IRS issues preliminary guidance on energy communities

On April 4, 2023, the IRS issued Notice 2023-29 (Notice), providing initial guidance on energy communities for purposes of qualifying for one of the bonus energy credit structures under the Inflation Reduction Act (IRA) production tax credit. The Notice also announces the Treasury Department’s intent to release proposed regulations expanding on this area.

Key takeaways

• Taxpayers can qualify for up to an additional 10% “bonus” amount of an investment or production tax credit in connection with a qualifying project located or placed in service within an energy community.
• The Notice introduces the definition of an energy community and rules for determining whether a project is located within one, ahead of further refining the guidance in forthcoming proposed regulations.
• Once released, the proposed regulations will apply to taxable years ending after April 4, 2023. Taxpayers can rely on the Notice in the interim.

Background

The IRA introduced new and overhauled preexisting clean energy credits, featuring production and investment tax credits. Generally, the production tax credit (PTC) under current section 45 and new section 45Y provides an annual per kilowatt hour credit for electricity a taxpayer produces from renewable resources; the investment tax credit (ITC) under current section 48 and new section 48E provides an upfront credit for the “energy percentage” of the basis of energy property the taxpayer places in service during a taxable year. The amounts of PTCs and ITCs for which taxpayers are eligible are determined using baseline figures that can be increased by certain “kickers,” including those for the project paying prevailing wages, employing apprentices, using domestically produced content and being located within an energy community. Find out how your organization can leverage IRA tax credits to save as much as 50% or more on qualifying project costs.

With respect to the PTC, the baseline amount of 0.3 cents per kilowatt hour is increased by 10% if the electricity is produced at a facility within an energy community. As for the ITC, the baseline percentage of 6% is increased by 2% if the energy property is located within an energy community (10% if the aforementioned prevailing wage and apprenticeship requirements, or a specified alternate requirement is met).