On February 13, 2023, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2023-18 (Notice), which establishes the program to allocate $10 billion of tax credits that were added by the Inflation Reduction Act of 2022 (IRA) under section 48C(e) of the Code for qualified investments in eligible qualifying advanced energy projects.

The purpose of the section 48C(e) program under the IRA is to (i) expand US manufacturing capacity and quality jobs for clean energy technologies (including production and recycling), (ii) reduce greenhouse gas emissions in the US industrial sector, and (iii) secure domestic supply chains for critical materials that serve as inputs for clean energy technology production.

To qualify for credits under section 48C(e), taxpayers must apply for certification through a competitive process run by Treasury and the IRS in consultation with the Department of Energy (DOE). The Notice provides initial guidance to taxpayers with respect to the process and timeline for participating in the section 48C(e) tax credit program under the IRA.

Background

In order to foster investment and job creation in clean energy manufacturing, the American Recovery and Reinvestment Act of 2009 included the section 48C investment tax credit for investments in manufacturing facilities for clean energy technologies. While the original section 48C investment tax credit was capped at $2.6 billion, effective January 1, 2023, the IRA added $10 billion of credits under section 48C(e) of which at least $4 billion must be allocated to qualifying advanced energy projects located in certain energy communities.

Under the IRA, the section 48C credit for any taxable year is equal to six percent (6%) of a taxpayer’s qualified investment for such taxable year with respect to any qualifying advanced energy project. The credit rate increases to thirty percent (30%) for projects that satisfy (or that are not subject to) prevailing wage and apprenticeship requirements. Moreover, the section 48C credit rate may be further enhanced if additional requirements are met, such as the domestic content and energy community requirements. The section 48C credit generally is eligible for direct pay and transferability under sections 6417 and 6418, respectively.

For purposes of section 48C, a taxpayer’s qualified investment means the basis of eligible property placed in service by the taxpayer during the taxable year which is part of a qualifying advanced energy project. Under the Notice, a taxpayer who receives a certification of section 48C credits for a project has two years from the date of issuance of the certification to place the project in service and to notify the DOE that the project has been placed in service.

A qualifying advanced energy project generally includes one of the three following project types, any portion of the qualified investment of which is certified by the Treasury as eligible for the section 48C credit:

1. A project that re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of one of the following nine property types:

• Property designed to be used to produce energy from the sun, water, wind, geothermal deposits or other renewable resources.
• Fuel cells, microturbines, or energy storage systems and components.
• Electric grid modernization equipment or components.
• Property designed to capture, remove, use, or sequester carbon oxide emissions.
• Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low-emission.
• Property designed to produce energy conservation technologies (including residential, commercial, and industrial applications).
• Light, medium, or heavy-duty electric or fuel cell vehicles, as well as technologies, components, or materials for such vehicles, and associated charging or refueling infrastructure.
• Hybrid vehicles with a gross vehicle weight rating of not less than 14,000 pounds, as well as technologies, components, or materials for such vehicles.
• Other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Secretary of the Treasury.

2. A project that re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least twenty percent (20%) through the installation of (i) low- or zero-carbon process heat systems, (ii) carbon capture, transport, utilization, and storage systems, (iii) energy efficiency and reduction in waste from industrial processes, or (iv) any other industrial technology designed to reduce greenhouse gas emissions, as determined by the Secretary of the Treasury.
3. A project that re-equips, expands, or establishes an industrial facility for the processing, refining, or recycling of critical materials (as defined in § 7002(a) of the Energy Act of 2020 (30 USC § 1606(a)). Critical materials generally include materials and minerals used in the production of batteries.

Appendix A of the Notice provides further guidance by giving examples of property, products and technology that are eligible and ineligible for the credit.

The section 48C credit is not available for an investment if a credit is allowed for such investment under section 48, 48A, 48B, 48E, 45Q, or 45V. Further, the advanced manufacturing production credit under section 45X is not allowed with respect to any property produced at a facility if the basis of any part of the facility is taken into account in computing the section 48C credit.

Program Procedures and Timeline

The IRS will consider allocating section 48C credits to a project only if the project has first received a recommendation and ranking from the DOE. Notice 2023-18 outlines the process whereby taxpayers may apply for recommendation from the DOE and ultimately for an allocation of section 48C credits for the first round of credit allocations, which is anticipated by the IRS to allocate approximately $4 billion of credits.

Concept Papers

A taxpayer must first submit a concept paper to the DOE. The concept paper should describe the proposed project and will be reviewed for general eligibility under the definitions and requirements for qualifying advanced energy projects and the reasonable expectation of the project’s commercial viability. After review, the DOE will either encourage or discourage the taxpayer to submit an application for section 48C credits (which the Notice generally refers to as a “48C(e) application”). Receiving a letter of discouragement from the DOE does not necessarily preclude the taxpayer from later submitting a section 48C(e) application but the Notice suggests that a taxpayer is unlikely to be allocated section 48C credits in such circumstances.

• For consideration in the first round of allocations under the section 48C(e) program, concept papers must be submitted to the DOE no later than July 31, 2023.

Section 48C(e) Application

After the initial DOE review, the taxpayer may submit to the DOE the 48C(e) application, which the DOE will review for compliance with eligibility and other threshold requirements. The application must properly identify the taxpayer and a contact person, identify the census tract where the project will be located, indicate whether the taxpayer intends to satisfy the prevailing wage and apprenticeship requirements, and include certain additional certifications and technical information specified in the Notice.

• For consideration in the first round of allocations under the section 48C(e) program, applications may be submitted beginning May 31, 2023 after receiving a letter of encouragement or discouragement from the DOE, through an end date that will be set by later guidance.
• As noted, the IRA added $10 billion of credits under section 48C(e) of which at least $4 billion must be allocated to qualifying advanced energy projects located in certain energy communities. The Notice indicates that the DOE will provide a mapping tool that identifies these energy communities in future guidance.

After review of all section 48C(e) applications, the DOE will make a recommendation to the IRS regarding the acceptance or rejection of the section 48C(e) applications, and a ranking of the applications.

Denial Letter or Allocation Letter

After receiving recommendations from the DOE, the IRS will make a decision regarding the denial or acceptance of each application based on the DOE recommendations and rankings. An applying taxpayer that is not allocated section 48C credits will receive a denial letter from the IRS. A taxpayer that receives a denial letter generally may request a debriefing, wherein the DOE will explain its impression of the strengths and weaknesses of the proposed project to inform the taxpayer for use in applications for future rounds of credit allocations.

Taxpayers that are allocated section 48C credits will receive an allocation letter from the IRS that sets forth the amount of section 48C credits allocated to the project. The date of the IRS allocation letter is treated as the date of acceptance by Treasury of the taxpayer’s section 48C(e) application for purposes of establishing the time to meet criteria for certification of section 48C credits.

Certification

A taxpayer that receives an IRS allocation letter must notify the DOE within two years that the certification requirements have been met. If the taxpayer fails to timely provide such notice, the taxpayer’ allocation of section 48C credits will be forfeited. A project is eligible for certification only if the taxpayer has received all permits from federal, state, tribal, and local governmental bodies for construction of the project at the planned location, including environmental authorization or reviews necessary to commence construction of the project. To obtain certification for the project, the taxpayer must submit to the DOE evidence that the taxpayer has met all requirements to commence construction of the project. In such case, the DOE will notify the IRS, and the IRS will then notify the taxpayer by letter of the IRS’s decision regarding certification. Under the Notice, a taxpayer receiving a certification letter from the IRS has an additional two-year period beginning from the date of the certification letter to place the project in service and to notify the DOE that such project has been placed in service. If the taxpayer has not placed the project in service, or has not notified the DOE that the project has been placed in service, within the required two-year period, then the section 48C credit allocated to the taxpayer’s project is forfeited.

The Notice states that a taxpayer’s receipt of an allocation of credits or a certification letter with respect to a project is not a final determination that the project is eligible for section 48C credits. The IRS may examine and seek to disallow section 48C credits with respect to the project.

Other Procedures and Rules

The Notice provides that an allocation of section 48C credits applies only to the taxpayer who applied for the allocation. A taxpayer’s successor in interest may request a transfer of the credit allocation under special rules set forth in the Notice. The Notice also contains special rules regarding changes to a project (such as design or location changes) following the submission of the taxpayer’s concept paper and section 48C(e) application with respect to the project. Moreover, the Notice includes special rules for taxpayers desiring to claim section 48C credits on qualified progress expenditures.

The Notice applies only to the first round of the section 48C(e) credit program. Future guidance will be issued to provide procedures applicable to future allocation rounds under the program.

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