IRS publishes additional guidance on the Section 48C Advanced Energy Project Tax Credit
On May 31, 2023, the Internal Revenue Service (IRS) released Notice 2034-44 (the Notice) as additional guidance for the Advanced Energy Project Credit (AEP). The Notice clarifies and modifies the Initial Guidance found in Notice 2023-18, which established a program under Section 48C(e)(1) of the Internal Revenue Code (Code) to allocate $10 billion of credits for investments in qualifying advanced energy projects (the Program).
As stated in the Initial Guidance, the IRS anticipates at least two allocation periods for the credits, with not less than $4 billion of the credits going to projects in energy community census tracts over the life of the program. The Initial Guidance also provided definitions for a number of terms related to the Program.
The Initial Guidance further provided that, to be considered for Round 1 of the allocations, taxpayers must submit concept papers to be reviewed by the IRS. Once reviewed, the Department of Energy (DOE) will provide the taxpayer with a letter either encouraging or discouraging the taxpayer from applying for the credits. Applications will be accepted starting 7 days after the date of the DOE’s letter and must be submitted no more than 45 days after the application window has opened.
The Initial Guidance made it clear that the DOE will only make a recommendation if it determines that a project has a reasonable expectation of commercial viability and merits a recommendation based on forthcoming additional guidance. The Notice comprises the additional Program guidance referenced therein.
According to the Notice, concept papers for Round 1 are due by July 31, 2023, and the IRS will make all Round 1 allocation decisions by March 31, 2024.
The Notice additionally provides general guidance related to Code Section 48C and the Program, including definitions; clarifications; information on the application process for the Program; reporting obligations to the IRS and the DOE; information on when the DOE’s online application portal, referred to as the “eXCHANGE portal,” will begin accepting concept papers; and the timeline for submitting an application for credits.
Definition of “facility” for 48C and 45X
Section 3 of the Notice provides that, for purposes of the AEP, a “facility” is “the eligible property that makes up the qualified investment that is part of the qualifying advanced energy project” (Section 48C Facility). For purposes of the Section 45X advanced manufacturing production credit, “all tangible property that comprises an independently functioning production unit that produces one or more eligible components will be treated as a single facility” (Section 45X Facility).
The term “production unit” will be defined in forthcoming guidance addressing a variety of Section 45X issues. Under Section 45X, components that were produced at a facility that has been allocated credits by the Program would not qualify for the Section 45X credits.
The Notice provides an example of the interaction between Section 45X and Section 48C. The example explains that, where a taxpayer operates a single manufacturing site with two production units, and one production unit receives an allocation of credits under the Program and the other does not, the production unit that receives an allocation of credits fails to qualify as a Section 45X Facility, but the production unit that did not receive credits can qualify as a Section 45X Facility, even though both are part of the same manufacturing site.
With this, taxpayers will be able to take both credits on the same site. The impact of this practice will likely be clearer once the term “production unit” is defined.
Placed-in-service requirement
Section 4 of the Notice explains that Program-eligible property must have been placed in service in the earlier of either (i) the year in which the taxpayer begins to take deprecation deductions or (ii) “the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.” This requirement is notable because, as the Notice explains, otherwise eligible property placed in service prior to being awarded an allocation of credits under the Program is no longer eligible for such allocation. This effectively means that taxpayers may have to wait until 2024, when Round 1 of the allocation awards will be complete, to place eligible projects into service.
Concept papers and program applications
As explained in the Initial Guidance, a taxpayer must submit a concept paper and an application through the eXCHANGE portal. The Notice provides a program timeline outlining how the Program will proceed, as well as outlines key dates and processes that the DOE and IRS will use in the approval process.
Energy community census tracts
Of the $10 billion in credits allocated, not less than $4 billion must be allocated to qualified investments that are located within energy communities census tracts. The Notice provides that a Section 48C Facility is treated as located within an energy communities census tract if 50 percent or more of its square footage is in an area that qualifies as an energy communities census tract. A list of the qualifying census tracts can be found in Appendix C of the Notice.
Selection criteria
The Notice provides the selection criteria that the DOE will use to determine which qualifying advanced energy projects merit a positive recommendation. Section 48C(d)(3)(A) provides that only projects with commercial viability will be considered. Further, Section 48C(d)(3)(B) provides that the IRS and DOE will take into consideration projects that:
- Will provide the greatest domestic job creation (both direct and indirect) during the credit period
- Will provide the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases
- Have the greatest potential for technological innovation and commercial deployment
- Have the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emission (based on costs of the full supply chain), and
- Have the shortest project time from certification to completion.
The Notice introduces technical review criteria by which the DOE will implement the above selection criteria. The technical review criteria are described in significant detail in Appendix B of the Notice, but they can be summarized as follows:
- Commercial viability. The first criterion of commercial viability is a key criterion for determining which qualifying advanced energy projects merit consideration based on Section 48C(d)(3)(A) and, consistent with Section 48C(d)(3)(B)(iv) and (v), will help to identify projects with the lowest levelized cost and shortest time frame for completion.
- Greenhouse gas emissions impacts. The second criterion of greenhouse gas emissions impacts, consistent with Section 48C(d)(3)(B)(ii), will help to identify projects with the greatest net impacts in avoiding or reducing anthropogenic emissions of greenhouse gases.
- Strengthening US supply chains and domestic manufacturing for a net-zero economy. The third criterion of strengthening US supply chains and domestic manufacturing for a net-zero economy is consistent with Section 48C(d)(3)(B)(ii) and (iii), and will help to identify impacts on domestic job creation and the potential for technological innovation and commercial deployment.
- Workforce and community engagement. The fourth criterion of workforce and community engagement, consistent with Section 48C(d)(3)(B)(i), (ii), and (v), will look to additional facts that can inform how and to what extent projects will lead to domestic job creation, reduce barriers that might otherwise increase project completion time, and have an impact on avoiding or reducing local pollution, including non-greenhouse gas air pollution.
The Notice provides that the four technical review criteria are also interrelated and work together to help further multiple goals under the statute, and they are consistent with the Inflation Reduction Act’s broader goals of increasing the deployment of renewable energy resources, increasing energy security and domestic investment in the renewable energy supply chain, and helping to ensure that benefits of the clean energy economy are shared broadly.
Certification and forfeiture of credits
A taxpayer receiving an allocation award must, within two years of receiving its allocation letter, notify the DOE through the eXCHANGE portal that the certification requirements have been met. Upon notification, the DOE will notify the IRS of the same, and the IRS will certify the Section 48C Facility. The taxpayer must then notify the DOE through the eXCHANGE portal that the Section 48C Facility has been placed in service within two years of certification. Failure to place the facility in service within the required two-year period or failure to notify the DOE of such placement in service will result in forfeiture of the credits allocated to the taxpayer.
What can DLA Piper provide?
With only $10 billion in credits available, understanding the guidance in the Notice is essential to ensuring concept papers and applications meet all requirements and deadlines. While this alert provides an overview of the process to apply for credits under Section 48C, there are additional nuances that companies are encouraged to consider.
At DLA Piper, we guide our clients through the process of obtaining tax credits created by the Inflation Reduction Act, and we have additionally assisted companies in navigating the earlier iteration of this program. For more information, please do not hesitate to reach out to any of the authors.
