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.
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:
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||700 megawatts|
|Category 2 – Located on Indian Land||200 megawatts|
|Category 3 – Qualified Low-Income Residential Building Project||200 megawatts|
|Category 4 – Qualified Low-Income Economic Benefit Project||700 megawatts|
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:
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 firstname.lastname@example.org 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.
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