The Inflation Reduction Act of 2022 (IRA) was enacted on August 16, 2022 to encourage innovation in and the growth of a clean energy economy. The IRA targets various renewable energy sources and offers credits and other incentives to promote the production or purchases of domestically manufactured energy property. The legislation also promotes investment in certain communities, e.g., those with closed coal mines or retired coal-fired electric generating units, and incentivizes projects to meet prevailing wage and apprenticeship program thresholds.
Internal Revenue Code (IRC) Section 48C was originally enacted under the American Recovery and Reinvestment Tax Act of 2009. Among a few other modifications to IRC §48C, the IRA allocates an additional $10 billion in investment tax credits for eligible investments in qualifying advanced energy projects (IRC §48C(e) program), of which at least $4 billion must be allocated to investments in certain energy communities.
On February 13, 2023, the IRS and the U.S. Department of the Treasury (Treasury) issued Notice 2023-18. It provides the framework and procedures the IRS and the U.S. Department of Energy (DOE) will follow regarding the allocation of the IRC §48C(e) program credits. Most importantly, the notice states that the allocation of the $10 billion in additional credits will be made via at least two allocation rounds with Round 1 to begin on May 31, 2023.
IRC §48C Investment Tax Credit Overview
IRC §48C provides tax credits for qualified investments with respect to qualifying advanced energy projects placed in service during a taxable year. The credit is computed by multiplying the basis of qualifying property placed in service by the applicable percentage. For eligible property placed in service on or after January 1, 2023, the applicable percentage is 6% but may be increased to 30% if prevailing wage and apprenticeship requirements are met.
Qualifying property is defined as tangible personal property or other tangible property that is not a building or its structural components, is subject to depreciation, and is an integral part of the qualified investment credit facility. In addition, qualifying property also must be necessary for:
- The production or recycling of certain clean energy property;
- Re-equipping an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20%; or
- Re-equipping, expanding, or establishing an industrial facility for the processing, refining, or recycling of critical materials as defined in the Energy Act of 2020 (see this listing enumerating the various qualifying advanced energy projects).
Submit Concept Papers as Early as May 31, 2023
As stated, Round 1 of the §48C(e) program begins May 31, 2023. Taxpayers seeking an allocation of §48C credits from Round 1 must submit a concept paper to the DOE by July 31, 2023. A concept paper describes the proposed project. It will be evaluated against criteria that may include eligibility requirements, definitions for qualifying advanced energy projects, and reasonable expectation of commercial viability, as well as other factors.
The IRS and Treasury announced that Round 1 of the IRC §48C(e) program will allocate $4 billion of qualifying advanced energy project credits (§48C credits) with approximately $1.6 billion of those credits being allocated to projects in certain energy communities. Notice 2023-18 provides that although the Treasury and IRS intend to allocate not less than $4 billion (40% of total) to projects in certain energy communities over the course of the §48C(e) program, allocations in Round 1 to projects located in energy communities may not equal 40% of Round 1 credits.
Section 48C(e) Program – Application & Certification Process
Notice 2023-18 outlines the general application and certification process for Round 1 as follows:
- A taxpayer submits a concept paper to the DOE through the eXCHANGE portal. Submissions will be accepted from May 31, 2023 to July 31, 2023. Note: Section 48C(e) applications will not be accepted without the submission of a concept paper.
- The DOE reviews the concept paper and sends a letter either encouraging or discouraging the taxpayer to submit a §48C(e) application. Note: Taxpayers who receive a letter of discouragement are not precluded from filing a §48C(e) application.
- The taxpayer submits a §48C(e) application through the eXCHANGE portal. The deadline for applications will be provided in further §48C(e) guidance.
- The DOE reviews the application for compliance with eligibility requirements.
- The DOE performs a technical review of the application to form a recommendation.
- The DOE provides a recommendation to the IRS regarding acceptance or rejection as well as a ranking of all applications.
- The IRS decides acceptance or rejection of each application and notifies each taxpayer of the outcome by sending either an allocation letter or a denial letter. The allocation letter provides the maximum amount of §48C credits that may be claimed by the taxpayer related to their project. A taxpayer who was encouraged to file an application and received a denial letter may request a debriefing with the DOE to gain a better understanding of the strengths and weaknesses of their denied application so they may improve an application filed in future allocation rounds.
- The taxpayer notifies the DOE via the eXCHANGE portal within two years after receiving the allocation letter that the certification requirements are met.
- The DOE notifies the taxpayer and the IRS that it has received the taxpayer’s notification that the certification requirements are met.
- The IRS certifies the project by sending a certification letter.
- The taxpayer places the project into service within two years after receiving the certification letter and then notifies the DOE via the eXCHANGE portal. A taxpayer who does not notify the DOE that the project has been placed into service within the two-year period forfeits any credits allocated to the taxpayer for the project.
- The DOE notifies the taxpayer and the IRS it has received the taxpayer’s notification the project was placed into service within the two-year period or the project will not be placed into service within the required two-year period.
- The taxpayer claims the §48C credits on their tax return for the year the property is placed in service.
Treasury and the IRS are expected to issue further guidance by May 31, 2023 concerning concept papers and applications.
Taxpayers who desire the §48C credits at the 30% rate must confirm their intentions to meet the prevailing wage and apprenticeship requirements in their application. Taxpayers should consult with contractors and subcontractors early in the project to determine the incremental costs of meeting the prevailing wage and apprenticeship requirements for all laborers and/or mechanics on the project.
Applications submitted for DOE recommendation will be evaluated and ranked in descending order. Section 48C credits will be allocated to projects that:
- Provide the greatest domestic job creation during the credit period;
- Provide the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases;
- Have the greatest potential for technological innovation and commercial deployment;
- Have the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emission; and
- Have the shortest project time from certification to completion.
Appendix A of Notice 2023-18 provides examples of eligible and ineligible property for purposes of these credits. Since §48C was originally enacted in 2009, roughly 200 advanced energy projects have received credits worth $2.3 billion. Further examples of potentially eligible property may be found in descriptions of these prior projects, as well as prior FAQs issued by the DOE and IRS.
Prevailing Wage & Apprenticeships
A taxpayer must meet the prevailing wage and apprenticeship requirements to get the increased 30% investment tax credit rate. Any laborers or mechanics employed by the taxpayer, contractor, or subcontractor related to qualifying advanced energy projects must be paid the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located. These rates are regularly determined by the Secretary of Labor and publicly available. In addition, a taxpayer must confirm that the applicable percent (10 to 15% depending on the beginning of construction date) of total labor hours for the construction, alteration, or repair work is performed by qualified apprentices to meet the apprenticeship requirement. Each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work related to qualifying advanced energy projects must employ one or more qualified apprentices to perform the work.
Section 48C(e) Energy Communities Census Tracts
Per Notice 2023-18, whether a project is in a §48C(e) Energy Communities Census Tract may impact the DOE’s recommendation. Although §48C does not provide a 10% bonus credit rate for locating a project in an energy community, it does limit the overall credit allocation for projects located elsewhere. An applicant will be able to determine qualifying §48C Energy Communities Census Tracts using a mapping tool provided by Treasury and the IRS in upcoming §48C(e) program guidance.
Section 48C(e) allocates at least $4 billion of investment tax credits to projects in census tracts that were not allocated §48C credits prior to August 16, 2022 as well as:
- A census tract in which a coal mine has closed after December 31, 1999;
- A census tract in which a coal-fired electric generating unit has been retired after December 31, 2009; and
- A census tract directly adjoining either of the two above.
Note that these energy communities are a smaller subset of the energy communities that qualify for the 10% bonus under IRC §45. More specifically, §48C(e) energy communities do not include brownfield sites or certain metropolitan and nonmetropolitan statistical areas as a separate applicable location.
Summary
The IRA expanded the credits available under §48C with the establishment of the §48C(e) program that includes $10 billion in funding for securing domestic supply chains of critical materials that serve as inputs for clean energy technology, expanding U.S. manufacturing capacity of such technology, and using clean energy technology to reduce greenhouse gas emissions in the U.S. industrial sector and elsewhere. Taxpayers seeking an allocation of §48C credits in Round 1 must submit a concept paper to the DOE between May 31, 2023 and July 31, 2023.
To learn more about §48C credits or other federal credits, please reach out to a professional at Forvis Mazars or use the Contact Us form below.