February 16, 2023
The Inflation Reduction Act of 2022 (IRA) created several new tax incentives to encourage developing clean energy projects that would benefit underserved communities and individuals. Among these incentives, Congress included generous adders to the Section 48 investment tax credit (ITC) for qualified solar and wind facilities deployed in specified low-income communities or residential developments (low-income community benefit adders).
To receive these increased credit amounts, project owners need to apply for an allocation of the “environmental justice solar and wind capacity limitation” through a program jointly administered by the Treasury Department and the Department of Energy.
On Feb. 13, 2023, the IRS released Notice 2023-17 establishing the initial guidance on this capacity limitation program and the standards on which projects will be evaluated, and promising more guidance to come.
Categories for Qualified Wind and Solar Projects
Solar and small-scale wind generation facilities are currently eligible for up to a 30% ITC under Section 48. Facilities with a maximum net production of less than 5 megawatts are potentially eligible for additional ITCs if they qualify for the low-income community benefit adders under Section 48(e)(2)(A). Notice 2023-17 reframes the low-income community benefit statutory requirements into four categories of facilities:
|Located in a low-income community (defined in Section 45D)|
|Located on federally identified Indian land|
|Located on a qualified low-income residential building development and the financial benefit of the electricity produced is equitably allocated to the residents|
|Facility provides at least 50% of the financial benefit of the electricity produced to low-income households|
Notice 2023-17 does not define “financial benefit” for these purposes, other than to reiterate from the statute that below-market electricity is a financial benefit. The notice promises further clarity on that subject in future guidance.
If a project owner believes a generating facility falls into one of these four categories, it does not automatically receive the additional credit. The taxpayer must request an allocation of an annual 1.8 GW environmental justice solar and wind capacity limitation from the Treasury to get the increased credit amounts. Notice 2023-17 marks the first step to understanding how taxpayers can apply for and receive such an allocation.
Allocation of the Capacity Limitation
The Treasury Department and IRS are responsible for defining selection criteria and establishing an allocation scheme. Treasury has expressly allocated the 1.8 GW capacity limitation into four categories for the 2023 calendar year, as follows:
|Category 1: Located in a Low-Income Community||700 MW|
|Category 2: Located on Indian Land||200 MW|
|Category 3: Qualified Low-Income Residential Building Project||200 MW|
|Category 4: Qualified Low-Income Economic Benefit Project||700 MW|
Any amounts not allocated from one category may be reallocated into another in the service of deploying as many projects as possible. Any amounts still unused will be carried forward into 2024.
Treasury is still developing its selection criteria, but it has indicated there will be a focus on facilities that (i) are owned or developed by community-based organizations and mission-driven entities, (ii) encourage new market participants, (iii) provide significant benefits to low-income communities and people excluded from economic opportunities, and (iv) have a higher level of commercial readiness. It is promised that future guidelines will thoroughly describe these criteria.
Applications for Capacity Allocation
The Department of Energy is responsible for administrating and evaluating low-income community benefit applications. Applications will be accepted in stages in 2023, starting with a 60-day application window in Q3. This first window will accept applications only for Category 3 and Category 4 facilities. Category 1 and Category 2 facility applications will be taken at a later point in 2023, yet to be determined. Further guidance on the application procedure and facility eligibility for all categories will be provided by the Treasury Department and IRS.
Current guidance permits only the owner of a facility to apply for an allocation of the capacity limitation, and owners can apply for only one category of low-income community benefit in 2023. If the total megawatts of applications exceed the capacity limitation reserved for each category, then a lottery or other processes may be used for allocations. Applicants that do not receive an allocation can apply for a future allocation in a different year, presumably in another category. No waitlist will be created from 2023 applications that did not receive an allocation.
To be eligible for a low-income community benefit ITC increase, the facility must be placed in service within four years after the date the applicant received its allocation of capacity limitation. Eligible property is considered placed in service in the earlier of the taxable year in which the period for depreciation begins or the taxable year in which the property is placed in a condition or state of readiness for a specifically assigned function. Facilities placed in service prior to being awarded an allocation of capacity limitation are not eligible to receive an allocation.
Taxpayers will need to plan their construction timelines carefully given these placed-in-service considerations in connection with the limited 60-day application windows, the inability to submit under multiple categories and the limitation to a single application each year.
An Important Start but Many Open Questions
As mentioned multiple times, the guidance in Notice 2023-17 applies only to 2023 applications, which effectively renders this first year a pilot year. Treasury and the IRS acknowledge that further guidance is required in some key areas and have left room for the rules to change.
A mechanical, but very important, clarification will come with the release of application forms and procedural guidelines. These will have to be released prior to the promised Q3 2023 application window for Category 3 and 4 projects.
At the same time, taxpayers should expect further resolution of the definitions of “financial benefit” for Category 3 and 4 projects. It is already clear that reduced-cost electricity will provide one such benefit, but the notice hints that other benefits will be refined. Additionally, the notice’s restatement of statutory references to low-income communities and environmental justice suggests a direction to the program’s main goals. Future guidance likely will describe benefits designed to encourage new market participants, provide social and economic uplift to communities impacted by pollution and adverse health effects, and benefit those marginalized from economic opportunities.