Highlights of Proposed Section 48 Investment Tax Credit Regulations

Article

December 15, 2023

The Inflation Reduction Act of 2022 (IRA) brought substantial improvements to Section 48 that addresses rules for identifying and claiming an investment tax credit (ITC) for renewable energy and energy storage facilities. The IRA extended the timeframe for claiming, increased the amount for the initial investment, and broadened the types of technologies eligible for energy tax credits.

Proposed Regulations and Clarity

The Internal Revenue Service (IRS) recently released proposed regulations to provide more clarity around the application of Section 48 and Section 6418 for the transferability of energy tax credits. These proposed regulations provide updates and guidance that were requested by taxpayers even before the IRA became a law.

Most of the guidance in these proposed regulations aligned with market expectations, but there were a few interesting interpretations. Particularly, the IRS released favorable rules related to offshore wind investments and potentially adverse new guidance related to biogas technologies.

Taxpayers greatly rely on these proposed regulations to help understand the IRS’ opinions that are not yet final rules, but it is expected that these regulations will be finalized in 2024.

Highlights of Proposed Section 48 Regulations

Important explanations for prevailing wage and apprenticeship requirements. This includes guidance on how to apply the ITC recapture rules for failing to meet prevailing wage and apprenticeship requirements as well as how to apply the apprenticeship requirements after a project is placed-in-service. While prevailing wages continue to apply in certain circumstances, the apprenticeship requirements do not.

Updates to proposed definitions of energy property and a unit of energy property. This definition now includes all functionally interdependent components of property that operate together and can function separately from other properties that may be contained within a larger project. The determination of energy property in the regulations considers multiple factors, which were originally set forth in Notice 2018-59. These include some interesting factors like financing agreements and common contracts.

Additional guidance related to the recapture of energy tax credits. In the case of a transferred energy tax credit subject to Section 6418, the transferor taxpayer must inform the transferee taxpayer if the energy tax credit becomes subject to recapture. The increase in tax for the recaptured amount is considered to occur in the year of the recapture event.

Additional Areas of Importance

Costs for offshore wind now cover items like undersea cables, equipment for conditioning power, and transfer equipment up to the point of transmission and distribution.
New examples of eligible components for biogas ITC are included in the regulations but are not eligible when upgrading equipment like biogas concentration and purification equipment. This was not expected guidance and renewable natural gas industry now has questions on how to properly apply.
Confirmation that you can now have a project that qualifies for both the production tax credit (PTC) and an ITC. For instance, you can have a solar energy facility that qualifies for the PTC and in the same project as a battery storage facility eligible for the ITC, and still claim both credits.
Additional rules on how to qualify certain costs for connection property for ITC. This covers guidelines for accounting adder provisions in the energy tax credit and implementing the five-megawatt limitation.
Guidance on how to determine qualification for ITC when there are multiple property owners in an energy project.
A nonexclusive list of technologies that qualify for energy storage ITC. Hydrogen energy storage must exclusively retain hydrogen for energy usage and not for any other purposes.
Rules regarding how to properly apply limitations on dual use properties that may be eligible for ITC.