28 January 2025 IRS issues final regulations on IRC Sections 45Y and 48E technology-neutral clean energy credits
Treasury and the IRS released final regulations (TD 10024) on the IRC Section 45Y clean electricity production tax credit (PTC) and the IRC Section 48E clean electricity investment tax credit (ITC) established by the Inflation Reduction Act. To qualify, an eligible facility that generates electricity must have a net-zero or negative greenhouse gas (GHG) emissions rate. The final regulations, which largely adopt the proposed regulations, detail how to determine rates of GHG emissions resulting from producing electricity, petition for provisional emissions rates (PERs) and determine eligibility for these credits. Revenue Procedure 2025-14, which is effective January 15, 2025, lists in the first Annual Table the technologies that are described in the final regulations as non-combustion and gasification facilities that have a zero or negative GHG emissions rate. The IRS received over 1,800 written comments in response to the proposed regulations and heard the testimony of 36 speakers. The final regulations are effective on the date of publication in the Federal Register (i.e., January 15, 2025). IRC Sections 45Y and 48E credits apply to eligible facilities or property placed in service after 2024. A qualified facility is one that:
The IRC Section 45Y credit for qualified facilities is 0.3 cents per kilowatt hour (kWh) of eligible electricity produced by the taxpayer at a qualified facility. A qualified facility can get a credit of 1.5 cents per kWh if the facility has a maximum net output of less than 1 megawatt (as measured in alternating current). The amounts will be adjusted for inflation. The IRC Section 48E credit for qualified investment in a qualified facility and any energy storage technology equals the applicable percentage of the qualified investment. The base rate of the credit is 6% unless a qualified facility or energy storage technology satisfies the requirements for the higher alternative rate of 30% by either (1) meeting the prevailing wage and apprenticeship (PWA) requirements, (2) having a net output or a capacity of less than 1 megawatt (as measured in alternating current) or (3) starting construction before January 29, 2023. Energy storage technology is defined as property (other than property primarily used in the transportation of goods or individuals and not for producing electricity) that receives, stores and delivers energy for conversion to electricity (or, for hydrogen, which stores energy), and has a nameplate capacity of at least 5 kWh. The IRS published proposed regulations (REG-119283-23) for IRC Sections 45Y and 48E in June 2024, which are largely adopted in the final regulations. The IRS published final regulations on the PWA requirements in June 2024 (see Tax Alert 2024-1269) and on the types of energy properties eligible for the IRC Section 48 credit in December 2024 (see Tax Alert 2024-2290). A qualified facility includes a unit of qualified facility, any integral parts of the facility and any qualifying components. A unit of a qualified facility includes all functionally interdependent components of property that are owned by the taxpayer, are operated together and can operate apart from other property to produce useful thermal energy and electricity. A qualified facility generally does not include equipment that adds to or modifies an existing qualified facility. The "single project" determination that was established for IRC Sections 45 and 48 for the purpose of an increased credit for meeting the PWA requirements, the domestic content bonus credit amount, and the increase in credit rate for energy communities, does not apply to IRC Sections 45Y and 48E credits. In addition, the dual-use rule, which was used in the IRC Section 48 regulations to address the treatment of energy property that uses energy derived from both a qualifying source and from a non-qualifying source, does not apply to IRC Sections 45Y and 48E credits and only the incremental cost of such component is included in the basis of the qualified facility. Treas. Reg. Section 1.45Y-4(d)(1) adopts the proposed regulations to provide that a facility may qualify as originally placed in service even if it contains, in accordance with the 80/20 rule, some used components of property within the unit of qualified facility. If a facility satisfies this rule, then the date on which the qualified facility is considered originally placed in service is the date on which the new components of property of the unit of qualified facility are placed in service. The final regulations confirm that a properly retrofitted facility will be considered a new qualified facility or a new energy storage technology for purposes of the IRC Section 48E credit so long as the facility meets all the necessary requirements. Under Treas Reg. Section 1.45Y-2(c)(1), a qualified facility does not include any facility for which a credit is determined under IRC Sections 45, 45J, 45Q, 45U, 48, 48A or 48E for the tax year or any prior tax year. In addition, a taxpayer that directly owns a qualified facility that is eligible for both an IRC Section 45Y credit and another federal income tax credit is only eligible for the IRC Section 45Y credit if the other credit was not allowed for the qualified facility. Under Treas. Reg. Section 1.48E-2(g), an energy storage facility includes a unit of energy storage property and property that is owned by the taxpayer and is an integral part of the energy storage property. Energy storage property does not include equipment that is an addition or modification to an existing energy storage property. A unit of energy storage property includes all functionally interdependent components of property owned by the taxpayer that are operated together and that can operate apart from other property to perform the property's intended function. Thermal energy storage property: The final regulations differ from the proposed regulations by clarifying that thermal energy storage property is equipment that adds or removes heat, but not equipment that transforms other forms of energy into heat. 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 used 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. Hydrogen energy storage property: 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. A qualified facility or an energy storage facility is considered placed in service in the earlier of (1) the tax year in which the property's depreciation begins under the taxpayer's depreciation practice; or (2) the tax year in which the energy storage facility is placed in a condition or state of readiness and availability for its intended function, whether in a trade or business or in the production of income. The final regulations give further guidance on how to make these determinations. IRC Section 48E included the ability to opt out of the normalization rules that apply to public utility property and dictate how to share investment tax credits with utility ratepayers. The proposed regulations pointed to IRC Section 48(c)(6), which says that "energy storage technology shall not include any property the construction of which begins after December 31, 2024." This would have prevented this election from applying to IRC Section 48E eligible property. The final regulations fix this issue by stating, "[f]or application of the normalization rules to the [IRC S]ection 48E credit in the case of certain regulated companies, including rules regarding the election not to apply the normalization rules to EST (as defined in section 48(c)(6) of the Code without regard to section 48(c)(6)(D) of the Code), see section 50(d)(2) of the Code." Treas. Reg. Section 1.45Y-5 describes the rules for determining GHG emissions rates for a facility under IRC Section 45Y, as well as the requirements for annual publication of these rates, the process for requesting PERs and substantiation requirements. The final regulations identify the specific technologies that qualify as non-combustion and gasification facilities with zero GHG emissions: wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, fusion energy, and certain types of waste energy recovery property. These facilities do not need to undergo a GHG emissions analysis. For combustion and gasification facilities, such as those that utilize biogas, renewable natural gas (RNG) or methane in the production of electricity, GHG emissions rates must be determined by a lifecycle analysis. The emissions rate for combustion and gasification facilities must consider all direct and significant indirect emissions associated with electricity production, which includes considerations of alternative fates of the input energy, as well as byproducts, coproducts and waste/disposal practices. Treas. Reg. Section 1.45Y-5(d)(2), which for the most part adopts the proposed regulations, gives detailed requirements for the lifecycle analysis. The Preamble to the final regulations discusses many of the comments received and clarifies some of the definitions. For example, the final regulations clarify that a combustion and gasification facility is one "that produces electricity through combustion or uses an input energy source to produce electricity, if the input energy source was produced through a fundamental transformation of one energy source into another using combustion or gasification." This clarification affects the eligibility of hydrogen fuel cells, depending on how they produce electricity. Most of the provisions under Treas. Reg. Section 1.45Y-5 for determining GHG emissions rates also apply to determining the rates for purposes of the IRC Section 48E credit. Additional requirements apply for facilities that require the use of certain feedstocks or carbon capture and sequestration. Taxpayers may submit objective indicia that these facilities will operate with a GHG emissions rate that is not greater than zero for at least 10 years beginning from the date the facility is placed in service. The final regulations do not permit the use of a book-and-claim accounting system to determine or claim the energy attributes of biogas, RNG, coal mine methane, any other methane used in the production of electricity, or any other input or feedstock. Revenue Procedure 2025-14, which was released with the final regulations, lists in the first Annual Table the technologies that are described in the final regulations as non-combustion and gasification facilities that have a zero or negative GHG emissions rate. Taxpayers may petition for an emissions rate for any facility for which an emissions rate has not been established in the Annual Table. Prop. Treas. Reg. 1.45Y-5(g) and 1.48E-5(g) provided the rules applicable to PER and the proposed rule was adopted without change. An emissions value may be obtained from the Department of Energy (DOE) or by using a designated lifecycle analysis model. The PER petition must be completed for each qualified facility and attached to the taxpayer's return for the first tax year in which the taxpayer claims a credit with respect to the facility. The emissions value determined by the DOE or by using a designated lifecycle analysis model will be deemed to be accepted upon the IRS's acceptance of the taxpayer's federal return containing the PER petition. The final regulations clarify the process for qualifying combustion and gasification facilities for credits under IRC Sections 45Y and 48E and provide some flexibility to account for the wide range of fuels and energy generation technologies. Taxpayers beginning construction on potentially qualifying facilities in 2025 and beyond should consider whether a PER must be obtained through the DOE or by using a designated lifecycle analysis model early in the project timeline to determine if the facility is likely to qualify for tech-neutral credits. The final regulations for IRC Sections 45Y and 48E differ from the previous credits under IRC Sections 45 and 48. Taxpayers should carefully evaluate the eligibility of their projects and the corresponding tax credit amounts.
Document ID: 2025-0343 | ||||||