On May 31, 2023, the Treasury Department and IRS released additional guidance to taxpayers seeking more details on the procedures to apply for additional investment tax credit (ITC) “adders”. Under the Inflation Reduction Act, up to 1.8 GW of additional tax credit allocations are made available to taxpayers who are awarded such allocation and thus able to obtain either a 10% or 20% increased tax credit for solar and wind facilities in low-income communities.
Earlier, the IRS issued an initial Notice (Notice 2023-17) which provided preliminary information on this tax credit allocation program. Now, via proposed rulemaking, the proposed rules (REG-110412-23, RIN 1545-BQ81) follow with some modifications the initial guidance that was released in February.
Explanation of proposed rules
According to the new guidance, the proposed rules cover specific definitions and requirements regarding the following topics:
(1) The definition of facility based on single project factors
(2) The definition of “in connection with” to demonstrate what it means for energy storage technology to be considered part of eligible property of a qualified facility
(3) Definitions of the terms “financial benefit” and “electricity acquired at a below market rate” under section 48(e)(2)(D), as well as a manner to apply such definitions, appropriately, to Category 3 facilities that are part of qualified low-income residential building projects, and Category 4 facilities that are part of qualified economic benefit projects
(4) The definition of “located in” for relevant geographic criteria
(5) A rule for facilities placed in service prior to an allocation award
(6) Reservations of Capacity Limitation allocation for applicant facilities that meet certain Additional Selection Criteria
(7) Sub-reservations of Capacity Limitation allocation for facilities built in a low-income community
(8) Application materials demonstrating facility viability in order to allow for an efficient allocation process
(9) Documentation and attestations to be submitted when a facility is placed in service
(10) Post-allocation compliance including disqualification and recapture of section 48(e) increases
Before these proposed rules are adopted as final rules, public comments can be submitted to the IRS by June 30, 2023.
What does CohnReznick think?This most recent guidance continues to add clarity to the low-income adder compliance regime. It should be noted, however, that this recent guidance does focus on the near-term – i.e., 2023 applications – and it’s likely that further additional changes may come, particularly for 2024 and beyond. Also, the rules pertaining to the inclusion of storage provide additional, and somewhat unexpected, opportunities. Of particular note is a modification of the prior “75% cliff” test for storage, now setting the cliff at 50%.
Subject matter expertise
JD, Senior Manager
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The Inflation Reduction Act
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. 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 specific to, among other things, your individual facts, circumstances and jurisdiction. 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.