Final Regulations Issued for Section 48 Energy Investment Tax Credit
TL/DR –
The US Department of the Treasury and the Internal Revenue Service have unveiled final regulations for the energy investment tax credit (ITC) under Section 48 of the Internal Revenue Code. The ITC is applicable for property for which construction begins before January 1, 2025, and a “tech-neutral” clean energy investment credit under Section 48E applies to property that begins construction on or after this date. The regulations, which haven’t been revised since 1987, provide a function-oriented approach to determining eligible energy property, introduce requirements for prevailing wage and apprenticeship, and introduce a single project rule, among other updates.
US Treasury and IRS Release Final Energy Investment Tax Credit Regulations
The U.S. Department of the Treasury and Internal Revenue Service released final regulations for the energy investment tax credit (ITC) under Section 48 of the Internal Revenue Code, modified by the Inflation Reduction Act (IRA).
These regulations, not revised since 1987, address several issues from new IRA provisions and technological advancements. They follow previous IRA regulations on prevailing wage, apprenticeship requirements, and tax credit transfer rules.
Key Dates for the ITC
The ITC is applicable for property with construction commencing before January 1, 2025. For properties starting construction on or after this date, the tech-neutral clean energy investment credit under Section 48E is available. The Section 48E credit embraces a tech-neutral approach for properties with a predicted zero greenhouse gas emissions rate.
Defining Energy Property
Treasury has opted for a function-oriented approach to identify equipment or components eligible for ITC. The rules characterize energy property as a unit of energy property that is an integral part of energy property. Components of a unit of energy property are functionally interdependent if their service is dependent on each other to generate or store energy.
Single Project Rule and Ownership Requirements
The proposed regulations posed challenges for owners of multiple energy properties. An overly rigorous rule could have prevented these aggregated projects from benefiting from the PWA requirements. The final regulations require four or more factors to be present to be considered a single project. Also, taxpayers must directly own a fractional interest in the entire unit of energy property to qualify for an ITC.
Qualified Biogas Property
The regulations state that gas upgrading equipment is “cleaning and conditioning property” that is qualified biogas property. The final regulations also clarify the point at which measurement of the methane percentage takes place. Flaring will not disqualify a qualified biogas property, provided it is primarily for sale or productive use of biogas and complies with all relevant laws and regulations.
Qualified Interconnection Property
The final regulations confirm that qualified interconnection property may be included in the eligible basis of energy property, but it is not itself energy property. Costs paid or incurred, if properly chargeable to the capital account of the taxpayer, are reduced by any utility or non-utility payments. The final regulations confirm that the 5 MW limitation for the qualified interconnection property is measured at the level of the energy property.
Future Regulations
Additional IRA guidance may be released before January 20, 2025, including final regulations for the technology-neutral clean energy credits (Section 48E and its counterpart, Section 45Y for clean energy production), and regulations for the credit adders for domestic content and energy communities.
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