Guidance Awaited on Energy Tax Credits in Low-Income Communities

Tax professionals and renewable-energy groups are anticipating guidance from the Treasury Department, which could be released in the coming days, about the allocation process under a provision in the tax-and-climate law that provides increased tax credits to solar and wind facilities in low-income communities.

The Inflation Reduction Act provides increased investment tax credits to certain facilities with maximum net output of less than 5 megawatts. The credit amount is boosted by 10 percentage points if the facility is located in a low-income community or on tribal land. The credit amount is increased by 20 percentage points for certain projects on rental buildings that participate in affordable housing programs and that provide most of the financial benefits of the electricity to residents. Projects that provide most of the financial benefits of the electricity produced to lower-income households can also quality for the 20 percentage point bonus.

To receive the enhanced credit amounts, companies need to apply for an allocation of “environmental justice solar and wind capacity limitation” from the Treasury Department. There is an annual limit of 1.8 gigawatts of direct current capacity that can be allocated nationwide in each of 2023 and 2024.

The law directs Treasury to establish a program to allocate the capacity limitation no later than 180 days of enactment—a date that translates to Feb. 12. The law says the procedures should be “efficient.”

Tax professionals as well as companies interested in utilizing the bonus credit amounts are looking to review the procedures for the allocation program and learning more about the application process.

“People are really eager to see it,” said Marc Nickel, an associate at McGuireWoods LLP. “I am curious to see how fully-formed it will be when they release it.”

The annual capacity limit is enough to be used for thousands of residential solar projects, Nickel said.

Tax professionals said the bonus credit could benefit projects that include solar panel installations on residential and commercial buildings, as well as small wind projects, in low-income areas. Solar installations on multi-family housing buildings are expected to be a main beneficiary of the 20 percentage point credit boost.

A similar credit enhancement will also be part of the law’s technology-neutral investment tax credit that replaces the existing credit for projects placed in service starting in 2025.

High Interest

Kimberly Wojcik, an attorney-adviser in Treasury’s office of tax policy, said at a recent conference that information about the allocation process is “coming forward,” noting the quickly approaching statutory deadline. She said Treasury has heard a lot of industry interest in the increased credit, noting that if companies add this increased credit with other credit increases in the tax-and-climate law, they can get credits of up to 70%.

“We’re hearing from industry that it actually is going to be oversubscribed, that there’s just so much interest in it,” Wojcik said.

Tax professionals had varying opinions about whether entities would apply for more allocation than is available, but agreed that the increased credit could prove to be popular.

Stephen Tracy, a partner at Novogradac & Company LLP, said he thinks the program will be oversubscribed.

“My sense is from talking to clients and others that there are a number of shovel-ready projects,” he said.

But Elizabeth Crouse, a partner at K&L Gates LLP, said some community organizations may not want to deal with the complexities of utilizing tax credits.

“Many of the community organizations that work in low-income areas have historically not tried to use the tax credits, because they’re tiny installations often, and the additional costs and complication of trying to utilize the tax credits can be such that it’s not really worthwhile,” she said.

Nickel said that 1.8 gigawatts is a large annual limit, so the annual cap may not be reached in the initial years of the credit enhancement but could be reached as time goes on.

Priorities for the Guidance

Renewable-energy groups and tax professionals have laid out a variety of priorities for what they would like to see in the forthcoming guidance about the allocation process.

Crouse said she wants the guidance to be “as simple a process as possible,” to help organizations that are unfamiliar with utilizing tax credits.

The American Council on Renewable Energy said in a November comment letter to the IRS that it wants Treasury to consider allowing projects enrolled in state programs focused on low-income communities to be eligible for the increased tax credit.

The group also wants taxpayers to be notified if the 1.8 gigawatt capacity limit has been used up or if any unused allocation will be carried over to the following year. “Having good coordination on that is going to be key” to making sure the tax-credit program is fully utilized and the allocation process is equitable, Allison Nyholm, ACORE’s vice president of government affairs, told Bloomberg Tax.

A renewable energy working group founded by Novogradac suggested in its comment letter that Treasury reserve a portion of the capacity limitation for the smallest projects. The group also requested guidance to clarify the definition of “financial benefits” of electricity produced by facilities that needs to go to tenants and low-income households in order to qualify for the bonus credit of 20 percentage points.

Tracy said the goal of the increased credit is to get renewable energy to populations that have previously had limited access. “I think that’s going to be super important that the guidance be written clear enough to allow for that result,” he said.