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In Notice 2024-30 (Notice), the IRS modifies earlier guidance on defining "energy communities" for purposes of the increased production tax credits (PTCs) under IRC Sections 45 and 45Y and investment tax credits (ITCs) under IRC Sections 48 and 48E. The Notice expands the areas that could qualify for the bonus credits by modifying the "nameplate capacity attribution rule" and the "fossil fuel employment rate" in Notice 2023-29.

According to the Notice, the rules will apply to tax years ending after April 4, 2023. Taxpayers can rely on Notice 2023-29, as modified by subsequent notices, until the proposed rules are issued.

Background

In 2023, the IRS outlined in Notice 2023-29 what it intends to include in proposed rules on energy communities and how taxpayers with qualifying projects located in these communities could get up to a 10% increase in bonus credits (see Tax Alert 2023-0675). Notice 2023-29 defined the energy communities to include brownfields, statistical areas, and coal closure tracts and gave specific requirements for each. Notices 2023-45 and 2023-47 clarified these requirements (see Tax Alert 2023-1083).

The Notice clarifies two of the requirements: the nameplate capacity test and the fossil fuel employment rate.

Nameplate capacity attribution rule

Energy communities must satisfy the nameplate capacity test or the footprint test to qualify for the bonus credits. To satisfy both tests, 50% or more of the project's nameplate capacity (maximum electrical output under normal operating conditions) or square footage, as applicable, must be located in an energy community.

The nameplate capacity test includes the nameplate capacity attribution rule to determine what property is included for purposes of the test. Under the attribution rule in Notice 2023-29, if a qualifying project with offshore energy generation units has nameplate capacity, but none of the energy-generating units are in a census tract or metropolitan statistical area (MSA) or non-metropolitan statistical area (non-MSA), then the entire nameplate capacity of the project is attributed to the land-based power conditioning equipment for energy generated by the project for transmission, distribution, or use and that is closest to the point of interconnection.

The Notice expands this attribution rule by including any "qualifying project supervisory control and data acquisition" (SCADA) equipment located in a qualifying project port. SCADA equipment is defined as property that is owned by qualifying project's owner and used to remotely monitor and control the project's operations. A port is defined as one used either full- or part-time to facilitate maritime operations necessary for installing or operating and maintaining the qualifying project. Additionally, the port must have a significant long-term relationship with the qualifying project and have staff that are employed by, or working as independent contractors for, the qualifying project's owner.

Fossil-fuel employment rate

The bonus credits are available to areas with significant employment or local tax revenues from fossil fuels and higher-than-average unemployment. Notice 2023-29 defined areas that can receive the bonus credits as MSAs and 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 modifies Notice 2023-29 by adding two 2017 North American Industry Classification System (NAICS) industry codes to use in calculating the fossil fuel unemployment rate. This results in an increased number of MSAs and non-MSAs that qualify for the bonus credits.

Implications

The changes to the attribution rule for offshore wind farms could have a big impact. The original guidance only included the location where the power conditioning equipment was (i.e., the step-up transformer) in the definition of attributed offshore facilities. Notice 2024-30 includes the port from which operations and maintenance is performed, as long as certain criteria are met as another location of attribution. This may allow additional projects to be eligible for the 10% bonus credits.

While the Notice requires the SCADA equipment to be owned by the same taxpayers as the energy-generating equipment, it is silent on the ownership of the power-conditioning equipment. This leaves some uncertainty as to whether the explicit requirement around SCADA equipment was intentional or meant to be more general in nature. Support for the rule being specific to SCADA equipment might be found in the recent proposed regulations under IRC Section 48, where an example had a different taxpayer owning onshore power-conditioning equipment while still maintaining qualification (see Tax Alert 2023-1936). Hopefully future guidance will clarify this issue.