The Internal Revenue Service issued Notice 2023-29 (the “Guidance”), which provides helpful guidance for energy projects seeking to evaluate whether they qualify for enhanced tax incentives under the energy community (“EC”) provisions of Internal Revenue Code sections 45, 45Y, 48, and 48E.

The Guidance is effective as of January 1, 2023. Treasury intends to issue regulations largely consistent with the provisions in the Guidance.

Practical commercial insights

The guidance confirms perpetual eligibility for projects on former coal and brownfield sites. Projects built on brownfield sites, closed coal mines, and closed coal sourced generation are treated as energy communities in perpetuity, even if a site loses brownfield designation. Thus, any project seeking financing in these sites is assured of its qualification for the EC allowance so long as the project is placed in service during a taxable year in which there is a tax credit available.

The guidance confirms that projects can grandfather EC status. The Guidance provides that if construction begins on a project (within the meaning of familiar start of construction rules^[1]) that project is treated as being in the EC for the full period of the production tax credits (“PTCs”) or as being eligible for investment tax credits (“ITC”), in each instance irrespective of whether the location of the project loses its EC designation in a later tax year.

The guidance provides mapping tools through the Department of Energy allowing taxpayers to verify EC designation as data are released. Taxpayers can click here to view an interactive map of ECs. The IRS has stated it will update the website as relevant data are available in order to enable taxpayers to quickly verify whether their project qualifies for an EC credit.

Offshore wind projects and projects straddling an EC can qualify for EC benefits. If land-based conditioning equipment (e.g., the onshore substation) for offshore generation is an EC, then nameplate capacity serviced by that equipment is in an EC. The Guidance provides that power-conditioning equipment includes transmission and distribution equipment.

Detailed analysis

Currently, the PTC under Code sections 45, 45Y and the ITC under Code sections 48, 48E are eligible for a bonus of up to 10% if the project is located in, or placed in service in an EC, respectively. The applicable credit increase for the PTC is a flat 10%, while the correlative increase for the ITC is 2% or 10%, depending on whether prevailing wage and apprenticeship requirements are met.

At a high level, Code section 45(b)(11)(B) defines an “energy community” as:

1. “Brownfield Category”. Brownfield sites, within the meaning of the EPA rules, under 42 U.S.C. 9601(39).
2. “Statistical Area Category”. Metropolitan or non-metropolitan statistical areas where the unemployment rate is at or above the national average, and either:

a. has 0.17% or greater direct employmentrelated to the extraction, processing, transport, or storage of coal, oil, or natural gas; or

b. at least 25% of local tax revenue is related to the extraction, processing, transport, or storage of coal, oil, or natural gas.

3. “Coal Category”. Census tracts in which there has been (a) a closed coalmine after December 31, 1999, or (b) a retired coal-fired electric generating unit after December 31, 2009, and, with respect to each category, all directly adjoining census tracts.

The interactive map providing data on whether an area is an EC will capture the foregoing categories. The below table summarizes the EC’s eligibility:

Key guidance points

The Treasury Department and IRS have clarified certain ambiguities and provided guidance to enable taxpayers to comfortably transact, a summary of which is provided below:

1. Energy property straddling an EC may qualify for the EC adder. To that end, when relying on adjacent tracts for qualification in an EC, a project with over 50% nameplate capacity (or square footage, if not applicable as in the case of biogas property) in an EC will qualify the entire project. Furthermore, “adjacent” can mean touching even at a single geographical point. Nameplate capacity is determined based on the generated current (AC or DC) prior to conversion, and is intended to use applicable standards for each technology e.g., MWh for storage versus MW for generation.
2. Offshore energy projects can be deemed to be in an EC. Energy produced offshore will be attributed to the land-based power conditioning equipment closest to the point of interconnection. This is known as the Nameplate Capacity Attribution Rule.
3. Statistical Area determinations to be periodically updated and remain valid for defined periods. Annual unemployment data for the prior calendar year is typically released in April of the following calendar year. The EC maps will therefore be updated to reflect qualifying Statistical Area Category designations in May 2023, and remain valid until May 2024, or when the next update is provided. In this manner, EC eligibility is on a 12-month May-to-May basis.
4. EC designation can change annually, but projects can grandfather EC status for credit period. If relying on the Statistical Area Category for eligibility, the EC bonus in the PTC realm is an annual determination. However, if the project begins construction in an energy community, the bonus credit will apply for the 10-year duration of the PTC, irrespective of whether or not the EC designation is satisfied in a particular year. Similarly, an ITC project receives the EC adder if it is placed in service in a year that the project is located in an EC, and if a project begins construction in an EC, such area will be an EC for ITC purposes even if the project is placed in service in a non-EC year.
5. Statistical Area determination for fossil fuel revenues is forthcoming. Guidance on eligibility using the Statistical Area Category through Fossil Fuel Tax Revenue remains unclear. The IRS is soliciting comments until May 4, 2023.
6. EC substantiation uses familiar recordkeeping rules. The Guidance provides that taxpayers can substantiate they are in an EC by satisfying the general recordkeeping rules under Code section 6001. Here, taxpayers must retain books and records substantiating EC. Presumably, screenshots of the interactive map, time-stamped employment and unemployment statistics, and records of Brownfields, Coal Closures, or fossil fuel revenues are sufficient.

Lastly, the below table sets forth the data sets upon which taxpayers can rely for their EC determinations.

^{[1] Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; updated, clarified, and modified by Notice 201704, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479; clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17.}