Taking advantage of IRA tax credits in energy communities   

Many communities have a longstanding history with the energy industry. These communities have supplied the energy we’ve depended on for decades, and their economies have historically relied on the production of oil, gas and coal to drive jobs and local tax revenue. Today, as the nation’s energy supply begins to transition from fossil fuels toward cleaner forms of energy, the residents of these communities are facing challenges as the demand for traditional fuels wanes and production needs decline.

A transition toward cleaner energy benefits the nation and the world as we try to reduce greenhouse gas emissions and face the challenges of coal mines closing, coal-fired power plants closing, and oil and gas production demand declining. Unfortunately, this can negatively impact the job market and the economy of these important communities. Recognizing the longstanding contributions that these communities have made (and can still make) to the energy economy, the federal government acknowledged the benefit to build new energy resources in these communities, so that they can benefit from the explosive growth of industries like solar, wind, biogas and other renewables.

The Inflation Reduction Act of 2022 (IRA) recognized this need and included a tax credit incentive program – the Energy Community Bonus Credit provision – focused on attracting clean energy development to communities that have historically had a lot of oil, gas and coal production. Designating such as “energy communities,” the IRA created significant tax credit opportunities to help fund the construction of qualified clean energy facilities within their boundaries. This presents an opportunity for energy communities to take advantage and get more involved in the clean energy economy.

What do you need to know about energy communities? 

Within the IRA, an energy community is defined as a location meeting certain geographic criteria that enables it to receive support and additional financial incentives for building qualified clean energy facilities in its location. This is meant to provide financial support for transitioning from traditional fossil fuel-based energy production to renewable energy production in these communities, which may have a larger-than-average concentration of energy industry workers, energy industry assets and perhaps industrial related brownfields.

The IRA defines an energy community as a location that meets one of the following definitions:

• A brownfield site, or (Brownfield Eligibility Category)
• A metropolitan statistical area or non-metropolitan statistical area which has 0.17% or greater direct employment or at least 25% of local tax revenues related to the extraction, processing transport or storage of coal, oil or natural gas, and has an unemployment rate greater than the national average unemployment rate for the previous year, (Statistical Area Category)
• A community which is in proximity to a coal mine which has closed after Dec. 31, 1999, or in proximity to a coal-fired electric generating unit that was retired after Dec. 31, 2009. A closed coal mine or retired coal-fired electric generating unit must have been closed within the census tract, or in a directly adjacent tract (Coal Closure Category).

In addition to the obvious economic benefits and environmental impacts on energy communities, these IRA-incentivized projects can assist with equity and inclusion efforts, making sure that vulnerable and disadvantaged regions are prioritized in the clean energy transition. However, one of the key details to keep an eye on is eligibility.

Energy community eligibility can change year-to-year

The Internal Revenue Service (IRS) updates its list of qualifying energy communities on an annual basis. The initial list of eligible energy communities applied to facilities that were placed into service between Jan. 1, 2023, and June 6, 2024. On June 7, 2024, the IRS released an updated list of qualifying energy communities that applies to clean energy projects being placed into service between June 7, 2024, and May 2025. This list will be revised each year, so developers should continue to keep tabs on eligibility requirements.

In the latest IRS release on June 7, 2024, there is notable expansion of eligible counties in some regions, while other geographic areas saw a narrowing of eligibility. This is largely a result of updates to the national average unemployment rate, which drives eligibility under the Statistical Area Category. In addition, a site location that has evidence of certain qualifying environmental contamination can enable a site location to be qualified for the Energy Community bonus credit under the Brownfield Category, but this eligibility must be appropriately substantiated to prove eligibility.

Municipal leaders and private energy developers planning and executing clean energy projects in Energy Communities may need assistance to better understand eligibility for the bonus credits as they seek to attract energy investments into their communities. 

The Energy Community Bonus Credit in action

Energy communities are important across the U.S., as they have played – and continue to play – a major role in producing clean energy for our nation. Baker Tilly continues to work closely with clients in regions where energy communities are most prevalent, including Pennsylvania, Texas, California and many other states.

For example, we recently assisted a major U.S. city with a renewable gas project that crossed over two qualifying census tracts. We worked with the municipal leaders to identify and substantiate Energy Community Bonus Credit eligibility for their project, earning them a 10% tax credit that helped offset some of the development and construction costs of the project.

Our specialists also helped a reputable higher education university identify and receive their investment tax credit on a qualifying geothermal project that will provide heating and air conditioning for a new building, which is on a piece of property that was formerly an industrial site. The client’s project met the Brownfield Category eligibility requirements for the energy community bonus credit and, with advisory, they were able to properly substantiate the tax credit for filing purposes. The extra 10% credit will translate into millions of additional tax credit revenue for the capital project.

Is your project located in an energy community?

Determining eligibility for the Energy Community Bonus Credit may seem simple, but knowing the requirements and the complexities of how these energy community bonuses work is critical in making sure your project can capture this important bonus credit when it is available. Developers and project owners can use the easy-to-navigate, interactive mapping tool to determine whether projects are located in an energy community and, ultimately, if they are eligible for the IRA bonus credit.

Make the most of the available tax credits and incentives. Get started with an IRA specialist today.  

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.