Tag: energy tax credits

Energy Tax Credits for a New World Part VII: Low-Income Communities Bonus Credits

What is the Low-Income Communities Bonus Credit?

The Low-Income Communities Bonus Credit available through the Inflation Reduction Act of 2022 (IRA)[1] is designed to increase the siting of, and access to renewable energy facilities in low-income communities, encourage new market participants, and provide social and economic benefits to individuals and communities that have been historically overburdened with pollution, adverse health or environmental effects, and marginalized from economic opportunities.[2]

The Low-Income Communities Bonus Credit supports “a transformative set of investments designed to create jobs, lower costs for American families, and spur an economic revitalization in communities that have historically been left behind.”[3] With the Low-Income Communities Bonus Credit the U.S. government is helping to “lower energy costs and provide breathing room for hard-working families, invest in good-paying clean energy jobs in low-income communities, and support small business growth.”[4]

The Low-Income Communities Bonus Credit is an investment tax credit (ITC) available for certain clean energy investments in low-income communities, on Indian lands, with certain affordable housing developments, and for certain projects benefiting low-income households.[5] It is an ITC for certain clean energy investments in a “Qualified Solar or Wind Facility,” that is, a facility with a net output of less than five megawatts. Unlike most of the other tax credits we have looked at in this Q&A with Andie series, there is a competitive bidding application process. Projects must receive a “Capacity Limitation Allocation Amount” to receive these credits.

What are the eligibility categories for the Low-Income Communities Bonus Credit?

There are four project eligibility criteria to qualify for the Low-Income Communities Bonus Credit:

  1. It is located in a “low-income community” (Category 1)
  2. It is located on “tribal Indian land” (Category 2)
  3. It is installed on certain federal housing projects that are qualified low-income residential building facilities (Category 3)
  4. It serves low-income households as a “qualified low-income economic project” (Category 4)

These eligibility categories are discussed in what follows.

Which tax credits do Low-Income Communities Bonus Credits apply to?

The Low-income Communities Bonus Credit is an additional bonus credit available for ITC-eligible credits at Internal Revenue Code (Code) Section 48, Energy Property ITC, and Section 48E, Clean Energy ITC (CEITC). Section 48 applies to an “eligible facility” (that is, a qualified solar or wind energy facility) for which construction begins before 2025; while the CEITC applies to construction in qualifying clean electricity generating facilities and energy storage technologies that are placed in service after December 31, 2024.[6] The base credit may be increased by 10 percent (for a project located in a low-income community or on Indian land) or by 20 percent (for a qualified low-income residential building project or a qualified low-income economic benefit project).[7]

Because the Section 48 credit expires at the end of 2024 and the Section 48E (CEIT) becomes effective January 1, 2025, we will need to look at Section 48 separately from Section 48E (CEITC) when we address the allocation procedures.

How is the Low-Income Communities Bonus Credit calculated?

The Low-Income Communities Bonus Credit is one of the few IRA energy tax credits that requires an application process and the granting of a “capacity limitation allocation amount.” For allocations in 2023 and 2024, the Section 48(e) ITC provides an increased tax credit for an eligible facility that is part of a “qualified solar or wind energy facility” and that receives a capacity limitation allocation amount. For allocations in 2025 and thereafter, the Section 48E (CEITC) credit applies to a broader group of facilities than those covered under Section 48(e).[8] For both Section 48 and 48E (CEITC), the base credit amount is six percent of a qualified investment (that is, the tax basis of the energy property), and that amount can be increased by 10- or 20-percentage points with the Low-Income Communities Bonus Credit, depending on whether the project meets certain eligibility category requirements.[9] The 10 percent credit is available for an eligible facility in a low-income community or on Indian land, while the 20 percent credit is available for a “qualified low-income residential building project” or a “qualified low-income economic benefit project.”

What is a qualified solar or wind facility?

A Qualified Solar or Wind Facility is an eligible facility if it meets three requirements.[10] First, it generates electricity solely from a wind facility, solar energy property, or small wind energy property. Second, it has a maximum net output of less than five megawatts as measured in alternating current. And third, it is described in at least one of the four Low-Income Communities Bonus Credit project categories.[11]

Because the eligible facility must have a maximum net output of less than five megawatts as measured in alternating current, can applicants divide larger projects into smaller ones to meet the five megawatts requirements?

No. The Treasury has issued Final Regulations on Low-Income Communities Bonus Credit (Final Low-Income Communities Regulations),[12] effective August 15, 2023. The Final Low-Income Communities Regulations provide that the capacity limitation allocation amounts will be made on a “single project factors test.”[13] This is intended to prevent applicants from artificially dividing larger projects into multiple facilities in an attempt to circumvent the requirement for the maximum net output.[14]

When can a Qualified Solar or Wind Facility be placed in service?

A project cannot be placed in service until after it receives the capacity allocation.[15] This is because the Treasury holds that “requiring projects to be placed in service after allocation provides the best way to promote the increase of, and access to, renewable energy facilities that would not be completed in the absence of the program.”[16] This is not viewed as an impediment because Section 48(e)(4)(E)(i) provides a “lengthy window of four years to place a facility in service following an Allocation of Capacity Limitation.”[17] Section 48E (CEITC) also provides a four-year window to place the facility in service.[18]

Definitions

What is a Category 1 low-income community for purposes of the Low-Income Communities Bonus Credit?

A Category 1 low-income community is a community that is located in a census area where the poverty rate is at least 20 percent or more, or the median family income is 80 percent or less than the median family income in the state where the community is located.[19] If the census tract is in a metropolitan area, the median family income cannot be more than 80 percent of the statewide median family income or the metropolitan area’s median family income.

The poverty rate for an eligible Category 1 low-income census tract is generally based on the threshold for low-income communities set by the New Markets Tax Credit (NMTC) Program, as noted in the Treasury Regulations. The NMTC updates its eligibility data every five years based on poverty estimates from the American Community Survey (ACS). New eligibility tables and maps for the NMTC program were released on September 1, 2023, which use underlying ACS estimates from 2016 to 2020.[20] The next NMTC update will include ACS estimates from 2021 to 2025, at which point applicants will have a period of one year following the date that the 2021-2025 NMTC is released to use the 2016-2020 NMTC dataset.[21]

How is Category 2 tribal Indian land defined?

Category 2 Tribal Indian land is land of “any Indian tribe, band, nation, or other organized group or community that is recognized as eligible for the special programs and services provided by the United States to tribes (Indians) because of their status.”[22] To qualify as Indian land, the property must meet the definition of Section 2601(2) of the Energy Policy Act of 1992, which is defined as, “Indian reservations; public domain Indian allotments; former Indian reservations in Oklahoma; land held by incorporated Native groups, regional corporations, and village corporations under the provisions of the Alaska Native Claims Settlement Act[23]; and dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a State.”[24]

The Energy Policy Act of 1992 was amended by the Energy Act of 2020 to include in the definition of land occupied by a majority of Alaskan Native Tribe members.[25]

How is a Category 3 qualified low-income residential building project defined?

A Category 3 qualified low-income residential building project is a federally subsidized residential building facility “installed on the same parcel or on an adjacent parcel of land that has a residential rental building that participates in an affordable housing program, and the financial benefits of the electricity produced by such facilities are allocated equitably among the occupants of the dwelling units or the building.”[26] Projects must be part of a “qualified program”: one among various federal housing assistance programs as are set out in the Treasury Regulations. For state programs to qualify to receive the 20 percent bonus credit, they must be part of a qualified federal program. To remain a qualified low-income residential building facility, a project must maintain its participation in a covered housing program for the entire five-year tax credit recapture period.

How does a Category 4 qualified low-income economic benefit project assist low-income households?

A qualified low-income economic benefit project is one where at least 50 percent of the financial benefits of the electricity produced are provided to households with income of less than 200 percent of the poverty line, or 80 percent of the area’s median gross income.[27] The financial benefits of a low-income economic project benefiting low-income households can only be delivered in utility bills savings. “Other means such as gift cards, direct payments, or checks are not permissible. Financial benefits for these facilities must be tied to a utility bill of a qualifying household. The Treasury Department and the IRS may consider other methods of determining Category 4 financial benefits in future years.”[28]

Allocation Process

How is the annual Capacity Limitation allocated across the four facility categories?

The annual Capacity Limitation amount is divided across each facility category as is set out in each program year. For the 2023 and 2024 Program Years, for example, we have IRS Notices setting out the Allocation Process. The Applicable Bonus Credit is available at Section 48. For the calendar year 2025 and succeeding years, the applicable bonus credit is available at Section 48E (CEITC). On September 3, 2024, the Treasury issued Proposed Regulations addressing Section 48E (CEITC) (Proposed 48E Allocation Regulations).[29]

For the 2024 Program Year, for example, the annual Capacity Limitation is divided across each facility category “plus any carried over unallocated Capacity Limitation from the 2023 Program Year.”[30]

 Does the Low-Income Communities Bonus Credit have a competitive bidding application?

Yes. The Low-Income Communities Bonus Credit has a competitive bidding application process that applies to each of the four eligibility categories. An annual allocation of up to 1.8 gigawatts (GWs) is available, in the aggregate, to the four categories of qualified solar or wind facilities with a maximum output of less than five megawatts.[32]

How does competitive bidding work?

Since it was introduced for the 2023 program year, competitive bidding has been very successful. The Low-Income Communities Bonus Credit program is extremely popular. The 2023 program—the first year of the competitive bidding process—was significantly over-subscribed with more than 46,000 applications submitted. Applications were for qualified facilities representing 8 GWs of capacity, although only 1.8 GWs of capacity were available for allocation.[33]

For purposes of the Section 48E Low-Income Communities Bonus Credit, we have the Proposed Section 48E Regulations to turn to as to how the competitive bidding process works. The Treasury has provided notice of a public hearing on the Proposed Regulations for October 17, 2024.

What government guidance do we have on the annual Capacity Limitation allocation process for Section 48?

For purposes of the Section 48 Low-Income Communities Bonus Credit, we have the Final Low-Income Communities Regulations. In addition, the IRS has issued revenue procedures and a Notice:

  • Rev. Proc. 2023-27[34] and Rev. Proc. 2024-19[35] provide information and guidance for the 2023 and the 2024 allocations. These revenue procedures both address the reservation of capacity limitations, allocation selection, and application procedures.
  • IRS Notice 2023-17,[36] sets out initial guidance on establishing the program to allocate the environmental justice solar and wind capacity limitation under Section 48(e).

What does the 2024 allocation program look like?

The 2024 capacity limitation allocation opened in May of 2024, with 1.8 GWs of capacity being allocated across the four eligible facility type categories.[37]

Are there any additional selection criteria for 2024?

Yes. For 2024, the Treasury has imposed what it refers to as “additional selection criteria” (ASC) for the 1.8 GWs allocation. The 2024 ASC requires at least 50 percent of the 1.8 GWs to be allocated to applications that meet specified ASC ownership and geographic criteria.

The 2024 ASC ownership criteria is based on applicants that qualify as one of the following: Tribal enterprises, Alaska Native Corporations, renewable energy cooperatives, qualified renewable energy companies, qualified tax-exempt entities,[38] Indian tribal governments, and any corporation described in Section 501(c)(12) that furnishes electricity to persons in rural areas.

The 2024 geographic criteria is based on the facility being located in a persistent poverty county or disadvantaged community as identified by the Climate and Economic Justice Screening Tool.[39] The screening tool is at an official U.S. government website, with an interactive map of census tracts that are “overburdened and underserved” and that are “highlighted as being disadvantaged.[40] For these purposes, Alaska Native Villages are considered to be disadvantaged communities.[41] The datasets used in the Screening Tool’s eight “indicators of burdens” are “climate change, energy, health, housing, legacy pollution, transportation, water and wastewater, and workforce development.”[42]

Where do we look for 2025 allocations and beyond?

The selection criteria for 2025 and beyond is addressed in the Proposed Section 48E Regulations.

Application Process

How are applications reviewed and Capacity Limitations allocated?

The Treasury and the IRS have partnered with the DOE to administer the program. The DOE’s “Office of Economic Impact and Diversity administers the program application portal and reviews applications, with the DOE making “recommendations to the IRS” based on the eligibility of the facility.[43] The Treasury and the IRS can adjust the allocations of Capacity in future years “for categories that are oversubscribed or have excess capacity.”[44] “At least 50% of the capacity within each category will be reserved for projects that meet certain ownership and/or geographic selection criteria. The ownership and geographic selection criteria can be found in §1.48(e)-1(h)(2).”[45]

How does an applicant apply for the Low-Income Communities Bonus Credit Program?

A taxpayer seeking to claim the credit must submit an application to the DOE for an allocation of capacity. The DOE allows one application per project. To begin their process, an applicant must create a login.gov account and register using the “Log In” button located at a DOE’s portal page, https://eco.energy.gov/ejbonus/s/. Before registering, applicants are encouraged to read the handy dandy “DOE Applicant User Guide”[46] available at the same web portal address. Applications are submitted through DOE’s online “Low-Income Communities Bonus Credit Program Applicant Portal” accessible at the same URL. The portal’s applicant checklist sets out rigorous documentation and attestation requirements to demonstrate that ownership requirements are being met.

How does an applicant support its allocation of capacity for its Low-Income Communities Bonus Credit application?

An applicant must submit information for each proposed facility allocation, including the “applicable category, ownership, location, facility size/capacity, whether the applicant or facility meet additional selection criteria, and other information.”[47] In addition, the applicant must complete a series of attestations and must upload to the online portal certain documentation in order to demonstrate project maturity.”[48] An allocation must be received by the taxpayer before an eligible facility can be placed in service.[49]

How are applications considered?

“There will be a 30-day period at the start of each program year where applications will be accepted for each category. Applications received within this 30-day period will all be treated as being received on the same day and time. Once the 30-day period is over, the DOE will accept applications on a rolling basis and recommend applicants to the IRS until the entire capacity limitation within the applicable category is diminished.”[50] In addition, once applications are submitted, “the DOE will review the applications and recommend projects eligible for the bonus to the IRS. The IRS will then award the applicant with an allocation of the capacity limitation or reject the application. The DOE will stop reviewing applications once the entire capacity limitation is awarded. Applicants can reapply for the bonus credit in the next program year if they remain eligible.”[51]

What happens if a facility is not placed in service within the four-year deadline?

A facility can be disqualified after it receives an allocation if the facility is not placed in service within the deadline set in Section 48(e)(4)(E) of four years after the date of allocation. “[P]roviding any type of alternative forms of completion within the four year window apart from ‘placed-in-service’ is inconsistent with the statute and not allowed.”[52]

Can a credit recipient face a recapture event?

Yes. Recapture of the benefit of any increased credit due to Section 48E is provided in Section 48(e)(5). The Treasury noted that “Under the recapture provisions of Section 48(e)(5), Congress provided that the period and percentage of such recapture must be determined under rules similar to the rules of Section 50(a). Section 50(a) generally provides that this is a five year period with differing applicable percentages depending on when the property ceases to qualify. Therefore, under Section 48(e)(5), stricter restrictions related to recapture should not be imposed.”[53]

The final regulations clarify that “any event that results in recapture under Section 50(a) will also result in recapture of the benefit of the section 48(e) Increase. The exception to the application of recapture provided in § 1.48(e)-1(n)(2) does not apply in the case of a recapture event under Section 50(a).”[54] This same recapture possibility applies to Section 48E (CEITC) credit recipients.

The firm extends gratitude to Nicholas C. Mowbray for his comments and exceptional assistance in the preparation of this article.

[1] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[2] “Inflation Reduction Act Guide for Local Governments and Other Tax-Exempt Entities; Solar and Storage Projects,” p. 17, New York State, January 2024, available at https://www.nyserda.ny.gov/-/media/Project/Nyserda/Files/Programs/Clean-Energy-Siting/Inflation-Reduction-Act-Guide-for-Solar-and-Storage-Projects.pdf.

[3] “Low-Income Communities Bonus Credit Program,” Department of Energy (DOE), Office of Energy Justice and Equity, available at https://www.energy.gov/justice/low-income-communities-bonus-credit-program.

[4] “U.S. Department of the Treasury, IRS Release Final Rules and Guidance on Investing in America Program to Spur Clean Energy Investments in Underserved Communities,” Press Release, U.S. Treasury, August 10, 2023, available at https://home.treasury.gov/news/press-releases/jy1688.

[5] “Low-Income Communities Bonus Credit,” IRS, available at https://www.irs.gov/credits-deductions/low-income-communities-bonus-credit.

[6] For a discussion of Sections 48 and 48E (CEITC), see Part II of this series: Production Tax Credits and Investment Tax Credits: The Old and The New.

[7] § 48(e).

[8] § 48E(h). “Elective pay and transferability frequently asked questions: Elective pay,” IRS, Overview, Q15, available at https://www.irs.gov/credits-deductions/elective-pay-and-transferability-frequently-asked-questions-elective-pay#q15.

[9] § 48(e)(1).

[10] Section 48(e)(2)(A) and the Treasury Regulations.

[11] Section 48(e)(2)(A)(iii).

[12] 88 FR 55506, “Additional Guidance on Low-Income Communities Bonus Credit Program,” U.S. Treasury, August 15, 2023, available at https://www.federalregister.gov/documents/2023/08/15/2023-17078/additional-guidance-on-low-income-communities-bonus-credit-program.

[13] Ibid.

[14] Ibid, Preamble, Definition of Qualified Solar or Wind Facility.

[15] 88 FR 55506, August 15, 2023.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] “Inflation Reduction Act Guide for Local Governments and Other Tax-Exempt Entities; Solar and Storage Projects,” p. 18, New York State, January 2024.

[20] “Frequently Asked Questions, 48(e) Low-Income Communities Bonus Credit Program,” Q47.

[21] Ibid.

[22] Ibid.

[23] 43 U.S.C. § 1601 et seq.

[24] 106 Stat. 3113; 25 U.S.C. § 3501.

[25] The Energy Act of 2020, Section 8013, As Amended Through Pub. L. 117-286, Enacted December 27, 2022. See also “Energy Act of 2020, Section-by-Section,” Section 8013. Indian Energy, available at https://www.energy.senate.gov/services/files/32B4E9F4-F13A-44F6-A0CA-E10B3392D47A.

[26] “Inflation Reduction Act Guide for Local Governments and Other Tax-Exempt Entities; Solar and Storage Projects,” p. 18, New York State, January 2024.

[27] Ibid.

[28] FAQ#53.

[29] 89 Fed. Reg. 71193 (Sept. 3, 2024).

[30] “Low-Income Communities Bonus Credit Program,” DOE, Office of Energy Justice and Equity, available at https://www.energy.gov/justice/low-income-communities-bonus-credit-program. Also see https://www.energy.gov/sites/default/files/2024-05/48e%20Slides%20for%20PY24%20Applicant%20Webinar.pdf and refer to Rev. Proc. 2024-19 (IRS) and Treasury Regulations § 1.48(e)–1 for the full definitions and requirements of each program category.

[31] Such as rooftop solar.

[32] “U.S. Department of the Treasury, IRS Release 2024 Guidance for Second Year of Program to Spur Clean Energy Investments in Underserved Communities, As Part of Investing in America Agenda,” Press Release, U.S Treasury, March 29, 2024. Proposed Section 48E (CEITC) Regulations.

[33] “The Low-Income Communities Bonus Credit Program: Categories and How to Apply,” Morgan Mahaffey, EisnerAmper, May 29, 2024, available at https://www.eisneramper.com/insights/real-estate/low-income-communities-bonus-credit-program-0524/

[34] Rev. Proc. 2023-27, IRS, August 10, 2023, corrected by Announcement 2023-28, September 11, 2023.

[35] Rev. Proc. 2024-19, IRS, March 29, 2024.

[36] Notice 2023-17, IRS, February 13, 2023.

[37] Treas. Reg. §1.48(e)-1 defines the four categories of facilities for Low-Income Communities Bonus Credit.

[38] Including Sections 501(c)(3) and 501(d) entities.

[39] The screening tool is available at https://screeningtool.geoplatform.gov/en/#3/33.47/-97.5.

[40] Ibid.

[41] Ibid.

[42] Climate and Economic Justice Screening Tool, Frequently Asked Questions, available at https://screeningtool.geoplatform.gov/en/frequently-asked-questions#3/31.77/-95.39.

[43] Ibid.

[44] “IRS releases Guidance on Low-Income Communities Bonus Credit Program, Inflation Reduction Act,” Forvis Mazars, LLP, August 15, 2023, available at https://www.forvismazars.us/forsights/2023/08/irs-releases-guidance-on-low-income-communities-bonus-credit-program.

[45] Ibid. See also, § 1.48(e)-1(h)(2), the Reservations of Capacity Limitation allocation for facilities that meet certain additional selection criteria is available at https://www.law.cornell.edu/cfr/text/26/1.48(e)-1.

[46] “Applicant User Guide,” DOE, available at https://www.energy.gov/sites/default/files/2024-05/2024%20DOE%2048%28e%29%20Applicant%20User%20Guide.pdf.

[47] “Low-Income Communities Bonus Credit Program,” DOE, Office of Energy Justice and Equity, available at https://www.energy.gov/justice/low-income-communities-bonus-credit-program.

[48] Ibid.

[49] “Low-Income Communities Bonus Credit,” IRS, available at https://www.irs.gov/credits-deductions/low-income-communities-bonus-credit.

[50] “IRS releases Guidance on Low-Income Communities Bonus Credit Program, Inflation Reduction Act,” Forvis Mazars, LLP, August 15, 2023.

[51] Ibid.

[52] 88 Fed. Reg. 55537.

[53] 88 Fed. Reg. 55538.

[54] 88 Fed. Reg. 55538.

Read Part I, Part II, Part III, Part IV, Part V, and Part VI here.

by: Andie Kramer of ASKramer Law

For more news on Energy Tax Credits, visit the NLR Environmental Energy Resources section.

Energy Tax Credits for a New World Part I: Overview of Energy Tax Credits under the IRA

Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) is the most significant long-term commitment made by the U.S. government to encourage and support a clean energy future. The IRA works through the Internal Revenue Code (Code) in ways that fundamentally change the landscape on how clean energy tax credits and incentives are designed, awarded, and monetized.

The regulation, taxation, and financing of energy projects has been an integral aspect of my law practice for decades. These are exciting times now, as the structuring of energy tax credits under the IRA expands on a number of themes that I first covered in an energy and environmental project finance book I coauthored for Oxford University Press back in 2010. Then, as now, my perspective is shaped by my work for clients in the traditional and emerging clean energy sectors.

Why launch a series now about the energy tax credits that were extended, modified, or introduced by the IRA?

  • Many of the IRA energy credits run until 2032, so project developers still have ample opportunity to get their projects underway while credits remain available.
  • The Treasury and the IRS have yet to provide us with many important details on IRA implementation, with much of the guidance having been provided in Notices and proposed Treasury Regulations. But while the details are being ironed out, taxpayers still need to move forward with their projects, and tax returns need preparation. As project owners and funders continue to seek assistance, it remains critical to remain vigilant and stay on top of the large number of new developments.
  • Two important technology-specific credits expire at the end of 2024. They will be replaced in 2025 by two technology-neutral credits. The technology-neutral credits do not expire until 2032, or until certain greenhouse gas emissions (GHG) are reduced to specific levels set out in the Code (most likely, later).
  • Projects that seek to qualify for IRA energy tax credits and which begin construction in and after 2025 will need to meet statutory requirements not required for earlier projects.

Developers and investors would be well advised to consider the tax consequences to their energy projects during the second half of 2024, which I look at as a transition period.

In this Q&A with Andie, Energy Tax Credits For A New World, I aim to provide an overview of the IRA as it relates to many important energy credits. I will take deep dives into some of the requirements and mechanics of some of these credits, and I will look at the ways in which these credits can be monetized.

Through Summer and Fall 2024, Readers can look forward to reading this extended occasional series presented in the following parts:

Part I: Overview of Energy Tax Credits under the IRA

Part II: Production Tax Credits and Investment Tax Credits: The Old and The New

Part III: Overview of Bonus Credits

Part IV: Prevailing Wage and Apprenticeship Bonus Credits

Part V: Domestic Content Bonus Credits

Part VI: Energy Community Bonus Credits

Part VII: Low-Income Communities Bonus Credits

Part VIII: Monetizing Energy Tax Credits

Part XI: Changes to Traditional Tax Equity Financing

The IRA’s tax benefits are enormous. As a result, when a “qualifying energy project” is properly structured and timed, it can receive tax credits that reduce certain related costs by more than 50 percent.

As I launch this series, I would like to extend my gratitude to Nicholas C. Mowbray for his comments and exceptional assistance.

Part I: Overview of Energy Tax Credits under the IRA

“Dozens of countries are widening the gap between their economic growth and their greenhouse gas emissions. . . . If these trends continue, global emissions may actually start to decline,” observed Umair Irfan writing for Vox.[1]

What is the importance of the Inflation Reduction Act (IRA) to energy tax credits?

The IRA has strengthened the United States’ long-term commitment toward a clean energy economy. It is the most ambitious U.S. effort to date to incentivize the development of renewable energy technologies[2] that can help to reduce greenhouse gas (GHG) emissions. The IRA targets the enormous capital expenditures needed to create, commercialize, and broadly make available renewable energy technologies. The IRA’s goal is to lay out a path toward a net-zero GHG economy by 2050.[3]

How does the IRA affect energy project funding?

The IRA has brought about major changes in the ways in which energy projects are structured and funded. It provides for loans, grants, financial and technical assistance, rebates, and energy tax credits. About $400 billion has been allocated for clean energy innovation, technology, and manufacturing. Of this funding, about $260 billion applies to the extension and modification of existing tax credits and the introduction of new ones. In fact, more than 70 percent of the IRA’s benefits are delivered through tax incentives. Now, more than 20 tax credits allow for monetization that supports clean energy generation, develops related manufacturing capacity, incentivizes the increased use of clean vehicles and energy sources, and increases carbon capture programs.[4]

How does the IRA target GHG emission?

The IRA uses funding and financial incentives to support research, development, and commercialization of low- and zero-GHG emission technologies. It also seeks to steer project developers to locate their projects in “energy communities” or “low-income communities”; to pay prevailing wages and encourage the training of registered apprentices; and to increase the use of domestic content components in project-related manufacturing and construction processes.

Have the IRA initiatives been effective?

Initial IRA success stories are very positive, but we have a long way to go. In 2023, “more solar panels were installed in China […] than the US has installed in its entire history. More electric vehicles were sold worldwide than ever.”[5] As the United States seeks to become a global leader in decarbonization and to compete with other major economies like China, the IRA is creating “new opportunities for workers […] and lower costs for America’s families.”[6]

Congress also seeks to ensure that monies provided by the IRA strengthen domestic supply chains and ensure the nation’s energy security in its transportation modes. The IRA is boosting domestic manufacturing for critical renewable energy components, while partially funding the construction of renewable energy projects through its rigorous domestic sourcing requirements.

In 2023 the American Council on Renewable Energy found that, “One of the most notable impacts of the IRA is how quickly it helped to onshore new advanced green manufacturing. More than 83 new or expanded wind, solar, and battery manufacturing facilities have been announced since August 2022, including 52 plants for solar production, 17 for utility-scale wind production, and 14 for production of utility-scale battery storage.”[7]

Notwithstanding some initial successes, two years after passage of the IRA, there are some serious concerns that some of the credits are unworkable, and that the IRA’s domestic sourcing requirements have fallen short of expectations.[8]

Is it possible that the IRA could be dismantled by future Administrations?

Yes. It is possible. Perhaps, a better question might be should the IRA be dismantled? Is it in our best interests to shut down the onward innovation of a thriving high-growth, high-benefit fledgling U.S. industry segment, substantially underwritten by the government, and made available to the residents of a leading market economy?

What makes the IRA different from prior environmental and climate efforts?

The IRA is fundamentally different from the carrot-and-stick approaches of many prior U.S. environmental and climate laws. It has an incentives-based focus: it does not rely on traditional regulation and enforcement to achieve its desired outcomes. It proactively seeks to encourage long-term commercial investments to decarbonize transportation, manufacturing, and construction. The IRA is popular among early adopters. Kimberly Clausing, the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law, noted in a 2023 interview, “There’s a lot of things to like about these tax credits […] they’re broad, they’re longer lived than prior tax credits, and they don’t phase out as quickly. They’re more flexible than prior tax credits. They’re more transferable and refundable, and that enables them to be ultimately more effective.”[9]

The IRA’s long-term focus on tax credits, financial incentives, and monetization may offer prospective project developers a degree of certainty in their planning; persuade investors to commit to clean energy undertakings; and broaden the pool of capital available to do so. So far, the facts speak for themselves: in the first year after the IRA’s enactment, 280 clean energy projects were announced across 44 states, representing $282 billion of investment.[10]

What deference will be given to Treasury Regulations addressing the IRA provisions?

Since passage of the IRA, the Treasury and the IRS have been carefully moving through the details of its rollout.[11] At the date of this writing, many critical questions remain unanswered. In addition, for many decades, the Treasury and the IRS have enjoyed broad latitude on the administration of the laws. But the legal landscape might be changing. On June 28, 2024, in Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court effectively overturned the so-called Chevron doctrine. Chevron is a 40-year-old Supreme Court case that afforded federal agencies a degree of deference in the reasonable interpretation of a statute that fell within their areas of expertise.[12] As a result, many questions will be raised about many laws, along with the frameworks for their roll out and enforcement. Although the Treasury and the IRS will be able to claim broad expertise in some areas of the tax law, it is likely that there will be disputes and litigation over the deference to be given to climate-related tax regulations.[13]

What is the starting point for the IRA’s focus on tax credits?

Let’s take a walk down memory lane. Federal income tax credits for wind and solar energy were first enacted in The Energy Tax Act of 1978.[14] They were structured as refundable 10 percent tax credits for energy property and equipment that produced electricity using wind and solar sources. Later, The Windfall Profit Tax Act of 1980 extended the expiration through 1985, increased the credit to 15 percent, and removed a taxpayer’s ability to get a tax refund based on the value of the credit.[15] The Tax Reform Act of 1986 reduced solar energy credits from 15 percent to 10 percent and extended them through December 31, 1988. Further energy credit extensions for solar property were enacted between 1988 and 1991.

With The Energy Policy Act of 1992,[16] Congress made solar energy credits “permanent” and named them “investment tax credits” (ITCs). The same legislation also enacted the “renewable electricity production tax credit,” or the PTC. When the PTC expired in 1999, it was subsequently extended and expanded to include additional energy technologies.

The Energy Policy Act of 2005 increased the ITC for solar energy from 10 percent to 30 percent, and it extended the credit to additional types of energy property.[17] It did not, however, extend the PTC for solar and refined coal facilities. This meant that from 2005 until enactment of the IRA, the PTC was not available for electricity that was produced from solar energy.

Does the IRA move away from technology-specific tax credits?

Yes. Before the IRA, the PTC at Section 45 and the ITC at Section 48 were the two principal energy tax credits. They were enacted to encourage the development of U.S. wind farms and solar arrays. Both the PTC and the ITC included technology-specific statutory provisions that had been amended over the years to include additional technologies identified by Congress.

The IRA modified and extended both the Section 45 PTC and the Section 48 ITC through the end of 2024 at which point they will be replaced by the next generation of technology-neutral credits: the Section 45Y Clean Electricity Production Tax Credits (CEPTC) and the Section 48E Clean Electricity ITC (CEITC).[18] The rest of the energy tax credits that the IRA modified or introduced took effect for projects beginning on or after January 1, 2023, with most of those credits expiring on December 31, 2032.

In the next part of this series, we will take a look at the production tax credit (PTC), the investment tax credit (ITC), and their progeny. Many of the IRA tax credits are modifications or expansions of the PTC and the ITC. It is an important next step to consider the underlying framework of the old credits and the new.

The firm extends gratitude to Nicholas C. Mowbray for his comments and exceptional assistance in the preparation of this article.

[1] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[2] Ibid.

[3] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[4] Treasury, Inflation Reduction Act, https://home.treasury.gov/policy-issues/inflation-reduction-act#:~:text=The Inflation Reduction Act, enhanced, for clean energy and manufacturing. See also, “Elective Pay Overview,”
IRS Pub. 5817 (Rev. 4-2024) Number 941211. https://www.irs.gov/pub/irs-pdf/p5817.pdf

[5] “We Might Be Closer to Changing Course on Climate Change Than We Realized,” Umair Irfan, Vox, April 25, 2024.

[6] “Inflation Reduction Act Tax Credit,” U.S. Department of Labor, Inflation Reduction Act Tax Credit | U.S. Department of Labor (dol.gov), accessed August 15, 2024.

[7] “Celebrating One Year of Progress: The Inflation Reduction Act’s Impact on Renewable Energy and the American Economy,” Greg Wetstone, American Council on Renewable Energy, August 14, 2023.

[8] Press release, www.manchin.senate.gov, June 4, 2024.

[9]  “Why the Inflation Reduction Act Can’t Be Repealed,” Evan George, Legal Planet, April 17, 2023.

[10] “The US Inflation Reduction Act is Driving Clean-Energy Investment One Year In,” Marco Willner,

Sebastiaan Reinders and Aviral Utkarsh, Goldman Sachs, October 31, 2023.

[11] “Here’s What the Court’s Chevron Ruling Could Mean in Everyday Terms,” By Coral Davenport et al., The New York Times, June 28, 2024.

[12] “The Supreme Court’s Elimination Of The Chevron Doctrine Will Undermine Corporate Accountability,” Michael Posner, Forbes, July 8, 2024.

[13] “Tax Pros Discuss Impact of Loper Bright on IRS Regs,” Tim Shaw, Thomas Reuters, July 29, 2024,
“The Supreme Court’s decision […] may have ripple effects on Treasury and IRS rulemaking, though to what extent remains unclear, tax professionals say.”

[14] Pub. L. No. 95-618, 92 Stat. 3174 (1978).

[15] Pub. L. No. 96-223, 94 Stat. 229 (1980).

[16] Pub. L. No. 102-486, 106 Stat. 2776 (1992); H.R. 776, 102nd Congress (1991̵–1992).

[17] Pub. L. No. 109-58, 119 Stat. 594 (2005). I will discuss the term “energy property” in a future article.

[18] The PTC, ITC, CEPTC, and CEITC are discussed in Part V: Domestic Content Bonus Credits of this series.

by: Andie Kramer of ASKramer Law

For more news on Energy Tax Credits under the IRA, visit the NLR Tax section.

Good News for Offshore Wind Blows in With New Guidance From the Treasury and IRS

The Inflation Reduction Act of 2022 (IRA) includes several tax credits to encourage investment in renewable energy projects, including an Investment Tax Credit (ITC) that is worth up to 30% of the overall project cost. The developer of a renewable energy project can receive a bonus of up to 10% on top of the ITC for a qualified facility that is located or placed in service in an “energy community.” One type of area that can qualify as an energy community under the IRA — the one most relevant to offshore wind projects — is an area that has significant employment or local tax revenues from fossil fuels and a higher-than-average unemployment rate.

In order to apply the criteria to offshore wind facilities, the US Department of Treasury initially proposed that an offshore wind project would be deemed to be located or placed in service at the place closest to the point of interconnection (POI) where there is land-based equipment that conditions the energy generated by the offshore wind project for transmission, distribution, or use.

Stakeholders in the offshore wind industry believed, however, that this approach did not adequately reflect the original intent of the IRA as it neglected to take into account the long-term benefits of activity related to offshore wind projects at locations, particularly ports, that were not at the POI.

Responding to stakeholder advocacy over the past several months, on March 22, the Internal Revenue Service (IRS) released updated guidance in IRS Notice 2024-30 (the Notice). The Notice permits projects with multiple POIs to qualify for the bonus credit, so long as one of the POIs is within an energy community. Stakeholders believe that this will be key in developing the shared transmission infrastructure that will be required for effective use of offshore wind energy.

Further, the Notice permits offshore wind facilities to attribute their nameplate capacity to additional property — namely, to supervisory control and data acquisition system (SCADA) equipment owned by the owner of the offshore wind project and located in an EC Project Port (as defined in the Notice). SCADA equipment is property that is used to remotely monitor and control the operations of the offshore wind project. The SCADA system is effectively the nerve center for an offshore wind project.

An “EC Project Port” is defined in the Notice as a port that is used either full or part time to facilitate maritime operations necessary for the installation or operation and maintenance of the offshore wind project, and that has a significant long-term relationship with the project’s owner by virtue of ownership or lease arrangements. The personnel based at the port need to include staff who are employed by, or who work as independent contractors for, the project’s owner and who perform functions essential to the project’s operations. Staff based at the port will be considered to perform functions essential to the project’s operations only if they collectively perform all the following functions: management of marine operations, inventory and handling of spare parts and consumables, and berthing and dispatch of operation and maintenance vessels and associated crews and technicians.

Finally, the Notice adds two industry codes from the North American Industry Classification System (NAICS) to those that are used to determine a community meets the IRA’s required percentage of its workforce who are employed in the extraction, processing, transport, or storage of coal, oil, or natural gas. These additional NAICS codes designate oil pipeline infrastructure and natural gas distribution infrastructure. These additional codes are intended to bring the benefits of the energy community bonus credit to more communities and the IRS has amended its list of energy communities accordingly.

Advocates note that the updated guidance in the Notice represents a more holistic approach to the energy communities bonus credit that will give offshore wind project developers more flexibility in identifying ports for their investment, The increased flexibility will bring the economic benefit of the offshore wind industry to more communities, which will ultimately reduce the cost burden to ratepayers.

© 2024 Jones Walker LLP
For more news on Tax Credits for Renewable Energy, visit the NLR Tax section.

Renewable Energy Tax Credits under the Inflation Reduction Act: Opportunities for Exempt Organizations

The Inflation Reduction Act of 2022 (the “IRA” or “Act”) added and modified several renewable energy tax provisions under the Internal Revenue Code of 1986, as amended (the “IRC”).[1] These changes provide many opportunities for exempt organizations, investors, and developers in clean energy projects to lower their costs by monetizing previously unavailable tax credits and thereby increase their business. Among them:

  • Solar facilities are now eligible for the Section 45 Production Tax Credit
  • An Investment Tax Credit for stand-alone energy storage technology with a minimum capacity of 5 kWh
  • A new two-tier credit system consisting of a base credit and an additional bonus credit for eligible projects that satisfy new prevailing wage and apprenticeship requirements
  • New “domestic content,” “energy community,” and “low-income community” bonus credits
  • New “technology neutral” tax credits
  • New ways to monetize tax credits

There has been significant interest in the energy credits by tax exempt organizations, in particular by universities and hospitals. Indeed, these organizations have been looking to minimize their greenhouse gas impact or carbon footprint with the goal of achieving clean energy even prior to the enactment of the IRA. The direct pay option which is now available under the IRA has accelerated the interest in clean energy. Commentators also note that private foundations have been interested in addressing climate change and taking advantage of these newly enacted credits to help spread the use of clean technologies.

Section 6417, discussed below, could be a “game changer” in this regard. Even though certain of the credits have been in existence, unless tax exempts have had a significant amount of unrelated business income tax (“UBIT”), they previously could not avail themselves of the credits prior to the enactment of Section 6417 which provides the direct payment alternative.

The below will outline the new and modified renewable energy tax credits under the IRA, and summarize recent guidance issued by the Treasury Department.

CHANGES TO EXISTING TAX CREDITS

Section 45 Production Tax Credit

Before the enactment of the IRA, the Section 45 Production Tax Credit (“PTC”) was available to electricity produced from certain renewable resources, including wind, biomass, geothermal, hydropower, municipal solid waste, and marine and hydrokinetic energy. Under the Act, solar facilities and are now also eligible for the PTC. In order to qualify for the PTC, eligible facilities must be placed in service and start construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

Section 48 Investment Tax Credit[2]

Prior to the Act, the Section 48 Investment Tax Credit (“ITC”) was not available to stand-alone energy storage projects. The IRA created an ITC for stand-alone energy storage technology with a minimum capacity of 5 kWh. The term “energy storage technology” includes any technology that receives, stores, and delivers energy for conversion to electricity, or to most technology that thermally stores energy.

Like the PTC, under the Act, eligible facilities can qualify for the ITC as long as they are placed in service and begin construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

STRUCTURAL CHANGES TO THE TAX CREDIT SYSTEM

The IRA created a new two-tier credit system consisting of a base credit and an additional bonus credit that is only available for eligible projects that satisfy the new prevailing wage and apprenticeship requirements (discussed below). The new ITC base rate will be 6 percent, and the bonus rate will increase it to 30 percent. The new PTC base rate will be 0.3 cents/kwh and the bonus rate will increase it to 1.5 cents/kwh.

Prevailing Wage Requirement

Taxpayers must pay laborers, mechanics, contractors, and subcontractors a prevailing wage during the construction of the project and with respect to subsequent alterations or repairs of the project following its placement in service. The prevailing wage is based on the pay rates published by the Department of Labor (“DOL”) for the geographic areas and type of job or labor classification. If relevant pay rates are not published, the taxpayer must request a wage determination or wage rate from the DOL.[3]

Apprenticeship Requirement

Taxpayers must also ensure that, with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. The “applicable percentage” is: (i) 10 percent for projects beginning construction before 2023, (ii) 12.5 percent for projects beginning construction during 2023, and (iii) 15 percent for projects beginning construction thereafter. Each contractor and subcontractor who employs four or more individuals to perform construction on an applicable project must employ at least one qualified apprentice. A “qualified apprentice” is an individual who is employed by the taxpayer or any contractor or subcontractor and who is participating in a registered apprenticeship program.

If a taxpayer fails to satisfy the apprenticeship requirement during a particular year, the taxpayer may correct the failure by paying a penalty to the IRS equal to $50 ($500 if the apprenticeship requirement was intentionally disregarded) multiplied by the total number of labor hours that did not satisfy the apprenticeship requirement. However, the IRA also includes a “good faith effort” exception if the taxpayer requests qualified apprenticeships from a registered apprenticeship program and either the request is denied, or the program fails to respond within five business days after receiving the request.

ADDITIONAL BONUS CREDITS

The IRA established the “domestic content,” “energy community,” and “low-income community” bonus credits.

Domestic Content

Projects qualifying for certain PTC and ITC credits could qualify for a 10 percent increase to the base and bonus credits if they satisfy the IRA’s new “domestic content” requirements. To qualify for this bonus credit, all steel, iron, and manufactured products that are components of the completed facility are to be produced in the United States.

Energy Community

Facilities located in an “energy community” will also qualify for a 10 percent increase to the base and bonus credits. An “energy community” includes brownfield sites, certain areas with significant employment related to, or local tax revenues generated by, coal, oil, or natural gas, and where there is high unemployment, or a census tract where a coal mine has recently closed or a coal-fired electric plant was retired or removed.

NEW “TECHNOLOGY NEUTRAL” TAX CREDITS

The IRA added new tax credits that apply to qualified facilities placed into service after December 31, 2024, and which yield zero greenhouse gas emissions. The Section 45Y Clean Electricity Production Credit (“CEPTC”) and the Section 48E Clean Electricity Investment Credit (“CEITC”) will replace the PTC and ITC, respectively, and are intended to be technology neutral. The credit amounts for the CEPTC and CEITC are calculated similarly to the PTC and ITC and are subject to similar prevailing wage and apprenticeship bonus requirements.

NEW WAYS TO MONETIZE TAX CREDITS UNDER THE IRA

The Act established the following two novel methods to monetize energy tax credits.

Direct Pay Available to Tax Exempt Organizations

For tax years beginning after December 31, 2022, and before January 1, 2033, certain “applicable entities” can make an election to receive a cash payment equal to the value of otherwise allowable tax credits. This option allows for the applicable entities to utilize and monetize the tax credits via a refund, even though the entities generally do not incur tax liabilities. The term “applicable entities” includes tax-exempt organizations, state and local governments, tribal governments, and the Tennessee Valley Authority.

The direct pay option is also available to taxpayers claiming the Sections 45V, 45Q, and 45X credits even if they do not meet the definition of an “applicable entity.”

Third-Party Sales

For tax years beginning after December 31, 2022, taxpayers (“transferee”) that do not meet the definition of an “applicable entity” may transfer all or a part of their eligible credits to an unrelated taxpayer (“transferor”) in exchange for cash. The cash consideration is not includible in the income of the transferor and is not deductible by the transferee. Credits may not be transferred more than once. In the case of any transfer election, the transferee taxpayer will be treated as the taxpayer for all purposes under the IRC with respect to such credit. With respect to a project held by a partnership, only the partnership itself (and not its partners) can elect to transfer the eligible credits. (Emphasis added.) Then it is likely to be treated as unrelated trade or business.

All of the tax credits eligible for the direct pay option, except for the Section 45W Clean Commercial Vehicles Credit, are also eligible for sale to a third-party.

NOTICES 2023-17 AND 2023-18

On February 13, 2023, the IRS issued Notices 2023-17 and 2023-18 which provide guidance on the administration of two allocation-based renewables tax credit programs under Sections 48(e) and 48C, respectively.

Notice 2023-17

The Act amended Section 48(e) to provide an increase in the ITC for qualified solar and wind facilities which are deployed in specified low-income communities or residential developments. To receive these increased credit amounts, a taxpayer must receive an allocation of “environmental justice solar and wind capacity limitation” (“Capacity Limitation”). A “qualified solar and wind facility” is any facility that (1) generates electricity solely from a wind facility, solar energy property, or small wind energy property; (2) has a maximum net output of less than five megawatts (as measured in alternating current); and (3) is described in at least one of the four categories described in the chart below.

Notice 2023-17 established the Low-Income Communities Bonus Credit Program under Section 48(e) and provided guidance on the procedures and information required to apply for an allocation of Capacity Limitation. For each of 2023 and 2024, the annual capacity limitation is 1.8 gigawatts of direct current capacity, which will be allocated among four categories of projects as follows:

Category

Required Facility Location

Category

Required Facility Location

Capacity Limitation Allocation (MW)

Bonus Percentage

1

Low-Income Community

700 MW

10%

2

Indian Land

200 MW

10%

3

Qualified Low-Income Residential Building Project

200 MW

10%

4

Qualified Low-Income Economic Benefit Project

700 MW

10%

A taxpayer must submit an application to the IRS in order to receive a Capacity Limitation allocation. Details regarding the application process are forthcoming, however, Notice 2023-17 states that applications will be accepted in a phased approach during a 60-day application window for calendar year 2023. Applications will be accepted for Category 3 and 4 projects beginning in the third quarter of 2023, and Category 1 and 2 project applications will be accepted thereafter.

The Department of Energy (“DOE”) will review applications for statutory eligibility and any other criteria provided by the IRS. On this basis, the DOE will provide recommendations to the IRS regarding the selection of applicants for an allocation of Capacity Limitation. If the selected applications exceed the capacity limitations for a given category, the DOE will use a lottery system or some other process to allocate Capacity Limitations. If accepted, the IRS will notify the applicant of its decision and specify the amount of Capacity Limitation allocated. Within four years of receiving such notification applicants must place the eligible property in service to claim the increased credit rate.

Notice 2023-18

The Act extended the Section 48C Advanced Energy Project Credit (“48C Credit” or “AEPC”), which was originally enacted as part of the American Recovery and Reinvestment Act of 2009. Section 48C provides a credit for investments in projects that fall into one of the following three general categories: (i) clean energy manufacturing and recycling projects, (ii) greenhouse gas emission reduction projects, and (iii) critical materials projects. The AEPC is subject to an aggregate cap of $10 billion, at least $4 billion of which will be allocated to census tracts (or tracts adjacent to census tracts) in which coal mines have been closed after 1999 or coal-fired generation facilities have been retired after 2009.

Notice 2023-18 provides guidance on the process and timeline for applying for an allocation of 48C Credits. The first allocation round of $4 billion began on May 31, 2023. Outlined below is an overview of the application, review, and approval process for the first allocation round of 48C credits:

The applicant submits a “concept paper” to the DOE between May 31, 2023, and July 31, 2023.

After reviewing the concept paper, the DOE will issue a letter to the applicant either encouraging or discouraging the submission of an application. All applicants that submit a concept paper during the above period may submit an application irrespective of the DOE’s response.

The applicant submits an application to the DOE for review. If the applicant intends to apply for a bonus credit because it will satisfy the prevailing wage and apprenticeship requirements, it must confirm this in the application.

The DOE then makes a recommendation as to whether to accept or reject the application and provides a ranking of the applications.

Based on the DOE’s recommendations and rankings, the IRS will make a decision regarding the acceptance or rejection of the application and notify the applicant of its decision.

Within two years after receiving an allocation from the IRS, the applicant must provide evidence to the DOE that the certification requirements have been met.

The DOE notifies the applicant and the IRS that it has received the applicant’s notification that the certification requirements have been met.

The IRS will provide a letter to the applicant certifying the project (“Allocation Letter”).

Within two years after receiving the Allocation Letter, the applicant must notify the DOE that the project has been placed in service. The applicant may claim the 48C Credit in the year in which the property is placed in service.

Additional guidance from the Treasury Department and IRS is expected to be released throughout the year.

FOOTNOTES

[1] Unless otherwise stated, all “Section” references are to the IRC.

[2] For any investment tax credit under Section 50(b)(3), an exempt organization could only avail itself of such credit to the extent the property in question was used in unrelated business income. So in effect, prior to the enactment of IRA, any property that was used consistent with the tax exempt organization’s mission presented an obstacle which Section 6417 expressly overrides. Section 50(b)(3).

[3] If a taxpayer fails to meet the prevailing wage requirement during a particular year, the taxpayer may cure the failure by paying each worker the difference between actual wages paid and the prevailing wage, plus interest and a penalty of $5,000. If a taxpayer’s failure to pay prevailing wages was due to “intentional disregard,” then the taxpayer must pay each worker three times the difference and pay the IRS a $10,000 penalty per worker.

© 2023 Blank Rome LLP

For more tax news, click here to visit the National Law Review.

Tax Credits in the Inflation Reduction Act Aim to Build a More Equitable EV Market

In February of this year, it was high time for me to buy a new car. I had driven the same car since 2008, and getting this-or-that replaced was costing more and more every year. As a first-time car buyer, I had two criteria: I wanted to go fast, and I wanted the car to plug in.

Like many prospective purchasers, I started my search online and by speaking with friends and who drove electric vehicles, or EVs for short. I settled on a plug-in hybrid sedan, reasoning that a plug-in hybrid electric vehicle (PHEV) was the best of both worlds: the 20-mile electric range was perfect for my short commute and getting around Houston’s inner loop, and the 10-gallon gas tank offered freedom to roam. In the eight months since I’ve had the car, I’ve bought less than ten tanks of gas. As the price of a gallon in Texas soared to $4.69 in June, the timing of my purchase seemed miraculous.

When it was time to transact, the dealer made vague mention of rebates and tax credits, but didn’t have a comprehensive understanding of the details. Enter Texas’s Light-Duty Motor Vehicle Purchase or Lease Incentive Program (LDPLIP). Administered by the Texas Commission on Environmental Quality (TCEQ), the program grants rebates of up to $5,000 for consumers, businesses, and government entities who buy or lease new vehicles powered by compressed natural gas or liquefied petroleum gas (propane), and up to $2,500 for those who buy or lease new EVs or vehicles powered by hydrogen fuel cells.

Rebates are only available to purchasers who buy or lease from dealerships (so some of the most popular EVs in the U.S. don’t qualify). There is no vehicle price cap, nor is there an income limit for purchasers. In June of 2022, the average price for a new electric vehicle was over $66,000, according to Kelley Blue Book estimates. But the median Texan household income (in 2020 dollars) for 2016-2020 was $63,826.

According to the grant specialist to whom I initially sent my application, the TCEQ has received “a vigorous response” from applicants, however, the TCEQ is limited in the number of rebate grants that it can award: 2,000 grants for EVs or vehicles powered by hydrogen fuel cells, and 1,000 grants for vehicles powered by compressed natural gas or liquefied petroleum gas (propane).

The grant period in Texas ends on January 7, 2023, but on July 5, 2022, the TCEQ suspended acceptance of applications for EVs or vehicles powered by hydrogen fuel cells. As of the writing of this post, the total number of applications received and reservations pending on the program’s website is 2,480.

In comparison with Texas’s rebate program, the EV tax credits in the Inflation Reduction Act of 2022 demonstrate a commitment to building a more equitable EV market. While EVs may be cheaper to own than gas-powered vehicles—especially when gas prices are high—a lot of lower and middle-income families have historically been priced out of the EV market. The IRA takes several meaningful steps towards accessibility and sustainability for a more diverse swath of consumers:

  • Allows point-of-sale incentives starting in 2024. Purchasers will be able to apply the credit (up to $7,500) at the dealership, and because sticker price is such an important factor for so many purchasers, this incentive will make buying an EV more attractive up front.
  • Removes 200,000 vehicle-per-manufacturer cap. Some American manufacturers are already past the maximum. Eliminating the cap means bringing back the tax credit for many popular and affordable EVs, which should attract new buyers.
  • Creates income and purchase price limits. SUVs, vans, and pickup trucks under $80,000, and all other vehicles (e.g. sedans) under $55,000, will qualify for the EV tax credit. For new vehicles, purchaser income will be subject to an AGI cap: $150,000 for individuals and $300,000 for a joint filers.
  • Extends the tax credit to pre-owned EVs. As long as the purchase price does not exceed $25,000, purchasers of pre-owned EVs (EVs whose model year is at least two years earlier than the calendar year in which the purchase occurs) will receive a tax credit for 30% of the sale price up to $4,000. The income cap for pre-owned EVs is $75,000 for individuals and $150,000 for a joint filers.

A purchaser who qualifies under both programs can get both incentives. Comparing Texas’s state government-level incentives and those soon to be offered at the federal level reveals a few telling differences—new vs. used, income caps, purchase price caps, post-purchase rebates vs. up-front point-of-sale incentives—but the differences all fall under the same umbrella: equity. The IRA’s tax credits are designed, among other things, to make purchasing an EV more attractive to a wider audience.

Of course, the EV incentive landscape has greatly changed since the Energy Improvement and Extension Act of 2008 first granted tax credits for new, qualified EVs. The LDPLIP wasn’t approved by the TCEQ until late 2013, so the U.S. government has arguably had more time to get it right. Some might say that the fact that Texas’s program offers the purchaser of the $150,000+ PHEV the same opportunity to access grant funds as the purchaser of the $30,000 EV means that the LDPLIP is even more “equal.”

It is worth noting that the IRA also sets a handful of production and assembly requirements. For instance, to qualify for the credit, a vehicle’s final assembly must occur in North America. Further, at least 40% the value of the critical minerals contained in the vehicle’s battery must be “extracted or processed in any country with which the United States has a free trade agreement in effect” or be “recycled in North America”—and this percentage increases each year, topping out at 80% in 2027. There is also a rising requirement that 50% of the vehicle’s battery components be manufactured or assembled in North America, with the requirement set to hit 100% in 2029. It is unclear whether automotive manufacturers and the U.S. critical mineral supply chains will be able to meet these targets—and that uncertainty may cause a potential limiting effect on the options a purchaser would have for EVs that qualify for the tax credit.

Time will tell whether the intentions behind the EV tax credits in the IRA have the effect that this particular blogger and PHEV owner is hoping for. While we wait to see whether this bid at creating an equitable EV market bears fruit, we can at least admire this attempt at, as the saying goes, “giving everyone a pair of shoes that fits.”

Article By Dania Abbasi of Foley & Lardner LLP

For more energy and environment legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Energy and Environmental Law Update: Week of 8/25/2014

Mintz Levin Law Firm

Now that summer is drawing to a close, let’s check in on one important bill that lost momentum just as the summer was beginning. Remember the Senate Finance Committee’s tax extenders package (S. 2260), which the committee marked up on a bipartisan basis in mid-May? The one that was poised to pass the Senate but that surprisingly failed to reach cloture after Senate leadership blocked Republican amendments on the bill? At the time, congressional staff and lobbyists—and even Majority Leader Harry Reid (D-NV) —suggested that the extenders package would come up again in the lame duck session after the November election. The House was not expected to vote on an extenders package before then anyway, so the Senate delay would not really impact the timing of final passage of this two-year extension of more than 50 tax provisions.

Well, that was then. Today, almost two months before the mid-term elections, the future of the clean energy provisions in an extenders package—particularly the production tax credit (PTC) and investment tax credit in lieu of the PTC—depends a great deal on which party wins control of the Senate. Republicans are more confident that they can win the necessary six seats to take back the top chamber; and if they do, they will have more leverage in the lame duck about what the contents of an extenders package would be. The $84 billion EXPIRE Act of 2014 not only extends the PTC by two years but also extends key clean energy depreciation benefits and tax credits, including a $1-per-gallon credit for biodiesel and a 50-cent-per-gallon credit for alternative fuels. Senate Democrats strongly support the clean energy provisions. Certain Republicans, such as Chuck Grassley (R-IA), remain staunch supporters of the PTC and biodiesel credits, but many other Republicans are eager to eliminate or scale back the PTC and other clean energy provisions. If Senator Orrin Hatch (R-UT) learns he will be chairman of the Finance Committee next year in a Republican chamber, he has less of an incentive to work with current Chairman Ron Wyden (D-OR) and Democrats during the lame duck session. He can simply hold out and put forward his own extenders bill next year with popular provisions like the research and experimentation (R&D) credit and without clean energy incentives.

The extension of a handful of relatively popular and less controversial business and individual extenders such as the R&D credit and bonus depreciation are more assured. House Republicans, as part of a “tax-reform-lite” effort, have passed several bills making select provisions such as these permanent. For clean energy advocates, they have to cling to the more popular parts of the overall package and make sure their provisions are not trimmed away when Congress eventually takes it up. The business community, which wants many of the non-energy provisions in the EXPIRE Act extended, also must be much more vocal if the bill is to rise to the front of the agenda.

If Democrats do manage to hold onto control of the upper chamber, they very likely will be dealing with a reduced majority, and that too will give Republicans more leverage. With all the competing priorities in a very short legislative period, it will be difficult for the package to be enacted before the end of the year. Another retroactive extension in early 2015 could be possible. Congress has let the PTC lapse several times since 1992 before renewing it again. While it’s hard to avoid feeling a feeling of déjà vu when faced with another “will-they-or-won’t-they” end-of-year extension, this time also seems different. Many legislators thought the previous PTC extension would be the last one, so the stakes are high. Anti-PTC campaigns financed by conservative groups and utilities ratchets up the pressure on lawmakers. One possible way to blunt some Republican opposition would be to modify the PTC and either reduce the amount of the credit or include a deadline by which projects must complete construction—or both.

Several scenarios exist where even a change of control in the Senate would not preclude the passage of a tax extenders package. A short-term extension would give lawmakers some breathing room to debate tax reform. Some Republicans from wind-friendly states might prefer the clean energy provisions to pass under a Democratic watch rather than under Republican leadership in the new Congress. In this optimistic scenario, the lame duck session could mirror the productive session of 1980.

Ironically, election results in any one of three bio-energy and wind states–Colorado, South Dakota, and Iowa—could help decide the balance in the Senate and the fate of clean energy tax credits.

ARTICLE BY

Bryan M. Stockton
 
OF 
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.