Treasury provides energy community adder credit guidance under the IRA

For purposes of Internal Revenue Code Sections 45, 45Y, 48, and 48E, the following are the three location-based categories of an energy community: brownfield category, statistical area category, and coal closure category.

See the Notice for precise details on the following. 

A brief summary is provided here:

1) Brownfield Category: The Notice draws heavily from cross-references to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). A brownfield site, for purposes of the Brownfield Category, is defined in 42 U.S.C. Section 9601(39)(A) as real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant (as defined under 42 U.S.C. Section 9601) and certain mine-scarred land (as defined in 42 U.S.C. Section 9601(39)(D)(ii)(III)). A brownfield site does not include the categories of property described in 42 U.S.C. Section 9601(39)(B).

Safe Harbor for Brownfield Sites

The Notice establishes a brownfield safe harbor whereby the IRS will accept that a site meets the definition of a brownfield site under 42 U.S.C. Section 9601(39)(A) if it satisfies at least one of the three conditions described below, and the site is not described in 42 U.S.C. Section 9601(39)(B):

a. The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a brownfield site under 42 U.S.C. Section 9601(39)(A).

b. An ASTM E1903 Phase II Environmental Site Assessment has been completed confirming presence of a hazardous substance.

c. For projects with a nameplate capacity of not greater than 5MW (AC), an ASTM E1527 Phase I Environmental Site Assessment (Phase I Assessment) has been completed with respect to the site in accordance with the most current applicable version of the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process of ASTM International.

2) Statistical Area Category: The Statistical Area Category includes MSAs and non-MSAs.

a. The Notice states that the category or statistical areas that are considered MSAs are groups of counties, or their equivalents, as grouped by the OMB, and OMB Bulletin No. 18-03 from April 18, 2018, is to be relied upon for all purposes of this Notice. Regarding MSAs, see Appendix A of the Notice. 

Non-MSAs: In general, non-MSAs are defined as nonmetropolitan areas as identified in the May 2021 Metropolitan and Nonmetropolitan Area Definitions published by the Occupational Employment and Wages Statistics division of the U.S. Bureau of Labor Statistics (BLS).  See also Appendix A of the Notice.

b. Fossil Fuel Employment: For purposes of determining whether an MSA or non-MSA is in the Statistical Area Category based on Fossil Fuel Employment, the relevant direct employment is determined by the number of people employed in the industries identified in eight categories by the 2017 North American Industry Classification System. See Appendix B of the Notice. The Notice gives 2017 NAICS codes and descriptions that should be used.

Unemployment Rate: For purposes of determining whether an MSA and non-MSA has an unemployment rate at, or above, the national average unemployment rate for the previous year, the unemployment rates are determined using the Local Area Unemployment Statistics (LAUS) annual data for counties from the Bureau of Labor Statistics and the comparison is made using unemployment rates for the previous calendar year. The reference data for this category will be updated by the Treasury and IRS once such 2022 data is available. At that time, the data will apply for all of 2023, until updated in May of 2024, at which time, an annual May-to-May schedule will apply.

Fossil Fuel Tax Revenue: The Treasury has asked for further public comment and provided no clarity on this issue in the Notice.

3) Coal Closure Category: 

For more information, refer to Appendix C of the Notice.

Census tracts: Census tract is defined and delineated for this purpose under the Notice as being by the Census Bureau for purposes of the 2020 Decennial Census (as described in 83 FR 56277).

Closed coal mine: The term “closed” is now defined by the Notice. Multiple considerations are involved, and the Notice also asks for taxpayer assistance in correcting irregular location information and states that the IRS will annually correct any such errors by separate Notice.

Retired coal-fired electric generating unit: This term is also now defined by reference to EIA forms 860M or form 860, or, as applicable, those forms from years 2016-2022 or 2010-2015 respectively.

Directly adjoining: This term is also defined if census tract boundaries touch at any single point; including if there is literally a single point of “contact”.

The Treasury Department and the IRS also intend to propose regulations that will be applied to taxable years ending after April 4, 2023. However, until the issuance of the proposed regulations, taxpayers may rely on the rules described in sections 3 through 6 of this Notice, regarding the energy community categories, general rules for determining whether a location requirement is met for the safe harbor for brownfields sites, and, most notably, the rules for beginning of construction (more detail below).

• Determining location eligibility at a specific time

In general, the Notice states that, for purposes of the PTC under Section 45 (pre-2025) and 45Y (2025 and beyond), whether a qualified facility is located in an energy community (and eligible for the increased credit amounts or rates) is determined separately for each taxable year of the qualified facility’s 10-year credit period. (See below for an exception to this rule for projects that are in an energy community when construction begins). For purposes of Section 45 and 45Y, a qualified facility is treated as located in an energy community during a taxable year if it is located in an energy community during any part of the taxable year.

In general, for purposes of Section 48, whether an energy project is placed in service within an energy community (and eligible for the increased credit rates) is determined as of the placed-in-service date (the date the credit is determined).Similarly, for purposes of Section 48E, whether a qualified facility or energy storage technology is placed in service within an energy community (and thus eligible for the increased credit rates) is determined as of the placed-in-service date (the date the credit is determined).

However, as noted above Notice 2023-29 creates an exception to these rules, and provides for a “special rule” that effectively may grandfather both PTC and ITC projects.

• Special rule for beginning of construction

Per the Notice, for purposes of determining a beginning of construction date for Section 45, 45Y, 48, and 48E, the previously issued notices under Section 45 and 48 that provide for determining when construction begins apply here. Therefore, principles similar to those provided in the beginning of construction notices apply for purposes of establishing eligibility for energy community bonus or “adder” credits.

Accordingly, per Notice 2023-29, and purposes of Section 45, 45Y, 48, and 48E, if a taxpayer begins construction of an energy community project on or after Jan. 1, 2023, in a location that is an energy community as of the beginning of construction date, then, with respect to that energy community project, the location will continue to be considered an energy community for the duration of the credit period for Section 45 and 45Y, or on the placed-in-service date for Section 48 and 48E. This should alleviate previous concerns over future changes in data over time, such as unemployment statistics.

Note: On April 11, 2023, the Treasury and IRS made a correction and substantive change to Notice 2023-29.  The original version of the Notice has now been replaced with the updated version on the official IRS website linked in this article.

With this official correction, the IRS now makes it clear that with respect to the beginning of construction safe harbor for purposed determining the location eligibility of a project within an energy community shall only be made available to projects on which construction began on or after Jan. 1, 2023. 

This means that for projects that began construction prior to 2023, such projects will not be allowed to rely on the project’s location at the time of the beginning of construction for purposes of determining the qualification of the project being in an energy community location for the entire credit period or for the year placed in service.

Furthermore, the Notice addresses previous taxpayer questions regarding projects that straddled qualifying and non-qualifying tracts. An energy community project is treated as “located in” or “placed in service within” an energy community, if the energy community project satisfies either the Nameplate Capacity Test as described or the square footage test (Footprint Test) as described below.

If an energy community project has a nameplate capacity, one must apply the Nameplate Capacity Test while an energy community project that has no nameplate capacity must apply the Footprint Test.

• Nameplate Capacity Test: Per the Notice, a project that has nameplate capacity is deemed either located in, or placed in service in, an eligible energy community if 50% or more of the energy community project’s nameplate capacity is in an area that qualifies as an energy community. For this rule, the nameplate capacity percentage is determined by dividing the nameplate capacity of that project’s energy-generating units that are physically located in an energy community by the total nameplate capacity of all the energy-generating units of the entire project.
• Footprint Test: For projects that don’t have a nameplate capacity, such projects must instead apply a Footprint Test. In this case, projects are to be deemed located in, or placed in service in, an eligible energy community if 50% or more of the project’s square footage is within a geographic area that qualifies as an energy community. This percentage is determined by dividing the square footage of the project that is located in an energy community by the total square footage of the project.

A taxpayer claiming the increased credit amount or rate for meeting energy community bonus credit requirements must meet the general recordkeeping requirements under IRC Section 6001 in order to substantiate that an energy community project is located, or has been placed, in service in an energy community. 

According to the Notice, Section 6001 provides that every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records as the Secretary may from time to time prescribe. 

Section 1.6001-1(a) of the Treasury Regulations for IRC section 6001 provides that any person subject to income tax must keep such permanent books of account or records as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax. 

Section 1.6001-1(e) of the regulations also provides that the books and records required by Section 1.6001-1 must be retained so long as the contents thereof may become material in the administration of any internal revenue law.

As part of this release, the Department of the Treasury and IRS have partnered with the Interagency Working Group on Energy Communities to provide a searchable mapping tool that helps identify areas that may be eligible for the energy community bonus. Note that brownfields sites are not shown on this map and as discussed above, as of the date of this alert, the unemployment rates need to be updated for 2022 data.

The Energy Communities IWG is also releasing a Memorandum of Understanding between 11 federal agencies to work together to get new resources into energy communities. Agencies will support Rapid Response Teams, which provide more targeted, on-the-ground assistance, resources, and technical guidance to communities and regions facing acute and unique challenges.

This new application of the beginning of construction guidance in this Notice is now one of two separate IRA-related guidance notices that rely, in part, on pre-IRA beginning of construction rules. It therefore appears that the beginning of construction rules for purposes of Notice 2022-61 – regarding Prevailing Wage and Apprenticeship (PWA) – now apply independently for PWA purposes and those very same rules now apply for purposes of this Notice, 2023-29 and energy community eligibility.  

While we presume that every taxpayer may only meet the beginning of construction rules once per project or facility, it appears that whether one can rely on those rules for more than one purpose on the same project is independently determined by the unique factors and separate rules specific to each component of the respective tax credit, i.e., PWA bonus credit versus Energy Community adder, etc.

Given that qualification for the Brownfields Category may require additional assessments of a specific site, we expect that may require involvement of service providers with capabilities with expertise in that area. Qualification for the Statistical Area Category and Coal Closure Category appear to require a more mechanical analysis of whether a project will qualify.

Finally, be sure that you are reading a correct copy of this Notice. As discussed above, a corrected version was released April 11, 2023.

We’ll be watching for the release of the forthcoming proposed regulations and will report to you when they are published.

Joel Cohn, CPA, Partner

410.895.7820

Lee Peterson, JD, Senior Manager

404.847.7744