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Section 48 ITC Proposed Regulations Detail Eligibility of Various Energy Properties to Reflect New Changes in Technology, Inflation Reduction Act Changes

Published by Alvin Lee , Nat Eng , and Peter Lawrence on Monday, May 13, 2024 - 12:27PM

While the Internal Revenue Service (IRS) released proposed regulations Nov. 22, 2023, defining which eligible energy property is qualified for the renewable energy investment tax credit (ITC), as amended by the Inflation Reduction Act (IRA), the industry is still waiting for answers. 

The Novogradac 2024 Spring Renewable Energy Tax Credits Conference from May 16-17 in San Diego is a potential venue for answers. At the conference, industry experts will discuss the latest Inflation Reduction Act guidance, industry trends, emerging technologies, tax credit equity pricing and financing strategies while taking part in valuable professional development and networking sessions. 

The proposed regulations detail the differing subsidy levels of the tax credit for which the energy property is qualified and introduces new definitions and program regulations for different types of energy properties. The proposed regulations would implement changes enacted by the IRA as well as make long-needed updates to the ITC regulations to reflect changes in technology and industry operations that predate the IRA. 

Novogradac's Renewable Energy (RE) Working Group submitted a comment letter Jan. 22, which identifies multiple concerns with the IRS proposed regulations addressing the renewable energy ITC as authorized under Internal Revenue Code (IRC) Section 48. 

IRC Section 48 Proposed Regulations Update Existing Provisions, Implements New Provisions

The proposed regulations prescribe how the renewable energy ITC ranges from 6% to 30% as determined by whether prevailing wage and apprenticeship requirements are met. It determines the eligibility of energy properties that are retrofitted or functionally interdependent. It also outlines the eligibility for energy properties with multiple owners, dual uses and interconnection costs. 

Prevailing Wage and Apprenticeship Requirements

To qualify for the 30% ITC for facilities of more than 1 megawatt (MW), prevailing wage and apprenticeship requirements must be met. The proposed regulations detail how the 1 MW exception applies for facilities that do not meet the prevailing wage or apprenticeship requirements but have a net output of less than 1 MW (alternating current, or AC) of electrical or thermal energy. Electrochromic glass properties, fiber-optic solar controllers and microgrid controllers are ineligible for the 1 MW exception because they do not generate electricity or thermal energy. 

If prevailing wage and apprenticeship requirements are not met for facilities of more than 1 MW, applicants for the ITC are only eligible for a 6% credit instead of the full 30%. The proposed regulations state that a failure to meet these requirements once credits are awarded will lead to a recapture of the increased credit amount. The amount recaptured will ramp down 20% each year the requirements are not satisfied. The five-year window for payment tax credit recapture begins the year that the energy property is placed in service, and annual reporting methods must be followed to ensure compliance to these standards. Correction and penalty procedures can be followed to avoid this tax credit recapture if there was a mistake in the filing process. 

Functional Interdependence

The idea that multiple parts of an energy property must work properly together to complete its objective is introduced in the proposed regulations as functional interdependence. The proposed regulations define something as functionally interdependent if the placed in service (PIS) date of each component is dependent upon the PIS date of each of the other components to generate or to store electricity, thermal energy, hydrogen or otherwise perform its intended function. For qualified biogas property, microgrid controllers, electrochromic glass property and fiber-optic solar energy property, components of such energy property would also be considered functionally interdependent if each component is dependent on the PIS date of each other.

Multi-Owner Energy Properties 

Multiple taxpayers that own an energy property are now eligible for the ITC due to IRC Section 48 multi-owner energy property proposed regulations. Taxpayers that own an energy property only qualify for the ITC to the extent of the taxpayer's eligible basis for the energy property. Their financial ownership interest is used to split their ITC benefits so that all parties get an equitable share. Properties that are integral to the overall functionality and completeness of the project are now defined in the proposed regulations as eligible for the ITC. Some integral properties that are listed in the proposed regulations are power/conditioning equipment and their associated parts, transfer equipment and on-site roads that are essential to the operation and maintenance of an energy property. 

Retrofitting Properties Under the 80/20 Rule

The proposed regulations reintroduce the 80/20 rule, which explains how projects can utilize some used material and still qualify for the credit. The 80/20 rule states that retrofitted energy property may be considered originally placed in service even if it contains some used components of property, provided it satisfies the rule. It dictates that to qualify for the ITC, the fair market value of the total property should not be more than 20% used. Within an energy project, this rule is applied separately to each unit of energy property that makes up its components. 

Dual-Use Properties

Another concept that was updated by the proposed regulations is dual-use property. The proposed regulations dictate that a solar energy property, wind energy property and geothermal equipment are eligible for the credit if energy from non-qualifying sources do not exceed 25% of its total energy input during an annual measuring period. This rule, entitled the "75% cliff" in the proposed regulations, also states that eligible properties that have an input of qualifying sources between 75% and 100% will receive an additional eligible basis of the ITC.

Qualified Interconnection Properties

The concept of a qualified interconnection property is introduced in the proposed regulations as, "any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system to accommodate such interconnection."

An interconnected energy property can have a maximum net output of 5 MW, which is referred to as the Five-Megawatt Limitation. The interconnected property excludes microgrid controllers and must be constructed, reconstructed or erected by the taxpayer. A taxpayer may include amounts paid or incurred by the interconnected energy property in their when applying for the ITC. 

Definitions of Types of Energy Properties

The proposed regulations provide new definitions for several different types of energy properties. Taxpayers should refer to the proposed regulations for specific requirements in determining their eligibility for the ITC. Notably, the proposed regulations for a qualified biogas property as, "property comprising a system that converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of section 48(a)(3)(A) (August 16, 2022)) into a gas that consists of not less than 52 percent methane by volume, or is concentrated by such system into a gas that consists of not less than 52 percent methane, and captures such gas for sale or productive use, and not for disposal via combustion." 

This includes any property that is part of the system that cleans or conditions such gas, but the proposed regulations state that gas-upgrading equipment is not included in the definition.

Novogradac's Comments for the IRS

In response to the proposed regulations, 197 parties submitted comments expressing their concerns on its impact. The IRS held a hearing for comments for proposed regulations Feb. 20. Novogradac's comment letter focused on further reconsideration for proposed regulations surrounding functionally interdependent property, single-party definition and the biogas property definition. Novogradac also requested clarification or adjustments on qualified interconnection property, property that is not energy property and the 1 MW exception. 

Functionally Interdependent Property 

Novogradac requests reconsideration for the proposed regulations that a single taxpayer must own a functionally interdependent energy property. The reason for this is that there are several practical scenarios in which different components of energy properties can be owned by different taxpayers. Infrastructure and equipment are often shared in economic, regulatory and operational ways that would necessitate tax ownership bifurcation. 

Novogradac also requests reconsideration of the proposed requirement that functionally interdependent property is only comprised of equipment placed in service contemporaneously and/or satisfies the 80/20 rule if claiming an energy credit. Adding additional equipment and other incremental improvements to existing facilities subject to the energy credit may be more economically efficient than completely repowering existing facilities. As currently defined, functional interdependence also creates disparity between various technologies that are eligible for the ITC. Technologies such as battery modules added to an energy storage facility during battery facility augmentation qualifies for the energy credit, while equipment that make trash and biomass facilities more efficient are not eligible for the energy credit even on an incremental basis. 

The RE Working Group finally requests further guidance for planned vs. unplanned improvements and how the timeline of these improvements would impact the five-year recapture period.

Single Property Definition 

In addition, the RE Working Group requests changes to the definition of a unit of property with respect to the wage and apprenticeship increased credit rate, the domestic content bonus and the energy community bonus. There are currently two separate criteria for the definition of a unit of property. The first is an eight-factor "facts and circumstances" analysis which applies to the 1.8 GW annual environmental justice solar and wind (EJSW) capacity limitation (sometimes referred to as the "low-income bonus") adder. The second is a seven-factor test where satisfying two of the factors would indicate that multiple energy properties are operated as a single property. Currently, the second definition is the only one that applies to prevailing wage and apprenticeship increased credit rate, the domestic content bonus credit and the energy community bonus. Novogradac requests that the "facts and circumstances" definition applicable to the low-income adder also be applied to prevailing wage and apprenticeship requirements, the domestic content bonus and the energy community bonus. This would be consistent with other federal tax law, such as placed-in-service determination and would provide a higher threshold of relevant criteria for industry practitioners to satisfy. The current proposed definition of a single property would also cause confusion, as prevailing wage and apprenticeship requirements vary across multiple jurisdictions where a single energy property lies.

Cleaning and Conditioning Equipment in Connection with Biogas Energy Properties 

Novogradac requests that cleaning and conditioning equipment in connection to biogas facilities be included in the energy credit. Cleaning and conditioning equipment used in relation to inverters, transformers and other power conditioning equipment commonly integrated in wind, solar and energy storage facilities are typically included in the energy credit basis. However, biogas facilities are inconsistently excluded from this rule. The proposed definition of a qualified biogas property in proposed Treasury Regulations Section 1.48-9(e)(11) disqualifies equipment installed by a taxpayer after a biogas conversation system reaches the threshold of 52% methane by volume. Gas upgrading equipment that removes carbon dioxide, nitrogen or oxygen to create an appropriate mixture is excluded from this definition. This stands directly in contrast with the definition of a qualified biogas property made by Congress in IRC Section 48(c)(7)(B), which includes, "any property which is part of such system which cleans or conditions such gas."

Clarification on Qualified Interconnection Property

Novogradac requests additional clarity regarding potential situations where multiple energy properties may share an interconnection property and for additional examples on the application of the "five-megawatt limitation" with respect to solar energy property and other various technologies.

Clarifications on Property that is Not energy Property

Currently, the term "energy property" excludes power intangible property such as purchase agreements, goodwill, going concern value and renewable energy certificates. Renewable energy certificates represent the property rights to environmental, social and other non-power attributes of electricity generation. They play an important role in determining the origin and methods of generation of electricity received through a utility grid. The RE Working Group requests additional clarification and/or examples of the potential bifurcation of renewable energy certificates from ITC basis. In the same way as a sale of merchant power, renewable energy certificates are often transacted at current market establishes prices. Additionally, industry practitioners typically do not assign value to renewable energy certificates. 

Adjustments to the 1 MW Exception

Novogradac also requests consideration of an eligible basis dollar threshold with respect to prevailing wage exemptions for energy properties such as electrochromic glass property, fiber-optic solar, thermal energy storage and microgrid controllers, which all do not generate electricity. 

Future Section 48 ITC Guidance

The RE Working Group will continue to monitor any changes to these guidelines, as well as forthcoming guidance, submitting comment letters on those issues most important to its membership. To join the RE Working Group and add your voice to upcoming discussions please submit an online form

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