The Inflation Reduction Act (IRA) of 2022 created an increased or “bonus” credit rate for certain solar and wind facilities placed in service in connection with low-income communities under Section 48(e). Bonus credit amounts significantly increase the tax incentives of qualified projects and will be competitively pursued. As such, the IRS’ recently released Notice 2023-17 is important to understand, as it provides initial guidance on the categorization, allocation and application of these bonus credits.
What Are the Bonus Credits and How Do You Qualify?
Energy credits are determined based on a specified energy percentage of the basis of energy property placed in service during the taxable year. Generally, the energy percentage rate is 6% for most projects.
Significantly, the IRA increases this energy percentage by either 10 or 20% for certain solar and wind facilities placed in service in connection with low-income communities. The amount of the increase is determined based on the type of community in which the project is placed. The bonus credit available under Sec. 48(e) is limited to the creation of 1.8 gigawatts of energy in calendar years 2023 and 2024, and zero thereafter. However, if the annual capacity limitation for calendar year 2024 exceeds the amount allocated for 2024, the excess amount may be carried forward and applied to the annual capacity limitation under new Sec. 48E for calendar year 2025.
A solar and wind facility qualified to apply for an allocation of this bonus credit is defined as any facility that:
- Generates electricity solely from a wind facility, solar energy property or small wind energy property;
- Has a maximum net output of less than five megawatts; and
- Is described in at least one of the following four categories:
- Category 1: A facility located in a low-income community. Low-income communities are defined as any population census tract if the poverty rate is at least 20%, or if the median family income of the tract does not exceed 80% of the statewide median family income. Specific rules apply depending on if the tract is located within a metropolitan area.
- Category 2: A facility located on Indian land. Indian land is described in the Energy Policy Act of 1992.
- Category 3: A facility part of a qualified low-income residential building project. A qualifying project must be installed on a residential rental building that participates in an affordable housing program, and the financial benefits of the electricity produced by the facility must be allocated equitably among the occupants of the dwelling units of the building.
- Category 4: A facility part of a qualified low-income economic benefit project. Facilities will qualify if at least 50% of the financial benefits of the electricity produced by the facility are provided to households with income of less than 200% of the poverty line, or less than 80% of area median gross income.
Facilities that qualify for categories 1 or 2, but not categories 3 or 4 are eligible for a 10% bonus credit. Facilities that qualify for categories 3 or 4 are eligible for a 20% bonus credit. Each category has been allocated a portion of the overall 1.8 gigawatt limitation, and once the allocated portion has been awarded, no further facilities will be awarded bonus credits. Notice 2023-17 allocates the 1.8 gigawatt limitation among the categories as follows:
|Category 1 – Located in a Low-Income Community
|Category 2 – Located on Indian Land
|Category 3 – Qualified Low-Income Residential Building Project
|Category 4 – Qualified Low-Income Economic Benefit Project
What Other Qualifications or Limitations Apply?
A qualifying facility must be placed in service within four years of being notified of the allocation. Any project placed in service before an award notification will not qualify. The Notice provides general guidance on the determination of the placed in service date, as well as eligibility to treat a lessee as a purchaser for credit allocation purposes. Additionally, the Notice provides priority criteria to consider when determining which facilities will be rewarded an allocation. This priority criteria will benefit facilities that:
- Are owned or developed by community-based organizations and mission-driven entities,
- Have an impact on encouraging new market participants,
- Provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and
- Have a higher degree of commercial readiness.
How Can You Apply for an Allocation of a Category and Bonus Credit?
Applications for an allocation of each category’s capacity limitation will be accepted on a phased approach over 60-day windows. Applications for a 2023 allocation of categories 3 and 4 will be accepted during Q3 2023, with applications for categories 1 and 2 taking place in a subsequent, unspecified 60-day window. Future guidance will provide more details on the application process, as well as to further describe each item of priority criteria.
These bonus credits have the ability to significantly increase tax incentives of qualifying projects while creating feasibility and profitability. Due to their limited nature, they will also likely be aggressively pursued and applied for. Potential applicants need to be well informed and properly prepared for upcoming guidance and the imminent application windows.
Contact Justin Gartner at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.