The IRS has issued final regulations and a revenue procedure (Rev. Proc. 2023-27) establishing the rules and the process for taxpayers to apply for enhanced credit rates for solar and wind projects that are built in certain geographic locations or benefit specific low-income populations.
The guidance builds on the application process originally proposed in Notice 2023-17 and REG-110412-23 and creates a preference for applications that meet specific ownership and geographic criteria.
Section 48 generally provides a 30% base credit for a variety of energy projects if prevailing wage and apprenticeship rules are satisfied (or the project is exempt). The Inflation Reduction Act also created a variety of increased rates for specific types of projects, including an “environmental justice” allocation under Section 48(e)(there are also bonus rates for domestic sourcing and energy communities). This environmental justice allocation offers an increased credit of either 10% or 20% for solar or wind projects under 5 megawatts in connection with certain low-income communities. Unlike other bonus credit amounts, taxpayers must apply to receive a Section 48(e) allocation and funding is capped at 1.8 gigawatts worth of projects annually for 2023 and 2024.
There are four categories of communities eligible for these enhanced rates as shown in the chart below, and the IRS in the final regulations retained the capacity allocations for each category from earlier guidance:
This table lists the four community categories eligible for enhanced rates for solar and wind projects where money has been allocated. The second column lists the capacity allocation in megawatts for each and the third column shows the percentage increase of the credits per community category.
The 700 MW allocation for projects in a NMTC census tract is further divided into sub-allocations of 490 megawatts for residential “behind-the-meter” facilities and 210 megawatts of “front-of-meter” facilities. In addition, 50% of the allocations across all categories are reserved for projects that meet specific ownership and geographic criteria. Under these rules, projects must be owned by a tribal enterprise, an Alaska Native corporation, a renewable energy cooperative, a tax-exempt entity, or certain renewable energy companies that specifically serve low-income communities and households. They must also be located in a “Persistent Poverty County” or a “Climate and Economic Justice Screening Tool” census tract. The IRS said it may adjust any of its allocations depending on whether certain categories are under- or over-subscribed.
The application process for 2023 will open in one phase starting in early fall of this year. The IRS changed the process to one phase from the two proposed for efficiency reasons. Taxpayers must apply though a portal on the Department of Energy (DOE) website.
The initial application period will be 30 days. Applications received within this 30-day period will all be treated as being received on the same day and time. 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 or reject the application.
If any categories are oversubscribed, the IRS will hold a lottery to determine which projects receive funding. If the allocations are not exhausted in the initial application period, the IRS and DOE will continue to accept applications on a rolling basis over subsequent 30-day periods.
The guidance provides detailed documentation and attestation requirements that the taxpayer must provide during the application process and post-allocation award. he information required will vary depending on the type of property and the category to which the applicant applies. Taxpayers applying in categories requiring financial benefits to be equitably allocated to residents or to benefit low-income households will need to submit more detailed information than projects simply eligible based on a geographic footprint. Applicants seeking preferential allocations for meeting geographic or ownership criteria will also need to submit additional information.
The final regulations provide rules for determining whether multiple facilities or energy properties are regarded as a single facility and for recapturing credits if projects cease to qualify within five years.
Grant Thornton insight:
Taxpayers with projects in a qualifying geography should consider applying for a credit. Timing is important. Projects cannot be placed in service before a credit allocation is rewarded. Applicants will only be able to submit one application per facility per the allocation year, but will be able to resubmit in 2024 if rejected in 2023. Funding could be competitive. The IRS said it is anticipating upwards of 100,000 applications annually. Unlike the Section 48C application process, applications will generally not be judged against each other, although applications meeting the geographic and ownership criteria receive a preferential allocation.
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