IRS releases Notice 2023-29 on energy community rules

I.     Overview

On April 4, 2023, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued Notice 2023-29(the Notice) to provide additional guidance on energy community bonus tax credits under IRC sections 45, 45Y, 48, and 48E, under the Inflation Reduction Act of 2022 (IRA). The energy community bonus provides an increased investment tax credit (ITC) amount or production tax credit (PTC) rate if certain requirements pertaining to energy communities are satisfied.

The Notice follows prior requests for comments in Notice 2022-51 on whether clarification is needed for the requirement that a facility be “located in” an energy community; the sources of information that the Treasury Department and the IRS should consider to determine metropolitan statistical areas (MSAs) and non-metropolitan statistical areas (Non-MSAs), as well as which “census tracts” had a coal mine closure or coal-fired electric generating unit retirement in the relevant time periods; and whether any changes to the definition, scope, boundary, or status of a brownfield site, an MSA or Non-MSA, or a census tract should be considered during the relevant credit period.

The Notice also provides substantiation requirements for taxpayers claiming an energy community bonus credit, and calls for further comments regarding the determination of fossil fuel tax revenue.

The Notice states that Treasury and the IRS intend to propose that the regulations will apply to taxable years ending after April 4, 2023. The Notice states that, until the issuance of the proposed regulations, taxpayers may rely on the rules described in the Notice.

Key takeaways from the Notice include the following:

• Brownfield safe harbor – the Notice provides a safe harbor by which sites that have previously been assessed to qualify as a brownfield site, either by a relevant governmental authority or through a private environmental analysis, will automatically qualify for purposes of the energy community bonus credit.
• MSA and Non-MSA tables – the Notice includes tables of MSAs and Non-MSAs that have the requisite fossil fuel employment. This will provide some degree of certainty in seeking energy community status under the statistical area category, but some uncertainty remains to the extent this category relies on annual unemployment data.
• Census Tracts – the Notice provides guidance on what qualifies as adjoining tracts and as a retired coal-fired electric generating unit.
• Beginning construction – the Notice provides a timing safe harbor, such that if a project meets energy community status as of the beginning construction date, it will retain that status for the duration of the credit period.
• Reliance – the IRS states that taxpayers may rely on the guidance in the Notice until forthcoming proposed regulations on energy community rules. As noted above, the Notice calls for further comments on one aspect of the statistical area category, and a previous notice invited comments on other energy community topics. This suggests that there is still an opportunity to provide written comments to the IRS on energy community issues that could stand to benefit from further clarification or guidance prior to the issuance of the proposed regulations.

II.     Energy Community Bonus

The IRA, among other things, amends sections 45 and 48 of the Internal Revenue Code (the Code), and adds new sections 45Y and 48E. These sections set forth certain production tax credits and investment tax credits available for renewable energy projects. The IRA provides for increased credit amounts or rates if certain requirements pertaining to energy communities are satisfied.

The IRA provides a general definition for an “energy community” in section 45(b)(11)(B), and sections 45(b)(11), 48(a)(14), 45Y(g)(7), and 48E(a)(3)(A) provide the energy community bonus credit requirements that taxpayers must satisfy to qualify projects for increased credit amounts or rates under those provisions of the Code.

The Notice applies generally to energy community projects, which it defines to include:

• a qualified facility eligible for a credit determined under section 45 or 45Y that is located in an energy community;
• an energy project eligible for a credit determined under section 48, which may include qualified property for which a taxpayer has made a valid irrevocable election under section 48(a)(5) to treat such qualified property as energy property under section 48, that is placed in service within an energy community; or
• a qualified investment with respect to a qualified facility or an energy storage technology eligible for a credit determined under section 48E that is placed in service within an energy community.

The IRA outlines the three categories that can qualify as an energy community: (i) brownfield sites, (ii) metropolitan or non-metropolitan statistical area with specified minimum levels of direct employment or local tax revenue related to certain fossil fuel activities, and an unemployment rate at or above the national average, and (iii) census tracts (or adjoining census tracts) in which a coal mine has closed or a coal-fired electric generating unit has been retired. The Notice expands on those definitions and requirements. The Notice also provides guidance on how and when a project must be “located in” an energy community or “placed in service” within an energy community, so as to qualify for the applicable bonus credit, including special rules for “beginning construction.”

III.     Energy Community Categories

Section 45(b)(11)(B) identifies three location-based categories for energy communities, and the Notice provides further guidance for each category.

A.     Brownfield Category

The first energy community category includes brownfield sites. The IRA generally defines brownfield sites by reference to certain aspects of the definition contained in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). The Notice reiterates this definition without much further explanation.

Specifically, the Notice clarifies that a “brownfield site” means “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant (as defined under 42 USC. § 9601),” and certain mine-scarred land. The IRA definition also incorporates a number of enumerated exclusions to brownfield sites from the CERCLA definition, including:

• A facility that is the subject of a planned or ongoing removal action under CERCLA;
• A facility that is listed on the National Priorities List or is proposed for listing;
• A facility that is the subject of a unilateral administrative order, a court order, an administrative order on consent or judicial consent decree that has been issued to or entered into by the parties under this chapter;
• A facility that is the subject of a unilateral administrative order, a court order, an administrative order on consent or judicial consent decree that has been issued to or entered into by the parties, or a facility to which a permit has been issued by the United States or an authorized State under the Solid Waste Disposal Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, or the Safe Drinking Water Act;
• A facility that-
  • is subject to corrective action under section 3004(u) or 3008(h) of the Solid Waste Disposal Act; and
  • to which a corrective action permit or order has been issued or modified to require the implementation of corrective measures;
• A land disposal unit with respect to which-
  • a closure notification under subtitle C of the Solid Waste Disposal Act has been submitted; and
  • closure requirements have been specified in a closure plan or permit;
• A facility that is subject to the jurisdiction, custody, or control of a department, agency, or instrumentality of the United States, except for land held in trust by the United States for an Indian tribe;
• A portion of a facility-
  • at which there has been a release of polychlorinated biphenyls; and
  • that is subject to remediation under the Toxic Substances Control Act; or
• A portion of a facility, for which portion, assistance for response activity has been obtained under subtitle I of the Solid Waste Disposal Act from the Leaking Underground Storage Tank Trust Fund established under section 9508 of title 26.

1.     Safe Harbor

What the Notice does provide on brownfields, beyond a simple reiteration of the statutory definition, is a safe harbor mechanism, under which the IRS represents that it will accept that a site qualifies as a brownfield site if it is not covered by one of the enumerated exceptions, and it meets one of the following conditions:

• The site was previously assessed through federal, state, territory, or tribal authorities as meeting the definition of a brownfield site under CERCLA. (The Notice observes that potential site lists may be found on the EPA’s Cleanups in My Community webpage or equivalent webpages maintained by states, territories, or Indian tribes).
• An ASTM E1903 Phase II Environmental Site Assessment has been completed with respect to the site and confirms the presence on the site of a hazardous substance, pollutant, or contaminant as defined by CERCLA.
• For projects with a nameplate capacity (defined below) of not greater than 5MW (AC), an ASTM E1527 Phase I Environmental Site Assessment has been completed with respect to the site.

B.     Statistical Area Category

The second energy community category is referred to as the “statistical area” category. The IRA sets forth three prongs a taxpayer must meet to demonstrate an energy community under this category: (i) an MSAs or Non-MSA, (ii) either a minimum level of employment or a minimum level of tax revenue attributable to the extraction, processing, transport, or storage of coal, oil, or natural gas, and (iii) an unemployment rate at or above the national average unemployment rate for the previous year.

1.     MSAs and Non-MSAs

The threshold unit for qualification under the statistical area category is either an MSA or a Non-MSA.

In general, MSAs are groups of counties or county-equivalents that are grouped according to standards determined by the Office of Management and Budget (OMB). The OMB updates these standards every 10 years in accordance with census data. For purposes of the guidance in the Notice, the IRS will refer to the MSA delineations provided by the OMB in Bulletin No. 18-03 (April 6 18, 2018).

Conversely, for purposes of the Notice, Non-MSAs are identified in the May 2021 Metropolitan and Nonmetropolitan Area Definitions published by the US Bureau of Labor Statistics (BLS). The BLS works in conjunction with individual states to determine nonmetropolitan area definitions. MSAs are first delineated, and then counties outside of MSAs are grouped together as nonmetropolitan areas. The Notice provides specific guidance for identifying Non-MSAs in certain states and territories. The IRS attached a delineation of all MSAs and Non-MSAs used for purposes of the Notice as Appendix A to the Notice.

The MSA or Non-MSA must either satisfy certain fossil fuel employment or fossil fuel tax revenue requirements to qualify under the statistical area category.

2.     Fossil Fuel Statistics

a.     Fossil Fuel Employment

The fossil fuel employment requirement is met if the relevant area has 0.17 percent or greater direct employment in the following industries as identified by the North American Industry Classification System:

• Oil and Gas Extraction
• Coal Mining
• Drilling Oil and Gas Wells
• Support Activities for Oil and Gas Operations
• Support Activities for Coal Mining
• Petroleum Refineries
• Pipeline Transportation of Crude Oil
• Pipeline Transportation of Natural Gas.

The fossil fuel employment rate is calculated annually by dividing the number of people employed in the above industries by the total number of employed people in the relevant area.

The IRS attached a list of MSAs and Non-MSAs that satisfy the 0.17 percent fossil fuel employment standard asAppendix B to the Notice.

b.     Fossil Fuel Tax Revenue

As an alternative to the fossil fuel employment requirement, an MSA or Non-MSA can qualify under the statistical area category if it has 25 percent or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas.

The Notice invites comments addressing the possible data sources, revenue categories, and procedures for determining whether an MSA or Non-MSA has satisfied the fossil fuel tax revenue requirement.

3.     Unemployment Rate

Regardless of whether an MSA or Non-MSA qualifies under the fossil fuel employment or the fossil fuel tax revenue requirement, it must also have an unemployment rate at or above the national average for the previous year. For purposes of the Notice, unemployment rates are determined using the Local Area Unemployment Statistics from the BLS, and the comparison is made using unemployment rates for the previous calendar year.

The Notice states that the IRS intends to issue a list identifying the MSAs and Non-MSAs that satisfy the unemployment rate requirement, and plans to update the list annually.

C.     Coal Closure Category

The third energy community category is the “coal closure” category. This category encompasses census tracts (or the directly adjoining census tracts) 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. The IRS attached a list of census tracts qualifying under the coal closure category asAppendix C to the Notice.

1.     Census Tracts

The threshold unit for qualification under the coal closure category is a census tract. A “census tract” is a relatively permanent, small-area geographic division of a county or statistically equivalent entity, defined by the Census Bureau for the tabulation and presentation of data from the decennial census and selected other statistical programs. The average population for census tracts in the US is 4,000 people. The Census Bureau may modify census tracts from time to time based on population fluctuation or other minor boundary corrections. For purposes of the Notice, census tracts will be those identified by the Census Bureau for the 2020 decennial census.

A census tract is “directly adjoining” another census tract (which itself contains a qualifying closed coal mine), if the boundaries of the two tracts touch at any single point. Where multiple census tracts meet at a single point, all such tracts are adjoining tracts to any one of them containing a closed coal mine.

2.     Closed Coal Mines

For the purposes of the Notice, “closed coal mines” means a surface or underground mine that has ever had, for any period of time since December 31, 1999, a status of abandoned or abandoned and sealed by the US Department of Labor's Mine Safety and Health Administration in the Mine Data Retrieval System (MDRS). Closed coal mines listed in the MDRS with irregular location information are excluded from the coal closure category of energy communities, but the Notice allows for Taxpayers with evidence to correct irregular location information to do so in an effort to secure energy community eligibility.

3.     Retired Coal-Fired Electric Generating Unit

For the purposes of the Notice, “retired coal-fired electric generating unit” means an electric generating unit classified as retired at any time since December 31, 2009, by the US Energy Information Administration (EIA), within the Department of Energy, in the Preliminary Monthly Electric Generator Inventory (EIA Form 860M) or the Electric Generator Inventory (EIA Form 860). An electric generating unit is a coal-fired generating unit according to its classification in the EIA data. From 2010 to 2013, units were so classified if they had a “primary fuel source code” of anthracite coal, bituminous coal, lignite coal, refined coal, coal-derived synthesis gas, subbituminous coal, and waste/other coal. From 2014 to 2022, units were so classified if they had a “technology” of “conventional steam coal” or “coal integrated gasification combined cycle.”

A unit’s characterization as an “electric generating unit” and as a “coal-fired electric generating unit” in the EIA data is determinative of its status for the purposes of the Notice, and it must be so characterized at the time it was retired.

IV.     Location Requirement

Under sections 45 and 45Y, a qualified facility must be “located in” an energy community, and under sections 48 and 48E, an energy project, qualified facility, or energy storage technology, as applicable, must be “placed in service” within an energy community, to qualify for the bonus credit amounts or rates. The Notice provides guidance on the location and the timing elements of these requirements.

A.     Location

The Notice provides two tests for determining whether a project is “located in” or “placed in service within” an energy community: the nameplate capacity test and the footprint test.

1.     Nameplate Capacity Test

Under the Nameplate Capacity Test, an energy project that has nameplate capacity is considered located in or placed in service within an energy community if 50 percent or more of its nameplate capacity is in an area that qualifies as an energy community.

Nameplate capacity percentage is determined by dividing the nameplate capacity (the maximum electrical generating output in megawatts that the unit is capable of producing on a steady-state basis and during continuous operation under standard conditions) of the project’s energy-generating units that are located in an energy community by the total nameplate capacity of all the energy-generating units of the project. The Notice also provides an attribution rule for projects with offshore energy generation units, none of which are in a census tract, MSA, or non-MSA.

2.     Footprint Test

The Notice provides an alternative test—the footprint test—available to projects that do not have nameplate capacity. Under this test, a project is considered located in or placed in service within an energy community if 50 percent or more of its square footage is in an area that qualifies as an energy community. This percentage is determined by dividing the square footage of the project that is located in an energy community by the total square footage of the project.

B.     Timing

For purposes of sections 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. This determination is made separately for each taxable year of the qualified facility’s 10-year credit period.

For purposes of an energy project under section 48 and for a qualified facility or energy storage technology under section 48E, the determination of when such project is placed in service within an energy community will be made as of the placed-in-service date (i.e., the date the credit is determined).

1.     Beginning Construction

If a taxpayer begins construction of an energy project in an energy community as of the beginning of construction (“BOC”) date, then the location will continue to be considered an energy community for the duration of the credit period for sections 45 and 45Y or on the placed-in-service date for sections 48 and 48E. The special BOC rules appear to apply to energy communities under any of the three categories.

The Notice refers to previous guidance¹ that the IRS has issued on determining a BOC date in other contexts, and noted that such guidance should be instructive here.

V.     Substantiation Requirements

The Notice states that taxpayers claiming the energy community bonus for a PTC or ITC must generally adhere to the recordkeeping requirements under section 6001 for documenting a project’s location in or placement into service within an energy community.

VI.     Request for Further Comments

Finally, the Notice invites further comments on the fossil fuel tax revenue requirement under the statistical area category. Specifically, the Notice seeks comments to address the possible data sources, revenue categories, and procedures to determine whether an MSA or Non-MSA qualifies under this requirement.

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