The Treasury Department and Internal Revenue Service (IRS) have released Notice 2023-44 and proposed regulations to provide long-anticipated guidance on the application procedures for the Section 48C(e) credit and for the transfer or direct pay of credits as provided under the Inflation Reduction Act of 2022 (IRA).[1]
The Section 48C Advanced Energy Project Credit
Under the IRA’s amendments to Section 48C(e) of the Code, $10 billion in advanced energy project credits will be allocated to qualifying advanced energy projects, with $4 billion specifically allocated to “Energy Communities,” which include brownfields, “coal communities” (census tracts, or adjoining census tracts, where a coal mine or coal-fired power plant has recently been retired), and areas where local taxes or employment have been impacted by the migration away from fossil fuels. A map of designated Energy Communities defined by the DOE can be found here.
Initially enacted by the American Recovery and Reinvestment Act of 2009, Section 48C gives taxpayers a credit of up to 30% of the amount invested in certain advanced energy projects (Qualifying Projects) for the year. As a result of the IRA, the total amount of credit available for the duration of the Section 48(C)(e) program has increased to $10 billion from just $2.3 billion. The amount of credit available remains up to 30% of investment in Qualifying Projects, so long as wage and apprenticeship requirements are met by the project.[2] In order to receive these credits, a taxpayer must apply for a 48C(e) allocation for its advanced energy project as set forth in Notice 2023-44.
Notice 2023-44 builds on the initial guidance provided by Notice 2023-18 issued this spring. Among other things, Notice 2023-44 provides the submission requirements and timeline associated with the Section 48C(e) credit, which we outline below:
- The first round will begin on June 30, 2023 and concept papers for projects are due by noon EST on July 31, 2023 via the eXCHANGE portal.
- Concept papers must at least (1) “propose a qualifying advanced energy project,” which includes clean energy manufacturing and recycling, greenhouse gas emission reduction, and “critical material” projects as defined under the Energy Act of 2020; and (2) include all information required for the Section 48C(e) program as described in Notices 2023-44 and 2023-18.[3]
- After an application is submitted, the U.S. Department of Energy (DOE) will review the concept paper and send the taxpayer a letter either “encouraging or discouraging the submission of a Section 48C(e) application.”[4] Regardless of the DOE’s encouragement or discouragement of applying, any taxpayer who submits a concept paper by the July 31 deadline, or the deadline for any to-be-announced following rounds, is eligible to submit an application.[5]
- An application for the Section 48C(e) credit must also be submitted on the eXCHANGE portal.[6]
- DOE will review the application and, if the eligibility and threshold requirements are met, conduct a technical review in order to form a recommendation.[7]
- The DOE will provide the IRS with its recommendation and the IRS will make a decision on accepting or rejecting the application based on the DOE’s recommendation.[8]
Taxpayers whose 48C(e) applications are accepted by the IRS will receive a positive “Allocation Letter” or negative “Denial Letter” from the IRS no later than March 31, 2024.[9] If denied, a debriefing may be requested with the DOE regarding the reasons for rejection.[10] Taxpayers whose application is accepted must notify the DOE though the eXCHANGE portal within two years of the receiving the Allocation Letter from the IRS that all certification requirements[11] for the project are met.[12] After receiving this certification, the DOE will notify the IRS that the 48C(e) certification requirements have been met, and the IRS will issue a “Certification Letter.”[13] The taxpayer must then place the subject project into service within two years after receiving the Certification Letter from the IRS, and must notify the DOE of the project being placed in service, again via the eXCHANGE portal.[14] Although a taxpayer may choose to make progress on its advanced energy project, it would forfeit the right to 48C(e) credits if its placed the project into service prior to receiving the initial Allocation Letter from the IRS. It is thus critical to have experienced tax counsel to guide your project development strategy to remain in compliance with these complex rules.
Direct Pay and Transferability of Investment Tax Credits
Some of the most dramatic provisions of the IRA are the direct pay and transferability options under Sections 6417 and 6418 for certain investment tax credits and certain taxpayers. The IRS has now provided additional guidance on registration requirements, as well as issued temporary regulations for direct payment under Section 6417, transferability under Section 6418, and elective payment of certain other credits.[15]
The proposed regulations require taxpayers[16] electing to transfer their credits or receive direct payment to complete an online prefiling registration and receive a registration number for each taxpayers that will cover all of its credit claims or transfers (as applicable) in the current taxable year.[17] Prefiling registration may be completed as soon as online registration is active and all required information is known, but the credit must be “earned” (i.e. the property placed in service) before an election to transfer or direct payment can occur.[18] Nelson Mullins can help you build an efficient and effective registration process that accounts for project timelines, registration start and end dates and projected tax benefits. Under Temporary Regulations 1.6417-5T (for direct payment) and 1.6418-4T (for transfer of credits), taxpayers electing direct payment or to transfer of credits must register online and provide general information about the taxpayer and the credit or credits for which it intends to elect direct payment or make a credit transfer for the tax year in which the credit is earned. The exact information required for registration is contained in Reg. §1.6417-5T(b) and §1.6418-4T(b), discussed below. This process must be completed, and the taxpayer must provide a registration number on its tax return for each credit that is intended to be claimed or transferred. Registration numbers will be valid for only one tax year and registration must be renewed each year for any applicable credits the taxpayer wishes to claim or transfer.[19]
The information required to be provided when registering for either direct payment or transferability under Reg. §1.6417-5T(b) and §1.6418-4T(b), respectively, is very similar. Taxpayers must provide:
- General information such as name, address, legal name, identification number, and contact information, as well as information about the type of entity and, for direct pay claims, the basis for its exempt status;
- Taxable year used and type of annual return(s) typically filed by the taxpayer;
- Type of credit for which the election is being made and each eligible property intended for use in determining the credit, as well as general information about the property (to include “any other information” believed to be helpful to the IRS in reviewing the registration). Subsequent projects/credits must be registered separately as each credit requires a separate registration and a different registration number when tax returns are filed;
- A statement that the information submitted is complete and accurate, signed under penalty of perjury by a person with personal knowledge of the facts who is authorized to act for the taxpayer; and
- “Any other information the IRS deems necessary.”[20] It is our understanding that, in processing registrations, the IRS will contact a registering taxpayer if more information is needed.
Following registration, both sellers and purchasers of credits must include a transfer election on their tax return filings. Required information for both parties includes a Form 3800 (General Business Credit), transfer election statement between the seller and purchaser, and any additional information the IRS may specify.
Additionally, the proposed regulations, which contain the same language as the temporary regulations, clarify that taxpayers may transfer portions of a credit to multiple transferees and that allocations by a passthrough transferee to its owners will not violate what is otherwise a prohibition on secondary credit transfers. Further clarified is that it is the transferee who will bear the recapture taxes, penalties, and costs if there is an event triggering credit recapture. However, if a partner or S corporation shareholder causes the recapture event though an impermissible secondary transfer (e.g. by then attempting to transfer the portion of the credit allocated to them by the transferee passthrough entity), then it is the individual who will bear the tax cost of recapture, not the transferee entity.
Temporary Regulation 1.48D-6T also requires taxpayers seeking advanced manufacturing facility credits under Section 48D to complete an online registration process.[21] Just as under the rules for direct pay and transferability, the process of registering and receiving a new registration number must be redone each year.[22] Additionally, if there is a change in facts relating to a qualifying investment in such a facility and a registration number has already been received, the registration must be renewed to reflect the new facts.[23] An example of such a situation provided by the regulations is when there is a change in ownership of the qualifying facility (including corporate reorganizations) where the new owner has a different employer identification number.
Key Takeaways
The new guidance for advanced energy project credits comes just shortly before the eXCHANGE portal is set to open, giving taxpayers and their counsel a short runway to ensure submissions to the DOE meet all the requirements of Notice 2023-44 and the Regulations.
Additionally, taxpayers with credits eligible for direct pay or transfer under Sections 6417 and 6418 now have a way forward to ensure their ability to monetize applicable clean energy credits. Finally, purchasers of the now transfer-eligible credits will be anxious to mitigate the consequences of potential recapture events caused by transferors.
[1] References to “Section” refer to Sections of the Internal Revenue Code of 1986 (the “Code” as most recently amended by the IRA) and references to “Reg. §” refer to Proposed, Temporary, or Final Regulations promulgated under the Code.
[2] See IRS Notice 2022-61.
[4] Id. at Section 5.03(2).
[6] Id. at Section 5.03(3).
[7] Id. at Section 5.03(4) and (5).
[8] Id. at Section 5.03(6).
[9] Id. at Section 5.03(7).
[11] See Notice 2023-18, Sections 5, 7. for certification requirements (all permits for construction, including environmental authorization or review, have been received; certain taxpayer certifications, and wage and apprenticeship compliance documentation, etc.
[12] Id. at Section 5.03(9).
[13] Id. at Sections 5.03(10) and (11).
[14] Id. at Section 5.03(12).
[15] Credits benefitting from the IRA’s new monetization options are: the alternative fuel vehicle refueling property under Section 30C; renewable energy production credits under Section 45(a); carbon capture equipment under Section 45Q(a); zero emission nuclear power under Section 45U(a); clean hydrogen production facilities under Section 45V(a); qualified commercial vehicles for tax-exempt entities under Section 45W; advanced manufacturing production under Section 45X(a); clean energy production under Section 45Y(a); and clean fuel production under Section 45Z(a); as well as the more traditional energy credits determined under Section 48; qualifying advanced energy projects under Section 48C; and clean electricity investment under Section 48E. See Sections 6417(b) (“Applicable Credit”) and 6418(f)(1) (“Eligible Credit”).
[16] “Taxpayers” is used here to describe any party eligible to either claim or transfer its tax credits, though direct payment is available only to entities that may not otherwise be taxpayers.
[17] Reg. §1.6417-5T(a) and Reg. §1.6418-4T(a).
[18] See the IRS Frequently Asked Questions here.
[19] Reg. §6417-5T(c) and Reg. §1.6418-4T(c).
[20] Reg. §1.6417(b)(5) and §1.6418(b)(5).
[21] Reg. §1.48D-6T(b)(1).
[22] Reg. §1.48D-6T(b)(7)(ii) and (iii).
[23] Reg. §1.48D-6T(b)(7)(iv).
