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Issue Number: FS-23-21
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Increased energy investment credit for solar and wind facilities benefitting low-income communities
The Inflation Reduction Act provides for an increase to the energy investment credit (under Internal Revenue Code Section 48) for qualifying solar and wind facilities benefitting certain low-income communities.
For a taxpayer to be eligible for this increase, the taxpayer must apply for and receive an allocation of environmental justice solar and wind capacity limitation (capacity limitation) with respect to their facility. If the facility continues to meet eligibility requirements and is placed in service within four years of the allocation award, the taxpayer that received that allocation may then claim the increased energy investment credit for the taxable year in which the facility is placed in service.
The Department of the Treasury and the Internal Revenue Service developed the Low-Income Communities Bonus Credit Program (Program) to allocate capacity limitation. The Treasury Department and the IRS released Notice 2023-17 on Feb. 13, 2023, to establish the Program. Notice 2023-17 also provided initial guidance for potential applicants seeking allocations of capacity limitation for calendar year 2023. The Treasury Department and the IRS then issued proposed regulations to provide definitions and requirements that are applicable to the Program on May 31, 2023, which were finalized, with certain modifications, in the final regulations published on Aug. 15, 2023. With the final regulations, the Treasury Department and the IRS simultaneously issued Revenue Procedure 2023-27 to provide information on the application requirements and process for facility owners to apply for an allocation of capacity limitation.
Taxpayers that own an eligible solar or wind facility must apply for their facility to be considered for an allocation of capacity limitation. Applications must be submitted to the portal hosted by the Department of Energy (DOE). The DOE will evaluate facility applications and provide a recommendation to the IRS regarding whether to award an applicant an amount of capacity limitation. Based on DOE’s recommendation, the IRS will send applicants either an allocation award letter or a denial letter. Applicants may also receive a denial letter if there is no remaining capacity limitation available to award.
For a facility to be eligible for an allocation, and later eligible to claim the increase to the energy investment credit, the facility must be a solar facility or wind facility with a maximum net output of less than five megawatts, as measured in alternating current (AC). Additionally, the facility must qualify under one of the four statutory project categories:
A 10-percentage-point increase to the energy investment credit is available to eligible solar and wind facilities that are placed in service in low-income communities or on Indian land. A 20-percentage-point increase is available to eligible solar and wind facilities that are part of either a qualified low-income residential building project or a qualified low-income economic benefit project.
There are separate criteria for each of the four project categories, including the requirement for facilities under Category 3 and 4 to distribute financial benefits derived from the electricity produced by the facility. The final regulations describe the criteria specific to each category and define financial benefits for Category 3 and Category 4.
The annual capacity limitation for each of the calendar years 2023 and 2024 is 1.8 gigawatts. The annual capacity limitation is divided across the facility categories for calendar year 2023 as follows:
For 2023, 50% of the capacity limitation within each category is reserved for facilities meeting certain ownership and/or geographic selection criteria, known as additional selection criteria. The additional selection criteria are described in more detail in the final regulations and Revenue Procedure 2023-27. Within Category 1, 490 megawatts of capacity limitation are reserved for eligible residential behind the meter facilities.
Facilities that receive an allocation must be placed in service within 4 years of the date of the allocation award. Facility owners will report to the DOE that the facility has been placed in service through the same portal they used to apply. When reporting, the facility owner will need to submit additional information and documentation specified in Revenue Procedure 2023-27.
The DOE will determine whether the facility, as placed in service, continues to be eligible under the applicable Program requirements and will provide a recommendation to the IRS. After reviewing DOE’s recommendation, the IRS will inform the taxpayer that they may claim the increased energy investment credit or that the facility, as placed in service, is no longer eligible and is therefore disqualified from claiming the increase.
Taxpayers that are eligible to claim the increase to the energy investment credit will calculate their energy investment credit and the increase by using the Form 3468, Investment Credit. The credit increase will be calculated as the basis of eligible property in the solar or wind facility and the applicable increase of either 10 or 20 percentage points, based on the project category under which the facility was awarded an allocation. The basis of energy storage technology installed in connection with the qualified solar or wind facility is also includable in the credit increase. The final regulations define what it means for energy storage technology to be installed in connection with the qualified solar or wind facility.
Finally, the increase to the energy investment credit under Section 48(e) is separately subject to recapture. The final regulations provide the rules applicable to recapture.
Applicant portal and user guide
Applications submitted within the first 30 days will be treated as submitted on the same date and at the same time, and on a rolling basis thereafter. Depending on capacity, DOE plans to accept applications for the 2023 Program year through early next year.
Webinar for potential applicants
The DOE and the Treasury Department hosted a virtual informational webinar for potential applicants on Sept. 29, 2023. This webinar provided information and details about the Program.
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