14 February 2023 Gabriel Grossman Energy and Infrastructure

IRA Guidance Watch: Notices Provide Guidance on Section 48C, Low-Income Community ITC Adder

On February 13, 2023, the IRS issued guidance on the administration of two allocation-based renewables tax credit programs under the Inflation Reduction Act of 2022 (the “IRA”), Section 48(e) and Section 48C, in Notice 2023-17 and Notice 2023-18, respectively.1 While this guidance represents a welcome starting point for articulating how these regimes will be administered, meaningful questions regarding the timing of allocations and the application of substantive criteria remain to be answered. 

Notice 2023-17 and the Low-income Community Enhancement

Assuming that certain labor-based requirements are met, the investment tax credit (“ITC”) for a solar or wind facility under Section 48 is generally equal to 30% of eligible basis. An increase to this rate of 10 percentage points may be available if the project qualifies for an “adder,” or ITC rate enhancement, which is available for (1) projects located in “energy communities,” (2) projects located in specified low-income communities (the “Low-Income Community Enhancement”), and (3) projects that meet certain requirements for U.S.-manufactured content. The statute identifies four types of projects eligible for the Low-Income Community Enhancement: projects located in census tracts that meet certain poverty rate and median income thresholds (“Low-Income Community Projects”), projects located on tribal lands, projects installed on residential rental buildings participating in specified affordable housing programs where the financial benefits of the project’s electricity are allocated equitably among the occupants (“Qualified Low-Income Residential Building Projects”), and projects producing electricity 50% of the financial benefits of which are provided to households with income less than 200% of the applicable poverty line or less than 80% of area median gross income (“Qualified Low-Income Economic Benefit Projects”). Unlike its sister adders, the Low-Income Community Enhancement is available only for wind and solar projects, has no analogue in the production tax credit (“PTC”), is available only if an “environmental justice solar and wind capacity limitation” (statutorily limited to an aggregate of 1.8GW for each of 2023 and 2024, and zero thereafter) is allocated to the project by the Secretary of the Treasury, and—in the case of Qualified Low-Income Residential Building Projects and Qualified Low-Income Economic Benefit Projects—may increase to 20 percentage points.

Notice 2023-17 outlines the basic system of allocating environmental justice solar and wind capacity limitation. First, the statutory 1.8GW limitation for calendar year 2023 is further divided between Low-Income Community Projects (Category 1—700MW), projects located on tribal lands (Category 2—200MW), Qualified Low-Income Residential Building Projects (Category 3—200MW), and Qualified Low-Income Economic Benefit Projects (Category 4—700MW). Excess capacity limitation may be allocated to 2024 or reallocated between the categories to maximize 2023 allocations, while over-allocations of capacity limitation will be resolved through “a lottery or other processes.” Projects placed in service prior to being awarded an allocation of capacity limitation are not eligible to receive an allocation. The IRS will accept or reject requests for allocations based on recommendations from the Department of Energy (“DOE”), which will initially review the applications for statutory eligibility and run the allocation process in the event of over-allocations or excess capacity limitation. While the Notice contemplates that applications for Qualified Low-Income Residential Building Projects and Qualified Low-Income Economic Benefit Projects will be accepted during a 60-day application window during the third calendar quarter of 2023 and applications for Low-Income Community Projects and projects located on tribal lands will be accepted during a 60-day application window thereafter, the Notice promises that additional guidance on the application process and project eligibility will be provided. 

Finally, the Notice indicates that the following specific aspects of renewables projects—in addition to broad principles of environmental justice—may favorably impact the allocation of capacity limitation and will be fully described in further guidance: (i) ownership or development by community-based organizations and mission-driven entities, (ii) impact on encouraging new market participants, (iii) substantial benefits to low-income communities and individuals marginalized from economic opportunities, and (iv) higher degree of commercial readiness.

Practice Notes
  • While Notice 2023-17 makes clear that a project cannot be placed in service by the time it receives an allocation of capacity limitation, it also provides no guidance as to when applications for such allocations are expected to be accepted or denied, thus potentially creating pressure on project construction and Permission to Operate schedules. The favorable emphasis on projects with a “higher degree of commercial readiness” further complicates taxpayer decisions with respect to construction timing.
  • In many cases, the availability (or lack thereof) of the Low-Income Community Enhancement has a significant impact on the economics of project acquisition and financing transactions. Additional clarity around the timing of the allocation decision may be of major importance to negotiations.
  • As with Section 1603 of the American Recovery and Reinvestment Tax Act, which was administered by the Department of the Treasury, the IRS does not directly administer the regime for Low-Income Community Projects. The implications of the DOE’s involvement on controversy and litigation in the future remain to be seen.
Notice 2023-18 and Section 48C

Assuming that certain labor-based requirements are met, newly-revived Section 48C allows a credit, generally equal to 30% of eligible basis, for a project that re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of a broad range of renewable project property, including property designed to be used to produce solar, water, wind, and geothermal energy. The program is capped at an aggregate $10 billion of credits, with certifications awarded to project sponsors based on various criteria stated in the statute, such as domestic job creation, net impact in avoiding or reducing air pollutant, potential for technological innovation and commercial deployment, levelized cost of generated or stored energy, and project time from certification to completion. 

Notice 2023-18 provides a detailed two-step framework for certifications of Section 48C eligibility. For Round 1 of the program, which will allocate $4 billion of Section 48C credits ($1.6 billion of which is intended to be allocated to projects located in “energy communities” under Section 45(b)(11)(B)(iii), i.e., census tracts with retired coal mines or retired coal-fired electric generating units), the taxpayer must first submit a “concept paper” to the DOE between May 31, 2023 and July 31, 2023, to which the DOE will provide a letter of encouragement or discouragement. Regardless of the DOE’s response, the taxpayer may then submit a Section 48C(e) application through a specified online portal, which will then be subject to a technical review, and ranking alongside the other applications, by the DOE. The DOE will then provide a recommendation of acceptance or denial to the IRS. The Notice contemplates at least one round of allocations subsequent to Round 1.

In addition to the statutory criteria to be used in awarding allocations, the Notice also mentions certain policy factors that may be considered by the DOE, including whether the project is eligible for support from other DOE financial assistance programs funded by the Infrastructure Investment and Jobs Act or the IRA (in which case it may be given priority) and whether a project receives complementary assistance from other programs (in which case the DOE may consider whether the Section 48C application justifies the need for and benefits of receiving assistance from multiple programs). The Notice also states that the DOE may consider whether the proposed project addresses “gaps, vulnerabilities, or risks” in the domestic production of clean energy products and conduct a review to determine if an applicant has a connection with a “foreign country of risk” that could frustrate such goals. Additional guidance will be issued to indicate specific priority technologies that would address such gaps.

Practice Notes
  • Notice 2023-18 does not define “foreign countries of risk” in evaluating gaps in the domestic production of clean energy products. While the most recent guidance on this term from the DOE, which uses this term in a number of its directives, limits “foreign countries of risk” to China, Russia, Iran and North Korea, this list is subject to change over time and it would be helpful for the IRS to confirm that the DOE definition should govern.
  • As with Notice 2023-17, the controversy and litigation implications of the DOE’s involvement in the administration of Section 48C remain to be seen. On an immediate note, it is intriguing that the DOE has been tasked with evaluating whether projects qualify for the energy community enhancement in Section 45(b)(11)(B)(iii) by virtue of being located in the same census tract as a retired coal mine or retired coal-fired electric generating unit (or in an adjacent tract). As this definition of “energy community” also applies for purposes of the ITC and the PTC, both of which are administered with no DOE input, such DOE involvement in the Section 48C context has the potential to complicate the interpretation of the energy community adder for ITC and PTC purposes as well as for Section 48C.
  • As with Notice 2023-17, Notice 2023-18 provides no guidance as to when applications for allocations might generally be accepted or denied, or when Round 2 might begin. Unlike Notice 2023-17, Notice 2023-18 does not explicitly state whether projects that have been placed in service by the time of allocation are per se ineligible for the Section 48C credit. Additional IRS guidance on both points would be desirable.
  • While the Notice states that allocations are taxpayer-specific to the applicant unless transferred with IRS consent, it provides no guidance as to whether a sponsor may apply for an allocation and subsequently transfer such allocation to a partnership. Moreover, we observe that many of the “gray areas” in the ITC analysis—such as the impact of partnership interest transfers subject to Section 743 on an ITC basis and the credit eligibility of various types of equipment—also apply to Section 48C. The DOE may unexpectedly find itself to be providing preliminary input on these rules. In any event, Notice 2023-18 and the allocation limitations of Section 48C arguably force the IRS to commit to positions on a variety of technical questions that may impact the ITC and PTC area more broadly as well.

Both Notice 2023-17 and Notice 2023-18 provide the long-awaited mechanics for applying for the Low-Income Community Enhancement and the Section 48C credit, respectively. However, additional guidance for both Notices is still necessary, particularly as to timing, and the IRS has made clear that more detailed guidance on these regimes is forthcoming. Of particular interest is the potential impact of these Notices on other IRA guidance, particularly with respect to the definition of “energy communities” under Section 45(b)(11)(B)(iii).  

1. All references to “Section” herein are to the US Internal Revenue Code of 1986, as amended unless otherwise noted.