13 December 2024 Final regulations address eligible energy property for IRC Section 48 investment tax credits
The Treasury Department and IRS have finalized the regulations (TD 10015, the Final Regulations) on the types of energy properties eligible for the IRC Section 48 investment tax credit (ITC). The Final Regulations adopt most of the Proposed Regulations (see Tax Alert 2023-1936) while making some changes in response to the 350 comments the IRS received. The changes most helpful to taxpayers include modifying the definitions of qualified biogas property and how to determine when multiple units of energy property are considered a single project for purposes of complying with prevailing wage and apprenticeship (PWA) requirements. The Final Regulations are effective December 12, 2024, and apply to projects that begin construction before January 1, 2025, and are placed in service during a tax year beginning after the effective date. Taxpayers may choose to apply the Final Regulations to eligible energy projects placed in service after December 31, 2022. Clean energy projects beginning construction after December 31, 2024, may be eligible for a credit under IRC Section 48E until 2033 based on greenhouse gas emissions (tech-neutral) of the generation technology. 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 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. In November 2023, the IRS released Proposed Regulations to amend several regulations under IRC Section 48 (revising Treas. Reg. Section 1.48-9 and adding Treas. Reg. Sections 1.48-13, 1.48-14 and 1.6418-5). It also proposed withdrawing and reproposing regulations under IRC Section 48 on the PWA requirements that were published on August 30, 2023 (see Tax Alert 2023-1469), as well as proposing additional regulations on transferring renewable tax credits under IRC Section 6418 (see Tax Alert 2023-1103). The Final Regulations adopt most of the Proposed Regulations while modifying and clarifying some provisions based on comments received during the comment period. The Final Regulations generally adopt the definitions of energy property in the Proposed Regulations. IRC Section 48(a)(3)(B)(i) defines energy property as property that is constructed, reconstructed or erected by the taxpayer. The Final Regulations adopt the Proposed Regulations' definition 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 Final Regulations also adopt the definition 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. The Final regulations clarify that the taxpayer must establish tax ownership of the energy property for federal income tax purposes. The Final Regulations also adopt the Proposed Regulations' energy property requirements for (1) depreciation, (2) performance and quality standards, and (3) being considered placed in service. The Final Regulations adopt most of the Proposed Regulations' definitions of eligible IRC Section 48 energy property. The Final Regulations did make changes, however, to the following definitions. The Final Regulations clarify the requirements for thermal energy storage property. Equipment that adds or removes heat (e.g., heat pumps) is eligible, but equipment that transforms other forms of energy into heat (e.g., through combustion or electric resistance) is not eligible. In addition, thermal energy storage property must be able to store the heat and substantially alter the time profile of when the added or removed heat changes the temperature of a residential or commercial building. If the thermal energy property to store energy is sufficient for heating or cooling for at least one hour, it falls into the new safe harbor. The Final Regulations also expand the examples of storage that can be used to artificial pits, aqueous solutions and solid-liquid phase change material, in addition to the underground tank or a borehole field already included in the Proposed Regulations. The Final Regulations confirm that energy storage technology is eligible for the IRC Section 48 ITC even if it is co-located with or shared by a facility that is otherwise eligible for the credits under IRC Sections 45, 45V or 48. The Final Regulations do not require hydrogen energy storage property to be used to store hydrogen that is solely used for producing energy and not for other purposes, like producing end products such as fertilizer. Property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property. The Final Regulations adopt the Proposed Regulations' functional interdependence test to determine which components of qualified biogas property are considered eligible for IRC Section 48 ITC purposes. The Final Regulations eased the requirements for qualified biogas property as they apply to gas upgrading equipment by providing more generally that this equipment is cleaning and conditioning property instead of requiring the specific identification of equipment. The Final Regulations acknowledge that ownership of both the functionally interdependent qualified biogas property and the biogas upgrading may be difficult to achieve and instruct taxpayers to use the "function-oriented" approach to determine what property is considered energy property and comprises the energy project under their specific facts. While the Final Regulations do not include additional examples of property that is included as qualified biogas property, they do clarify that property that is an integral part of qualified biogas property includes, but is not limited to, waste feedstock collection systems, landfill gas collection systems, and mixing and pumping equipment. The Final Regulations also address flaring; while a qualified biogas property generally may not capture biogas for disposal via combustion, combustion in the form of flaring will not disqualify a qualified biogas property if the primary purpose of the qualified biogas property is the sale or productive use of biogas as long as the flaring complies with all other federal, state, Tribal, and local laws and regulations. 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. Like the Proposed Regulations, the Final Regulations define a unit of energy property as all functionally interdependent components of property that (1) are owned by the taxpayer, (2) are operated together, and (3) can operate apart from other energy properties within a larger energy project. For solar energy property, the Final Regulations clarify that the unit of energy property is considered all the solar panels that are connected to a common inverter, which would be considered an integral part of the energy property, or connected to a common electrical load, if a common inverter does not exist. "Accordingly, a large, ground-mounted solar energy property may be comprised of one or more units of energy property depending upon the number of inverters." The Final Regulations adopt by cross-reference the PWA Final Regulations promulgated in June 2024 (see Tax Alert 2024-1269). The PWA requirements under IRC Section 48 apply to the creditable portion of an energy project within the meaning of IRC Section 48(a)(9)(A) and the Final Regulations. Taxpayers must satisfy the PWA requirements for construction, alteration or repair that occurs on or after January 29, 2023. For purposes of the PWA provisions, an "energy project" consists of one or more energy properties that are part of a single project. The Proposed Regulations listed seven factors for determining when multiple energy properties are operating as part of a single 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 Proposed Regulations would have required two of the following factors to be met to be considered a single project:
In response to comments that the single project rule "would apply to an overly broad range of energy properties and lead to illogical groupings and practical difficulties in complying with various bonus credit amounts and increased credit rates under [IRC S]ection 48," the IRS said in the Preamble that "additional flexibility is warranted." Thus, the Final Regulations require four or more factors to be present and permit the factors to be assessed, at the taxpayer's choice, either at any point during construction or the tax year the energy properties are placed in service. To determine if multiple energy properties are a single project, the Final Regulations provide particular and specific requirements rather than a facts-and-circumstances approach. As the PWA requirements, the domestic content bonus credit amount, and the increase in credit rate for energy communities each apply at the energy project level, the Final Regulations also state that the determination of whether an energy project meets any of these requirements cannot be made before the placement in service of the last of the multiple energy properties within that energy project. The Final Regulations adopt the Proposed Regulations' applications of 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. Many commenters asked the IRS to abandon or change the 80/20 rule, but the Final Regulations declined to do so. 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 Final Regulations confirm that tangible property required to modify and upgrade transmission or distribution systems beyond the point of interconnection would be considered qualified interconnection property and eligible for inclusion in basis for purposes of the IRC Section 48 ITC. The Final Regulations retain the rule that the determination of whether an energy property has a maximum net output no greater than five MW (as measured in alternating current) is based on the nameplate capacity of the energy property. The Final Regulations, however, provide a method of measuring nameplate capacity for an energy property that generates electricity in direct current. Thus, for energy properties that generate electricity in direct current, the taxpayer may choose to determine whether an energy property has a maximum net output no greater than five MW (in alternating current) by using the lesser of (1) the sum of the nameplate generating capacities within the unit of energy property in direct current, or (2) the nameplate capacity of the first component of property that inverts the direct current electricity generated into alternating current. Several commenters raised concerns regarding ITC eligibility where multiple taxpayers own components of the energy property. The Final Regulations adopt the Proposed Regulations by allowing taxpayers to claim an ITC only if they own at least a fractional interest in an entire unit of energy property. Taxpayers owning one or more separate components of energy property that do not constitute a unit of energy property may not claim a credit. The Final Regulations provide examples of how the ownership rules may apply to qualified biogas property, noting that, in certain situations, "ownership of both the functionally interdependent qualified biogas property … and the biogas upgrading equipment [is] difficult to achieve."Application of the ownership rules to geothermal heat pump property, solar energy property and offshore wind facilities is also discussed in the Preamble to the Final Regulations. Taxpayers should carefully examine how the updated guidance in the Final Regulations impacts both ongoing projects as well as those that will begin construction before the end of 2024. While the Final Regulations largely adopt the Proposed Regulations released in November 2023, they address some of the key issues that remained unclear. The Final Regulations modify the Proposed Regulations' definition of "qualified biogas property" to address several concerns raised by taxpayers. These modifications clarify the application of single ownership rules to biogas facilities, which typically have multiple owners of functionally interdependent components, so taxpayers investing in biogas facilities with multiple owners may now be eligible for a credit. The modification of the "single project test" to require four common factors, as opposed to the two common factors in the Proposed Regulations, should ease beginning-construction requirements and the availability of increased credit amounts. The Final Regulations also give taxpayers flexibility as to when the single project determination is made. The examples of what constitutes a unit of energy property are especially helpful given that taxpayers now must complete IRS Form 3468, Investment Credit, on a facility-by-facility basis. Additionally, as year-end nears, the determination of what constitutes a unit of energy property can be critical in determining what portion, if any, of a project has been placed in service before the end of the tax year. The IRS and Treasury received a significant number of comments, many of which dealt with narrow fact patterns. Many of these comments were discussed in the Preamble. While the Preamble is not authoritative, it does provide some insight into the IRS's thinking on some matters.
Document ID: 2024-2290 | ||||||
