The Inflation Reduction Act of 2022 (IRA) aimed to accelerate the transition to a clean energy economy by encouraging investment and development in economically disadvantaged communities. The IRA extended the Investment Tax Credit (ITC) available under Section 48 of the Internal Revenue Code (the Code), which provides up to 30% in tax credit for wind and solar energy facilities that have a maximum net output of less than 5 megawatts. The IRA also provided a bonus 10% credit for such facilities located in low-income communities, defined as the same communities eligible for the New Markets Tax Credit. Additionally, this provision created a 10% bonus credit for facilities located on federally identified Indian land, and a 20% bonus credit for facilities that are built as part of a qualified low-income residential building or qualified low-income benefit project.
To receive these bonus credits, project owners must apply for an allocation of credit through a program administered by the Internal Revenue Service (IRS) and Department of Energy (DOE). The IRS recently released initial guidance establishing the program that will allocate the “Environmental Justice Solar and Wind Capacity Limitation.”
In 2023 and 2024, the total capacity limitation of the program is 1.8 gigawatts per year. Unused capacity in 2023 will carry over into 2024. Of that total, 700 megawatts will be allocated to projects located in low-income communities, called “Category 1” projects.
Applications for the program will open in 60-day windows later in 2023, and windows for each category will open in phases. An applicant can apply only for one category of credit. The application window for Category 1 is likely to open after Categories 3 and 4 (qualified low-income residential buildings and qualified low-income benefit projects). DOE will review applications and make recommendations to IRS regarding which applicants should receive an allocation of credit.
Like application timing, construction timing will be important. The facility must be placed in service within four years after the allocation is received and is not eligible if it is placed in service before credit is allocated. In addition, for a solar project to be eligible for the ITC under Section 48, project construction must begin before January 1, 2025. However, if construction begins after January 1, 2025, a solar project may still qualify for a tax credit and low-income community credit boost under Section 48E of the Code, known as the Clean Electricity Investment Tax Credit. Details for that program have not yet been announced.
IRS plans to release additional guidance on the Section 48 ITC boost, which will include the criteria that the IRS and DOE will use to allocate capacity between applicants. There may be a focus on facilities that:
- Are owned or developed by community-based organizations and mission-driven entities.
- Have an impact on encouraging new market participants.
- Provide substantial benefits to low-income communities and individuals marginalized from economic opportunities.
- Have a higher degree of commercial readiness.
IRS may also implement a lottery or other process to allocate the capacity limitation if applications exceed the category’s capacity limitation. Stay tuned for more detail on the application process and facility eligibility.
IRS may also implement a lottery or other process to allocate the capacity limitation if applications exceed the category’s capacity limitation. Stay tuned for more detail on the application process and facility eligibility. If you have any questions or need help navigating tax credit transactions, please contact Drew Kervick and Megan Noonan at SRH Law.
*The information provided on this website does not and is not intended to constitute legal or tax advice. All information, content, and materials available on this site are for general informational purposes only.
