The IRS published a notice of proposed rulemaking, REG-110412-23, which proposes rules concerning the low-income bonus credit program under the Inflation Reduction Act, on June 1, 2023. The proposed rules expand on its earlier guidance set forth in Notice 2023-17. Comments on the proposed rules are open through June 30, 2023.
Under the Inflation Reduction Act, new Internal Revenue Code (IRC) Section 48(e) established the low-income communities bonus credit—sometimes referred to as the environmental justice bonus credit. The credit allows a taxpayer or applicable entity eligible for direct pay under IRC Section 6417 with a qualified solar and wind facility to receive an increased income tax credit of between 10 and 20 percentage points. This bonus percentage is on top of the other bonus criteria, such as prevailing wage and apprenticeship requirements.
Qualified solar and wind facilities are defined in IRC Section 48(e) as facilities that meet all of the below and has been awarded an allocation of the annual capacity limitation:
The proposed regulations include definitions and further describe the allocation process for 2023. While the proposed regulations in REG-110412-23 are intended to supplement the guidance in Notice 2023-17, the Treasury Department and IRS are requesting comments on the proposed definitions and requirements and whether these should apply for purposes of the low-income community bonus credit program for 2024 and beyond. Further guidance will likely be issued later this year to establish a comprehensive set of rules and procedures for applicants.
Several definitions and requirements are included in the proposed regulations.
IRC Section 48(e) defines a qualified solar and wind facility, for which one part of the facility has a net output of five MW or less. The Treasury Department and IRS are concerned some applicants might attempt to circumvent the five MW cap by artificially dividing larger projects into multiple facilities. As a result, the proposed regulations include a rule to aggregate multiple projects or facilities into a single project or facility.
Whether multiple facilities or properties are operated as part of a single project depends on the relevant facts and circumstances and is evaluated based on the factors provided in Section 7.01(2)(a) of Notice 2018-59 or Section 4.04(2) of Notice 2013-29, as applicable.
IRC Section 48(e) provides that eligible property includes energy storage technology installed in connection with a qualified solar or wind facility. Under the proposed definition of installed in connection with, the property is eligible if both of the following are true:
IRC Section 48(e) provides that electricity acquired at a below-market rate may be considered a financial benefit. Thus, definitions for financial benefit and electricity acquired at a below-market rate are proposed, as well as how such definitions are applied to qualified low-income residential projects and qualified economic benefit projects.
The proposed rules require that at least 50% of the financial value of net energy savings are equitably passed on to the building occupants by distributing equal shares among the qualified residential property’s units or by distributing proportional shares based on each dwelling unit’s electricity usage.
Further rules are also proposed for situations in which the building owner and the qualified facility have the same or different ownership, and an agreement for distributing the savings must be in place.
The proposed rules also account for the impact of metering on the delivery of the financial benefit, whether master-metered or sub-metered, and indicate that the guidance issued by the United States Department of Housing and Urban Development should be followed.
The proposed rules require low-income economic benefit project facilities to serve multiple households with at least 50% of total output distributed to qualified low-income households.
In addition, to further the goals of the program, the proposed rules reserve allocations under this category exclusively for applicants that provide at least a 20% bill credit for all such low-income households.
A method for calculating the bill credit discount is also proposed, including applicant verification of a household’s qualifying low-income status and submitting proof of meeting the requirements of the allocation.
The proposed regulations include several methods to verify eligibility, such as the verification of a household’s participation in a needs-based federal, state, Tribal, or utility program with income limits at or below the qualifying income level for the specific facility.
The proposed rules include a nameplate capacity test for determining if the location requirements are met. Under the nameplate capacity test, a facility that has a nameplate capacity is considered located in or on the relevant geographic area if 50% or more of the facility’s nameplate capacity is in a qualifying area. The nameplate capacity of any energy storage technology installed in connection with the facility doesn’t affect the assessment of the nameplate capacity test.
Consistent with Notice 2023-17, the 1.8 gigawatts of total allocation authority for 2023 is proposed to be reserved as follows:
Also consistent with Notice 2023-17, the proposed rules provide facilities placed in service prior to receiving an allocation aren’t eligible to receive an allocation, as those facilities don’t increase adoption of and access to renewable energy facilities as compared to the absence of the low-income communities bonus credit program.
Notice 2023-17 proposed a phased application approach, but based on public feedback and operational capabilities to administer the program, the proposed regulations took a new approach.
The proposed approach includes an initial application window in which all applications received by a certain time are evaluated together. This would be followed by a rolling application process if the capacity limit isn’t fully allocated after the initial application window closes.
Furthermore, facilities that meet at least one of the two categories of additional selection criteria would receive priority for an allocation within each category. At least 50% of the total capacity limit in each category will be reserved for facilities that meet the additional selection criteria. Facilities meeting both additional selection criteria will have the highest prioritization.
The Treasury Department and IRS retain the discretion to reallocate the capacity limits across categories and sub-categories to maximize allocation if one category or sub-category is oversubscribed and another has excess capacity.
Two categories of additional selection criteria exist, based on ownership and geographic location.
A qualified facility meets the additional ownership criteria if it’s owned by a:
Specific definitions of each ownership category are provided in the proposed regulations.
The geographic criteria are based on where the facility will be placed in service. To meet the criteria, a facility needs to be located in:
Applicants who meet the geographic criteria at the time of application are considered to meet the geographic criteria for the duration of the recapture period unless the location of the facility changes.
It’s anticipated the largest number of applications will be received for Category 1 facilities located in low-income communities. Therefore, it’s proposed that 560MW of the 700MW capacity limitation be reserved for residential behind-the-meter (BTM) facilities, including rooftop solar.
The remaining 140MW capacity limitation would be available for applicants with front-of-the-meter (FTM) facilities.
The proposed regulations include certain documentation and attestation requirements when applying for an allocation. Some requirements differ for FTM or BTM facilities and other requirements differ based on the category and additional selection criteria. As a result, the proposed regulations set forth several tables outlining what information and attestations are required in the different scenarios.
The proposed regulations require facilities to report to the United States Department of Energy when a facility is placed in service, along with additional documentation and attestations. Thus, final verification that facilities have met certain eligibility requirements could occur. The proposed regulations set forth several tables outlining what information and attestations would be required in the different scenarios.
There are several ways to be disqualified after receiving an allocation—as well as ways to trigger a recapture of the bonus credit increase.
To discourage material changes in project plans, such as significant reductions in facility size that tie up capacity limitations, the proposed rules set forth that a facility awarded a capacity limitation allocation is disqualified if, prior to or upon placement in service, one of several changes occur.
The facility can also be disqualified if it received an allocation based, in part, on meeting the ownership criteria and ownership of the facility changes prior to the facility being placed in service.
Per the proposed regulations, the following circumstances result in a recapture event if the property ceases to be eligible for the increased credit during the five-year recapture period:
The proposal includes a one-time 12-month cure.
If you have questions about this guidance or other related concerns, contact your Moss Adams professional.