The IRS and US Treasury Department issued new guidance Tuesday on the energy community bonus tax credit requirements in President Joe Biden’s tax-and-climate law.
Clean energy developers and investors can increase some credits by 10% by building facilities in an “energy community” that has been dependent on fossil fuels, according to the law.
The tax incentives will drive billions in new investments and make projects more financially viable, said Wally Adeyemo, deputy secretary of the Treasury, in a press call Monday.
Notice 2023-29 outlines what is considered an energy community and whether a project is located in one.
Some companies have been holding off on finalizing deals for clean energy projects, and this guidance gives them the certainty to move forward, tax professionals said.
“People will be able to at least get comfortable as to whether or not they’re getting a 30% credit versus a 40% credit,” said Amish Shah, a partner at Holland & Knight. “And again, that will help our clients and others decide when and where to build projects.”
The energy community bonus credit makes projects more financially feasible, allows sponsors to use better equipment and increases the likelihood of a project being successfully completed, said Stephen Tracy, a partner at Novogradac.
If a taxpayer begins construction in an energy community, the location will be continue to be considered an energy community for the duration of the credit period or placed-in-service date, depending on the credit.
The notice also clarifies that offshore wind projects can qualify when there is an interconnection facility in an energy community.
In addition to the guidance, the agencies issued three lists: metropolitan statistical areas and non-MSAs; MSAs and non-MSAs that meet the fossil fuel employment threshold; and census tracts that have a closed coal mine or a retired coal-fired electric generating unit.
The agencies plan to update the list of areas that meet the fossil fuel employment requirements annually in May.
After the tax-and-climate law passed, there was concern that the broad definition of an energy community wouldn’t target those most negatively impacted by the clean energy transition.
The IRS and Treasury released a searchable mapping tool to identify the areas eligible for the bonus credit.
The map shows “that a fairly sizable portion of the country geographically is an energy community so it’s not surprising, but certainly it’s good confirmation,” said Shah.
The Treasury Department adopted provisions sought by the solar sector, said Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association. Those include rules that qualify projects with at least 50% nameplate capacity in an energy community and projects built in census tracts that adjoin a tract with a shuttered coal-fired power plant or coal mine.
The IRS and Treasury intend to propose rules on the energy community bonus credit that will apply to taxable years after April 4, 2023. Until the proposed rules are issued, taxpayers can rely on the notice, the guidance said.
Taxpayers looking to apply for a portion of the $10 billion allocation of qualifying advanced energy project credits under Section 48C also got more certainty in the guidance, although the 48C tax credit wasn’t mentioned specifically, tax pros said.
Projects that are located in energy communities will receive $4 billion of the funding. These projects will get preference for allocation and will be more competitive, Shah said. Companies will weigh whether projects are in energy communities based on the recent guidance and recognize the likelihood of getting a credit allocation is significantly higher, he said.
The guidance was largely consistent with what the law required, said Daniel Raimi, a fellow with Resources for the Future who created a map last year to estimate the boundaries of energy communities.
While coal communities are clearly defined, the inclusion of an annually updated fossil-fuel employment figure appears to make swaths of the country eligible for the tax credit one year and ineligible the next year, Raimi said.
“Coal communities have some certainty with this new definition,” he said. “The other parts of the map, it’s a little less clear at this point.”
He noted that roughly half of the country is potentially eligible for the tax credit, saying, “so if the goal is to specifically target fossil fuel generation regions, we can see that it doesn’t do that.”
An energy community can also be an area where fossil fuels provide at least 25% of the local tax revenue, but the guidance didn’t address a data source for taxpayers to refer to due to the lack of public data. The agencies said they were open to receiving comments on possible data sources.
It’s not clear what impact the lack of tax revenue data will have on companies looking to put projects in energy communities, said David Burton, a partner at Norton Rose Fulbright.
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