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Article | Tax alert

Guidance on low-income communities bonus credit program

The Internal Revenue Service (IRS) recently published proposed regulations (Proposed Rules), describing proposed definitions and requirements related to the allocation of environmental justice solar and wind capacity limitation. An allocation of this limitation to a qualified applicant will increase the energy percentage used by the applicant to calculate its section 48 investment tax credit.

Later this year, the Treasury Department and the IRS expect to issue details regarding the allocation of the calendar-year 2023 capacity limitation. It is anticipated that the information in the Proposed Rules will be incorporated into the details, which will further cover a comprehensive set of procedures and rules for applicants. In the interim, the Proposed Rules provide guidance as to what the application process will require. Applications will not be accepted until additional program details are released.

Key takeaways

  • These Proposed Rules define several terms and requirements that will govern the allocation of the 2023 capacity limitation.
  • It is anticipated details regarding the application process for the 2023 calendar year will be released later this year.
  • The current proposal calls for 2023 allocations be made to applications received within an initial application window and, thereafter, to other applications on a rolling basis to the extent there are residual capacity allocations after the initial window. Applications should be submitted within this initial window (the timing of which is to be determined) to increase the possibility of receiving an allocation.
  • Facilities must apply for and receive an allocation of a capacity limitation prior to being placed in service. A facility will not be eligible for an allocation thereafter.
  • The rules are proposed to apply to tax years ending on or after June 1, 2023.


Generally, section 48 allows an investment tax credit for taxpayers equal to the basis of energy property placed in service during the taxable year multiplied by the energy percentage. The “Energy Percentage” consists of a base percentage and is increased if certain requirements are satisfied, for example, a project pays prevailing wages and employs apprentices, uses domestic content, etc. Most of the mechanisms for percentage increases operate independently; in other words, a taxpayer can qualify for the prevailing wage and apprenticeship increase even if they have not satisfied the domestic content requirements.

Section 48(e), enacted as part of the Inflation Reduction Act of 2022, provides an increase to the Energy Percentage for qualified solar and wind facilities placed in service in connection with low-income communities. The Treasury Secretary will allocate to eligible projects up to a set amount of direct current capacity (Capacity Limitation). For the 2023 and 2024 calendar years, the Secretary may allocate up to 1.8 gigawatts of direct current capacity each year.

A qualified solar and wind facility is a facility that:

1. Generates electricity solely from a wind facility, solar energy property or small wind energy property;

2. Has a maximum net output of less than 5 megawatts (as measured in alternating current); and

3. Is described in at least one of four categories found in section 48(e)(2)(A)(iii) (Qualified Solar and Wind Facility).

To illustrate, a qualified solar facility with a maximum net output of 3 megawatts is the first to apply for and receive a Capacity Limitation allocation for the 2023 tax year. The Secretary has 1.797 remaining gigawatts of Capacity Limitation to allocate for the remainder of 2023.

The four aforementioned categories are eligible property:

1. Located in a low-income community (Category 1 facility);

2. Located on Indian land (Category 2 facility);

3. That is part of a qualified low-income residential building project (Category 3 facility); and

4. That is part of a qualified low-income economic benefit project (Category 4 facility).

Earlier this year, the Treasury issued Notice 2023-17 which establishes a program under section 48(e) for the allocation of these amounts (for additional details, see our previous tax article). The Proposed Rules supplement the guidance in Notice 2023-17 to further outline the specific application procedures, provide additional allocation criteria and define specific terms. Later this year, the Treasury and the IRS plan to issue details for the program to allocate the Capacity Limitation for the 2023 calendar year.

The Proposed Rules

The Proposed Rules define several terms and set procedures that will be used in the application process, the details regarding which are expected to be released later this year.

As noted above, a qualified solar and wind facility must have a maximum net output of less than 5 megawatts. To prevent taxpayers from circumventing this requirement by dividing larger projects that should be considered a single facility, the Proposed Rules would implement a facts-and-circumstances test to determine whether facilities reported as separate should really be considered one facility. The Proposed Rules also reference factors to be used in the determination.

To qualify as a Category 3 facility, the financial benefits of the electricity produced by such facility must be allocated equitably among the occupants of the dwelling units. To qualify as a Category 4 facility, at least 50% of the financial benefits of the electricity produced by such facility must be provided to households with income at or below certain defined levels. The Proposed Rules provide formulas to determine what amount of benefit must be allocated or provided to tenants and further defines how these benefits must be passed on to the tenants.

The location of a facility is relevant for determining whether the facility is a Category 1 facility or a Category 2 facility. The Proposed Rules utilize the nameplate capacity test, which evaluates whether at least 50% of the facility’s nameplate capacity is in a qualifying area.

Notice 2023-17 provided that a facility placed in service prior to being awarded an allocation of Capacity Limitation would not be eligible to receive an allocation. The Proposed Rules reiterate this rule. Accordingly, facilities placed in service prior to being awarded an allocation of Capacity Limitation are not eligible to receive an allocation.

Notice 2023-17 provided for an allocation of the Capacity Limitation across the four categories of facilities. The allocation is as follows: Category 1 facility - 700 megawatts, Category 2 facility - 200 megawatts, Category 3 facility - 200 megawatts, and Category 4 facility - 700 megawatts.

The Proposed Rules revise the application process as originally provided for by Notice 2023-17. As opposed to the phased approach called for by the notice, there will be an initial application window in which all applications received during this period will be evaluated together. After that window, there will be a rolling application process if the Capacity Limitation is not fully allocated to applications already received.

The Proposed Rules would give a preference to facilities satisfying additional selection criteria, including specific ownership and geographic criteria. At least 50% of the total Capacity Limitation in each facility category will be reserved for facilities meeting the additional selection criteria.

The ownership criteria focuses on the owner of the facility and has specific definitions for each of the different entities that qualify under the ownership criteria. To meet the geographic criteria, a facility must be located in a persistent poverty county or in a census tract that is designated in the Environmental Protection Agency’s Climate and Economic Justice Screening Tool as disadvantaged. Further definitions of these terms are provided in the Proposed Rules.

In evaluating applications received during the initial application window, priority will be given to eligible applications for facilities meeting at least one of the two additional selection criteria. If the applications for any category satisfying at least one of the additional selection criteria exceed the Capacity Limitation for that category, priority will be given to applications satisfying both of them. A lottery system may be used to address any further overages.

The Treasury and the IRS may reallocate Capacity Limitation across categories and sub-categories in order to maximize allocation in the event one category or sub-category is oversubscribed and another has excess capacity.

The Treasury and the IRS anticipate that the largest number of applications will be for Category 1 facilities. Because of this, the Proposed Rules further divide the 700 megawatts allocated to Category 1 facilities for the 2023 calendar year. Of this allocation, 560 megawatts are reserved specifically for eligible residential behind the meter (BTM) facilities, including rooftop solar. The remaining 140 megawatts of Capacity Limitation would be available for applicants with front of the meter (FTM) facilities as well as nonresidential BTM facilities.

A qualified solar or wind facility must be placed in service within four years of the date of receiving an allocation. To promote efficient allocation of the Capacity Limitation and to better ensure that allocations will be awarded to facilities that are sufficiently viable, the Treasury and the IRS propose to require applicants to submit certain documentation and attestations when applying for an allocation. Some requirements differ for FTM and BTM facilities and other requirements differ by category and additional selection criteria. Specific required documentation is listed in the Proposed Rules.

The Treasury and the IRS propose to require qualified solar and wind facilities that receive a Capacity Limitation allocation to report to the Department of Energy that the facility has been placed in service, and to submit additional documentation or complete additional attestations with the reporting. There is a list of items the applicant would have to submit documentation for or sign an attestation for in the Proposed Rules.

Under the Proposed Rules, a qualified solar or wind facility that was awarded a Capacity Limitation allocation is disqualified from receiving that allocation if prior to or upon the facility being placed in service certain events take place or certain requirements are not satisfied.

The Proposed Rules also set forth circumstances that will result in a recapture event.

For more information on this topic, or to learn how a Baker Tilly specialist can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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