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IRS Issues Proposed Regulations on Clean Electricity Credits
(Parker Tax Publishing June 2024)
The IRS issued proposed regulations relating to the clean electricity production credit under Code Sec. 45Y and the clean electricity investment credit under Code Sec. 48E, both of which were established by the Inflation Reduction Act of 2022 (Pub. L. 117-169). The proposed regulations provide guidance for owners of qualified clean electricity facilities and energy storage technology placed in service after December 31, 2024. REG-119283-23.
Background
The renewable electricity production credit determined under Code Sec. 45 (Section 45 credit) is generally available for qualified facilities described in Code Sec. 45(d), which provides that the construction of the qualified facilities must begin before January 1, 2025. Similarly, the energy credit determined under Code Sec. 48 (Section 48 credit), which is an investment credit under Code Sec. 46, is generally available for energy property the construction of which begins before January 1, 2025. Therefore, as long as construction begins on the relevant qualified facility or energy property before January 1, 2025, a taxpayer may be able to claim a Section 45 credit or Section 48 credit, respectively, even if the taxpayer places the qualified facility or energy property in service after December 31, 2024.
Code Secs. 45Y and 48E were added by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169). The clean electricity production credit determined under Code Sec. 45Y (Section 45Y credit) applies to facilities placed in service after December 31, 2024. The clean electricity investment credit determined under Code Sec. 48E (Section 48E credit) applies to property placed in service after December 31, 2024. Code Secs. 45Y and 48E generally replace Code Secs. 45 and 48 with respect to qualified facilities, and for Code Sec. 48E, with respect to energy storage technology, that is placed in service after December 31, 2024.
Clean Electricity Production Credit
Code Sec. 45Y(a)(1) provides that for purposes of the general business credit under Code Sec. 38, the Section 45Y credit for any tax year is an amount equal to the product of the kilowatt hours of eligible electricity produced by a taxpayer at a qualified facility, multiplied by the applicable amount with respect to such qualified facility. Eligible electricity is electricity that is either (1) sold by the taxpayer to an unrelated person during the tax year or (2) in the case of a qualified facility that is equipped with a metering device that is owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer during the tax year.
Under Code Sec. 45Y(a)(2), the applicable amount used in calculating the Section 45Y credit is either a base amount of 0.3 cents or a higher alternative amount of 1.5 cents. Under Code Sec. 45Y(a)(2)(B), the alternative amount of 1.5 cents applies in the case of any qualified facility (1) with a maximum net output of less than 1 megawatt (as measured in alternating current), (2) the construction of which begins prior to the date that is 60 days after the Treasury Secretary publishes guidance on the prevailing wage requirements of Code Sec. 45Y(g)(9) and the apprenticeship requirements of Code Sec. 45Y(g)(10), or (3) that satisfies Code Sec. 45Y(g)(9) and, with respect to the construction of such facility, satisfies Code Sec. 45Y(g)(10). Both the base and alternative amounts are adjusted for inflation. Code Sec. 45Y(g)(7) provides for an increase in the Section 45Y credit amount for any qualified facility located in an energy community, and Code Sec. 45Y(g)(11) provides for an increase if the domestic content bonus requirement in Code Sec. 45Y(g)(11)(B)(i) is satisfied.
Clean Electricity Investment Credit
For purposes of Code Sec. 38, which includes the investment credit under Code Sec. 46, Code Sec. 48E(a)(1) provides a credit for any tax year in which a qualified investment is made with respect to any qualified facility and any energy storage technology (EST). Generally, under Code Sec. 48E(b)(1) the qualified investment with respect to a qualified facility for any tax year is the sum of (1) the basis of any qualified property placed in service by the taxpayer during such tax year that is part of a qualified facility plus (2) the amount of expenditures that are paid or incurred by the taxpayer for qualified interconnection property that is properly chargeable to capital account of the taxpayer.
The Section 48E credit amount equals to the applicable percentage of the qualified investment in any qualified facility and any EST. Code Sec. 48(E)(a)(2) provides a base rate of 6 percent and a higher alternative rate of 30 percent for the applicable percentage. Under 48E(a)(2)(A)(ii), the alternative rate of 30 percent applies in the case of any qualified facility (1) with a maximum net output of less than 1 megawatt (as measured in alternating current), (2) the construction of which begins prior to the date that is 60 days after the Treasury Secretary publishes guidance on the prevailing wage requirements of Code Sec. 48E(d)(3) and the apprenticeship requirements of Code Sec. 48E(d)(4), or (3) that satisfies Code Sec. 48E(d)(3) and, with respect to the construction of such facility, satisfies Code Sec. 48E(d)(4). Similarly, Code Sec. 48E(a)(2)(B)(ii) provides that the alternative rate of 30 percent applies in the case of an EST (1) with a capacity of less than 1 megawatt, (2) the construction of which begins prior to the date that is 60 days after the Treasury Secretary publishes guidance on the prevailing wage and apprenticeship requirements, or (3) that satisfies Code Sec. 48E(d)(3) and with respect to the construction of such EST, satisfies Code Sec. 48E(d)(4).
Code Sec. 48E(a)(3)(A) provides for an increase in credit rate for a qualified facility or EST located in an energy community (as defined in Code Sec. 45(b)(11)(B)). Code Sec. 48E(a)(3)(B) similarly provides for an increase in credit rate for a qualified facility or EST that meets the domestic content bonus requirements.
Previous Guidance
In August of 2023, the IRS issued proposed regulations (REG-100908-23) providing guidance on the prevailing wage and apprenticeship (PWA) requirements under Code Secs. 45, 45Y, 48, and Code Sec. 48E and several other Code sections (August Proposed Regulations). The August Proposed Regulations also proposed guidance on the 1-megawatt exception under Code Secs. 45, 45Y, 48, and Code Sec. 48E. In November of 2023, the IRS issued proposed regulations (REG-132569-17) providing guidance under Code Sec. 48 (November Proposed Regulations). Among other matters, the November Proposed Regulations withdrew and reproposed the regulations in Prop. Reg. Sec. 1.48-13 from the August Proposed Regulations regarding the PWA requirements under Code Sec. 48, the 1-megawatt exception under Code Sec. 48(a)(9)(B)(i), and the recapture rules under Code Sec. 48(a)(10)(C).
Proposed Regulations
On May 29, the IRS issued proposed regulations relating to the Section 45Y and Section 48E credits. The proposed regulations affect all taxpayers who produce clean electricity and claim the clean electricity production credit with respect to a facility or the clean electricity investment credit with respect to a facility or energy storage technology, as applicable, that is placed in service after 2024.
The proposed regulations under Code Sec. 45Y are organized in five sections, Prop. Reg. Sec. 1.45Y-1 through Prop. Reg. Sec. 1.45Y-5 (Section 45Y regulations). Prop. Reg. Sec. 1.45Y-1 provides an overview of the Section 45Y regulations, generally applicable definitions, and general rules applicable to Code Sec. 45Y, including a rule for calculating the credit for a CHP property. Prop. Reg. Sec. 1.45Y-2 provides rules relating to qualified facilities for purposes of the Section 45Y credit. Prop. Reg. Sec. 1.45Y-3 is reserved for rules relating to the increased credit amount for meeting the prevailing wage and apprenticeship requirements. Prop. Reg. Sec. 1.45Y-4 provides the rules of general application under Code Sec. 45Y, including rules that attribute production to the taxpayer, rules for the expansion of a facility and incremental production, and rules for retrofits of an existing facility. Prop. Reg. Sec. 1.45Y-5 provides rules pertaining to the determination of a greenhouse gas (GHG) emissions rate for a facility under Code Sec. 45Y.
The proposed regulations under Code Sec. 48E are also organized in five sections, Prop. Reg. Sec. 1.48E-1 through Prop. Reg. Sec. 1.48E-5 (Section 48E regulations). Prop. Reg. Sec. 1.48E-1 provides an overview of the Section 48E regulations, generally applicable definitions, and the rules applicable to the calculation of Section 48E credit. Prop. Reg. Sec. 1.48E-2 provides rules relating to a qualified facility, a qualified investment, a qualified property, and an EST. Prop. Reg. Sec. 1.48E-3 is reserved for rules relating to the increased credit amount for meeting the prevailing wage and apprenticeship requirements. Prop. Reg. Sec. 1.48E-4 provides the rules of general application under Code Sec. 48E, including the rules regarding the inclusion of qualified interconnection costs in the basis of a low-output associated qualified facility, rules for expansion of a facility and incremental production, rules for retrofitting an existing facility, rules for the ownership of a qualified facility or an EST, rules regarding the coordination of the Section 48E credit with other federal income tax credits, and rules for credit recapture. Prop. Reg. Sec. 1.48E-5 provides rules pertaining to the determination of a GHG emissions rate for a facility under Code Sec. 48E.
For a discussion of the clean electricity production credit and clean electricity investment credit, see Parker Tax ¶108,300.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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