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Final regulations released for the section 48 tax credit

Dec 09, 2024 · Authored by Robert Moczulewski, Jowan Abouhosah, Jiyoon Choi, Beckett Woodworth

On Dec. 4, 2024, the Department of Treasury and the IRS released final regulations for the Internal Revenue Code section 48 tax credit, which are scheduled to be published on Dec. 12 [1]. Section 48 is also commonly known as the investment tax credit (ITC).

The final regulations for IRC Section 48 (ITC) introduce several important updates and clarifications from the proposed regulations. The framework from the statute and proposed regulations published earlier were retained but also clarified the definition of energy property and energy project. The following updates aim to provide clearer guidance and greater flexibility for taxpayers, addressing concerns raised during the public comment period.

Explore some of the more significant changes stated in the final regulations below.

Defining the "energy project"

An energy project is a project consisting of one or more energy properties that are part of a single project. Multiple energy properties will be considered as one energy project if a single taxpayer or related taxpayers own them and meet four or more of the following seven factors.

The energy properties are constructed on contiguous pieces of land;
The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
The energy properties have a common intertie;
The energy properties share a common substation, or thermal energy offtake point;
The energy properties are described in one or more common environmental or other regulatory permits;
The energy properties are constructed pursuant to a single master construction contract; or
The construction of the energy properties is financed pursuant to the same loan agreement [1].

Under proposed regulations, multiple energy properties were considered as a single energy project if they are owned by a single taxpayer or related taxpayers and meet two of the seven factors.

Providing the definition and quality standards to energy properties

Biogas: The final regulations confirmed that systems such as feedstock collection, gas upgrading equipment and ancillary systems critical to biogas production qualify as integral property if they function independently with the biogas system. Also, the IRS confirmed that normal flaring and complying with proper state, federal or other permits do not disqualify a biogas property from eligibility.
Geothermal Heat Pump (GHP): The final regulations clarified that for a geothermal heat pump system to be eligible for section 48 property, a taxpayer needs both the ownership of GHP systems that collects geothermal energy and distributes geothermal energy. For example, owners of underground coils can claim the ITC only if they own at least one heat pump used in conjunction with the coils. Fractional ownership interests of coils are recognized as meeting ownership of both collection systems and directly owned heat pump distribution asset.
Hydrogen storage: The final regulations clarified that the hydrogen energy storage property does not need to store hydrogen solely used as energy and not for other purposes.

Treatment of qualified interconnection property

While the 5 MW (AC) limitation is measured at the energy property level, the utility reimbursements no longer affect ITC-eligible costs.
Interconnection property is exempt from prevailing wage and apprenticeship requirements and it is not considered when determining eligibility for domestic content or energy community bonus credits. Additionally, the determination of a single energy project has been made more flexible, now requiring “ownership plus four factors” instead of “ownership plus two factors.”

Additional updates or reiterations in the final regulations are listed in the below proposed vs final regulations comparison table.

Comparison of the proposed and final regulations for IRC section 48 tax credit

Proposed rule	Final rule
Definition of energy project
Multiple energy properties treated as one project if owned by a single taxpayer and any two factors are present	Requires four or more of the listed factors are met for multiple energy properties to be treated as a single project Provide flexibility on timing of the determination of whether multiple energy properties constitute a single energy project This determination can be made at any time before the energy properties are placed in service
Definition of energy property
Includes various types of properties eligible for the ITC, which include: Solar process heat Fiber-optic solar property Combined heat and power (CHP) system property Qualified fuel cell property Qualified microturbine property Electrochromic glass Energy storage technology Microgrid controllers Biogas property	Same as proposed rules, with clarifications and examples of each type Provided quality standards to energy properties such as biogas, geothermal and hydrogen storage
Qualified biogas property
“Qualified biogas property” was defined as a system that converts biomass into a gas with at least 52% methane by volume and captures it for sale or productive use Excluded gas upgrading equipment from being considered functionally interdependent Required the same taxpayer to own all components of the qualified biogas property, including gas collection and upgrading equipment Methane content is measured at the point where gas exits the biogas production system	Methane content is measured at the point where the biogas exits the qualified biogas property, ensuring the gas meets the 52% methane requirement after upgrading Includes gas upgrading equipment as cleaning and conditioning property, making it eligible for the credit Allows for separate ownership of components, addressing concerns that different entities often own gas collection and upgrading equipment
Geothermal and geothermal heat pump energy property
“Geothermal property” was defined as equipment that uses geothermal energy to generate electricity or provide heating and cooling Geothermal heat pump property is equipment that use ground, groundwater, or other underground fluids for a thermal energy source to heat or cool a building Required the taxpayers to own the geothermal system themselves to claim the ITC	Provide more detailed guidance on the eligibility of geothermal heat pumps Specify that taxpayers must own the geothermal systems that produce and distribute or use energy derived from a geothermal deposit or underground thermal energy Clarify that geothermal property includes systems that produce and distribute or use energy derived from a geothermal deposit Clarify that the property integral to the geothermal system, such as underground piping and the heat pump distribution, must be owned by the same taxpayer to be included in the ITC basis
One-megawatt exception
Applied only to energy properties generating electrical or thermal energy Maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy, the determination is based on the nameplate capacity.	Clarification and confirmation that the one-megawatt exception applies only to energy projects which generate electrical or thermal energy Explicitly stating that electrochromic glass property, fiber-optic solar energy property, and microgrid controllers are not eligible for the exception because they do not generate electrical or thermal energy, therefore must meet the prevailing wage and apprenticeship requirements to qualify for the full 30% ITC; if not met, the base credit rate for these technologies would be 6% Detailed rules for measuring the maximum net output for different types of energy properties to determine eligibility, including specific conversion factors for thermal energy storage property, hydrogen energy storage property and qualified biogas property. The special rules are: Electrical generating energy property: The maximum electrical generating output in MW that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202 Electrical energy storage property: The storage device’s maximum net output Thermal energy storage property and other property generating thermal energy: The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu per hour/3,412,140 = MW) Hydrogen energy storage property and specified clean hydrogen production facilities: The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per hour of hydrogen Qualified biogas property: The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour and taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the Environmental Protection Agency (EPA) GHG Reporting Rule (GHGRR) at table C-1 to subpart C of part 98 (40 CFR part 98)
80/20 rule
Retrofitted energy property may qualify if the fair market value of used components is not more than 20% of the total value, meaning that at least 80% of the property’s value must come from new components 1.48-14(a) specifically provides that if a taxpayer satisfies the 80/20 rule, then the taxpayer may include the new costs paid or incurred for property that is an integral part of the energy property in the basis of the energy property for purposes of the section 48 credit	Same as proposed rules, with examples for solar and hydropower facilities
Qualified interconnection property
Tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system required at or beyond the point of interconnection to accommodate the energy project The property must be constructed, reconstructed, or erected by the taxpayer, or the cost must be paid or incurred by the taxpayer The original use of the property must commence with a utility Qualified interconnection property was not considered part of the energy property and was not included in determining whether an energy project satisfies the domestic content bonus credit amount or the increase in credit rate for energy communities	Maintains the definition but provides additional clarity on the application of the rules and examples to illustrate Clarifies that interconnection property is not subject to PW&A requirements but can be included in the basis for calculating the credit Specifies that the five-megawatt limitation provides a method for measuring nameplate capacity for energy properties generating in direct current (being measured at the level of the energy property and not the energy project) Mentions that for purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) must be taken into account, with the original use determined on the date of the sale-leaseback or lease Addresses situations where the costs borne by the taxpayer are reduced by utility or non-utility payments; final rules clarify that Federal tax principles may require the taxpayer to reduce the amount treated as paid or incurred for qualified interconnection property to determine the section 48 credit
Dual use property
The term “dual use property” meaning property that uses energy derived from both a qualifying source (that is, from an energy property including a qualified facility for which an election has been made) and from a non-qualifying source (that is, sources other than an energy property including a qualified facility for which an election has been made) Qualifies if non-qualifying energy use does not exceed 50% of total energy input during an annual measuring period (365-day period, 366-day period if leap year) If energy used from a qualifying source is between 50-100%, only a proportionate amount of the basis of the energy property will be taken into account in computing the section 48 credit If for any subsequent annual measuring period (within the recapture period specified in section 50(a) of the Code), the equipment’s use of energy from all qualifying sources is reduced below 50 percent of its total energy input, then recapture of the section 48 credit is required under section 50(a)	Same as proposed rules, with examples and clarification on how to apply the rules for dual use property Specifies that the Commissioner may accept any other method that accurately establishes the relative annual use of energy derived from all qualifying sources and of energy input from all non-qualifying sources

These final regulations provide taxpayers with the necessary clarity and certainty to support the growth and compliance of eligible projects. Leverage the expertise of our section 48 tax credit specialists today.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Robert Moczulewski

Director

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