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The Inflation Reduction Act of 2022 (IRA) created an additional tax credit incentive of either 10% or 20% for solar and wind projects that benefit low-income communities. Given the tremendous economic value of this provision on many projects, final guidance has been eagerly awaited and on August 10, 2023, the IRS released most of that guidance. Now, taxpayers can better plan their tax credit strategy for projects that qualify.
The regulations detail the application process necessary in order to claim the low-income communities bonus credit program for the energy investment credit established pursuant to the IRA.
The IRA added new Section 48(e) to the Code, which increases the amount of the Section 48 credit with respect to eligible property that is part of a qualified solar or wind facility that is awarded an allocation of Capacity Limitation as part of the low-income communities bonus credit program.
This regulation provides definitions and requirements that are applicable for this program and affect applicants seeking allocations of the environmental justice solar and wind capacity limitation to increase the amount of the energy investment credit for which such applicants would otherwise be eligible once the facility is placed in service.
The regulation operates in conjunction with Revenue Procedure (Rev. Proc.) 2023-27 that was simultaneously issued, along with a Program Portal.
The Energy Department (DOE) will administer the program, and has also launched a landing page and will provide information about the application opening date and materials.
Revenue Procedure (Rev. Proc.) 2023-27
On August 10, the IRS also issued a revenue procedure that provides the process under Section 48(e) of the Internal Revenue Code (IRC) to apply for an allocation of environmental justice solar and wind capacity limitation (Capacity Limitation) commonly referred to as the low-income adder.
This revenue procedure provides the process for the Low-Income Communities Bonus Credit Program. These procedural rules provide guidance necessary to implement the Low-Income Communities Bonus Credit Program, including, in relevant part, information an applicant must submit, the application review process, and the manner of obtaining an allocation from the IRS.
Revenue Procedure 2023-27 provides clarifying and procedural guidance applicable to the low-income communities bonus credit program for the energy investment credit established pursuant to the Inflation Reduction Act of 2022 (Program). This revenue procedure is being issued simultaneously with the final regulations applicable to the Program provided in TD 9979.
What does CohnReznick think?
Now that the low income adder final regulations and procedures are public, all that remains is to see the final application-portal and procedures. At that time, taxpayers will be able to assess in an informed manner their eligibility for the adder, as well as the cost-benefit of pursuing the adder. Because the low income adder must be pre-applied for and pre-approved, it continues to present both practical and economic challenges to those who wish to pursue it, thus making a generally complicated solar, solar+storage, or wind transaction even more complex.
Also of note, the DOE will still need to go live with the portal in order to manage the timing of applications. While the application window is to be 60 days, developers are currently still at risk of the administrative process being dragged out -- and either missing the deadline to qualify for this adder or the complications with delaying of failing the placed in service rules. The guidance makes clear that this adder is not available for situations when the tax credit eligible equipment is already placed in service. As we await this update, it’s important to also note that the Treasury Department and the IRS are anticipating upwards of 100,000 applications annually for the Program.
Subject matter expertise
Joel Cohn
CPA, Partner, Project Finance & Consulting
Lee Peterson
JD, Senior Manager
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The Inflation Reduction Act
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.