Solar panels for IRA investment tax credits

On Feb. 13, 2023, the IRS and Departments of Treasury and Energy released Notice 2023-17, which provides guidance on the energy credit allocation programs under §48(e). Section 48(e) covers the “bonus credit percentage” allocations of environmental justice solar and wind capacity limitations.

Taxpayers can receive a “bonus” amount of the Inflation Reduction Act (IRA) investment tax credit under §48, in connection with qualified solar and wind facilities that are either placed in service in a low-income community or meet other specifications. Qualified solar and wind facilities are those that:

  • Generate electricity solely from a wind facility, solar energy property or small wind energy property,
  • Have a maximum net output of less than 5 megawatts, and
  • Are described in one of the following four categories, as being:
    1.  Located in a low-income community,
    2.  Located on Indian land,
    3.  Part of a qualified low-income residential building project, or
    4.  Part of a qualified low-income economic benefit project.

The energy percentage multiplier for determining the amount of credit under §48 will be increased up to 10 percentage points if the facility is described in category 1 or 2, but not 3 or 4. The percentage will increase up to 20 points if the facility is described in category 3 or 4.

Per §48(e)(4), the Department of Treasury is authorized to allocate to these facilities access to these bonus credits based on a per-year “annual capacity limitation.” Notice 2023-17 carries out the directive of §48(e)(4) for Treasury to establish a program to allocate the 1,800 MW or 1.8 gigawatts capacity limitation amongst the four different categories of qualifying facilities and provide for an efficient allocation process. The allocation of the capacity limitation for each facility category for 2023 is as follows:

  1. Located in a low-income community: 700 megawatts,
  2. Located on Indian land: 200 megawatts,
  3. Part of a qualified low-income residential building project: 200 megawatts,
  4. Part of a qualified low-income economic benefit project: 700 megawatts.

In addition to providing further definitions and placed-in-service requirements, Notice 2023-17 establishes the general framework of the application process taxpayers will undergo to secure an allocation for their facility. The application process will be conducted in phases, with the anticipation that 60-day application windows will open to category 3 and 4 facilities first in Q3 of 2023, and for category 1 and 2 facilities thereafter. The Department of Energy will be responsible for reviewing the applications. Notice 2023-17 also provides that additional criteria will be incorporated in determining which applications will be accepted in the interest of fulfilling the program’s goals of furthering environmental justice and increasing access to renewable energy in lower-income communities. The criteria may include a focus on facilities that are:

  1. Owned or developed by community-based organizations and mission-driven entities,
  2. Have an impact on encouraging new market participants,
  3. Provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and
  4. Have a higher degree of commercial readiness.

A key takeaway from the guidance is that any facility that is placed in service before being awarded a bonus allocation is not eligible for the increased ITC percentage. Forthcoming guidance will outline the specific application procedures and provide additional criteria, more definitions and other information regarding program administration.

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.

Joel M. Laubenstein
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