On September 3, 2024, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) published proposed regulations relating to the Clean Electricity Low-Income Communities Bonus Credit Program (the “Program”) under Section 48E(h) (Reg 108920-24) (the “Proposed Regulations”). The Treasury and IRS have requested comments to the Proposed Regulations, which must be received by October 3, 2024. A public hearing on the Proposed Regulations has been scheduled for October 17, 2024. The guidance under Section 48E(h) is substantially similar to previous guidance under the related Low-Income Communities Bonus Credit Program of Section 48(e), our discussion of which can be found here.
Section 48E(h) provides for up to an additional 10% to 20% investment tax credit (“ITC”) on eligible property that is part of an applicable facility. To claim the additional ITC, owners of the eligible property must apply for and be allocated a share of the total “Capacity Limitation,” a fixed amount of capacity that the IRS may allocate to applicant facilities annually. Unallocated Capacity Limitation will generally be carried forward to later years, and for calendar year 2025, any unallocated amounts of the Capacity Limitation for the Section 48(e) credit will be applied to the Capacity Limitation available under Section 48E(h).
An applicable facility is defined as a “qualified facility” under Section 48E that meets additional criteria. First, facilities must have an anticipated greenhouse gas (“GHG”) emissions rate of zero and cannot produce electricity through combustion or gasification (“C&G Facilities”). Under the Proposed Regulations, certain types of qualified facilities are categorically non-C&G Facilities with a GHG emissions rate that is not greater than zero, including wind facilities, hydropower facilities, marine and hydrokinetic facilities, solar facilities, geothermal facilities, nuclear fission facilities, nuclear fusion facilities, and certain waste energy recovery property.
Under Section 48E, energy storage technology generally qualifies for the ITC but is not a “qualified facility”; and the Proposed Regulations clarify that energy storage technology is therefore not eligible for the increased ITC under Section 48E. This differs from the existing similar program under Section 48(e) that is applicable to certain wind and solar facilities under which certain energy storage technology can qualify for the credit increase.
Additionally, facilities that have a maximum output of 5 megawatts or greater do not qualify for the additional credit. Unlike Section 48, the rules under Section 48E do not include an “energy project” concept for viewing multiple properties as a single project or facility. As a result, the Section 48E 5-megawatt limit would be applied to each individual electricity-generating unit, potentially allowing for Capacity Limitation to be allocated to larger operations than would have been eligible under Section 48(e). The Proposed Regulations request comments on how the output of facilities with integrated operations may be aggregated in a way consistent with the goals of the Program. The preamble also notes that the IRS intends to deprioritize review of applications for an applicable facility that together with other qualified facilities (1) share a point of interconnection, (2) produce electricity using the same technology, (3) are owned by the same taxpayer, and (4) have an aggregate total maximum net output equal to or greater than 5 megawatts.
Finally, facilities must fall into one of four established categories by being either located in a low-income community (“Category 1”), located on Indian land (“Category 2”), part of a qualified low-income residential building project (“Category 3”), or part of a qualified low-income economic benefit project (“Category 4”). Facilities in Category 1 and Category 2 receive up to an additional 10% ITC (depending upon whether the allocation of Capacity Limitation received equals the capacity of the facility), and facilities in Category 3 and Category 4 receive up to an additional 20%. The total Capacity Limitation for each year is allocated among the same categories in annual guidance published by the IRS (see, for example, Rev. Proc. 2024-19 for the allocation under Section 48(e) for 2024).
A low-income community (for purposes of Category 1) is generally defined under Section 45D(e)(1) as any population census tract with a poverty rate of at least 20%, or a tract for which the median family income does not exceed 80% of statewide median family income (or if greater, but only for a tract in a metropolitan area, 80% of the metropolitan area median family income). The Proposed Regulations also adopt an expanded definition from Section 45D(e)(4) and (5) for census tracts with a population of less than 2,000 and census tracts experiencing high rates of outward migration. The Proposed Regulations state that the allocation to Category 1 facilities will be further subdivided with residential “behind the meter” facilities receiving a specified portion, and “front of the meter” facilities as well as non-behind the meter residential facilities receiving the remainder.
Facilities intended to qualify under Category 3 or Category 4 must meet requirements addressing how their financial benefits are allocated among occupants of the qualified low-income housing residential building project or households of the qualified low-income economic benefit project. In both cases, at least 50% of the financial benefits of the facility must be allocated to low-income occupants or households. The Proposed Regulations provide guidance on how to measure the financial benefit of such a facility and how the financial benefit may be allocated through utility bill reductions or other methods.
Similar to the previous guidance under Section 48(e), the Proposed Regulations provide that at least 50% of the total Capacity Limitation in each of the four categories is reserved for facilities meeting at least one of two additional criteria relating to the ownership of the facility (the “Ownership Criterion”) and location of the facility (the “Geographic Criterion,” and collectively, “Additional Selection Criteria”). Higher priority will be given to facilities meeting both of the Additional Selection Criteria.
The Ownership Criterion is met when the owner of a facility is (i) a Tribal enterprise, (ii) an Alaska Native Corporation, (iii) a Native Hawaiian Organization, (iv) a renewable energy cooperative, or (v) a qualified tax-exempt entity. A disregarded entity meets the Ownership Criterion if its regarded owner is any of these types of entities, as does a partnership if any of these types of entities either is a managing member or general partner that owns at least 1% of the partnership or directly owns 100% of the managing member or general partner.
The Geographic Criterion is met when a facility is located in either (i) a Persistent Poverty County as defined by the U.S. Department of Agriculture (generally, described as any county in which 20 percent or more of residents have experienced high rates of poverty over the past 30 years) or (ii) certain census tracts identified on the Climate and Economic Justice Screening Tool maintained by the Council on Environmental Quality (generally, as (A) greater than or equal to the 90th percentile for energy burden or certain air pollution exposure and (B) greater than or equal to the 65th percentile for low income). The Geographic Criterion does not apply to Category 2 facilities.
Owners of facilities that are allocated Capacity Limitation must report to the IRS the date on which the facility is placed in service. Facilities that have already been placed in service are ineligible to receive an allocation. A facility that is placed in service after the submission of an application but before the allocation is awarded, and is then awarded an allocation, will have the allocation rescinded. The Proposed Regulations provide a list of events that will disqualify a facility with a pending application. A facility will also lose an allocation if it is not placed in service within four years of the owner being notified of the allocation. The Proposed Regulations also describe rules for the recapture of the increased ITC in the event the facility ceases to be eligible for the Section 48E credit within five years of being placed in service.
The IRS will issue additional procedural guidance that is expected to be similar to that under the existing program under Section 48(e).
We also note that the preamble to the regulations includes a unique “Authority” section, that has not appeared in prior preambles to proposed tax regulations. In the “Authority” section, Treasury cites specific Code sections that it considers to provide an “express delegation of authority” for the issuance of the regulations. This new section appears to be prompted by the repeal of Chevron deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), which has called into question the extent of the discretionary regulation-writing authority of administrative agencies. Statements of authority of this type may well become a common feature of notices of proposed regulations from Treasury in the future.
