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IRS Hearing on Proposed Section 48 Regulations Reveals Potential Issues with the 80/20 Test, Functional Interdependence and Energy Storage Property

Published by Nat Eng , Peter Lawrence , and Alvin Lee on Monday, May 13, 2024 - 11:50AM

As the renewable energy industry awaits final regulations on the proposed update to the rules for the investment tax credit (ITC) under Internal Revenue Code Section 48, it’s important to understand where things stand.

Over two days in February, witnesses expressed their concerns at public hearings on the proposed IRC Section 48 regulations. On Feb. 20, the Internal Revenue Service (IRS) and U.S. Department of the Treasury hosted an in-person hearing where more than 30 speakers shared their thoughts on the proposed regulations, as well as a correction that was made available Feb. 16 and ultimately posted Feb. 22; a follow-up telephone hearing was held Feb. 21 to accommodate nearly a dozen additional speakers. Novogradac partners Nathaniel Eng and Alvin Lee testified on behalf of the Novogradac Renewable Energy Working Group (RE Working Group), sharing the members’ concerns about the definition of a unit of property, the facts and circumstances definition and functional interdependence, all detailed in the group’s comment letter

Concerns Over Proposed Guidelines

The hearing transcript shows that comments addressed a range of issues, with speakers repeatedly coming back to several topics: removing or at least revising the 80/20 test; editing the definitions of functional independence and energy storage property; and providing additional or final guidance in a timely manner, as the Dec. 31, 2024, deadline to begin construction is approaching and any delays in guidance can hinder investments. Though the correction to proposed regulations was issued just several days before the hearing, speakers commented on it, first thanking the IRS for taking the initiative but stressing that the correction does not go far enough. While the change will allow taxpayers to include gas upgrading equipment as an integral part, without additional clarification regarding functional interdependence and multiple ownership, the number of taxpayers who can benefit from the investment tax credit will be limited. 

Much of testimony called for adjustments to the 80/20 rule, which dictates the fair market value of the energy property should not be more than 20% used to quality for the ITC. Lisa Jacobson of the Business Council for Sustainable Energy explained how it would be problematic when considering maintenance and upgrades of energy properties, while David Lowman of Hunton Andrews Kurth called for removing the excluded cost provisions. Multiple testimonials called for an outright deletion of the 80/20 rule for a variety of reasons. Heather Dziedzic from the American Biogas Council stated that biogas facilities have different ownership structures and adjacent actors, which may impact their ability to follow the 80/20 rule. 

Clarifications for the term "functional interdependence" were also a common request. Connor Dolan of Fuel Cell and Hydrogen Energy Association said that the IRS should expand examples of functional interdependence, while Grant Zimmerman of AMP Americas said that functional interdependence should be removed from IRC Section 48 and everything should be written out in "plain language." Regarding functional interdependence, Eng and Lee of Novogradac requested that it be consistent with Inflation Reduction Act policy of tech neutrality.

Multiple speakers suggested edits to the term "unit of energy property." A main concern stated by multiple speakers was that cleaning and upgrading equipment, especially pertaining to biogas, should qualify as a "unit of energy property." Michael Purdie of National Hydropower Association requested more clarification on what is considered a unit of energy property versus an integral property. 

Lastly, Eng and Lee of Novogradac detailed scenarios where the proposed definition of a unit of energy property might be considered problematic. They also requested that the facts and circumstances definition be applicable to the single property definition, as it is consistent with areas of other federal tax law. 

The urgent construction deadlines were also a main concern for speakers. Robert Guido of BP America stated that the rules are underpinning the construction of new facilities and urged the IRS to make swift changes. Zimmerman amplified the idea that delaying investments means reducing investments when it comes to emissions.

Future Section 48 Guidance

In total, 304 comments regarding the IRC Section 48 proposed guidance were submitted. The release of the correction to the IRC Section 48 proposed regulations gave the public another opportunity to provide comments, which were due March 25. The RE Working Group will continue to evaluate future proposed regulations surrounding Section 48, as well as other energy provisions in the Inflation Reduction Act. 

Those wishing to discuss the latest guidance and industry trends, with opportunities for networking and professional development should attend the Novogradac 2024 Renewable Energy Tax Credits Conference May 16-17 in San Diego. 

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