The IRS recently published guidance (Notice 2023-17), establishing initial rules for allocating enhanced credit rates for certain types of solar and wind projects under Section 48(e).
Section 48 generally now provides a 30% base credit for a variety of energy projects. The Inflation Reduction Act (IRA) allows increased rates for specific types of projects, including an additional 10% rate for projects in “energy communities” and 10% for domestically sourced projects. The “environmental justice” allocation addressed by Notice 2023-17 provides an increased credit of either 10% or 20% for solar or wind projects in connection with certain low-income communities.
The facilities must have a maximum net production of less than 5 megawatts (MW). Treasury has a limited allocation of only 1.8 gigawatts (GW) worth of projects it can award under the program for calendar years 2023 and 2024, and taxpayers must apply for a portion of the allocation. The notice provides that for 2023, the 1.8 GW capacity limitations will be allocated among the four categories of communities eligible for the low-income community benefit as shown in the chart below.
The guidance does not set the specific application deadlines or provide the application itself. The notice does specify that applications will be accepted in stages in 2023, beginning with a 60-day application window in the third quarter of the year. This first window will accept applications only for Category 3 and Category 4 facilities described above. Category 1 and Category 2 facility applications will be taken at a later point in 2023, yet to be determined.
The application must be submitted by the owner of the project and can only be made with respect to one allocation category. It is not clear whether “owner” in this context refers to the project company that owns the facility or, if a project company is a disregarded entity, the tax owner of the facility.
The Department of Energy (DOE) will be responsible for administrating and evaluating low-income community benefit applications. Unlike the Section 48C program, it does not appear that the DOE will rank qualified projects in order to determine who is funded. Instead, the notice provides that if the total applications for one of the four categories exceed the capacity for such category, then the IRS may use a lottery system or other processes. Conversely, if the capacity in any category is not fully used in 2023, the excess may be reallocated by the IRS to another category to maximize the 2023 allocations. There will be no waitlist for denied applicants, so rejected applicants must reapply the following calendar year to be reconsidered.
The notice does not provide the full criteria for determining whether projects will qualify, but did indicate there will be a focus on facilities that:
- Are owned or developed by community-based organizations and mission-driven entities
- Encourage new market participants
- Provide significant benefits to low-income communities and people excluded from economic opportunities
- Have a higher level of commercial readiness
Detailed information on this criteria is not provided; however, additional details are expected in the coming months.
The property must be placed in service within four years after the date the applicant was notified that the capacity limitation was allocated to the project. Eligible property is considered placed in service in the earlier of the taxable year in which the period for depreciation begins, or the taxable year in which the property is placed in a condition or state of readiness for a specifically assigned function.
Interested entities should carefully review the information contained in Notice 2023-17 and be on the lookout for additional guidance from DOE and Treasury in the coming months.
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