a number of open questions. As with the Notice 2023-18, there continues to be an emphasis on projects/investments in energy communities and these projects are expected to be well-positioned to receive an allocation.
Notice 2023-44 also gives taxpayers much needed clarity on the double benefit limitation between the manufacturing production tax credit under IRC Section 45X and the IRC Section 48C credit. By defining a "facility" as all tangible property that makes up an independently functioning production unit, taxpayers with vertically integrated manufacturing operations may now have a path to obtain an IRC Section 48C allocation while preserving the value of their IRC Section 45X credit.
Potential applicants should pay close attention to the information required as well as the specific scoring criteria for the category under which their project fits. While the concept paper is limited to five pages, the data sheet, which is specific to each category, requires additional detail that may take time to collect, so it is important to begin the data collection process as soon as practicable. Similarly, given the limited time (i.e., 52 days) to complete the entire application, applicants submitting concept papers may want to begin working on the full application before receiving an encourage/discourage letter, so they have ample time to complete all of the required materials.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor