Final Regs Reflect Inflation Reduction Act Amendments to Energy Investment Credit

(Parker Tax Publishing December 2024)

The IRS issued final regulations that set forth final rules relating to the energy credit under Code Sec. 48, including rules for determining whether investments in energy property are eligible for the energy credit and for implementing certain amendments made by the Inflation Reduction Act of 2022. The final regulations impact taxpayers who invest in energy property eligible for the energy credit. T.D. 10015.

Background

Code Sec. 38 allows certain business credits against the federal income tax. Among the credits allowed by Code Sec. 38 are the investment credit determined under Code Sec. 46, which includes the energy credit determined under Code Sec. 48. Code Sec. 48(a)(1) generally provides that the energy credit for any tax year is the energy percentage of the basis of each energy property placed in service during such tax year. For most types of energy property, eligibility for the Code Sec. 48 credit and, in some cases, the amount of the Code Sec. 48 credit for which energy property is eligible, are dependent upon meeting certain deadlines for beginning construction of the energy property and for placing the energy property in service.

Code Sec. 48 has been amended many times, most recently by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169). The IRA amended Code Sec. 48 in several ways, including by making additional types of energy property eligible for the Code Sec. 48 credit, providing a special rule to allow certain lower-output energy properties to include amounts paid for qualified interconnection property in connection with the installation of energy property, and providing an increased credit amount for energy projects that satisfy prevailing wage and apprenticeship (PWA) requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities.

In August 2023, the IRS issued proposed regulations in REG-100908-23 that provide rules regarding the increased credit amounts available to for taxpayers satisfying PWA requirements established by the IRA (PWA Proposed Regulations).

In November 2023, the IRS issued proposed regulations in REG-132569-17 that provide guidance under Code Sec. 48 (Proposed Regulations). The Proposed Regulations withdrew certain portions of the PWA Proposed Regulations and re-proposed regulations that provide additional guidance on the PWA requirements under Code Sec. 48, including the statutory exception for energy projects with a maximum output of less than one megawatt (MW) and the recapture rules under Code Sec. 48(a)(10)(C) related to the PWA requirements.

The PWA Proposed Regulations, other than the portions that were withdrawn, were adopted as final regulations in T.D. 9998, which was published in June 2024.

In June 2023, the IRS issued proposed regulations in REG-101610-23 to provide rules concerning the election under Code Sec. 6418 to transfer certain credits, including the Code Sec. 48 credit (6418 Proposed Regulations). Prop. Reg. Sec. 1.6418-5 of the 6418 Proposed Regulations included proposed rules addressing notification requirements and the impact of the credit recapture rules under Code Secs. 50(a), 49(b), and Code Sec. 45Q(f)(4). The Proposed Regulations supplemented the 6418 Proposed Regulations by adding provisions addressing notification requirements and the impact of the recapture rules for failing to satisfy the PWA requirements under Code Sec. 48(a)(10) if an election under Prop. Reg. Sec. 1.6418-2 or Prop. Reg. Sec. 1.6418-3 has been made. In April 2024, the IRS issued T.D. 9993 adopting the 6418 Proposed Regulations as final regulations (6418 Final Regulations). The 6418 Final Regulations did not finalize the portion of Prop. Reg. Sec. 1.6418-5 that was included in the Proposed Regulations.

T.D. 10015

On December 4, the IRS published final regulations in T.D. 10015 that finalize the Proposed Regulations with modifications in response to practitioners' comments. The final regulations are scheduled be published in the Federal Register on December 12.

The final regulations clarify general rules for the Code Sec. 48 credit and its definitions of property eligible for the credit. Regarding the definition of "energy project," the final rules revise the definition provided in Prop. Reg. Sec. 1.48-13 to require ownership of the energy property plus four or more factors from a list of seven factors provided in Reg. Sec. 1.48-13(d). In addition, the final regulations clarify that taxpayers can assess the factors at any point during construction or during the tax year energy properties are placed in service. The final regulations also provide that a Code Sec. 48 credit may be claimed for energy storage technology that is co-located with and shares power conditioning and transfer equipment with a qualified facility for which a taxpayer claims a renewable electricity production credit under Code Sec. 45.

Reg. Sec. 1.48-9(f)(3) of the final regulations retains the clarification made in the Proposed Regulations that owners of offshore wind farms can claim the Code Sec. 48 credit for power conditioning and transfer equipment (e.g., subsea cables) that they own. The final also clarify in an example in Reg. Sec. 1.48-14(e) that, with respect to geothermal heat pumps, the owner of underground coils can claim the Code Sec. 48 credit if they own at least one heat pump used in conjunction with the coils. The final rules clarify what property is qualified biogas property and what is an integral part of qualified biogas property. In addition, the final regulations provide that hydrogen energy storage property does not need to store hydrogen that is solely used as energy and not for other purposes.

The provisions of Reg. Sec. 1.48-9 and Reg. Sec. 1.48-14 apply with respect to property that is placed in service during a tax year beginning after December 12, 2024. Reg. Sec. 1.6418-5(f) applies to tax years ending on or after December 12, 2024. Taxpayers may choose to apply the final rules in Reg. Sec. 1.48-9, Reg. Sec. 1.48-14, and Reg. Sec. 1.6418-5(f) with respect to property that is placed in service after December 12, 2022, provided taxpayers follow the final regulations in their entirety and in a consistent manner.

Notice 2009-52, which provides procedures for taxpayers to make an irrevocable election under Code Sec. 48(a)(5) to treat qualified property that is part of a qualified investment credit facility as energy property eligible for a Code Sec. 48 credit in lieu of a Code Sec. 45 credit, is obsoleted for tax years beginning after December 12, 2024.

For a discussion of the energy credit, see Parker Tax ¶104,315.

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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