Bloomberg Law
Aug. 16, 2023, 8:45 AM

IRS Clarifies Clean Energy Credits for Low-Income Communities

Nancy Dollar
Nancy Dollar
Hanson Bridgett

Final Treasury regulations and Revenue Procedure 2023-27 clarify how to apply and qualify solar and wind facility projects for the Low Income Communities Bonus Credit Program. Established under the Inflation Reduction Act, the program boosts tax credits by 10% or 20% for eligible properties in targeted communities.

The Department of Energy has launched the program page, which it will update in the coming weeks with an application portal and user guide. The opening date for registration and submissions through the application portal will be announced in early September. In the meantime, applicants can prepare materials based on the available guidance.

Instead of the staggered two-phased process outlined in the initial guidance, the new review and selection procedures feature a single 30-day initial submission period. All applications submitted within the first 30 days of the start of the program year will be treated as submitted on the same date.

Unlike the prior guidance, applications also will be open across all four eligible project categories. The IRS will begin awarding bonus tax credit allocations at the end of the year. Depending on the remaining capacity, applications may be considered on a rolling basis through early 2024.

Apart from the revised application process, the Department of the Treasury also adjusted language in the final rules in response to taxpayer concerns. These changes include further language on project eligibility and ownership criteria for partnerships owned and managed by tax-exempt entities.

Solar or wind facilities must have a maximum net output of less than 5 megawatts to be eligible for the bonus tax credit program. To prevent attempts to circumvent the net output limitation, the final regulations incorporate certain single project factor tests provided under Notice 2018-59 and Notice 2013-29.

In response to public concerns, however, the final regulations clarify that whether multiple facilities or energy properties are operated as part of a single project depends on the relevant facts and circumstances, with no single factor or factors as determinative.

The final regulations also considered comments to better reflect existing financing structures for tax credit monetization to preserve priority consideration for qualified tax-exempt entities. For example, under the proposed rules, there was a risk that tax-exempt applicants owning and managing a facility through a limited liability company or partnership wouldn’t be considered qualified as priority applicants under the ownership criteria.

Additional language in the final regulations clarify that a qualified solar or wind facility owned by an entity treated as a partnership can still be eligible for the priority reserve.

In such cases, an entity that meets the ownership criteria must have at least a 1% direct or indirect interest in each material item of partnership income, gain, loss, deduction, and credit of the partnership. In addition, for all times during the partnership’s existence, the entity must be either a managing member or general partner under state law of the partnership or the direct owner of 100% of the equity interests in the managing member or general partner.

The IRS procedures list the general and category-specific documents and attestations required for each application. Reviewers may contact applicants to address missing or incorrect information within a 21-day cure period or else the application will be withdrawn.

Given the accelerated timeline and level of detail on submissions, taxpayers can begin gathering the necessary materials for planning projects eligible for bonus tax credit awards under the program.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Nancy Dollar is a senior counsel at Hanson Bridgett in San Francisco and advises businesses, owners, and investors on federal income tax matters. Her practice includes planning for specialty credits and incentives, primarily for private companies.

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