The IRS released guidance on April 4 (Notice 2023-29) providing rules and a limited mapping tool for determining whether an energy project is located in an “energy community” and will qualify for a 10% bonus energy credit under Sections 45 and 48.
The bonus credit rates are key to the economics of many energy projects, and there is enough guidance that many taxpayers can now determine whether a project will qualify. Energy communities will potentially cover a massive amount of the country’s geographic area, including nearly the entirety of several Western, Midwest, and Southern states.
Projects located in energy communities are generally eligible for an additional 10% investment tax credit (ITC) under Section 48 or a 10% increase in the rate for the production tax credit (PTC) under Section 45. There are three separate categories of qualifying energy communities:
- “Brownfield” sites
- “Statistical areas” meeting energy activity thresholds with unemployment above national averages
- Census tracts (and adjoining census tracts) where a coal mine or coal-fired elective plant has closed
The IRS intends to propose regulations based on the notice that would apply to tax years ending after April 4, 2023, but taxpayers may rely on the rules until proposed regulations are issued.
Grant Thornton Insight
The guidance relies heavily on determinations and lists from other government agencies, and while there is helpful clarity, lingering areas of uncertainty remain. The mapping tool is a valuable resource for coal census tracts, but the “statistical areas” identified by the map will only qualify depending on unemployment numbers to be released in April. The map does not cover Brownfield sites at all, although there is a separate safe harbor available for them.
The determination of energy communities is important for PTC, the ITC, and to a limited extent, the Section 48C credit. It will also apply to the Section 45Y PTC and Section 48E ITC when they replace the current Section 48 ITC and Section 45 PTC for projects beginning construction in 2025 or later.
The PTC generally offers a credit up to 2.7 cents per kilowatt hour (indexed for inflation) of electricity produced during the 10 years after a facility is placed in service. The ITC offers a credit of up to 30% of the basis of energy property when it is placed in service. The credits were extended and enhanced by the Inflation Reduction Act, which created three separate additional bonus credits amounts for:
- Projects located in “energy communities”
- Projects meeting domestic sourcing threshold for steel, iron and manufactured components
- Wind and solar projects on “Indian land” or benefiting low-income communities (see our previous story)
Projects located in energy communities will be eligible for an additional 10% ITC or a 10% increase in the PTC rate if they meet prevailing wage and apprenticeship requirements (or are exempt).
Grant Thornton Insight
The Section 48C credit is a 30% credit with a limited $10 billion allocation that taxpayers must apply for. At least $4 billion of the allocation must be directed to projects in census tracts that qualify under the coal tract prong of energy community definition. Census tracts containing a project that previously received a Section 48 allocation will be excluded, so separate guidance is likely needed for the Section 48C special allocation areas (see our Tax Flash for more information on Section 48C).
The statutory language defines a qualifying Brownfield site based on a definition in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). The applicable section (42 U.S.C. § 9601(39)) is expansive, including “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant” and certain “mine scarred land” with a handful of specific exceptions.
Notice 2023-28 provides no additional information on how to make a general determination based on this CERCLA language, but does provide a safe harbor. Under the safe harbor, a Brownfield site will qualify if it meets any of the following conditions:
- The site was previously assessed by federal, state, territory or Indian tribal Brownfield resources as a Brownfield (the IRS notes that a list of these sites can be accessed from an EPA website and similar government webpages)
- An “ASTM E1903 Phase II Environmental Site Assessment” has been completed and confirmed the presence of an applicable hazardous substance, pollutant or contaminant
- An “ASTM E1527 Phase I Environmental Site Assessment” has been completed and the project has a nameplate capacity of 5 megawatts or less
Grant Thornton Insight
The safe harbor will provide certainty for many sites, but the underlying definition offers potential opportunities to a much broader range of locations. Taxpayers looking at project sites not covered by a safe harbor will need to make a determination based on their own interpretation of very open-ended statutory language. Under CERCLA, real property can be considered a Brownfield solely based on whether reuse or development “may be complicated” by hazardous substances without any actual designation by the EPA or another governmental agency.
“Energy communities” include any metropolitan or non-metropolitan “statistical area” (MSA or non-MSA) that meets both prongs of the following two-part test:
- The area has at least 0.17% direct employment or 25% local tax revenues related to the extraction processing, transport, or storage of coal, oil or natural gas
- The area has an unemployment rate at or above the national average for the previous year
MSAs are groups of counties delineated by the Office of Management and Budget under OMB standards every 10 years based on census results. Counties outside of MSAs are then grouped together as non-MSAs. The IRS generally relies on OMB groupings provided in OMB Bulletin No. 18-03.
The employment rate in coal, oil and natural gas activities will be determined by using employment numbers under eight specific codes in the 2017 North American Industry Classification System using data from the “County Business Patterns” published by the Census Bureau. The unemployment rate within a statistical area will be determined using “Local Area Unemployment Statistics” data for counties from the Bureau of Labor Statistics. The IRS said unemployment rates are generally released in April of the following calendar year and will update its information for 2022 by May.
Grant Thornton Insight
The IRS has already identified all MSAs and non-MSAs that will meet the energy employment standard, and has made this information accessible in its mapping tool and an appendix. But a determination of whether the areas will actually qualify based on their unemployment levels will have to wait for updates to national employment rates. The IRS said it is struggling to identify public data sources to determine tax revenue from oil and gas activities and asked for public recommendations. Because the statute requires determinations on local tax revenues to be made by Treasury, taxpayers will likely not be able to use that standard to identify qualifying areas unless additional guidance is issued.
Coal census tracts
This category includes census tracts and adjoining census tracts where a coal mine closed after 1999 or a coal-fired electric generating unit was retired after 2009. The IRS relied on mine statuses as listed in the “Mine Data Retrieval System” from the Department of Labor’s Mine Safety and Health Administration (MSHA), but excluded mines with irregular location information. Taxpayers with evidence to correct bad information can submit it to the MSHA. The IRS relied on data from the Energy Information Administration of the Department of Energy to determine retired coal-fired electrical generating units.
Grant Thornton Insight
The IRS has fully identified all qualifying census tracts under this category in an appendix and its mapping tool, although census tracts could presumably be added if location errors are corrected or additional mines or generation units close.
Determining project location
The guidance includes favorable rules for determining whether a project is physically within an energy community. The statute generally provides that the ITC determination is made when the property is placed in service and the PTC determination must be made separately for each year of the 10-year credit period. This could pose a problem as energy communities change over time, particularly with statistical areas where employment rates may change from year to year.
The guidance provides that if a project location is within an energy community when construction begins, the location will continue to be considered an energy community for the duration of the PTC credit period or the ITC placed-in-service date. The IRS will rely on existing guidance for determining when construction begins (see our previous story on the wage and apprenticeship rules for more on when construction begins).
If a project straddles an energy community, it will qualify if either 50% or more of the nameplate capacity or square footage of the project is within the energy community.
Many taxpayers should have enough information to determine whether the bonus credit will be available for their potential projects. The bonus credit could be critical for modeling out credit options and the viability of potential projects, though there are other important factors. Taxpayer can generally elect either the PTC or ITC for energy projects, and there are new options for monetizing credits. Taxpayers should also look out for future guidance on credit transfers and the bonus rates for domestic sourcing.
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