The IRS released initial guidance (Notice 2023-18) on Feb. 3 establishing the advanced energy property credit program under Section 48C, which will provide a credit of up to 30% for a variety of different types of energy projects. Taxpayers must apply to secure a portion of a limited $10 billion allocation, and competition for funding is likely to be intense.
The program was originally created and funded in 2009 with a $2.3 billion one-time allocation. It was resurrected in its current iteration by the Inflation Reduction Act (IRA). The credit is potentially available to a broad range of activities that might not fit under specific definitions for other energy credits. Manufacturers of renewable energy property, fuel cells, grid modernization equipment, carbon capture equipment, energy conservation technology, hybrid and electric vehicles and infrastructure, and equipment to produce, refine or blend any low-carbon or renewable fuel may qualify. The credit is also available for manufacturers that re-equip a facility to reduce carbon emissions by 20% and for equipment to process critical minerals.
The application process for the first round of funding will begin on May 31, 2023, when the Department of Energy (DOE) will start accepting concept papers. Concept papers are due by July 31, 2023.
Notice 2023-18 offers important information about the application and certification process, including the types of qualifying projects and the criteria for judging applications. But many questions remain unanswered. The IRS is still working on additional guidance, including the actual application itself, the application deadline, the full criteria for judging submissions, and a map of census tracts qualifying for a special allocation.
Allocations
The IRS anticipates providing at least two allocation rounds under the Section 48C program. Total allocations from both rounds will equal $10 billion, and at least $4 billion must be allocated to projects located in a census tract (or adjoining tract) that had either a coal mine close after 1999 or coal-fired electric generating unit retired after 2009 and did not have a project receive any 2009 allocation. The IRS said that the Department of Energy (DOE) would be responsible for determining eligible census tracts and would release a mapping tool in future guidance.
The first round of allocations, announced in Notice 2023-18, will consist of $4 billion in funding, with approximately $1.6 billion—or 40%—of that amount allocated to projects located in the coal census tracts. The IRS has not yet announced a timeline for the second allocation round. A third allocation round may only be available to the extent approved projects are unable to use their allocation.
Grant Thornton Insight
The last time this program was offered, the IRS said it received more than $7.5 billion in qualified applications for its $2.3 billion allocation and could ultimately fund less than one-third of otherwise eligible projects. Although the current $10 billion allocation is much larger, the scope of the credit and the cost of projects have both increased. Competition for funding is expected again to be fierce.
Qualifying property
Three different types of projects qualify, and there are multiple qualifying categories under each one. The credit is generally available for:
Grant Thornton Insight
Facilities that process raw ore, brines, mine tailing, end-of-life products, waste streams and other source material into critical minerals will generally qualify. Projects that process critical minerals into derivative products, such as metal processing, generally will not.
- Projects that re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20% through the installation of:
- Low-or-zero-carbon process heat systems
- Carbon capture, transport, utilization and storage systems
- Energy efficiency and reduction in waste from industrial processes
- Other industrial technology designed to reduce greenhouse gas emissions, as determined by Treasury
Grant Thornton Insight
The IRS said the instructions for calculating an emissions reduction of 20% will be provided in additional guidance. An appendix to Notice 2023-18 provides extensive examples of the types of equipment that will qualify under each category.
- Projects to re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of:
- Property designed to produce energy from the sun, water, wind, geothermal deposits or other renewable resources
- Fuel cells, microturbines or energy storage systems and components
- Grid modernization equipment or components
- Property designed to capture, remove, use or sequester carbon dioxide emissions
- Equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable or low-carbon and low-emission
- Fuel cell or electric vehicles, and their components, materials and charging infrastructure
- Hybrid vehicles weighing less than 14,000 pounds and their components and materials
- Property designed to produce energy conservation technologies
- Other property designed to reduce greenhouse gas emissions, as determined by Treasury
Grant Thornton Insight
The appendix also provides extensive examples of the types of property that will qualify under each of these categories. The notice also provides that Treasury does not necessarily need to identify in guidance the types of “other property” that will qualify for reducing greenhouse emissions, but can make its determination in an acceptance letter for an application.
Eligible property must be depreciable tangible property used as an integral part of the qualifying advanced energy project. It does not include any buildings or structural components. No credit is allowed under Section 48C for any investment for which a credit is claimed under Sections 48 (energy credit), 48A (advanced coal), 48B (gasification), 48E (clean electricity), 45Q (carbon oxide sequestration) or 45V (clean hydrogen production). Taxpayers will also not be allowed to claim a credit under Section 45X for components manufactured at a facility for which the Section 48C credit was claimed.
Grant Thornton Insight
The various credits in the IRA are complex and overlapping. Section 48C targets different activities than many of the other credits because it generally rewards investing in equipment to manufacture energy property, rather than rewarding the placement of energy property itself in service. Section 48C also covers many activities that might not be eligible under other credits, and in some cases, Section 48C won’t preclude the use of other credits farther down the supply chain. For instance, taxpayers could potentially receive a Section 48C allocation for investing in equipment to manufacture property such as solar panels, electric vehicles, carbon capture equipment, and charging stations, while taxpayers placing the manufactured property in service could themselves claim a separate credit. In other cases, taxpayers will have to choose between credits. Manufacturers of battery, wind and solar components (and critical mineral processors) will have to choose between a Section 48C credit based on investing in manufacturing capacity or a Section 45X credit based on actual components manufactured. Manufacturers using carbon capture equipment to reduce emissions may need to choose between a credit under Section 45Q based on the amount of carbon captured or a Section 48C credit for reducing emissions by 20%. Businesses should consider modeling the potential costs and benefits of various credits and projects.
Prevailing wage and apprenticeship rules
The taxpayer must meet prevailing wage and apprenticeship requirements to qualify for the full 30% credit rate. These rules generally impose a minimum wage for laborers and mechanics on a project and require a minimum percentage of hours to be performed by qualified apprentices, both by the taxpayer and any contractors and subcontractors. Taxpayers must satisfy the apprenticeship requirements during construction while the prevailing wage requirements must be met while re-equipping, expanding, or establishing an approved facility. Taxpayers failing to fulfill the requirements will generally only be eligible for one-fifth of the full credit amount, although it is possible to retain the 30% rate by paying a penalty.
Taxpayers can still claim the full rate after a prevailing wage failure by paying the difference in wages (multiplied by three for intentional disregard), plus the underpayment rate under Section 6621 (using 6% instead of 3%), and an additional $5,000 ($10,000 for intentional disregard) for each worker who was underpaid. Taxpayers can regain compliance with the apprenticeship requirements by paying $50 per labor hour ($500 for intentional disregard) for the amount of hours the taxpayer fell below the required threshold.
Notice 2023-18 provides little new guidance on how to comply with the wage and apprenticeship rules. It instead relies on the guidance previously laid out in Notice 2022-61.
Grant Thornton Insight
The IRS will require taxpayers claiming the 30% Section 48C credit to both confirm that they intend to satisfy the prevailing wage and apprenticeship requirements, and then later confirm actual compliance. The guidance, however, does not appear to require any specific documentation for this certification besides the general rules outlined in Notice 2022-61. Notice 2022-61 itself offered very little guidance or recordkeeping or documentation. It said simply that taxpayers must maintain and preserve sufficient records in accordance with the rules under Section 6001, which provide the general requirements for any item on a return. Except for a single example, there is no explicit guidance on the types of records or payroll information that would meet the documentation requirements for this specific credit. For more information, see our prior story, “IRS starts clock on wage and apprenticeship rules.”
Application timeline and process
The application process for the first round of funding will begin on May 31, 2023, when the DOE will start accepting concept papers. The IRS intends to issue additional guidance by that date, including guidance on specific information applicants will be required to submit to request a credit allocation.
The concept paper is not the actual application, but it must be submitted if taxpayers intend to apply. The deadline for submitting concept papers is July 31, 2023. The DOE will review the papers and provide taxpayers a letter encouraging or discouraging them to apply. Taxpayers who receive a letter of discouragement may still apply, but the letter represents the DOE’s feedback that the project is unlikely to receive a recommendation based on the information provided.
The IRS and DOE have not yet released the application itself or announced when applications will be submitted.
Grant Thornton Insight
Although the IRS has not yet offered an application opening date or deadline, the guidance provides that applications received before the deadline (when announced) will be deemed submitted on the deadline. This should avoid a race to submit as the IRS is presumably trying to remove any advantage based on the order applications are received.
Applicants will be awarded allocations based on a DOE ranking of all the applications. The IRS will assign allocations starting at the top of the list and move down until all the funds available for allocation in that round are exhausted.
The statute under Section 48C requires Treasury and the DOE to take into consideration the following criteria:
- Domestic job creation
- Net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases
- Potential for technological innovation and commercial deployment
- Levelized cost of energy or reduction in consumption
- Project timeline from certification to completion
The project must also have a reasonable expectation of commercial viability. In addition, Notice 2023-18 provides that the DOE may consider the following policy factors:
- To achieve maximum benefits to strengthen U.S. industrial competitiveness and clean energy supply chains, as well as to promote high-quality jobs and community benefits, the DOE may consider giving priority to qualifying advanced energy projects not eligible for support from other DOE financial assistance programs funded by the Infrastructure Investment and Jobs Act (P.L. 117-58) or the IRA.
- To help build more resilient, diverse and secure U.S. clean energy supply chains, the DOE may consider whether proposed projects address specific gaps, vulnerabilities or risks in the domestic production of clean energy products. Additional guidance will specify priority technologies that would address these gaps, vulnerabilities and risks to relevant domestic supply chains.
Taxpayers whose projects are not funded can request a debriefing from the DOE, but only if they did not receive a letter of discouragement based on their concept paper. DOE will provide an impression of the strengths and weaknesses of these rejected applications, which may help taxpayers who will apply again in future allocation rounds.
Taxpayers who are awarded an allocation will receive a letter and then will have two years to certify their project. A project is eligible for certification only if the taxpayer has received all permits from federal, state, tribal, and local governmental bodies for construction of the, including environmental authorization or reviews necessary to commence construction. Taxpayers will be required to submit specific information requesting certification. If approved, the IRS will send a certification letter, and taxpayers will have two more years to place the project in service. The project will be considered placed in service in the taxable year that the period of depreciation begins (“under the taxpayer’s depreciation practice”), or if earlier, the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically designed function.
Taxpayers who do not meet these deadlines can forfeit their allocation. Taxpayers with a significant change in plans or change in ownership must notify the IRS, and the IRS can void or recapture the credit or allocation.
Grant Thornton Insight
While Notice 2023-18 provides important preliminary information like key deadlines for concept papers and background information regarding eligible projects, much more guidance from the IRS is expected (and needed) before concept papers can be submitted on May 31, 2023. Taxpayers should begin gathering pertinent materials for a concept paper and look for additional guidance from the IRS and the DOE.
Next steps
The Section 48C program will provide a major source of funding to a broader range of activities than many other credits. The limited allocation, however, will make the application process competitive. The interplay with other credit opportunities can also be complex. Taxpayers should model the potential benefits and costs of various credit options and projects. Those who plan to apply for a Section 48C allocation should assess the criteria and policy considerations, as the strongest possible concept paper will be crucial. Preparation could involve internal information gathering and identifying outside data on energy supply chains and energy markets.
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