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).

Energy community defined

The IRA broadly defines an energy community as 1) a brownfield site, 2) a “statistical area” that has an unemployment rate at or above the national average for the previous year, and 0.17% or greater direct employment, or 25% or greater tax revenues, related to the extraction, processing, transport or storage of: coal, oil or natural gas (Fossil Fuels), or 3) a census tract in which a coal mine closed after 1999 or a coal-fired electric generating unit has been retired after 2009 (directly adjoining census tracts also qualify).

The Notice expands upon these definitions as follows:

1) A brownfield site is real property that may contain hazardous substances, pollutants or contaminants that render it difficult to expand, redevelop or reuse. “[C]ertain mine-scarred land” is also considered a brownfield site. The Notice also includes a safe harbor whereby property will be considered a brownfield site if one of three certain conditions are met.

2) A statistical area includes both metropolitan statistical areas, as grouped according to Office of Management and Budget standards, and nonmetropolitan statistical areas, which are defined by the U.S. Bureau of Labor Statistics (BLS). Whether the area satisfies the unemployment requirement is measured using BLS data. Fossil Fuel-related direct employment is assessed by evaluating the number of people employed in specified industries using local census data. Lastly, the Notice acknowledges the measurement of tax revenues related to the extraction of Fossil Fuels will be difficult and invites public comments on how the data can be quantified.

3) Detailed definitions are provided for coal mines and coal-fired electric generating units, and how to determine their status as closed or retired. A census tract will be considered directly adjoining to one in which such a mine or unit has been closed or retired if the tracts’ boundaries touch at any single point.

Location requirement

For the PTC, a qualified facility must be located within an energy community. The Notice provides that this determination is made for each taxable year of the facility’s 10-year credit period, beginning on its placed-in-service date. The facility need only be located in an energy community for any part of the tax year to satisfy this requirement. Regarding the ITC, property must be placed in service within an energy community to be credit-eligible, determined as of the placed-in-service date.

The Notice provides a special rule that applies to both the PTC and ITC, whereby if the taxpayer begins construction of the project or facility within an energy community as determined at the time construction begins, the location will be considered an energy community for the duration of the PTC period or on the ITC placed-in-service date. This is true regardless of whether the location subsequently fails to satisfy the definition of an energy community.

A project or property is considered located or placed in service in an energy community if it satisfies either the:

1) Nameplate Capacity Test: met if 50% or more of the project’s or property’s nameplate capacity is in an energy community, or

2) Footprint Test: met if the property or project does not have a nameplate capacity and 50% or more of its square footage is in an energy community.

In addition to the Notice, Treasury and the IRS have released a mapping tool developed in partnership with the Interagency Working Group on Energy Communities that can be used to determine whether a coal mine was closed after 1999 or a coal-fired electric generating unit was retired after 2009 in a census tract or directly adjoining census tract, and whether a statistical area had 0.17% or greater direct employment related to the extraction, processing, transport or storage of Fossil Fuels. The tool, as well as three appendices referenced within the Notice that identify the relevant statistical areas, whether they meet the Fossil Fuel employment requirement, and the census tracts in which a coal mine was closed after 1999 or a coal-fired electric generating unit was retired after 2009 in a census tract or directly adjoining census tract can be found here.

Substantiation requirement

Taxpayers claiming the increased credit must adhere to the recordkeeping requirements under section 6001, by maintaining documentation necessary to substantiate that their project is located in or property has been placed in service within an energy community.

For more information on this topic, or to learn how a Baker Tilly specialist can help, contact our team.

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.