Alert
Proposed Rules Expand Low-Income Communities Bonus Credit Program Eligibility
Proposed regulations for the Low-Income Communities Bonus Credit Program aim to enhance access to bonus tax credits for clean energy investments benefiting low-income communities, Tribal lands, affordable housing, and low-income households.
These regulations will promote greater investment in sustainable energy solutions by expanding eligibility to include a wider range of clean energy technologies—such as hydropower and geothermal—beyond just wind and solar.
The Treasury and IRS published a Notice of Proposed Rulemaking (NPRM) on September 3, 2024, that outlines these changes, which will take effect in 2025.
Background
The environmental justice solar and wind capacity limitation, also known as the environmental justice bonus credit or low-income communities bonus credit (LICB), program was established under the Inflation Reduction Act of 2022.
The program allows qualifying clean energy facilities, known as applicable facilities, to receive an increased tax credit between 10 and 20 percentage points on top of the tax credit percentage for projects meeting other bonus credit criteria, such as prevailing wage and apprenticeship requirements under Internal Revenue Code (IRC) Section 48E.
Before, the LICB program has been administered under IRC Section 48 and only applies to certain wind or solar facilities, including certain energy storage facilities installed in connection with such wind and solar facilities. For prior, detailed coverage of the LICB program under IRC Section 48, much of which will continue to be relevant under the IRC Section 48E program, read our article, IRS Issues Additional Guidance on Low-Income Communities Bonus Credit Program.
Under the NPRM, the LICB program that will be administered under IRC Section 48E starting in 2025 will allow applicants investing in any applicable clean electricity generation facilities that produce electricity without combustion and gasification to apply for an allocation of environmental justice capacity limitation to increase the amount of the clean electricity investment credit for the taxable year in which the facility is placed in service.
The capacity limitation is equal to 1.8 gigawatts (GW) per year as measured in alternating current (AC), in addition to any carryover of unused capacity limitation from a prior year.
In addition to other criteria, an applicable facility must have greenhouse gas (GHG) emissions rate no greater than zero and have a maximum net output of less than 5 megawatts (MW) as measured in AC.
Applicable facilities fall into one of four categories:
- Category 1: Located in a low-income community.
- Category 2: Located on Tribal land.
- Category 3: Part of a qualified low-income residential building project.
- Category 4: Part of a qualified low-income economic benefit project.
Applicable Category 1 and Category 2 facilities are eligible for a 10-percentage point increase on the Section 48E tax credit, while applicable Category 3 and Category 4 facilities are eligible for a 20-percentage point increase.
Taxpayers and applicable entities must complete an application to apply for an allocation of the program to receive an allocation of the available credit. In addition to the overall 1.8 GW capacity limitation, the NPRM indicates that the categories above will be subject to various sub-limitations.
What Changes with the NPRM?
The proposed amendments in the NPRM clarify and expand on the definitions and requirements for each category of applicable facility originally provided in Section 48E(h) of the IRC.
Consistent with the statute, the proposed regulations expand eligibility to include clean energy technologies beyond wind and solar, including but not limited to hydropower, geothermal, marine and hydrokinetic, nuclear fission and fusion, and waste energy recovery. The regulations also provide for technologies that may become available in the future, so long as they meet the underlying requirements mentioned above.
Unlike the LICB program under Section 48 of the IRC, the NPRM clarifies that energy storage facilities don’t qualify for the IRC Section 48E LICB program, even if attached to a qualifying clean energy project.
Also differing from the LICB program under IRC Section 48, the NPRM doesn’t include an energy project concept for aggregating multiple energy properties for purposes of the 5 MW limitation. Accordingly, the 5 MW limit would be applied to each electricity-generating unit, potentially allowing for an allocation of LICB credit to large, utility-scale energy projects.
However, the NPRM preamble states that the IRS intends to deprioritize review of applications for a facility that together with other facilities:
- Share a point of interconnection
- Produce electricity using the same technology
- Are owned by the same taxpayer
- Have an aggregate total maximum net output equal to or greater than 5 MW
NPRM Timing
The effective date of the proposed rules is January 1, 2025.
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