U.S. Treasury Proposes New Regulations on Eligibility Requirements for Clean Energy Tax Credits under the Inflation Reduction Act
June 11, 2024
Publications
by Tim Horstmann and Susan Bruce
The United States Department of the Treasury (Treasury) on June 3, 2024 published proposed regulations on Internal Revenue Code (IRC) Sections 45Y and 48E, which provide for clean energy production and investment tax credits for projects placed in service after Dec. 31, 2024. The clean energy tax credits provided by IRC Sections 45Y and 48E replace the tax credits previously offered by IRC Sections 45 and 48.
IRC Sections 45Y and 48E were added pursuant to the Inflation Reduction Act of 2022 (the Act), which authorized a variety of clean energy investments and tax credits. The benefits of these tax credits also are available to governmental entities and nonprofits exempt from federal income taxation. The Act also added IRC Section 6417, which permits these entities to elect to receive a direct payment from Treasury equal to the amount of the credit. You can read our prior commentary on IRC Section 6417 and its impact on publicly-financed clean energy projects here.
Under the Act, projects qualifying for the IRC Section 45Y and 48E tax credits must demonstrate that they have a greenhouse gas emissions rate of not greater than zero. Treasury in the proposed regulations has indicated that it will publish annual tables to determine whether a particular facility meets the requirements. Projects not covered by the annual tables must file a petition with Treasury to establish the emissions rate.
Treasury also proposed rules for determining which property is included in the definition of a “qualified facility,” a critical determination for the IRC Section 48E credit (which is equal to a percentage of the cost basis of such property). A qualified facility is generally defined to include “all functionally interdependent components of property that are operated together and that can operate apart from other property to produce electricity.”
Also included for purposes of the IRC Section 48E credit calculation are any components of property that are an “integral part” of the qualified facility, i.e., used directly in the intended function of the facility and essential to the completeness of such function. In addition to the general rule provided by the definition, Treasury proposed specific rules for certain types of property which may satisfy the “integral part” test. For example, under the proposed regulations roads may qualify as an “integral part” of a facility, but fences never do.
Treasury in the proposed regulations did not provide rules on the application of the prevailing wage and apprenticeship requirements, which if met, result in a quintupling of the base credit (for example, increasing the IRC Section 48E credit from 6% to 30%). Those rules will be finalized in a separate rule-making.
Treasury will hold public hearings on Aug. 12 and 13 to hear comments from the public regarding the guidance. Interested parties have the opportunity to submit public comments. If you have questions about the proposed regulations, or would like to submit comments, please contact a member of the McNees Public Finance or Energy and Environmental Groups for assistance.
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