Treasury Issues Preliminary Guidance on Energy Community Bonus Credit Qualification
Legal Alert
The U.S. Department of the Treasury earlier today released Internal Revenue Service (IRS) Notice 2023-29, Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022 (the Notice). The Notice indicates that the Treasury Department and the IRS intend to issue proposed regulations regarding qualification for the energy community bonus credits that were added by the Inflation Reduction Act of 2022 (the IRA) and provides preliminary guidance that can be relied upon prior to the issuance of those regulations.
The IRA added bonus credits for purposes of calculating the production tax credit (PTC) and investment tax credit (ITC) for an energy project that is located in or placed in service within in an “energy community.” The energy community bonus credit will also apply to a project that qualifies for the clean electricity production credit and the clean electricity investment credit that were added by the IRA and will be effective with respect to qualified projects placed in service after December 31, 2024. For purposes of the bonus credit, energy communities include certain brownfield sites (the Brownfield Category), statistical areas that meet certain employment or local tax revenue thresholds (the Statistical Area Category), and census tracts that include (or are adjacent to census tracts that include) a recently closed coal mine or recently retired coal-fired electric generating unit (the Coal Closure Category). The bonus credit increases the PTC by 10% or the ITC energy percentage by 10-percentage points, assuming a project satisfies or is not subject to the newly added prevailing wage and apprenticeship requirements (as discussed in our prior alert available here).
Site Qualification
The Notice includes guidance related to qualification of a location for each energy community category.
Brownfield Category
The Brownfield Category includes a brownfield site as defined in Section 101(39)(A), (B), and (D)(ii)(III) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). The Notice clarifies that this includes real property defined in CERCLA Section 101(39)(A) and certain mine-scarred land defined in CERCLA Section 101(39)(D)(ii)(III). The Notice also clarifies that a site that is described in CERCLA Section 101(39)(B) does not constitute a brownfield site for purposes of the energy community bonus credit. This includes sites that are subject to existing or planned CERCLA removal actions, sites that are listed or proposed to be listed on the National Priorities List, sites that are the subject of certain administrative or court orders or consent decrees under CERCLA, sites under the jurisdiction, custody, or control of the United States (except for tribal trust land), and other sites subject to certain federal environmental permits or subject to existing environmental actions under specified federal environmental statutes.
The Notice provides a safe harbor for the Brownfield Category under which a site will be considered an energy community if it fits within any of the following three categories:
Statistical Area Category
The Statistical Area Category includes any metropolitan statistical area (MSA) and non-metropolitan statistical area (non-MSA) that
The Notice identifies relevant resources for defining MSAs and non-MSAs for this purpose and designates the North American Industry Classification System industry codes (NAICS codes) that are considered for purposes of determining relevant employment statistics.
Appendix A (available here) to the Notice identifies all potentially relevant MSAs and non-MSAs that may qualify for the Statistical Area Category. Appendix B (available here) to the Notice identifies specific MSAs and non-MSAs that the Treasury Department and IRS have determined satisfy the Fossil Fuel Employment threshold. The Notice indicates that the Treasury Department and IRS will update these appendices, based on the Treasury Department’s updated determination of applicable unemployment rate data for the prior calendar year, annually in May of each year.
The Notice and appendices do not identify MSAs and non-MSAs that satisfy the Fossil Fuel Tax Revenue threshold. This presents a challenging issue primarily because MSAs and non-MSAs do not always share boundaries with states or counties that have tax revenues. The Notice includes a request for submission of public comments regarding possible data sources, revenue categories and procedures to determine whether an MSA or non-MSA meets the Fossil Fuel Tax Revenue threshold.
Coal Closure Category
The Coal Closure Category includes any census tract (or adjoining census tract) in which a coal mine has closed after December 31, 1999 or in which a coal-fired electric generating unit has been retired after December 31, 2009. The Notice clarifies that two census tracts that meet at a single point (i.e., a corner) are considered to be adjoining for purposes of the Coal Closure Category.
The Notice identifies relevant data sources for determining sites of closed coal mines and retired coal-fired electric generating units. The Notice provides that if the location of a mine or coal-fired electric generating unit is not adequately identified in those data sources, a taxpayer may provide evidence to the applicable government entities (Department of Labor's Mine Safety and Health Administration (MSHA) in the case of closed mines and the Department of Energy, Energy Information Administration (EIA) in the case of closed coal-fired electric generating units) to correct the information.
Appendix C (available here) to the Notice identifies all of the census tracts that currently meet the Coal Closure Category requirements. If a taxpayer corrects mine or electric generating unit location information with the applicable government entities in the applicable data sources, the IRS will issue annual ministerial notices to update the appendix.
Project Qualification
The Notice provides guidance related to certain ancillary issues for determining whether a project is considered to be located in an energy community.
Projects Straddling Energy Community and Non-Energy Community Sites
In the case of a project that straddles two areas, one of which qualifies as an energy community and one of which that does not, the Notice provides two alternative tests to determine if the project is considered to be located in an energy community. Generally, a project is considered located in an energy community if 50% or more of the project is located in the energy community. For most projects, this will be determined by calculating the portion of the nameplate capacity of a project that is located in the energy community compared to the project's overall nameplate capacity (the Nameplate Capacity Test). Special rules under the Nameplate Capacity Test apply for offshore projects. In the case of a project that does not have a nameplate capacity (such as a qualified biogas property), the location of the project is based on the square footage of the project that is located in the energy community compared to the project's overall square footage (the Footprint Test). If a project has a nameplate capacity, it must use the Nameplate Capacity Test and may not use the Footprint Test.
Beginning of Construction Safe Harbor
The Notice provides that, in the case of a project that qualifies for the PTC, whether a qualified facility is located in an energy community is determined separately for each taxable year of the facility's 10-year credit period. In the case of a project that qualifies for the ITC, whether an energy property is located in an energy community is determined as of the placed-in-service date for such property. The Notice also provides a special rule, however, under which qualification can be determined based on the beginning-of-construction date for a project. Under this special rule, a site will be treated as an energy community for the duration of the 10-year credit period, in the case of the PTC, or as of the placed-in-service date, in the case of the ITC, if the site is considered an energy community on the date that construction of the relevant project begins. The beginning-of-construction date for a project is based on existing IRS guidance related to beginning of construction for PTC and ITC projects. This beginning of construction safe harbor is especially helpful for a PTC project that is relying on the Statistical Area Category, which otherwise is based on the unemployment rate in the prior year and which, without this safe harbor, would be determined each year during the credit period.
Overall, the Notice provides helpful resources and guidance related to whether a location is considered an energy community for purposes of the bonus credit, and for determining whether a project is located in an energy community. In particular, the appendices to the Notice provide clarity for determining whether a project is located in an energy community. This will provide helpful certainty to developers of projects that need to secure tax equity financing prior to the issuance of the proposed regulations. The guidance is, however, preliminary in nature and future proposed regulations may alter or expand the rules in a way that could impact a project’s qualification. The Notice provides, however, that taxpayers may rely on the rules described in the Notice until the issuance of the proposed regulations. In addition, the IRS will need to issue additional guidance related to the Fossil Fuel Tax Revenue threshold for the Statistical Area Category, which presents a particularly challenging issue.
The IRA added bonus credits for purposes of calculating the production tax credit (PTC) and investment tax credit (ITC) for an energy project that is located in or placed in service within in an “energy community.” The energy community bonus credit will also apply to a project that qualifies for the clean electricity production credit and the clean electricity investment credit that were added by the IRA and will be effective with respect to qualified projects placed in service after December 31, 2024. For purposes of the bonus credit, energy communities include certain brownfield sites (the Brownfield Category), statistical areas that meet certain employment or local tax revenue thresholds (the Statistical Area Category), and census tracts that include (or are adjacent to census tracts that include) a recently closed coal mine or recently retired coal-fired electric generating unit (the Coal Closure Category). The bonus credit increases the PTC by 10% or the ITC energy percentage by 10-percentage points, assuming a project satisfies or is not subject to the newly added prevailing wage and apprenticeship requirements (as discussed in our prior alert available here).
Site Qualification
The Notice includes guidance related to qualification of a location for each energy community category.
Brownfield Category
The Brownfield Category includes a brownfield site as defined in Section 101(39)(A), (B), and (D)(ii)(III) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). The Notice clarifies that this includes real property defined in CERCLA Section 101(39)(A) and certain mine-scarred land defined in CERCLA Section 101(39)(D)(ii)(III). The Notice also clarifies that a site that is described in CERCLA Section 101(39)(B) does not constitute a brownfield site for purposes of the energy community bonus credit. This includes sites that are subject to existing or planned CERCLA removal actions, sites that are listed or proposed to be listed on the National Priorities List, sites that are the subject of certain administrative or court orders or consent decrees under CERCLA, sites under the jurisdiction, custody, or control of the United States (except for tribal trust land), and other sites subject to certain federal environmental permits or subject to existing environmental actions under specified federal environmental statutes.
The Notice provides a safe harbor for the Brownfield Category under which a site will be considered an energy community if it fits within any of the following three categories:
- 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 Section 101(39)(A) of CERCLA. The Notice indicates that potential site lists for this purpose can be found under the Brownfields Properties category on the EPA’s Cleanups in My Community webpage (or similar webpages maintained by states, territories, or federally recognized Indian tribes).
- An ASTM E 1903 Phase II Environmental Site Assessment has been completed with respect to the site and the assessment confirms the presence on the site of a hazardous substance or a pollutant or contaminate as defined in CERCLA.
- For a project with a nameplate capacity of not greater than 5MW (AC), an ASTM E 1527 Phase I Environmental Site Assessment has been completed in accordance with the most current applicable version of the standards for phase I assessments.
Statistical Area Category
The Statistical Area Category includes any metropolitan statistical area (MSA) and non-metropolitan statistical area (non-MSA) that
- Has an unemployment rate at or above the national average unemployment rate for the previous year (as determined by the Secretary of the Treasury), and
- Either has
- (i) 0.17% or greater direct employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary) (defined in the Notice as the Fossil Fuel Employment threshold), or
- 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary) (defined in the Notice as the Fossil Fuel Tax Revenue threshold).
The Notice identifies relevant resources for defining MSAs and non-MSAs for this purpose and designates the North American Industry Classification System industry codes (NAICS codes) that are considered for purposes of determining relevant employment statistics.
Appendix A (available here) to the Notice identifies all potentially relevant MSAs and non-MSAs that may qualify for the Statistical Area Category. Appendix B (available here) to the Notice identifies specific MSAs and non-MSAs that the Treasury Department and IRS have determined satisfy the Fossil Fuel Employment threshold. The Notice indicates that the Treasury Department and IRS will update these appendices, based on the Treasury Department’s updated determination of applicable unemployment rate data for the prior calendar year, annually in May of each year.
The Notice and appendices do not identify MSAs and non-MSAs that satisfy the Fossil Fuel Tax Revenue threshold. This presents a challenging issue primarily because MSAs and non-MSAs do not always share boundaries with states or counties that have tax revenues. The Notice includes a request for submission of public comments regarding possible data sources, revenue categories and procedures to determine whether an MSA or non-MSA meets the Fossil Fuel Tax Revenue threshold.
Coal Closure Category
The Coal Closure Category includes any census tract (or adjoining census tract) in which a coal mine has closed after December 31, 1999 or in which a coal-fired electric generating unit has been retired after December 31, 2009. The Notice clarifies that two census tracts that meet at a single point (i.e., a corner) are considered to be adjoining for purposes of the Coal Closure Category.
The Notice identifies relevant data sources for determining sites of closed coal mines and retired coal-fired electric generating units. The Notice provides that if the location of a mine or coal-fired electric generating unit is not adequately identified in those data sources, a taxpayer may provide evidence to the applicable government entities (Department of Labor's Mine Safety and Health Administration (MSHA) in the case of closed mines and the Department of Energy, Energy Information Administration (EIA) in the case of closed coal-fired electric generating units) to correct the information.
Appendix C (available here) to the Notice identifies all of the census tracts that currently meet the Coal Closure Category requirements. If a taxpayer corrects mine or electric generating unit location information with the applicable government entities in the applicable data sources, the IRS will issue annual ministerial notices to update the appendix.
Project Qualification
The Notice provides guidance related to certain ancillary issues for determining whether a project is considered to be located in an energy community.
Projects Straddling Energy Community and Non-Energy Community Sites
In the case of a project that straddles two areas, one of which qualifies as an energy community and one of which that does not, the Notice provides two alternative tests to determine if the project is considered to be located in an energy community. Generally, a project is considered located in an energy community if 50% or more of the project is located in the energy community. For most projects, this will be determined by calculating the portion of the nameplate capacity of a project that is located in the energy community compared to the project's overall nameplate capacity (the Nameplate Capacity Test). Special rules under the Nameplate Capacity Test apply for offshore projects. In the case of a project that does not have a nameplate capacity (such as a qualified biogas property), the location of the project is based on the square footage of the project that is located in the energy community compared to the project's overall square footage (the Footprint Test). If a project has a nameplate capacity, it must use the Nameplate Capacity Test and may not use the Footprint Test.
Beginning of Construction Safe Harbor
The Notice provides that, in the case of a project that qualifies for the PTC, whether a qualified facility is located in an energy community is determined separately for each taxable year of the facility's 10-year credit period. In the case of a project that qualifies for the ITC, whether an energy property is located in an energy community is determined as of the placed-in-service date for such property. The Notice also provides a special rule, however, under which qualification can be determined based on the beginning-of-construction date for a project. Under this special rule, a site will be treated as an energy community for the duration of the 10-year credit period, in the case of the PTC, or as of the placed-in-service date, in the case of the ITC, if the site is considered an energy community on the date that construction of the relevant project begins. The beginning-of-construction date for a project is based on existing IRS guidance related to beginning of construction for PTC and ITC projects. This beginning of construction safe harbor is especially helpful for a PTC project that is relying on the Statistical Area Category, which otherwise is based on the unemployment rate in the prior year and which, without this safe harbor, would be determined each year during the credit period.
Overall, the Notice provides helpful resources and guidance related to whether a location is considered an energy community for purposes of the bonus credit, and for determining whether a project is located in an energy community. In particular, the appendices to the Notice provide clarity for determining whether a project is located in an energy community. This will provide helpful certainty to developers of projects that need to secure tax equity financing prior to the issuance of the proposed regulations. The guidance is, however, preliminary in nature and future proposed regulations may alter or expand the rules in a way that could impact a project’s qualification. The Notice provides, however, that taxpayers may rely on the rules described in the Notice until the issuance of the proposed regulations. In addition, the IRS will need to issue additional guidance related to the Fossil Fuel Tax Revenue threshold for the Statistical Area Category, which presents a particularly challenging issue.
Related Professionals
Partner
Associate
