TAKEAWAYS

• The proposed regulations offer helpful guidance for taxpayers seeking to take advantage of the ITC under IRC section 48.
• The proposed regulations add new definitions to clarify the scope of recently added qualifying property, including qualified biogas property, energy storage facilities and geothermal energy property.
• The proposed regulations withdraw and re-propose a portion of the regulations published earlier this year relating to the prevailing wage and apprenticeship requirements.

On November 17, 2023, the Internal Revenue Service (IRS) published proposed regulations [REG-132569-17] in the Federal Register providing further guidance on the Energy Investment Tax Credit (ITC) under section 48 of the Internal Revenue Code (IRC) of 1986, as amended. The proposed regulations expand on existing Treasury regulations under IRC section 48 to incorporate the changes made by the Inflation Reduction Act of 2022. As relevant here, the Inflation Reduction Act of 2022 extended the existing ITC for most projects that begin construction before January 1, 2024, and modified it by expanding the types of energy properties that are eligible for the credit, allowing for increased credit amounts for energy projects that satisfy the prevailing wage and apprenticeship requirements and providing opportunities for several bonus credits.

High-Level Overview of the Proposed Regulations
The proposed regulations are broad in scope and thorough. Below is a high-level overview of the topics addressed in the proposed regulations:

• The proposed regulations generally adopt the existing definitions of construction, reconstruction, original use and acquisition of energy property.
• The proposed regulations update the definition of depreciation allowable to include required specifications for energy properties and acknowledge bonus depreciation under IRC section 168(k) as a permissible method of depreciation.
• The proposed regulations set forth special performance and quality standards for small wind and electrochromic glass property.
• The proposed regulations provide that energy storage technologies eligible for the ITC under IRC section 48 that share power conditioning and transfer equipment with an IRC section 45 qualified investment credit facility will not disqualify a taxpayer from claiming credits under IRC sections 45 and 48.
• The proposed regulations incorporate into the definition of energy property the following new technologies that were added through the Inflation Reduction Act of 2022: (1) solar energy property, (2) fiber-optic solar energy property and electrochromic glass property, (3) geothermal energy property, (4) qualified fuel cell property, (5) qualified microturbine property, (6) combined heat and power system property, (7) qualified small wing energy property, (8) geothermal heat pump equipment, (9) waste energy recovery property, (10) energy storage technology, (11) qualified biogas property and (12) microgrid controllers.
• The proposed regulations take a functional interdependence approach on components and other property that are an integral part of an energy property, thus making the ITC more technology neutral.
• The proposed regulations withdraw certain portions of previously issued proposed regulations relating to the prevailing wage and apprenticeship requirements and re-propose guidance on the statutory exception for projects with a maximum output of less than one megawatt and the recapture rules related to the prevailing wage and apprenticeship requirements.
• The proposed regulations adopt the “80/20 rule” for retrofitted energy property, allowing previously placed in service energy property to qualify as originally placed in service for ITC purposes so long as the retrofitted energy property is not more than 20% of the facility’s total fair market value.
• The proposed regulations provide that energy property can qualify for the ITC even if it uses energy from both qualifying and non-qualifying energy sources.
• The proposed regulations detail certain circumstances where energy property may be eligible for both the ITC as well as another credit.
• The proposed regulations clarify that, when energy property is owned by several taxpayers, each taxpayer is only eligible for the ITC to the extent of its eligible basis in the energy property.

Final Analysis
The proposed regulations provide needed clarity to taxpayers who intend to construct energy projects that qualify for the ITC under IRC section 48 as modified by the Inflation Reduction Act of 2022. Taxpayers may rely on the proposed regulations until final regulations on the topic are published in the Federal Register.

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