Treasury/IRS Propose New Rules for Implementing Section 48 Energy Tax Credits

By: Bryen Alperin, Partner and Managing Director of Renewable Energy & Sustainable Technologies, Foss & Company


The U.S. Treasury Department and IRS have recently announced the release of proposed regulations (REG-132569-23) for publication in the Federal Register. These regulations are set to amend the existing rules under section 48, incorporating modifications from the Inflation Reduction Act of 2022 (IRA), previous legislative changes, and various administrative guidelines. The Notice of Proposed Rulemaking (NPRM) extends over 127 pages and aims to provide both clarifications and updates concerning the energy tax credit.

Initial Foss Takeaways: Key Points for Investors

  • Uncertainty for Biogas Equipment: In a surprising outcome, the proposed rules indicate that “gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property”. However, it emphasizes the eligibility of costs associated with essential components of biogas projects, such as equipment for cleaning and conditioning the gas. This has caused confusion and uncertainty in the RNG industry, as many projects feature equipment that both cleans and concentrates the gas. The implication of the proposed rules is that investors will need to do a detailed review of the process flow diagrams and determine which costs are associated with equipment which cleans or conditions gas versus equipment that concentrates gas. Depending on the determination, large portions of existing RNG projects may not qualify for the ITCs they thought they would. The industry will be lobbying to have this definition changed, or further clarified.
  • New “Placed in Service” Criteria: The NPRM proposes a new definition of “placed in service” for Section 48, replacing long-relied-on Section 46 regulations. The definition is as expected and states that projects generating tax credits are considered “placed in service” either in the taxable year when depreciation starts or when the energy property is ready for operation.
  • Energy Storage Definitions: The NPRM defines electrical energy storage property, thermal energy storage property, and hydrogen energy storage property for the first time. Of note, hydrogen storage may qualify for energy storage tax credits only if the hydrogen being stored is used exclusively for energy production. This could include hydrogen storage for heat generation, electricity production, or fuel cell vehicles (but not fertilizer). Further guidance on documentation for hydrogen storage sites is anticipated.
  • Boost for Offshore Wind Projects: The eligibility of subsea cables as part of qualifying costs for offshore wind projects marks a significant win for the industry. This resolves uncertainties around the inclusion of transmission and distribution infrastructure, potentially propelling growth in the offshore wind sector.
  • Recapture Provisions for Prevailing Wage and Apprenticeship Adder (PWA): Projects must consistently meet prevailing wage and apprenticeship requirements over a five-year period to avoid recapture. This recapture would apply even if the tax credit is purchased on a transferable basis. Taxpayers will need to demonstrate compliance annually by filing a form that includes information about the payment of prevailing wages, or risk having tax credits disallowed. This will require investors to do ongoing compliance monitoring and reporting, even if they are just buying tax credits on a transferable basis.

Other Notable Amendments and Clarifications:

  • Expansion of Eligible Energy Property: Updates definitions for the types of energy property eligible for the energy credit, including newer categories added by the IRA. This includes the inclusion of solar process heat equipment for industrial or commercial use, a category which previously had some ambiguity.
  • Clarification on Credit Transfer Rules: Specifies how new credit transfer rules apply to energy credit recapture rules, especially in cases of non-compliance with PWA requirements.
  • Eligibility of Specific Equipment: Defines the eligibility of power conditioning and transfer equipment, like the above-mentioned subsea export cables in offshore wind projects and certain equipment in onshore substations.
  • Guidance on Qualified Interconnection Costs:

    Addresses costs that can be included in the basis of some lower-output energy properties. Property incapable of storing or generating electricity or thermal energy cannot avail the 1 MW exception. Consequently, this renders all electrochromic glass properties, fiber-optic solar energy properties, and microgrid controller projects subject to the prevailing wage and apprenticeship stipulations.

  • Additional General Requirements and Rules: Covers a range of topics such as functionally interdependent components, integral property parts, the application of the “80/20 Rule” to retrofitted energy property, dual-use property, and the separate ownership of energy property components.

Public Interaction and Future Developments

The Treasury Department has also released additional descriptions and commentary on these regulations:

Stakeholders are invited to comment on the proposed regulations and request to speak or outline topics for discussion at a public hearing scheduled for February 20, 2024. The deadline for these submissions is 60 days after the publication of the regulations in the Federal Register, expected on November 22, 2023. If no outlines are received by then, the public hearing will be cancelled.

The release of the proposed regulations marks a significant step in refining the legal framework governing energy credits under Section 48. This comprehensive document offers a detailed overview of the expected changes and their implications. Foss & Company anticipates providing further analysis and observations in the coming weeks, contributing to a deeper understanding of these regulatory developments.

Read the related IRS release —IR-2023-220 (November 17, 2023) for more information.