New guidance for the energy community bonus credit
Notice 2023-29, issued April 4, 2023, helps provide clarity to Internal Revenue Code (IRC) 45(b)(11)(B) in determining whether a qualified energy facility, project or storage technology is located in an energy community. The Inflation Reduction Act of 2022 (IRA) changes the Production Tax Credit (PTC) and Investment Tax Credit (ITC) by amending IRC Sections 45 and 48 to provide increased credit amounts if requirements related to energy communities are satisfied.
The IRA also created the Clean Energy Production Credit and Clean Energy Investment Credit by adding new IRC Sections 45Y and 48E. These new sections provide increased credit amounts for certain qualified facilities, energy projects or energy storage technologies that satisfy energy communities requirements and are placed in service after December 31, 2024.
Here is what your organization needs to know to take advantage of these changes:
Increased credit amounts
The increased credit amount available for meeting the energy community requirements is generally 10% for the PTC and 2% for meeting the requirements for the ITC. With the ITC, you can gain an additional 10% if prevailing wage and apprenticeship requirements or certain other requirements are also met.
The Treasury Department and the IRS intend to issue proposed regulations which will apply to taxable years ending after April 4, 2023. However, until the issuance of the proposed regulations, taxpayers may rely on the rules contained within Notice 2023-29.
Energy community categories
IRC Section 45(b)(11)(B) identifies three location-based categories of energy communities:
1. Brownfield category
A brownfield site is real property where the presence — or potential presence — of a hazardous substance, pollutant or contaminant complicates the property’s expansion, redevelopment or reuse. Certain mine-scarred land would also qualify.
2. Statistical area category
Statistical area includes metropolitan statistical areas and nonmetropolitan statistical areas that:
- Have (or had at any time after December 31, 2009) 0.17% or greater direct employment (fossil fuel employment) or 25% or greater local tax revenues (fossil fuel tax revenue) related to the extraction, processing, transport or storage of coal, oil or natural gas.
- Have an unemployment rate at or above the national average unemployment rate for the previous year.
3. Coal closure category
This category includes census tract (or a census tract directly adjoining such census tract) in which a coal mine has closed after December 31, 1999, or in which a coal-fired electric generating unit has been retired after December 31, 2009.
Location requirements
To qualify for the bonus credit under IRC Sections 45 and 45Y, a qualified facility must be located in an energy community. Under IRC Sections 48 and 48E, an energy project, facility or storage technology must be placed in service within an energy community.
For the purposes of IRC Section 45 and 45Y, a qualified facility is treated as located in an energy community during a taxable year if it is located in an energy community during any part of the taxable year, determined separately for each taxable year of the qualified facility’s 10-year credit period. With IRC Section 48 and 48E, whether qualified facilities, energy projects or energy storage technologies are placed in service within an energy community is determined as of the placed-in-service date.
If a taxpayer begins construction of qualified facilities, energy projects or energy storage technologies that are located in an energy community as of the beginning of construction date, the location will continue to be considered an energy community for the duration of the credit period or on the placed-in-service date. This rule will only apply to projects that begin construction on or after January 1, 2023.
Notice 2023-29 provides tests for determining whether the energy project, facility, or storage technology is located in or placed in service within an energy community:
- The nameplate capacity test, which measures maximum electrical generating output
- The square footage test, which measures the square footage located in an energy community
Qualified facilities, energy projects or energy storage technologies that have nameplate capacity must apply the nameplate capacity test, whereas an energy project, facility or storage technology that has no nameplate capacity must apply the square footage test.
Substantiation
A taxpayer claiming the increased credit amount or rate for meeting energy community bonus credit requirements must meet the general recordkeeping requirements under IRC Section 6001 to substantiate that the qualified facilities, energy projects or energy storage technologies are located in, or have been placed in service in, an energy community.
Advanced energy projects
Although never stated outright within Notice 2023-29, it seems the definition of energy community in IRS Section § 45(b)(11)(B) will apply to the determination of IRC 48C-qualifying advanced energy projects.
Notice 2023-18, Section 5.06 states that the secretary must allocate at least $4 billion of IRC Section 48C credits to projects located in certain energy communities. So, it is likely that the application of Notice 2023-29 regarding energy communities will be factored into consideration of qualification of advanced energy projects.
How Wipfli can help
Do you have questions about how to qualify for the energy community bonus credit? Wipfli’s knowledgeable and experienced tax team can help you navigate the new guidance and continue to monitor updates. Contact us to learn more about how we can help you reduce your tax liability.
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