Renewable Energy Industry Reviews Domestic Content Guidance from the IRS, Awaits Additional Guidance

Published by Peter Lawrence on Tuesday, May 16, 2023 - 12:00am

The Internal Revenue Service (IRS) released May 12 Notice 2023-38, which helps clarify how taxpayers can qualify for the domestic content bonus credit provided for under the Inflation Reduction Act (IRA) of 2022. The domestic content bonus credit was designed to boost American manufacturing, by providing a 10% bonus under the renewable energy production tax credit (PTC) for facilities and a 10% bonus for projects under the investment tax credit (ITC) for meeting domestic content requirements. Notice 2023-38 details the application of the rules that taxpayers must satisfy to qualify for the domestic content bonus credit amounts under Sections 45, 45Y, 48 and 48E as well as the related record keeping and certification requirements. The notice also details a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects or energy storage technologies. The Renewable Energy Working Group is reviewing this most recent guidance release to determine if additional clarity and/or guidance is needed.  

This latest release from the IRS joined previous issuances from the U.S. Department of the Treasury and other federal agencies over the past several months.  The IRA included an historic investment in clean, renewable and green energy–the bill included what was initially estimated to be $369 billion in clean energy and renewable energy provisions, with $270 billion in tax incentives, though more recent analysis conducted by the Joint Committee on Taxation in the context of the House-passed debt limit bill which repealed most of the IRA puts the estimated investment at about $550 billion. While they review the domestic content guidance–as well as other recently released guidance on the energy community bonus credit, the Environmental Justice program allocation of 1.8 gigawatt bonus ITC to low-income communities and critical materials components, electric vehicles and greenhouse gas reduction–many stakeholders, including the Renewable Energy Working Group, are waiting for guidance on additional key IRA provisions, as well as clarity on already released guidance.

Industry Stakeholders Welcome Recently Released Guidance

The Renewable Energy Working Group’s first order of business in the fall 2022 was providing comments and requests for clarity around the six notices released by Treasury in October 2022 and then the three notices that followed in November. The Novogradac responses—five letters were submitted by the Renewable Energy Working Group and another letter was submitted by the Low-Income Housing Tax Credit (LIHTC) Working Group–included information on energy generation incentives, credit enhancements, incentives for homes and buildings, consumer vehicle credits, manufacturing credits, credit monetization, commercial clean vehicles and alternative fuel vehicle refueling property and clean fuel production.

Within these letters, the working groups identified areas that will require special attention. These areas include provisions providing additional tax credit authority (domestic content, energy communities, low-income community, low-income economic benefit project and affordable housing bonuses), transferability of credits, new eligible costs/technologies, direct pay, solar PTCs and the global minimum tax.  The IRA set guidelines on when certain guidance was to be released.

A previous Notes from Novogradac post detailed the guidance released in late 2022, which included December releases of initial guidance released on the clean energy tax provisions in the IRA in the form of a Treasury FAQ document sheet, and Treasury guidance on processes for manufacturers and sellers of clean vehicles.  

1.8 GW Environmental Justice Solar and Wind Capacity Limitation Initial Guidance

On Feb. 13, the IRS issued Notice 2023-17, initial guidance on the allocation of the 1.8 gigawatts of capacity bonus renewable energy ITCs to low-income communities. As detailed in the graphic below, the allocation can be thought to be divided into 900 MW of “household-based” incentives and another 900 MW for “placed-based” incentives. For the former, for 2023, this allocation will include 200 MW for facilities serving federally subsidized residential buildings (including those supported by the LIHTC) and 700 MW for facilities in low-income communities. The place-based incentives for 2023 include 200 MW for facilities on Tribal land and 700 MW for facilities where at least 50% of the financial benefits of the electricity produced goes to households with incomes below 200% of the poverty line or below 80% of area gross median income.

The application process will be in two phases, starting with low-income residential buildings and projects that benefit low-income households. As noted below, guidance is still forthcoming on the application process.

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Advanced Energy Credit Guidance

Additionally that day, the IRS provided guidance on the qualifying advanced energy credit program in Notice 2023-18. The goal of the program is to expand U.S. manufacturing capacity and quality jobs for clean energy technologies (including production and recycling), to reduce greenhouse gas emissions in the U.S. industrial sector, and to secure domestic supply chains for critical materials (including specified critical minerals) that serve as inputs for clean energy technology production. Eligible projects could receive an ITC of up to 30%. The IRA provides $10 billion in funding for the program, with at least $4 billion reserved for projects in communities with closed coal mines or retired coal-fired power plants.

Clean Vehicle Credit Guidance

Treasury provided guidance May 31 on the clean vehicle credit. The guidance provided clarity to manufacturers on the IRA requirements for a vehicle’s eligibility. The guidance also provided clarity on the critical mineral and battery requirements. To meet the critical mineral requirements, a percentage of the value of the critical minerals contained in the vehicle battery must be extracted or processed in the United States, or a country that has a free trade agreement with the United States or be recycled in North America.

Energy Communities Guidance

The recently released energy communities guidance contained in Notice 2023-29, provides information on the bonus credits–up to an additional 10 percentage points on top of the renewable energy ITC and the PTC–for clean energy projects and facilities located in communities that traditionally focused on energy production. Energy communities encompass:

  • brownfield sites;
  • metropolitan statistical areas (MSAs) or non-MSAs with employment or local tax revenue from fossil fuel industries and unemployment rates at or above the national average rate over the previous 12 months; or
  • census tracts (including adjoining tracts) in which a coal mine has closed after 1999 or in which or coal-fired plant has been retired after 2009.  

Accompanying this release was the announcement of a searchable mapping tool created by Treasury and the IRS along with the Interagency Working Group on Energy Communities. At the time of its release, the mapping tool was incomplete as needed unemployment data was not yet available. That data is expected to be released at the end of May.   

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Industry Awaits Forthcoming Guidance and Additional Clarity

While the guidance released to date does provide much needed clarity, there are still numerous IRA provisions around which guidance is still forthcoming. Further, questions remain around guidance that has already been released.

1.8 GW Environmental Justice Solar and Wind Capacity Limitation Application and Further Guidance

As noted above, though guidance was released on the 1.8 GW calendar year limitation on bonus credits for solar and wind facilities located in low-income communities, questions remain about the allocation process. The application process is not expected to start for several more months, with applications accepted after the application guidance is expected to be released in the third quarter of 2023. Stakeholders have questions about how recipients will be selected and how the application process will work. The late start date also means that some projects already in the pipeline may not be able to apply for and utilize the bonus credits. The Renewable Energy Working Group plans to submit a comment letter on the application guidance for the 1.8 GW calendar year limitation once released with specific requests for clarity and recommendations.

Clarification Needed on Energy Communities

Even with the release of the energy community guidance and the searchable mapping tool, determining eligibility for bonus credits is not entirely clear yet. The data, and in some cases the data sources, needed to determine eligibility is not yet available. For instance, the guidance released did not specify a data source for taxpayers to consult regarding area where fossil fuels provide at least 25% of the local tax revenue. Furthermore, as noted above, the required unemployment data needed to determine eligibility is not yet available. This is but one of the areas that Treasury and the IRS are expecting comments. The Renewable Energy Working Group used this opportunity to submit a comment letter requesting clarity around brownfield designations and providing recommendations on construction start dates to satisfy the energy community location requirement.    

Forthcoming Guidance on Transferability, Direct Pay, and 45X Advanced Manufacturing Credit

Guidance has not yet been provided on two IRA provisions: transferability of credits, which is the ability to transfer some or all of certain tax credits to unrelated parties for cash; and direct pay provisions, which would allow the election of a direct payment of certain clean and renewable energy tax incentives in lieu of tax credits. Updates provided by IRS and Treasury, including a recently released statement from Assistant Secretary for Tax Policy Lily Batchelder, have hinted at guidance on transferability being released in the coming weeks, followed by guidance on direct pay and the advanced manufacturing credit (Internal Revenue Code Section 45X) in the second half of 2023, and  additional guidance on Environmental Justice program (1.8GW) bonus ITC in the third quarter of 2023.

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What’s Next

As additional guidance is released, Novogradac and the Renewable Energy Working Group will be working to provide analysis and commentary. There are many opportunities to learn more, such as Novogradac’s Tax Credit Tuesday podcasts–recent topics covered include transferability, adders for affordable housing, and energy storage. The Novogradac 2023 Spring Renewable Energy and Environmental Tax Credits Conference is taking place May 18-19 in San Diego, where the IRA and subsequent provisions will be thoroughly discussed. The conference will include discussions on industry trends, emerging technologies, tax credit equity pricing and financing strategies. The conference also provides attendees with the opportunity to network with industry leaders.

The Renewable Energy Working Group, led by Novogradac partners focused on renewable, clean energy and energy efficiency tax credits, can provide professionals with the information and analysis needed to better understand the far-reaching effects of the IRA. The working group includes among its membership attorneys, investors, syndicators, lenders, for-profit and nonprofit developers, sponsors, consultants and other renewable energy professionals. To join these stakeholders and add your voice to the discussion around the ever changing energy industry, consider joining the working group by visiting this link.