IRS Releases Long-Awaited Updates to Investment Tax Credit Regulations


Late last week, the Internal Revenue Service (“IRS”) and Department of the Treasury released the long-awaited proposed regulations (the “Proposed Regulations”) relating to investment tax credits under Section 48 of the Code (the “ITC”).  These regulations help to clarify what qualifies as energy property that is eligible for the ITC (Section 1.48-9), provide additional ITC-specific rules surrounding the increased credit amount as a result of satisfying the prevailing wage and apprenticeship requirements enacted by the Inflation Reduction Act (Section 1.48-13), and adopt various other rules relating to the ITC (Section 1.48-14).  Taxpayers may generally rely on the proposed regulations at least until final regulations are promulgated (the reliance period varies by provision, to some degree), and parties interested in commenting on the proposed regulations before final regulations are issued may submit written comments to the IRS until 60 days after the proposed regulations are formally publish in the Federal Register, which publication is expected to be on November 22, 2023.

Select specific provisions are described in more detail below.  At a high level, several takeaways of the Proposed Regulations include: confirming that owners of projects including battery energy storage systems and property eligible for the production tax credit (the “PTC”), such as solar or wind, may claim the ITC for batteries and the PTC for solar or wind (or other PTC-eligible property), indicating that the apprenticeship requirements that apply to many projects for the increased credit amount to the 30% ITC do not apply during the five-year recapture period, and clarifying ITC-eligibility for property that is jointly owned by multiple taxpayers.

Section 1.48-9 – Definition of Energy Property

Requirements for Energy Property

The Proposed Regulations generally take a technology neutral approach to identifying property that is eligible for the ITC.  These rules will be helpful in determining what property is eligible for the ITC, particularly with respect to newly eligible property such as battery energy storage systems, biogas property, electrochromic glass, and microgrid controllers.  As a general matter, the Proposed Regulations provide that ITC-eligible property includes all equipment of an otherwise-eligible project that is either functionally interdependent equipment or is an integral part of the applicable energy property.  Functionally interdependent for this purpose means that each component of property is dependent upon the placing in service of each of the other components to perform the applicable function, such as storing energy, producing electricity, producing thermal energy, producing biogas, or producing thermal energy. Integral parts of energy property must be property that is used directly in the intended function of the applicable energy property, and includes properly capitalized costs for O&M roads, certain buildings, and subsea cables and voltage transformers necessary for off-shore wind facilities to condition electricity for use on the electrical grid.  Several specific applications are described below.

Section 1.48-13: Rules Relating to the Increased Credit Amount for Prevailing Wage and Apprenticeship Requirements

The Proposed Regulations also provide much needed clarity regarding the application of the apprenticeship requirements in the alteration or repair of projects and recapture, as well as other key points listed below.

Within this section, the Proposed Regulations also provide clarification regarding the 1 MW (AC) exception for claiming the 30% ITC.  First, the determination whether an energy project has a maximum net output of less than 1 MW is determined based on the nameplate capacity.  Second, the Proposed Regulations indicate that electrochromic glass property, fiber-optic solar energy property, and microgrid controllers are not eligible for the 1MW (AC) exception because such energy properties do not generate electricity or thermal energy. Finally, special rules are provided to assist taxpayers in determining theelectrical or thermal generating capacity of certain types of energy property, such as electrical energy storage property, hydrogen energy storage property, specified clean hydrogen production facilities, and qualified biogas property.

Section 1.48-14 – Various Rules Applicable to Energy Property

The Proposed Regulations provide additional rules regarding retrofitted energy property, incremental cost limitations, ownership of energy property and qualified interconnection costs.


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National Law Review, Volumess XIII, Number 324