Making Sense of the IRS’s Low-Income Community Bonus Tax Credits

The IRS recently published a notice of proposed rulemaking about low-income community bonus tax credits under Section 48(e). This new section of the tax code permits owners of qualifying wind and solar projects to claim up to a 20% additional investment tax credit if they receive an allocation award.

The bonus credit is 10% for a facility in a low-income community or on Native American land, and 20% for those that are part of a qualified low-income residential building project or economic benefit project.

Stakeholders can comment on the proposed rules until June 30.

The proposed rules largely follow earlier guidance in Notice 2023-17, including that facilities can’t receive allocations if already placed in service. But the proposed rules would change the overall application process. They also provide detailed requirements for applications and compliance, describe recapture and disqualifying events, and add new standards, clarifications, and definitions.

The program has an annual capacity limitation of 1.8 gigawatts of direct current for 2023 and 2024. A qualified solar and wind facility satisfies low-income community location criteria; generates electricity solely from a wind facility, solar energy property, or small wind energy property; and has a maximum net output less than 5 megawatt alternating current.

Application Process

Applications are submitted by the owner of the facility and considered separately among four categories, which track these low-income community location criteria. The categories receive the following shares of the total 1.8 capacity limitation for 2023, although the Treasury Department could modify this later to maximize allocations.

Low-income communities (Category 1) and qualified low-income benefit projects (Category 4) are each allocated 700 megawatts of capacity. Native American land (Category 2) and qualified low-income residential building projects (Category 3) are allocated 200 megawatts each.

The 700 megawatts allocated to low-income communities is further subdivided: 560 megawatts for residential behind-the-meter facilities and 140 megawatts for non-residential behind-the-meter and front-of-the-meter facilities.

The rulemaking notice includes a chart listing the documents and attestations required for each facility category, which are designed to ensure that the facility is developed enough to be placed in service within four years of notification of the award. One example is a signed interconnection agreement—the allocation is forfeited if the facility isn’t placed in service within four years.

Applications for all categories will be reviewed during an initial period, yet unspecified. After this period ends, there will be a rolling application period—specific details aren’t available yet.

Initial Period Selection

The capacity limitation is allocated first to facilities that satisfy priority criteria based on ownership or geographical location. If there’s any remaining capacity limitation in the category, it will be allocated via lottery to facilities in the category that don’t meet the criteria, subject to a 50% minimum reserve for prioritized facilities.

In other words, if 200 megawatts were allocated to qualified low-income benefit projects that meet either or both the ownership and location criteria, 150 megawatts would have to be reserved for those priority facilities during the rolling period, and 350 megawatts would be available for allocation by lottery.

The ownership criteria are met if the facility is owned by a tribal enterprise, an Alaska Native corporation, a qualified renewable energy cooperative (meeting certain requirements in the rulemaking notice), a renewable energy company that serves low-income communities and provides pathways for low-income individuals to adopt clean energy, or a qualified tax-exempt entity, which includes state and local governments, Tribes, and rural energy cooperatives.

The location criteria is met if the facility is located in a persistent poverty county—meaning a county where 20% or more of the residents have experienced high rates of poverty over the past 30 years—or a census tract designated by the Climate and Economic Justice Screening Tool as disadvantaged based on the tract being in at least the 65th percentile for low income and at least the 90th percentile for either energy burden or PM2.5 exposure.

Additional Clarifications and Guidance

Satisfying the financial benefits requirement for Category 3 facilities under Section 48(e)(2)(B) requires 50% of the financial value of the net energy savings be distributed to low-income units.
Satisfying the financial benefits requirement for Category 4 facilities under Section 48(e)(2)(C) includes a minimum 20% bill credit discount rate for qualifying low-income households.
Treating multiple properties as a single facility when operated as a single project to prevent abuse of the less than 5-megawatt capacity requirement.
Criteria for considering energy storage technology installed in connection with the qualified facility, which uses commonality factors and a minimum charging requirement.

Conclusion

While the proposed rules provide much useful detailed guidance and information, they leave many questions unanswered, such as whether a second application can be submitted for a different category during the rolling process notwithstanding the prohibition in Notice 2013-17.

A bigger issue may be the impact of the proposed rules on owners of facilities that don’t meet either the ownership or the location criteria. Such applicants face a lottery system where, at best, only half of the category’s capacity limitation is offered.

This may not provide enough certainty in some situations given that the application requirements are designed to ensure that development of the facility is sufficiently underway to meet the four-year requirement to be placed in service.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anne Levin-Nussbaum is a federal income tax attorney at Akerman. Her practice focuses on transactions involving the development, financing, sales and acquisitions of renewable energy projects.