March 13, 2023

Limited initial guidance issued for section 48(e) investment tax credit enhancer

Randy Buchanan, Frank Comparetto III, Xenia Garofalo, Anna Hargett, Christopher Neill, Benje Selan, Caroline Setliffe, Wes Sheumaker

Eversheds Sutherland (US) LLP

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Eversheds Sutherland (US) LLP

On February 13, 2023, the Department of Treasury (Treasury) and the Internal Revenue Service (Service) issued Notice 2023-17 (Notice), establishing the 48(e) Low-Income Communities Bonus Credit Program (Program) with respect to qualified solar and wind facilities eligible for the Investment Tax Credit under section 48 (ITC), as amended by the Inflation Reduction Act (IRA).

The stated goals of the Program are to increase adoption of and access to renewable energy facilities in low-income and other communities with environmental justice concerns; encourage new market participants; and provide social and economic benefits to individuals and communities that have been fraught with pollution, negative health and environmental effects, as well as reduced economic opportunities.

The Program generally allows an increased ITC for qualified solar and wind facilities that receive an allocation of Annual Capacity Limitation (1.8 gigawatts of direct current capacity for calendar years 2023 and 2024) pursuant to the Program. Taxpayers must apply to participate in the Program. The Notice establishes the Program and provides initial guidance regarding its overall design, application process, and additional criteria that will be considered in determining which applicants will receive an allocation of Capacity Limitation. The Notice indicates that future guidance will be issued which outlines the specific application procedures, additional criteria, applicable definitions, and other information necessary to submit an application to request an allocation of Capacity Limitation for 2023. Pending implementation and analysis of the 2023 process, Treasury and the IRS may make additional modifications to the Program for calendar year 2024.

ITC

The energy ITC is generally calculated by multiplying the taxpayer’s basis in each of its energy projects placed in service during the taxable year by an applicable energy percentage. The base energy percentage for projects starting on or after January 29, 2023 is 6%, subject to several credit enhancers. The base percentage increases to 30% if applicable prevailing wage and apprenticeship requirements are met. See our prior legal alert, The Clock is Ticking to Start Construction: Prevailing Wage and Apprenticeship Guidance Issued. Additional credit enhancers include the domestic content and energy community incentives (10% for each, assuming the prevailing wage and apprenticeship requirements are met). The Program offers an additional opportunity for taxpayers to increase their ITC energy percentage, accounting for 10% or 20% depending on the category of the qualifying facility receiving a Capacity Limitation award:

Facility Category	Description	Bonus Credit	Annual Capacity Limitation Megawatts (2023)
Category 1 – Low-Income Community	(i) any population census tract with a poverty rate of 20%, or (ii) for a tract not located in a metropolitan area – the median family income of the tract does not exceed 80% of statewide median family income, or (iii) for a tract located in a metropolitan area – the median family income of the tract does not exceed 80% of the statewide median family income or metropolitan median family income.	10%	700
Category 2 – Located on Indian Land	Indian land is defined in section 2601(2) of the Energy Policy Act of 1992: (i) any land located within the boundaries of an Indian reservation, pueblo, or rancheria; (ii) any land not located within the boundaries of an Indian reservation, pueblo, or rancheria, the title to which is held— (a) in trust by the United States for the benefit of an Indian tribe or an individual Indian; (b) by an Indian tribe or an individual Indian, subject to restriction against alienation under laws of the United States; or (c) by a dependent Indian community; and (iii) land that is owned by an Indian tribe and was conveyed by the United States to a Native Corporation pursuant to the Alaska Native Claims Settlement Act, or that was conveyed by the United States to a Native Corporation in exchange for such land.	10%	200
Category 3 – Qualified Low-Income Residential Building Project	Residential rental building which participates in an affordable housing program, and the financial benefits of the electricity produced are allocated equitably among the occupants of the building.	20%	200
Category 4 – Qualified Low-Income Economic Benefit Project	At least 50% of the financial benefits of the electricity produced by such facility are provided to households with income of less than 200% of the poverty line, or less than 80% of the area median gross income.	20%	700

The following definitions and descriptions associated with the Program are included in the Notice:

Qualified Solar and Wind Facility: means any facility (i) that generates electricity solely from a wind facility, solar energy property, or small wind energy property; (ii) that has a maximum net output of less than 5 MWs; and (iii) is located in one of the four low-income/Indian land categories.
Facility Category and Capacity Allocation:
- The total annual capacity limitation for 2023 and 2024 is 1.8 gigawatts.
- Unused capacity limitations for 2023 may be carried over to 2024.
- Unused capacity limitations for 2024 may be carried over to 2025 (48E(h)(4)(D)(ii)).
- Section 48(e)(1)(A)(i) allots 10 percentage points for eligible property that is part of a Category 1 facility or a Category 2 facility that is not also a Category 3 facility or Category 4 facility.

Program Criteria:
- Facilities placed in service prior to receiving an allocation award are not eligible to participate.
- Only the facility owner may apply for an allocation of capacity limitation.
- Applications will be accepted in a phased approach for calendar year 2023, during 60 day application windows:
  - Category 3 and Category 4 facilities may apply for capacity limitations in the third quarter 2023;
  - Category 1 and Category 2 facilities will be accepted after the window for Category 3 and Category 4.
- The IRS may consider additional criteria in allocating capacity limitation to facilities, including facilities that:
  - are owned or developed by community-based organizations and mission-driven entities;
  - have an impact on encouraging new market participants;
  - provide substantial benefits to low-income communities and individuals marginalized from economic opportunities; and
  - have a higher degree of readiness.
- An allocation award is not a determination that the facility will qualify for the section 48(e) bonus or the section 48 credit generally.

A taxpayer meeting prevailing wage and apprenticeship requirements, as well as the domestic content, energy community and low-income community credit enhancers could be eligible for an ITC of up to 70% of its basis in an energy project.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.