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November 21, 2023

Proposed regulations on IRC Section 48 investment tax credit would update requirements for eligible energy property

  • Proposed Regulations provide much-need clarity on energy property eligible for the IRC Section 48 investment tax credit (ITC) after new technologies were added by the Inflation Reduction Act, including standalone energy storage, biogas property and microgrid controllers.
  • The Proposed Regulations also provide a clear definition of "energy project" for taxpayers seeking an increased credit for prevailing wage and apprenticeship requirements.

In proposed regulations (REG-132569-17, the Proposed Regulations), the Treasury Department and IRS provide clarity on the types of energy properties eligible for the IRC Section 48 investment tax credit (ITC) and incorporate changes from the Inflation Reduction Act (IRA). The Proposed Regulations would clarify the definitions of energy properties, including new types of energy property technologies added by the IRA, and update the general rules for the ITC. The regulations under IRC Section 48 have not been updated since 1987.


The IRA extended the ITC under IRC Section 48 for most projects that begin construction before January 1, 2025. The IRC Section 48 ITC is subject to the two-tiered investment structure (with the top, bonus rate being achieved if prevailing wage and apprenticeship (PWA) requirements are met) (see Tax Alert 2022-1236). The IRA also includes bonus credits for clean energy facilities located in designated energy communities (see Tax Alert 2023-0675) and for meeting domestic content requirements (see Tax Alert 2023-0908).

Eligibility for the IRC Section 48 ITC depends, among other criteria, on the type of energy property used in the clean energy projects and whether it meets certain requirements.

Changes to previous proposed regulations

The Proposed Regulations would amend several regulations under IRC Section 48 (Treas. Reg. Section 1.48-9 would be revised and Treas. Reg. Sections 1.48-13, 1.48-14 and 1.6418-5 would be added). They also would withdraw and repropose regulations under IRC Section 48 on the PWA requirements that were published on August 30, 2023 (see Tax Alert 2023-1469), as well as propose additional regulations on transferring renewable tax credits under IRC Section 6418 (see Tax Alert 2023-1103).

Definition of energy property

The Proposed Regulations would generally update the definitions of energy property to account for new legislation and technology.

IRC Section 48(a)(3)(B)(i) defines energy property as property that is constructed, reconstructed or erected by the taxpayer. The Proposed Regulations would largely adopt the definition from existing regulations that property is considered constructed, reconstructed or erected by the taxpayer if the work is performed for the taxpayer in accordance with the taxpayer's specifications. The Proposed Regulations would clarify that the property is acquired by a taxpayer when the taxpayer obtains rights and obligations with respect to energy property, including (1) title to the energy property under the law of the jurisdiction in which the energy property is placed in service, unless the property is possessed or controlled by the taxpayer as a lessee, and (2) physical possession or control of the energy property."

In addition, depreciation must be allowable for energy property to qualify for the IRC Section 48 ITC. The Proposed Regulations generally would adopt the existing rules for determining whether depreciation is allowable under IRC Section 48, with some modifications.

Energy property must also meet certain performance and quality standards. The Proposed Regulations would adopt the current rules from Treas. Reg. Section 1.48-9(c)(2) and provide special rules for both small wind property and electrochromic glass property.

Prop. Treas. Reg. Section 1.48-9(b)(5)(i) would clarify that energy property is considered placed in service in the tax year that is the earlier of (1) the tax year in which the depreciation period for the property begins, or (2) the tax year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function in either a trade or business or in the production of income.

Excluded property

An IRC Section 48 ITC is not allowed for property in a qualified facility for which a taxpayer is receiving an IRC Section 45 production tax credit (PTC). The Proposed Regulations would allow taxpayers to receive both credits by excluding from energy property any property that is part of a qualified facility for which an IRC Section 45 PTC is allowed for any tax year, including any prior tax year.

The IRS said in the Preamble that energy storage technologies are often co-located with qualified facilities and may share power conditioning and transfer equipment. To address this, power conditioning and transfer equipment that is shared by a qualified facility and an energy property may be treated as an integral part of the IRC Section 48 energy property. This shared property would not be considered part of a qualified facility, so the taxpayer could claim the IRC Section 48 credit for the energy property and the IRC Section 45 credit for the qualified facility.

Definitions of specific types of energy property

The Proposed Regulations provide detailed, and in some cases modified, definitions for all types of eligible IRC Section 48 energy property. Some of the key definitions and modifications to existing definitions are outlined next.

Solar energy property

The Proposed Regulations include slight modifications to the existing definition of solar energy property, which includes solar electric generation equipment. The definition of this equipment would be modified to eliminate the exclusion of passive solar equipment and adopt the functional interdependence test. For solar thermal property, the Proposed Regulations would explicitly include solar process heat equipment (equipment that uses solar energy to generate heat for use in industrial or commercial processes) in the definition of solar energy property.

Electrochromic glass property

The Proposed Regulations define two types of electrochromic glass property: electrochromic glass incorporated into a full window and electrochromic glass incorporated into a secondary window (i.e., secondary glazing). Electrochromic glass property includes the balance of window and installation components including glass, flashing, framing and sealants. The control package, which includes electronics, power supply, sensors and software, would also be eligible for IRC Section 48 ITC purposes. The Proposed Regulations also adopt certain performance and quality standards specific to this type of eligible energy property.

Geothermal energy property

Under the Proposed Regulations, the definition of geothermal energy property is largely unchanged from the statute and would include equipment used to produce, distribute and use energy derived from a geothermal deposit. The definition of production equipment would be modified to include equipment necessary to bring geothermal energy from the deposit to the surface. Electricity generating equipment would also be included in the definition under the Proposed Regulations. From a distribution perspective, components of a building's HVAC system would be included as distribution equipment.

Combined heat and power (CHP) system property

The Proposed Regulations would simplify the definition of CHP property, but leave unchanged the requirements related to efficiency and production of useful electrical/mechanical and thermal energy. Components and property used to transport the energy source to the generating facility or to distribute energy produced by the CHP property would be excluded from the definition of eligible property.

Energy storage technology

The IRA added standalone energy storage to the types of property eligible for an IRC Section 48 ITC. The Proposed Regulations would adopt the statutory definition of energy storage technology, which includes both electrical energy and thermal energy storage. The Proposed Regulations would clarify that hydrogen storage technology that is used for producing energy and electrochemical batteries of all types is eligible for the IRC Section 48 ITC. Additionally, the exclusion of property primarily used in the transportation of goods or individuals would not extend to energy storage technologies that are used to charge or recharge a vehicle or other modes of transportation.

Qualified biogas property

The definition of qualified biogas property would adopt the functional interdependence test to determine which components of the property are considered eligible for IRC Section 48 ITC purposes. Upgrading and conditioning the gas to capture it for sale or use is not eligible property under the Proposed Regulations. The definition would also clarify the point at which the methane content of gas should be measured to determine whether it is qualified.

The Proposed Regulations contain additional definitions for the following types of eligible property:

  • Fiber-optic solar energy property
  • Qualified fuel cell property
  • Qualified microturbine property
  • Qualified small wind energy property
  • Waste energy recovery property
  • Microgrid controllers
  • Other property included in IRC Section 48

Components that are considered energy property

For purposes of the IRC Section 48 ITC, energy property consists of all components that are functionally interdependent and integral to the production of energy. In addition to energy generation property, energy property includes the cost related to components such as power conditioning equipment and transfer equipment. To avoid limiting future energy technologies, the IRS said it is adopting a function-oriented approach to describe the types of components that are considered energy property. Therefore, Prop. Treas. Reg. Section 1.48-9(f) would adopt the concepts of functional interdependence and property that is an integral part of an energy property.

To illustrate this approach, the Proposed Regulations give an example of a qualified offshore wind facility. The qualified facility includes all the components up to and including the transformer and switchgear housed in the onshore substation; these components are identified as either functionally interdependent components of an energy property or integral parts of an energy property.

PWA requirements

Prop. Treas. Section 1.48-13 addresses the increased credit amounts for complying with PWA requirements. The same regulation section that was in the August proposed regulations would be withdrawn and replaced with the proposed one with some minor changes and some new rules. For the August 2023 proposed regulations on the PWA requirements, see Tax Alert 2023-1469.

A taxpayer that has claimed an increased credit under the PWA requirements but failed to satisfy the requirements during the five years beginning on the date a project is placed in service is subject to recapture of a portion (up to 100%) of the increased credit. Prop. Treas. Reg. Section 1.48-13 would clarify that failure to satisfy the rules in the five-year period could subject the taxpayer to the correction and penalty provisions in Prop. Treas. Reg. Section 1.45-7(c)(1). In addition, the Proposed Regulations would clarify that the five-year recapture period would begin on the day an energy project is placed in service and end on the day that is five full years after the placed-in-service date and each 365-day period (366 days for a leap year) within the recapture period is a separate recapture year. The Proposed Regulations would also institute an annual compliance reporting obligation for verifying compliance with the prevailing wage requirements.

Definition of energy project

For purposes of the PWA provisions, an "energy project" is a project consisting of one or more energy properties that are part of a single project. The Proposed Regulations list the factors for determining when multiple energy properties are operating as part of a single project. If multiple energy properties were treated as a single project for beginning-of-construction purposes under the IRC Section 48 ITC, the Proposed Regulations would treat them as one energy project for purposes of the PWA requirements, the domestic content bonus credit and the increase in the IRC Section 48 ITC rate for energy communities.

The August proposed regulations provided that facilities with a maximum net output of less than one megawatt (as measured in alternating current) would be eligible for the increased credit without meeting the PWA requirements but did not say how to determine the maximum output of a project. The Proposed Regulations specify how to determine nameplate capacity as expressed in MWs of electrical (as measured in alternating current) or thermal energy to make the megawatt determination. The Proposed Regulations also indicate that electrochromic glass property, fiber-optic solar and microgrid controllers are not eligible for the one-megawatt exception because they do not generate electricity or thermal energy.

Clarifications of specific issues

Retrofitted energy property: Prop. Treas. Reg. Section 1.48-14(a) would apply the 80/20 rule to energy property for purposes of the IRC Section 48 ITC. Under this rule, a qualified facility may qualify as originally placed in service even though it contains some used property if the fair market value of the used property is not more than 20% of the qualified facility's total value.

Dual use property: Energy property can qualify for the IRC Section 48 ITC if it uses energy from both non-qualifying and qualifying sources. Under Prop. Treas. Reg. Section 1.48-14(b)(2), it would qualify as energy property if its use of energy from non-qualifying sources did not exceed 50% of its total energy input during an annual measuring period.

Energy property eligible for multiple credits: Under Prop. Tres. Reg. Section 1.48-14(c)(1), the same energy property may be eligible for both the IRC Section 48 ITC and another credit, subject to certain limitations.

Ownership: A taxpayer that owns an energy property is eligible for the IRC Section 48 ITC only to the extent of its eligible basis in the energy property. If multiple parties hold ownership shares in an energy property, each party would be eligible for the IRC Section 48 ITC to the extent of their fractional ownership interest.

Interconnection property: Qualified interconnection property is (except for a microgrid controller) any tangible property that is involved in a transmission or distribution system that connects to the electrical grid through an interconnection agreement. The Proposed Regulations define (1) qualified interconnection property, (2) the five-megawatt limitation, (3) the interconnection agreement, (4) utility and (5) the reduction to amounts chargeable to a capital account.


The Proposed Regulations provide much-needed clarity around the new technologies added to IRC Section 48 by the IRA, including standalone energy storage, biogas property and microgrid controllers. The Proposed Regulations also adopt several definitions and other items, such as the single-project test for beginning construction, which were contained in previous guidance on qualifying property and calculating the IRC Section 48 credit. While the Proposed Regulations may not immediately impact the eligibility or credit amount for ongoing renewable energy projects, taxpayers should carefully review the definitions of eligible energy property to be sure they are including and excluding property as necessary to accurately determine their IRC Section 48 ITC.

Additionally, the Proposed Regulations clearly define energy projects for taxpayers seeking an increased credit for meeting PWA requirements. Under the Proposed Regulations, taxpayers will need to determine whether the rules apply to laborers and mechanics based on the eligible energy property for which they will claim a credit for each specific project. For example, there are certain situations where buildings and structural components, which are generally ineligible for the IRC Section 48 ITC, may be includable as energy property. As a result, PWA requirements would extend to those laborers working on building construction.


Contact Information
For additional information concerning this Alert, please contact:
National Tax
   • Greg Matlock, EY’s Global Energy & Resources Industry Tax Leader (
Americas Power & Utilities Tax Group
   • Brian Murphy, Americas Power & Utilities Tax Leader (
   • Mike Reno (
Tax Credit Investment Advisory Services
   • Michael Bernier (
Credits and incentives and sustainability
   • Paul Naumoff (
   • Akshay Honnatti (
   • David Camerucci (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor