Proposed Rule2023-25539
Definition of Energy Property and Rules Applicable to the Energy Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 22, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that would amend the regulations relating to the energy credit for the taxable year in which eligible energy property is placed in service. This document also withdraws and reproposes, for additional clarity, portions of previously proposed regulations regarding the increased energy credit amount available if prevailing wage and registered apprenticeship requirements are met. In connection with the Inflation Reduction Act of 2022, the proposed regulations would: update the types of energy property eligible for the energy credit, including additional types of energy property added by that law; clarify the application of new credit transfer rules to the energy credit recapture rules applicable to failures to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers; and include qualified interconnection costs in the basis of some lower-output energy properties. The proposed regulations would also provide additional requirements and rules generally applicable to energy property, such as rules regarding: functionally interdependent components; property that is an integral part of an energy property; application of an "80/20 Rule" to retrofitted energy property; dual use property; separate ownership of components of an energy property; property that could be eligible for multiple Federal income tax credits; and the election to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit. The proposed regulations would impact taxpayers who invest in energy property eligible for the energy credit.
Full Text
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[Federal Register Volume 88, Number 224 (Wednesday, November 22, 2023)]
[Proposed Rules]
[Pages 82188-82223]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-25539]
[[Page 82187]]
Vol. 88
Wednesday,
No. 224
November 22, 2023
Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Definition of Energy Property and Rules Applicable to the Energy
Credit; Proposed Rule
Federal Register / Vol. 88 , No. 224 / Wednesday, November 22, 2023 /
Proposed Rules
[[Page 82188]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-132569-17]
RIN 1545-BO40
Definition of Energy Property and Rules Applicable to the Energy
Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking, public hearing, and partial
withdrawal of notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would amend
the regulations relating to the energy credit for the taxable year in
which eligible energy property is placed in service. This document also
withdraws and reproposes, for additional clarity, portions of
previously proposed regulations regarding the increased energy credit
amount available if prevailing wage and registered apprenticeship
requirements are met. In connection with the Inflation Reduction Act of
2022, the proposed regulations would: update the types of energy
property eligible for the energy credit, including additional types of
energy property added by that law; clarify the application of new
credit transfer rules to the energy credit recapture rules applicable
to failures to satisfy the prevailing wage requirements, including
notification requirements for eligible taxpayers; and include qualified
interconnection costs in the basis of some lower-output energy
properties. The proposed regulations would also provide additional
requirements and rules generally applicable to energy property, such as
rules regarding: functionally interdependent components; property that
is an integral part of an energy property; application of an ``80/20
Rule'' to retrofitted energy property; dual use property; separate
ownership of components of an energy property; property that could be
eligible for multiple Federal income tax credits; and the election to
treat qualified facilities eligible for the renewable electricity
production credit instead as property eligible for the energy credit.
The proposed regulations would impact taxpayers who invest in energy
property eligible for the energy credit.
DATES: Written or electronic comments must be received by January 22,
2024. A public hearing on these proposed regulations is scheduled to be
held on February 20, 2024, at 10 a.m. ET. Requests to speak and
outlines of topics to be discussed at the public hearing must be
received by January 22, 2024. If no outlines are received by January
22, 2024, the public hearing will be cancelled. Requests to attend the
public hearing must be received by 5 p.m. on February 15, 2024. The
public hearing will be made accessible to people with disabilities.
Requests for special assistance during the hearing must be received by
5 p.m. on February 14, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-132569-
17) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of Treasury (Treasury Department) and the
IRS will publish for public availability any comments submitted,
whether electronically or on paper, to the IRS's public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-132569-17), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Office of Associate Chief Counsel (Passthroughs & Special Industries)
at (202) 317-6853 (not a toll-free number); concerning submissions of
comments or the public hearing, Vivian Hayes, (202) 317-6901 (not toll-
free number) or by email to <a href="/cdn-cgi/l/email-protection#a5d5d0c7c9ccc6cdc0c4d7cccbc2d6e5ccd7d68bc2cad3"><span class="__cf_email__" data-cfemail="4a3a3f28262329222f2b3823242d390a233839642d253c">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This notice of proposed rulemaking consists of several proposed
amendments to the existing Income Tax Regulations (26 CFR part 1) under
section 48 of the Internal Revenue Code (Code) addressing the energy
credit determined under section 48 (section 48 credit) for purposes of
sections 38 and 46 of the Code (proposed regulations). This notice of
proposed rulemaking also withdraws and reproposes portions of another
notice of proposed rulemaking (REG-100908-23) proposing regulations
under section 48 that were published in the Federal Register (88 FR
60018) on August 30, 2023. This notice of proposed rulemaking would
also propose additional regulations under section 6418 of the Code to
supplement a notice of proposed rulemaking (REG-101610-23) published in
the Federal Register (88 FR 40496) on June 21, 2023.
Section 38 allows certain business credits against the Federal
income tax imposed by chapter 1 of the Code (chapter 1). Among the
credits allowed by section 38 are the investment credit determined
under section 46, which includes the energy credit determined under
section 48. See sections 38(b)(1) and 46(2). Section 48(a)(1) generally
provides that the energy credit for any taxable year is the energy
percentage of the basis of each energy property placed in service
during such taxable year. For most types of energy property,
eligibility for the section 48 credit and, in some cases, the amount of
the section 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.
Section 48 was originally enacted by section 2 of the Revenue Act
of 1962, Public Law 87-834, (76 Stat. 960, 963) to spur economic growth
by encouraging investments in various capital projects across many
industries including energy, transportation, and communications.
Section 48 has been amended many times since its enactment, most
recently by section 13102 of Public Law 117-169, 136 Stat. 1818 (August
16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA).
The IRA amended section 48 in several ways, including by making
additional types of energy property eligible for the section 48 credit,
providing a special rule to allow certain lower-output energy
properties to include qualified interconnection costs in the basis of
associated energy property, and providing an increased credit amount
for energy projects that satisfy prevailing wage and apprenticeship
requirements, a domestic content bonus credit amount, and an increase
in credit rate for energy communities.
The current Income Tax Regulations at Sec. 1.48-9, which provide
definitions and eligibility rules for determining whether property is
energy property eligible for the section 48 credit, were published on
January 23, 1981 (T.D. 7765, 46 FR 7287). Those regulations were
amended on July 21, 1987 (T.D. 8147, 52 FR 27336), to provide rules for
dual use property, but have not been updated since 1987, before many of
the current types of energy property became eligible for the section 48
credit.
Prior to proposing amendments to the existing regulations under
section 48, the Treasury Department and the IRS have twice requested
comments on issues to be addressed. On October 26, 2015, the Treasury
Department and the
[[Page 82189]]
IRS published Notice 2015-70, 2015-43 I.R.B. 604, to request comments
regarding statutory updates to section 48 preceding those made by the
IRA. On October 24, 2022, in response to the passage of the IRA, the
Treasury Department and the IRS published Notice 2022-49, 2022-43
I.R.B. 321, to request general as well as specific comments on issues
arising under section 48, among other sections, that were amended or
added by the IRA. After consideration of comments submitted in response
to Notice 2015-70 and Notice 2022-49, and after consultation with the
Department of Energy, the Treasury Department and the IRS propose the
revisions to the existing regulations under section 48 contained in
this notice of proposed rulemaking.
On August 30, 2023, the Treasury Department and the IRS published
in the Federal Register (88 FR 60018) a notice of proposed rulemaking
(REG-100908-23) proposing rules regarding the increased credit amount
available for taxpayers satisfying prevailing wage and registered
apprenticeship requirements established by the IRA (August Proposed
Regulations). The August Proposed Regulations provided rules addressing
the recapture under section 48(a)(10)(C) of increased credit amounts
from only initially satisfying the prevailing wage requirements under
section 48(a)(10)(A) and (B). Comments were requested and a public
hearing has been scheduled for November 21, 2023. This notice of
proposed rulemaking withdraws certain portions of the August Proposed
Regulations and reproposes regulations that would provide additional
guidance on the prevailing wage and apprenticeship requirements under
section 48, including the statutory exception for energy projects with
a maximum output of less than one megawatt (MW) and the recapture rules
under section 48(a)(10)(C) related to the prevailing wage requirements.
Although this notice of proposed rulemaking withdraws certain
portions of the August Proposed Regulations, the Explanation of
Provisions section in the preamble to the August Proposed Regulations
generally remains relevant. Therefore, to the extent not inconsistent
with the Summary of Comments and Explanation of Provisions section of
this preamble, the Explanation of Provisions section of the August
Proposed Regulations is incorporated by reference in this notice of
proposed rulemaking. This notice of proposed rulemaking does not
address written comments that were submitted in response to the
regulations proposed in the August Proposed Regulations. Any comments
received in response to this notice of proposed rulemaking, including
comments on the reproposed regulations, will be addressed in the
Treasury Decision adopting these regulations as final regulations. This
notice of proposed rulemaking does not extend the comment period or
affect the scheduled hearing for the August Proposed Regulations.
On June 21, 2023, the Treasury Department and the IRS published in
the Federal Register (88 FR 40496) a notice of proposed rulemaking
(REG-101610-23) proposing rules concerning the election under section
6418 of the Code established by the IRA to transfer certain Federal
income tax credits, including the section 48 credit (June Proposed
Regulations). The June Proposed Regulations provided proposed rules
addressing notification requirements and the impact of credit recapture
rules under sections 50(a), 49(b), and 45Q(f)(4) of the Code in
proposed Sec. 1.6418-5. Comments were requested and a public hearing
on the June Proposed Regulations was held on August 23, 2023. This
document amends those June Proposed Regulations to add guidance to
proposed Sec. 1.6418-5 that describes the recapture rules relating to
failing to satisfy the prevailing wage and apprenticeship requirements
under section 48(a)(10) and (11), including the statutory exception for
energy projects with a maximum output of less than 1 MW in section
48(a)(9)(B)(i), and the recapture rules under section 48(a)(10)(C)
related to the prevailing wage requirements. This notice of proposed
rulemaking does not address written comments that were submitted in
response to the regulations proposed in the June Proposed Regulations.
Any comments received in response to this notice of proposed
rulemaking, including the amendments to the June Proposed Regulations,
will be addressed in the Treasury Decision adopting these regulations
as final regulations. This notice of proposed rulemaking does not
otherwise extend the comment period for the June Proposed Regulations.
Summary of Comments and Explanation of Provisions
I. Requirements for Energy Property
For purposes of the section 48 credit, energy property consists of
all the components of property that meet the statutory requirements for
an energy property as defined by section 48. Components of an energy
property are those that would be included in a unit of energy property
because they are functionally interdependent (as described in proposed
Sec. 1.48-9(f)(2)(ii)) as well as property owned by the same taxpayer
that is an integral part of such energy property (as described in
proposed Sec. 1.48-9(f)(3)). Additionally, components of property must
not be a type of property specifically excluded from energy property
(as described in proposed Sec. 1.48-9(d)).
Section 48(a)(3)(B)-(D) provides general requirements for all types
of energy property. Section 48(a)(3)(B)(i) defines energy property as
property that is constructed, reconstructed, or erected by the
taxpayer. Alternatively, section 48(a)(3)(B)(ii) provides that energy
property can also include property which the taxpayer acquires if the
original use of such property commences with the taxpayer. Section
48(a)(3)(C) provides that to be eligible as energy property,
depreciation (or amortization in lieu of depreciation) must be
allowable for the property. Section 48(a)(3)(D) provides that to be
eligible as energy property, the property must also meet any
performance and quality standards that have been prescribed by the
Secretary of the Treasury or her delegate (Secretary), after
consultation with the Secretary of Energy, and are in effect at the
time of the taxpayer's acquisition of the property. Under section
48(a)(3), energy property does not include property that is part of a
qualified facility the production from which is allowed a renewable
electricity production credit determined under section 45 (section 45
credit) for the taxable year or any prior taxable year. Lastly, where
section 48 provides dates by which construction of energy property must
begin or when energy property must be placed in service, such energy
property must meet those deadlines to be eligible for the section 48
credit at specified energy percentages. Proposed Sec. 1.48-9(a) would
provide this general overview of the definition of energy property.
A. Definitions Related to Requirements for Energy Property
Before 1990, section 48 defined the term ``section 38 property'' to
include, among other types of property, energy property eligible for
the section 48 credit. The Revenue Reconciliation Act of 1990, Public
Law 101-508, 104 Stat. 1388 (November 5, 1990) removed the term
``section 38 property'' in amending section 48. However, section 48 is
one of the credits that comprise the investment credit for any taxable
year determined under section 46, which is included in section 38(b)(1)
and remains subject to the general business credit rules under section
38. As a result, rules
[[Page 82190]]
related to ``section 38 property'' remain generally applicable to the
section 48 credit. The Treasury Department and the IRS published
regulations under Sec. Sec. 1.48-1 and 1.48-2 to provide guidance with
respect to section 38 property. Section 1.48-1 was last substantially
revised on October 11, 1988 (T.D. 8233, 53 FR 39592) and Sec. 1.48-2
was last revised on June 28, 1985 (T.D. 8031, 50 FR 26698). Although
subsequent amendments to section 48 have made some of the rules
provided by these regulations inapplicable, those rules continue to
provide useful definitions, some of which Sec. 1.48-9 of these
proposed regulations (proposed Sec. 1.48-9) would adopt.
1. Construction, Reconstruction, or Erection of Energy Property
Section 48(a)(3)(B)(i) defines energy property as property that is
constructed, reconstructed, or erected by the taxpayer. Existing Sec.
1.48-2(b)(1) provides that property is considered as constructed,
reconstructed, or erected by the taxpayer if the work is performed for
the taxpayer in accordance with the taxpayer's specifications. Proposed
Sec. 1.48-9(b)(1) would largely adopt the definition of the term
``constructed, reconstructed, or erected'' from existing Sec. 1.48-
2(b)(1) while modifying it to address energy property.
2. Acquisition and Original Use of Energy Property
Section 48(a)(3)(B)(ii) provides that energy property includes
property that is acquired by the taxpayer if the original use of such
property commences with the taxpayer. Existing Sec. 1.48-2(b)(6)
provides that property is deemed to be acquired when reduced to
physical possession or control by the taxpayer. Proposed Sec. 1.48-
9(b)(2) would adopt the concepts from existing Sec. 1.48-2(b)(6), and
provide additional clarification that the term ``acquisition of energy
property'' means a transaction by which a taxpayer obtains rights and
obligations with respect to energy property, including title to the
energy property under the law of the jurisdiction in which the energy
property is placed in service, unless the property is possessed or
controlled by the taxpayer as a lessee, and physical possession or
control of the energy property. In addition, existing Sec. 1.48-
2(b)(7) defines the term ``original use'' as the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. Proposed Sec. 1.48-9(b)(3) largely would
adopt the Sec. 1.48-2(b)(7) definition of original use while modifying
it to address energy property.
3. Depreciation Allowable
Section 48(a)(3)(C) requires that energy property be property with
respect to which depreciation (or amortization in lieu of depreciation)
is allowable, and existing Sec. 1.48-1(b) explains when depreciation
is allowable with respect to section 38 property. Specifically, Sec.
1.48-1(b) provides that a deduction for depreciation is allowable if
the property is of a character subject to the allowance for
depreciation under section 167 of the Code and the basis (or cost) of
the property is recovered through a method of depreciation, including,
for example, the unit of production method and the retirement method as
well as methods of depreciation that measure the life of the property
in terms of years. Proposed Sec. 1.48-9(b)(4)(i) generally would adopt
the Sec. 1.48-1(b) rule for determining whether depreciation is
``allowable'' under section 48, with certain modifications to update
the described methods of depreciation and to make the definition
specific to energy property as defined in section 48. Proposed Sec.
1.48-9(b)(4)(i) would also clarify that the 100-percent additional
first year depreciation provided by section 168(k) of the Code is
considered a method of depreciation.
In addition, existing Sec. 1.48-1(b)(3) provides language
describing when depreciation is not allowable to the taxpayer for
purposes of defining section 38 property. Section 1.48-1(b)(3) provides
that if the cost of property is not recovered through a method of
depreciation but through a deduction of the full cost in one taxable
year, for purposes of Sec. 1.48-1(b)(1) a deduction for depreciation
with respect to such property is not allowable to the taxpayer.
However, if an adjustment with respect to the income tax return for
such taxable year requires the cost of such property to be recovered
through a method of depreciation, a deduction for depreciation will be
considered as allowable to the taxpayer.
Proposed Sec. 1.48-9(b)(4)(ii) generally would adopt this rule
from Sec. 1.48-1(b)(3) to determine when depreciation is not
allowable, with certain modifications to update the described methods
of depreciation and to make the definition specific to energy property
as defined in section 48. Proposed Sec. 1.48-9(b)(4) would provide
that if the basis or cost of energy property is not recovered through a
method of depreciation but through a deduction of the full cost in one
taxable year, a deduction for depreciation with respect to such
property is not allowable to the taxpayer.
However, proposed Sec. 1.48-9(b)(4)(i) would provide that if an
IRS adjustment with respect to an income tax return or information
return for such taxable year requires the basis or cost of such
property to be recovered using a method of depreciation, including any
additional first year depreciation deduction provision in the Code, a
deduction for depreciation will be considered as allowable to the
taxpayer.
4. Performance and Quality Standards for Energy Property
Section 48(a)(3)(D) provides that energy property is property that
meets the performance and quality standards (if any) that have been
prescribed by the Secretary by regulations (after consultation with the
Secretary of Energy), and are in effect at the time of the acquisition
of the property. Existing Sec. 1.48-9(m)(1) provides that ``energy
property must meet quality and performance standards, if any, that have
been prescribed by the Secretary (after consultation with the Secretary
of Energy) and are in effect at the time of acquisition.'' Proposed
Sec. 1.48-9(c)(2) would adopt this rule for performance and quality
standards for energy property from Sec. 1.48-9(m)(1).
After consultation with the Department of Energy, proposed Sec.
1.48-9(c)(2)(ii) would provide special rules for performance and
quality standards with respect to both small wind and electrochromic
glass property. These clarifications are needed to ensure that the
intended energy production or savings occurs.
a. Performance and Quality Standards for Small Wind Energy Property
Proposed Sec. 1.48-9(c)(2)(ii)(A) would provide that small wind
energy property must meet the performance and quality standards in
effect at the time of acquisition of the small wind turbine set forth
in one of the following: the American Wind Energy Association Small
Wind Turbine Performance and Safety Standard 9.1-2009, or subsequent
revisions (AWEA); International Electrotechnical Commission 61400-1,
61400-2, 61400-11, 61400-12, or subsequent revisions (IEC); or the
ANSI/ACP 101-1-2021, the Small Wind Turbine Standard, or subsequent
revisions (ACP). Proposed Sec. 1.48-9(c)(2)(ii)(A) would also provide
that certification requirements applicable to such performance and
quality standards for small wind energy property are provided in
guidance published in the Internal Revenue Bulletin, such as Notice
2015-4, 2015-5 I.R.B. 407, and
[[Page 82191]]
its successor, Notice 2015-51, 2015-31 I.R.B. 133.
b. Performance and Quality Standards for Electrochromic Glass Property
As described in part I.C.2.b of this Summary of Comments and
Explanation of Provisions, electrochromic glass is incorporated into
either an electrochromic window or secondary glazing product.
Accordingly windows, including secondary glazings, that incorporate
electrochromic glass are electrochromic glass property for purposes of
the section 48 credit. Proposed Sec. 1.48-9(c)(2)(ii)(B) would also
adopt the requirement that windows that incorporate electrochromic
glass must be rated in accordance with the National Fenestration Rating
Council (NFRC) and would provide that secondary glazing systems must be
rated in accordance with the Attachments Energy Rating Council (AERC)
Rating and Certification Process, or subsequent revisions.
c. Time of Acquisition
Existing Sec. 1.48-9(m)(2) provides that the time of acquisition
for purposes of applying quality and performance standards for energy
property is either (i) the date the taxpayer enters into a binding
contract to acquire the property; or (ii) for property constructed,
reconstructed, or erected by the taxpayer, the earlier of the date that
the taxpayer begins construction, reconstruction, or erection of the
property, or the date the taxpayer and another person enter into a
binding contract requiring the other person to construct, reconstruct,
or erect property and place the property in service for an agreed upon
use. Proposed Sec. 1.48-9(c)(2)(iii) would adopt the rule for the
``time of acquisition'' from Sec. 1.48-9(m)(2) only for purposes of
applying the performance and quality standards for energy property.
d. Binding Contract
Section 1.168(k)-2(b)(5)(iii)(A) provides the following definition
of a binding contract in the context of the acquisition of qualified
property for the allowance of additional first year depreciation under
section 168(k) of the Code:
A contract is binding only if it is enforceable under State law
against the taxpayer or a predecessor, and does not limit damages to
a specified amount (for example, by use of a liquidated damages
provision). For this purpose, a contractual provision that limits
damages to an amount equal to at least five percent of the total
contract price will not be treated as limiting damages to a
specified amount.
Proposed Sec. 1.48-9(c)(2)(iv) would adopt this definition of the
term ``binding contract'' from Sec. 1.168(k)-2(b)(5)(iii)(A) for
purposes of applying the performance and quality standards for energy
property.
5. Placed in Service
Section 48(a) provides that the energy credit for any taxable year
is the energy percentage of the basis of each energy property placed in
service during such taxable year. As part of the regulations under
section 46 for the investment credit, Sec. 1.46-3(d)(1) provides
general rules for determining when a taxpayer has placed a property in
service for the section 48 credit. Property is considered placed in
service in the earlier of the taxable year in which, under the
taxpayer's depreciation practice, the period for depreciation with
respect to such property begins; or the taxable year in which the
property is placed in a condition or state of readiness and
availability for a specifically assigned function, whether in a trade
or business, in the production of income, in a tax-exempt activity, or
in a personal activity.
Proposed Sec. 1.48-9(b)(5) largely would adopt the general rules
from Sec. 1.46-3(d)(1) for determining whether a taxpayer has placed
an energy property in service with certain modifications. As discussed
previously, to be eligible for the section 48 credit, energy property
must be property with respect to which depreciation (or amortization in
lieu of depreciation) is allowable. Further, one requirement for
determining if depreciation is allowable with respect to energy
property is that the basis or cost of such energy property is recovered
using a method of depreciation. Accordingly, proposed Sec. 1.48-
9(b)(5)(i) clarifies that the taxable year in which energy property is
placed in service would be the earlier of the taxable year in which the
period for depreciation of such property begins, or the taxable year in
which the energy property is placed in a condition or state of
readiness and availability for a specifically assigned function in
either a trade or business or in the production of income.
In addition, section 50(b)(3) of the Code provides that tax-exempt
organizations cannot determine an investment tax credit, including the
section 48 credit, unless the property is used predominantly in an
unrelated trade or business, so the proposed regulations do not include
a rule applicable to tax-exempt use. However, section 6417(d)(2) of the
Code provides that an applicable entity (as defined in section
6417(d)(1), and including a tax-exempt organization) making an elective
payment election under section 6417 can determine an applicable credit
(defined in section 6417(b), and including the section 48 credit)
without regard to section 50(b)(3), by treating any property with
respect to which the section 48 credit is determined as used in a trade
or business of the applicable entity. (See the rules of proposed Sec.
1.6417-2(c)(2) contained in the notice of proposed rulemaking (REG-
101607-23) published in the Federal Register (88 FR 40528) on June 21,
2023.) Thus, if the rules under section 6417(d)(2) apply, the general
rule adopted in proposed Sec. 1.48-9(b)(5)(i) would apply to determine
when the energy property is placed in service by an applicable entity.
Section 1.46-3(d)(3) provides that notwithstanding the provisions
of Sec. 1.46-3(d)(1), property with respect to which an election is
made under Sec. 1.48-4 to treat the lessee as having purchased such
property is considered placed in service by the lessor in the taxable
year in which possession is transferred to such lessee. Proposed Sec.
1.48-9(b)(5)(ii) would adopt the special rule from Sec. 1.46-3(d)(3)
for determining when a leased property has been placed in service.
B. Property Excluded From Energy Property
Section 48(a)(5) generally provides an election to treat certain
types of qualified facilities as defined in section 45(d), referred to
as a ``qualified investment credit facility,'' as energy property for
purposes of section 48. However, section 48(a)(5)(B) provides that no
section 45 credit is allowed for any taxable year with respect to any
qualified investment credit facility. Section 48(a)(5)(C) provides, in
part, that the term ``qualified investment credit facility'' means any
qualified facility with respect to which no section 45 credit has been
allowed for which the taxpayer makes an irrevocable election.
Accordingly, proposed Sec. 1.48-9(d) would exclude from energy
property any property that is part of a qualified facility with respect
to which a section 45 credit is allowed for any taxable year, including
any prior taxable year.
The Treasury Department and the IRS understand that energy storage
technologies eligible for the section 48 credit are often co-located
with qualified facilities eligible for the section 45 credit and may
share power conditioning and transfer equipment. In consideration of
this practice, the proposed rules would provide that power conditioning
and transfer equipment that is shared by a qualified
[[Page 82192]]
facility (as defined in section 45(d)) and an energy property may be
treated as an integral part of the section 48 energy property. Such
shared property is not considered part of a qualified facility and,
therefore, the sharing of such property will not impact the ability of
a taxpayer to claim the section 48 credit for the energy property or
the section 45 credit for the qualified facility. The Treasury
Department and the IRS request comments regarding whether additional
guidance is needed on this rule.
C. Types of Energy Property
Proposed Sec. 1.48-9(e) would expand upon the definitions of
energy property provided in existing Sec. 1.48-9 to account for new
technologies that were added by amendments to section 48, including by
section 13102 of the IRA. Generally, the definitions of the types of
energy property provided in the proposed regulations do not provide
specific beginning of construction or placed in service deadlines.
Taxpayers should refer to the current statutory language of section 48
for specific requirements applicable to each type of energy property
with respect to any particular taxable year. The following definitions
in proposed Sec. 1.48-9(e) for the different types of energy
properties were developed by the Treasury Department and the IRS in
consultation with the Department of Energy.
1. Solar Energy Property
Section 48(a)(3)(A)(i) provides that energy property includes solar
energy property and defines solar energy property as any property that
is equipment that uses solar energy to generate electricity, to heat or
cool (or provide hot water for use in) a structure, or to provide solar
process heat, excepting property used to generate energy for the
purposes of heating a swimming pool.
Existing Sec. 1.48-9(d)(1) defines solar energy property as
including equipment and materials (and parts related to the functioning
of such equipment) that use solar energy directly to (i) generate
electricity, (ii) heat or cool a building or structure, or (iii)
provide hot water for use within a building or structure. Further,
existing Sec. 1.48-9(d)(3), in part, defines solar electric generation
equipment as equipment that uses solar energy to generate electricity
through a process that involves the transformation of sunlight into
electricity through the use of such devices as solar cells or other
collectors.
In response to Notice 2015-70, commenters requested that the
Treasury Department and the IRS provide guidance regarding specific
components that may be considered solar energy property, including in
photovoltaic (PV) systems (including concentrated PV systems), non-PV
concentrated solar power systems (passive solar), solar process, and
thermal systems. Several commenters requested that the regulations
explicitly list certain types of technologies as solar energy property,
such as integrated thermoplastic roofing and racking systems. Other
commenters requested that the regulations simply define solar energy
property to include common components such as controllers to manage use
of solar energy, mounting structures, energy storage technology, power
conditioning equipment, and step-up transformers.
Proposed Sec. 1.48-9(e)(1)(i) would depart from the existing
definition of solar energy property at Sec. 1.48-9(d)(1) by adopting a
modified version of the current statutory definition, which provides
that solar energy property is equipment that uses solar energy to
generate electricity, to heat or cool a structure, or to provide solar
process heat, and parts related to the functioning of such equipment.
Proposed Sec. 1.48-9(e)(1)(ii) would define the term ``solar electric
generation equipment'' as equipment that converts sunlight into
electricity through the use of devices such as solar cells or other
collectors, while adopting the current statutory exclusion for any
property used to generate energy for the purposes of heating a swimming
pool. The proposed regulations would eliminate the exclusion for
passive solar in existing Sec. 1.48-9(d)(2) because section 48 does
not distinguish between passive and active solar energy systems.
Finally, the proposed regulations would apply the functional
interdependence test as described in part I.D.2 of this Summary of
Comments and Explanation of Provisions to determine whether components
are included as part of solar energy property.
Existing Sec. 1.48-9(d)(7) provides that solar energy property
does not include equipment that uses solar energy to generate steam at
high temperatures for use in industrial or commercial processes (solar
process heat). This definition conflicts with section 48(a)(3)(A)(i).
Accordingly, the proposed regulations would adopt the statutory
language by explicitly including solar process heat within the
definition of the term ``solar energy property.'' After consultation
with the Department of Energy, proposed Sec. 1.48-9(e)(1)(iii) would
define ``solar process heat equipment'' as equipment that uses solar
energy to generate heat for use in industrial or commercial processes.
2. Fiber-Optic Solar Energy Property and Electrochromic Glass Property
a. Fiber-Optic Solar Energy Property
Section 48(a)(3)(A)(ii) provides that energy property includes
equipment that uses solar energy to illuminate the inside of a
structure using fiber-optic distributed sunlight. The Treasury
Department and the IRS received no comments in response to Notice 2022-
49 regarding fiber-optic solar energy property. Accordingly, proposed
Sec. 1.48-9(e)(2)(i) would adopt the statutory definition of fiber-
optic solar energy property. Additionally, the proposed regulations
would apply the functional interdependence test as described in part
I.D.2 of this Summary of Comments and Explanation of Provisions to
determine whether components are included as part of fiber-optic solar
energy property.
b. Electrochromic Glass Property
Section 48(a)(3)(A)(ii) was modified by the IRA to add
electrochromic glass property as a type of energy property. That
provision defines electrochromic glass property as equipment that uses
electricity to change its light transmittance properties in order to
heat or cool a structure. The Treasury Department and IRS consulted
with the Department of Energy to determine the types of property
eligible as electrochromic glass property. Accordingly, Sec. 1.48-
9(e)(2)(ii) would provide that there are only two types of
electrochromic glass property: (i) electrochromic glass incorporated
into a full window that is installed directly into a building or (ii)
electrochromic glass incorporated into a secondary window (known as
secondary glazing) that is installed on top of an existing window. For
each type of electrochromic glass property, there is a separate control
package consisting of electronics, power supply, sensors, and software
necessary to control the operations of the electrochromic glass
property. Thus, electrochromic glass property is not only comprised of
electrochromic glass but also the relevant window or secondary glazing
property that incorporates the electrochromic glass property.
Therefore, in addition to the electronic controls package that includes
the power electronics, sensors, wires, and software systems, the
electrochromic window or secondary glazing also includes the
electrochromic glass coating and the balance of window and installation
components including glass, flashing, framing, and sealants, as
applicable, to the type of electrochromic glass property.
[[Page 82193]]
In response to Notice 2022-49, several commenters provided input on
the definition of electrochromic glass property. Several commenters
requested a narrow definition. Other commenters suggested adopting a
broader definition of electrochromic glass property. One commenter
stated that interpretations of the terms ``electrochromic glass'' or
``dynamic glass'' should be expanded to include any material or
technology that meets or exceeds the performance criteria for such
components established by the most recent Energy Star or International
Energy Conservation Code (IECC) standards in effect at the time such
component is placed in service.
In response to the comments and after consultation with the
Department of Energy, the proposed regulations would clarify the
definition of electrochromic glass property. Proposed Sec. 1.48-
9(e)(2)(ii) would adopt the statutory definition of electrochromic
glass property while providing that light transmittance properties
include both visible light and near infrared light. Additionally, as
mentioned previously, proposed Sec. 1.48-9(c)(2)(ii)(B) would adopt
the performance and quality standards that new electrochromic windows
must be rated in accordance with the NFRC and secondary glazing systems
must be rated in accordance with the AERC Rating and Certification
Process, or subsequent revisions. The application of these performance
and quality standards are needed to ensure that the intended energy
savings occurs from the installation of electrochromic glass property.
The Treasury Department and the IRS received comments requesting
guidance concerning the eligible components of electrochromic glass
property. Similar to the other energy properties, the proposed
regulations would apply the functional interdependence test as
described in part I.D.2 of this Summary of Comments and Explanation of
Provisions to determine whether components are included as part of
electrochromic glass property. This approach provides a technology-
neutral way to determine what is considered included in the energy
property that is broad enough to encompass technological changes. In
the case of electrochromic glass property, for example, an
electrochromic glass system includes the full controls package, the
electrochromic glass coating, and the balance of window and
installation components including glass, flashing, framing, and
sealants.
3. Geothermal Energy Property
Section 48(a)(3)(A)(iii) provides that energy property includes
geothermal property, and defines geothermal property as equipment used
to produce, distribute, or use energy derived from a geothermal deposit
(within the meaning of section 613(e)(2) of the Code), but only, in the
case of electricity generated by geothermal power, up to (but not
including) the electrical transmission stage.
Existing Sec. 1.48-9(c)(10)(i) defines ``geothermal equipment'' as
equipment that produces, distributes, or uses energy derived from a
geothermal deposit. Existing Sec. 1.48-9(c)(10) generally provides
that geothermal property includes production and distribution
equipment. Proposed Sec. 1.48-9(e)(3)(i) would adopt this definitional
framework by providing that geothermal energy property is equipment
used to produce, distribute, or use energy derived from a geothermal
deposit (within the meaning of section 613(e)(2)), and includes
production equipment (as defined in proposed Sec. 1.48-9(e)(3)(ii))
and distribution equipment (as defined in proposed Sec. 1.48-
9(e)(3)(iii)).
Proposed Sec. 1.48-9(e)(3)(ii) would adopt a modified definition
of production equipment from existing Sec. 1.48-9(c)(10)(ii) in three
respects. First, proposed Sec. 1.48-9(e)(3)(ii) would provide, in
part, that production equipment includes equipment necessary to bring
geothermal energy from the subterranean deposit to the surface. Second,
while existing Sec. 1.48-9(c)(10)(ii) provides that reinjection wells
required for production may qualify as production equipment, proposed
Sec. 1.48-9(e)(3)(ii) would expand the types of wells that may qualify
as production equipment to production, injection, and monitoring wells.
Third, proposed Sec. 1.48-9(e)(3)(ii) would also include the
electricity generating equipment as production equipment for those
projects that convert geothermal energy to electricity.
Proposed Sec. 1.48-9(e)(3)(iii) would adopt a modified definition
of distribution equipment from existing Sec. 1.48-9(c)(10)(iii). The
existing regulations provide that distribution equipment includes
components of a heating system, such as pipes and ductwork that
distribute the energy derived from the geothermal deposit within a
building. Proposed Sec. 1.48-9(e)(3)(iii) would also add components of
a building's heating or cooling system as distribution equipment. The
proposed regulations would apply the functional interdependence test as
described in part I.D.2 of this Summary of Comments and Explanation of
Provisions to determine whether components are included as part of
geothermal energy property.
In response to Notice 2015-70, one commenter requested that the
regulations be modified to include as credit eligible costs incurred to
drill failed or non-producing wells, and in some scenarios, for the
margin or contingency that a subsidiary contractor requires to be paid
to perform under an engineering, procurement, and construction (EPC)
contract. While the proposed regulation would expand the types of wells
that may be considered production equipment, it would not specifically
include costs incurred to drill failed or non-producing wells. In many
cases costs incurred to drill failed or non-producing geothermal wells
are already recoverable through intangible drilling costs under Sec.
1.612-5. It is also unclear whether the margin or contingency that a
subsidiary contractor requires to be paid to perform under an EPC
contract can be recovered by a taxpayer. However, if such costs are
recoverable, such recovery would likely occur through capitalizing the
costs to the underlying mineral interest and claiming depletion
deductions under section 613(e). Therefore, the Treasury Department and
the IRS have determined that these costs cannot be included in the
basis of the geothermal energy property for purposes of calculating the
section 48 credit.
4. Qualified Fuel Cell Property
Section 48(a)(3)(A)(iv) provides that energy property includes
qualified fuel cell property. As modified by the IRA, section 48(c)(1)
defines ``qualified fuel cell property'' as a fuel cell power plant
that has a nameplate capacity of at least 0.5 kilowatt (kW) (1 kW in
the case of a fuel cell power plant with a linear generator assembly)
of electricity using an electrochemical process or electromechanical
process and an electricity-only generation efficiency greater than 30
percent. Electricity-only generation efficiency may be calculated by
dividing the heat rate of the fuel cell (for example, kilowatt-hours
(kWh) electricity produced per kilogram (kg) of fuel consumed) by the
higher heating value of the fuel (for example, kWh per kg). Section
48(c)(1)(C) defines the term ``fuel cell power plant'' as an integrated
system comprised of a fuel cell stack assembly, or linear generator
assembly, and associated balance of plant components that converts a
fuel into electricity using electrochemical or electromechanical means.
The Treasury Department and the IRS received few comments regarding
qualified fuel cell property in response to Notice 2022-49. As
discussed, the
[[Page 82194]]
proposed regulations are intended to provide a technology-neutral way
to determine what is included in energy property that is broad enough
to encompass technological changes and do not include rules for a
particular type of product. As a result, proposed Sec. 1.48-9(e)(4)
would adopt the statutory definition of qualified fuel cell property.
The proposed regulations would also apply the functional
interdependence test as described in part I.D.2 of this Summary of
Comments and Explanation of Provisions to determine whether components
are included as part of qualified fuel property.
5. Qualified Microturbine Property
Section 48(a)(3)(A)(iv) provides that energy property includes
qualified microturbine property. Section 48(c)(2) defines ``qualified
microturbine property'' as a stationary microturbine power plant that
has a nameplate capacity of less than 2,000 kW and an electricity-only
generation efficiency of not less than 26 percent at International
Standard Organization conditions. Section 48(c)(2)(C) provides that a
``stationary microturbine power plant'' is an integrated system
comprised of a gas turbine engine, a combustor, a recuperator or
regenerator, a generator or alternator, and associated balance of plant
components that convert a fuel into electricity and thermal energy. A
stationary microturbine power plant also includes all secondary
components located between the existing infrastructure for fuel
delivery and the existing infrastructure for power distribution,
including equipment and controls for meeting relevant power standards,
such as voltage, frequency, and power factors.
The Treasury Department and the IRS received no comments regarding
qualified microturbine property in response to the request for comment
published in Notice 2022-49. Therefore, proposed Sec. 1.48-9(e)(5)
would adopt the statutory definition of qualified microturbine
property. The proposed regulations would also apply the functional
interdependence test as described in part I.D.2 of this Summary of
Comments and Explanation of Provisions to determine whether components
are included as part of qualified microturbine property.
6. Combined Heat and Power System Property
Section 48(a)(3)(A)(v) includes combined heat and power system
(CHP) property as a type of energy property. Section 48(c)(3)(A)
defines CHP property as property comprising a system that uses the same
energy source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in combination with
the generation of steam or other forms of useful thermal energy
(including heating and cooling applications). Section 48(c)(3)(A)
further provides, in part, that a CHP property must produce at least 20
percent of its total useful energy in the form of thermal energy that
is not used to produce electrical or mechanical power (or combination
thereof), and at least 20 percent of its total useful energy in the
form of electrical or mechanical power (or combination thereof), and
that the energy efficiency percentage of the system must exceed 60
percent.
Section 48(c)(3)(B) provides that the credit for CHP property is
reduced to the extent that a CHP property has an electrical or
mechanical capacity in excess of applicable limits. Subject to the
exception for CHP property that uses closed or open-loop biomass as
feedstock, CHP property with capacity in excess of the applicable
capacity limit (15 MW or a mechanical capacity of more than 20,000
horsepower or an equivalent combination of electrical and mechanical
energy capacities) is eligible for only a fraction of the otherwise
allowable section 48 credit. The fraction is equal to the applicable
capacity limit divided by the capacity of the CHP property. However,
CHP property with a capacity in excess of 50 MW or a mechanical energy
capacity in excess of 67,000 horsepower or an equivalent combination of
electrical and mechanical energy capacities does not qualify for the
section 48 credit.
Section 48(c)(3)(C) provides that the energy efficiency percentage
of a CHP property is the fraction (1) the numerator of which is the
total useful electrical, thermal, and mechanical power produced by the
system at normal operating rates, and expected to be consumed in its
normal application, and (2) the denominator of which is the lower
heating value of the fuel sources for the system. The energy efficiency
percentage and the percentages under section 48(c)(3)(A)(ii) are
determined on a British thermal unit (Btu) basis. Section
48(c)(3)(C)(iii) specifically provides that the term ``combined heat
and power system property'' does not include property used to transport
the energy source to the facility or to distribute energy produced by
the facility.
Additionally, section 48(c)(3)(D) provides that a CHP property with
a fuel source that is at least 90 percent from closed or open-loop
biomass that would otherwise qualify for the section 48 credit but for
the failure to meet the efficiency standard is eligible for a credit
reduced in proportion to the degree to which the system fails to meet
the efficiency standard. For example, a system that would otherwise be
required to meet the 60-percent efficiency standard, but which only
achieves 30-percent efficiency, would be permitted to claim a credit
equal to one-half of the otherwise allowable credit (that is, a five
percent credit).
In response to Notice 2015-70, several commenters requested that
the definition of CHP property be modified by relaxing certain
requirements. Specifically, commenters requested that the definition of
CHP property be modified by eliminating or reducing the requirement
that a facility produce at least 20 percent of its total useful energy
in the form of electrical or mechanical power (or combination thereof).
This modification would allow waste heat to power (WHP) property, which
uses waste heat from industrial processes to generate electricity, to
qualify as CHP property despite its inability to meet certain statutory
requirements. Since the comments to Notice 2015-70 were received,
Congress amended section 48 by adding waste energy recovery property
(WERP) as a type of energy property in the Consolidated Appropriations
Act, 2021, Public Law 116-260, 134 Stat. 1182 (Dec. 27, 2020).
Additional information on requirements for WERP is provided in part
I.C.9 of this Summary of Comments and Explanation of Provisions.
Proposed Sec. 1.48-9(e)(6)(i) would adopt a simplified version of
the statutory definition of CHP property. Additionally, proposed Sec.
1.48-9(e)(6)(ii) would provide that CHP property does not include
property used to transport the energy source to the generating facility
or to distribute energy produced by the facility. The proposed
regulations would also apply the functional interdependence test as
described in part I.D.2 of this Summary of Comments and Explanation of
Provisions to determine whether components are included as part of CHP
property.
7. Qualified Small Wind Energy Property
Section 48(a)(3)(A)(vi) provides that energy property includes
qualified small wind energy property. Section 48(c)(4) defines
qualified small wind energy property as property using a qualifying
small wind turbine (which has a nameplate capacity of not more than 100
kW) to generate electricity. The Treasury Department and the IRS
received no comments regarding qualified small wind energy property in
response to Notice 2015-70.
[[Page 82195]]
Accordingly, proposed Sec. 1.48-9(e)(7) would adopt the statutory
definition of qualified small wind energy property. The proposed
regulations would apply the functional interdependence test as
described in part I.D.2 of this Summary of Comments and Explanation of
Provisions to determine whether components are included as part of
qualified small wind energy property.
8. Geothermal Heat Pump Equipment
Section 48(a)(3)(A)(vii) provides that energy property includes
geothermal heat pump equipment. The statute provides, in part, that
geothermal heat pump equipment is equipment that uses the ground or
ground water as a thermal energy source to heat a structure or as a
thermal energy sink to cool a structure. The Treasury Department and
the IRS received no comments regarding geothermal heat pump equipment
in response to Notice 2015-70. As a result, proposed Sec. 1.48-9(e)(8)
would adopt the statutory definition of qualified geothermal heat pump
equipment while providing the modification that in addition to the
ground and ground water, other underground working fluids may be used
as a thermal energy source or as a thermal energy sink. The proposed
regulations would apply the functional interdependence test as
described in part I.D.2 of this Summary of Comments and Explanation of
Provisions to determine whether components are included as part of
geothermal heat pump equipment.
Additionally, while section 48(a)(3)(A)(vii) does not specify
energy distribution equipment and components of a building's heating
and/or cooling system as components of geothermal heat pump equipment,
such equipment may be integral to the function of the geothermal heat
pump equipment, to heat or cool a structure. Thus, energy distribution
equipment may be considered geothermal heat pump equipment. See section
I.E.3. of this preamble for a discussion of an integral part of energy
property.
9. Waste Energy Recovery Property (WERP)
Section 48(a)(3)(A)(viii) provides that energy property includes
WERP. Section 48(c)(5)(A) defines WERP as property (with a capacity not
in excess of 50 MW) that generates electricity solely from heat from
buildings or equipment if the primary purpose of such building or
equipment is not the generation of electricity. Additionally, section
48(c)(5)(C) prevents taxpayers from claiming a double benefit by
providing that any property that could be treated as WERP (determined
without regard to section 48(c)(5)), which is part of a CHP property is
not treated as WERP for purposes of section 48 unless the taxpayer
elects not to treat such system as a CHP property for purposes of
section 48.
Proposed Sec. 1.48-9(e)(9), would adopt the statutory definition
of WERP. The proposed regulations would also apply the functional
interdependence test as described in part I.D.2 of this Summary of
Comments and Explanation of Provisions to determine whether components
are included as part of WERP. Additionally, after consultation with the
Department of Energy, proposed Sec. 1.48-9(e)(9) would provide
examples of buildings or equipment the primary purpose of which is not
the generation of electricity including, but not limited to,
manufacturing plants, medical care facilities, facilities on college
campuses, pipeline compressor stations, and associated equipment.
10. Energy Storage Technology
Section 48(a)(3)(A)(ix) was added by the IRA to provide that energy
property includes energy storage technology. Section 48(c)(6)(A)(i)
defines energy storage technology to mean property (other than property
primarily used in the transportation of goods or individuals and not
for the production of electricity) that receives, stores, and delivers
energy for conversion to electricity (or, in the case of hydrogen, that
stores energy), and has a nameplate capacity of not less than 5 kWh.
Section 48(c)(6)(A)(ii) provides that thermal energy storage property
is also energy storage technology.
Section 48(c)(6)(B) provides a rule for modifications of energy
storage technology. In the case of any property that either was placed
in service before August 16, 2022, and would be described in section
48(c)(6)(A)(i), except that such property has a capacity of less than 5
kWh and is modified in a manner that such property (after such
modification) has a nameplate capacity of not less than 5 kWh, or is
energy storage technology (as described in section 48(c)(6)(A)(i)) and
is modified in a manner that such property (after such modification)
has an increase in nameplate capacity of not less than 5 kWh, such
property is treated as energy storage technology (as described in
section 48(c)(6)(A)(i)) except that the basis of any existing property
prior to such modification is not taken into account for purposes of
section 48.
Section 48(c)(6)(C) defines thermal energy storage property, for
purposes of section 48(c)(6) as property comprising a system that: is
directly connected to a heating, ventilation, or air conditioning
system; removes heat from, or adds heat to, a storage medium for
subsequent use; and provides energy for the heating or cooling of the
interior of a residential or commercial building. Section
48(c)(6)(C)(ii) provides that thermal energy storage property does not
include a swimming pool, a combined heat and power system property, or
a building or its structural components.
The Treasury Department and the IRS received comments addressing
energy storage technologies in response to Notice 2022-49. Some
comments discussed the definition of energy storage technology and how
broadly energy storage technology should be interpreted in the
regulations. For example, a commenter requested that guidance define
energy storage broadly based on its characteristics and capabilities,
rather than using a technology-based definition that could
unintentionally exclude developing technologies. Some commenters
requested that the definition of energy storage technology focus more
on capability and less on a particular technology. Other commenters
requested confirmation that certain specific technologies would be
included within the definition of energy storage technology and that
the definition be based on the underlying definition for the technology
provided in section 48(c)(6), as opposed to the specific
functionalities of the energy storage technology. After consideration
of these comments, proposed Sec. 1.48-9(e)(10) would adopt the
statutory definition of energy storage technology.
Commenters also provided input on hydrogen storage, including a
variety of recommendations on what the definition of hydrogen storage
property should include. For example, one commenter suggested that
``energy storage technology'' with respect to hydrogen storage includes
all equipment, facilities, storage receptacles, dedicated vehicles and
vessels used to compress, liquify, store, and distribute hydrogen and
hydrogen carriers, such as ammonia, methanol, and other forms of
hydrogen carriers. Another commenter requested that regulations include
a broad list of components of energy storage technologies including the
storage receptacle itself and all pressure vessels, piping, valves, and
tanks among many other components. This commenter also suggested that
property that facilitates use of ammonia, methanol and other hydrogen
carriers be included as hydrogen energy storage technology. Another
commenter noted that the regulations should provide specific use
limitations for stored hydrogen such as
[[Page 82196]]
for use solely in energy-related activities.
Section 48(c)(6)(A) already defines energy storage technology
(including hydrogen storage) and thermal energy storage property based
on the general functions of the relevant energy storage technology.
Hydrogen energy storage property must store hydrogen that is solely
used for the production of energy and not for the production of end
products, such as fertilizer. For example, this would include, but is
not limited to, hydrogen used to produce heat, to generate electricity,
or to be used in a fuel cell vehicle. The type of hydrogen storage
medium (for example, physical based or material based), is not limited.
Proposed Sec. 1.48-9(e)(10)(iv) therefore would adopt that rule. The
Treasury Department and the IRS request comments on alternative
approaches to assessing limitations on the use of hydrogen energy
storage property, including whether additional clarification is needed
regarding the production of energy from hydrogen, and what type of
documentation would be needed to demonstrate that a hydrogen energy
storage property was used to store hydrogen solely used for the
production of energy.
Proposed Sec. 1.48-9(e)(10) would apply the functional
interdependence test as described in part I.D.2 of this Summary of
Comments and Explanation of Provisions to determine whether components
are included as part of an energy storage technology. This approach
provides a technology-neutral way to determine what is considered
energy storage technology and is broad enough to encompass
technological changes. The proposed regulations would, however, provide
additional guidance in the form of a non-exclusive list of examples of
different types of energy storage technologies. The list is non-
exclusive because it would be impossible to list all the types of
technologies that could qualify currently, and the Treasury Department
and the IRS acknowledge the importance of leaving the language broad to
allow future technological advances in energy storage technologies to
qualify.
Additionally, rechargeable electrochemical batteries of all types
meet the functional definition by receiving energy in the form of
electricity, storing electro-chemical energy, and producing
electricity. A commenter requested that re-used or ``second life''
batteries should be considered ``new energy property.'' Generally, used
property cannot be considered ``new property'' for purposes of the 80/
20 Rule, which is described in part III.A. of this Summary of Comments
and Explanation of Provisions. However, proposed Sec. 1.48-9(e)(10)(v)
would provide that recycled components may be used to meet the
modification rule for energy storage technology. The Treasury
Department and the IRS request comments on whether ``second life''
batteries should be considered new components for purposes of the 80/20
Rule. Additionally, the Treasury Department and the IRS request comment
on what types of components may be used to modify an existing energy
storage technology, and whether there are any challenges with recycled
components being used to meet the modification rule.
Energy storage technology excludes property primarily used in the
transportation of goods or individuals and not for the production of
electricity under section 48(c)(6)(A)(i). The Treasury Department and
the IRS understand that this exclusion, at a minimum, would apply to
batteries and other energy storage technology that are incorporated
into or otherwise physically integrated within motor vehicles and other
modes of transportation of goods or individuals and from which an
electric motor of such vehicle or other mode of transportation draws
electricity for propulsion. The Treasury Department and the IRS do not
intend that this exclusion apply to batteries and other energy storage
technology that may be used to charge or recharge such vehicles or
other modes of transportation, if the batteries and other energy
storage technologies are physically separate from such vehicles or
other modes of transportation. The Treasury Department and the IRS
request comments as to how the exclusion for property primarily used in
the transportation of goods or individuals and not for the production
of electricity should be defined and the specific types of property
that may be covered or not covered by this exclusion.
Although the list of examples of energy storage technologies that
proposed Sec. 1.48-9(e)(10) would provide is nonexclusive, and
therefore many other technologies that are not addressed would meet
these functional definitions, there are some examples that do not meet
the functional definition. For example, some technologies are marketed
as ``virtual batteries,'' which are aggregations of controllable
electricity demand providing similar electrical grid services to an
electrical grid battery. Such ``virtual batteries'' receive energy in
the form of electricity, but they do not store it for later discharge
as electricity. The function of ``virtual batteries'' is to shift
demand to different points in time. Because such demand shifting is not
a storage activity for purposes of section 48(c)(6), this technology is
not an energy storage technology. There are other technologies for
which the determination of whether they meet the statutory requirements
of section 48(c)(6) is less clear. The Treasury Department and the IRS
request comments on whether these other types of technologies should be
considered energy storage technologies.
11. Qualified Biogas Property
Section 48(a)(3)(A)(x) was added by the IRA to provide that energy
property includes qualified biogas property. Section 48(c)(7)(A)
defines qualified biogas property as property comprising a system that
converts biomass (as defined in section 45K(c)(3), as in effect on the
date of enactment of section 48(a)(3)(A) (August 16, 2022)) into a gas
that consists of not less than 52 percent methane by volume, or is
concentrated by such system into a gas that consists of not less than
52 percent methane, and captures such gas for sale or productive use,
and not for disposal via combustion. Section 48(c)(7)(B) provides that
qualified biogas property includes any property that is part of such
system that cleans or conditions such gas.
In response to Notice 2022-49, the Treasury Department and the IRS
received several comments regarding qualified biogas property. Many
commenters supported adopting a broad definition of qualified biogas
property to include all the related technologies that commenters stated
could be utilized in qualified biogas property. After consideration of
these comments, proposed Sec. 1.48-9(e)(11) would adopt the statutory
definition of qualified biogas property.
Additionally, at least one commenter stated that when gas is being
upgraded and injected into a pipeline, upgrading equipment is necessary
to condition the gas into the appropriate mixture for injection into
the pipeline and should be part of the qualified biogas property. In
the commenter's view, the eligibility of this upgrading equipment
hinges on the meaning of the phrase ``captures such gas for sale or
productive use.'' The commenter asserted that the statute should
encompass such conversion of biogas to a more portable product such as
a compressed or liquified gas. Therefore, the commenter asserted that
upgrading equipment be included in a qualified biogas property because
it captures such biogas for sale or
[[Page 82197]]
productive use and includes any property that is part of such qualified
biogas property that cleans or conditions such gas.
After consideration of these comments, proposed Sec. 1.48-9(e)(11)
would provide that components of property are considered qualified
biogas property if they are functionally interdependent, that is, if
the placing in service of each component is dependent upon the placing
in service of each of the other components in order to perform the
intended function of the qualified biogas property as described in
proposed Sec. 1.48-9(e)(11)(i). This approach would provide a
technology-neutral way to determine what is considered included in a
qualified biogas property and is broad enough to encompass
technological changes. Additionally, proposed Sec. 1.48-9(e)(11)(i)
provides examples of functionally interdependent components of the
qualified biogas property including, but not limited to, a waste
feedstock collection system, a landfill gas collection system, mixing
or pumping equipment, and an anaerobic digester.
Regarding the upgrading equipment that is necessary to condition
biogas into the appropriate mixture for injection into the pipeline,
this equipment is not functionally interdependent with the qualified
biogas property that converts biomass into a gas containing not less
than 52 percent methane and captures such gas for sale or productive
use as specified in the statute. While this upgrading equipment makes
the injection of biogas into a pipeline possible, such upgrading
equipment is not necessary to satisfy the statutory requirements that
the biogas converted from biomass contain not less than 52 percent
methane, and that it be captured for sale or productive use. In support
of including upgrading equipment necessary to prepare the biogas for
injection into the pipeline, commenters point to the statutory language
that qualified biogas property includes any property that is part of
such system that cleans or conditions such gas. However, unlike
upgrading equipment that is necessary for injection of the biogas into
the pipeline, cleaning and conditioning equipment is part of the
necessary process to convert biomass into gas that is not less than 52
percent methane and capture gas for sale or productive use. Therefore,
proposed Sec. 1.48-9(e)(11)(i) would clarify that upgrading equipment
is not a functionally interdependent component of qualified biogas
property. The Treasury Department and the IRS request comments
regarding what types of components may be included within the
definition of cleaning and conditioning property provided in the
definition of qualified biogas property in section 48(c)(7)(B).
One commenter had recommendations about the application of the
requirement in section 48(c)(7)(A)(ii) that a qualified biogas property
captures such gas for sale or productive use, and not for disposal via
combustion. This commenter noted that some properties that produce
electricity from gas using a combustion process, may flare waste or
tail gas, including during commissioning or maintenance periods. The
commenter recommended a de minimis exception so that sale or use of gas
in this manner will not prevent a property that produced such gas from
being a qualified biogas property. The Treasury Department and the IRS
request additional comments on whether such an exception is necessary
and what should be considered de minimis for this purpose.
Lastly, several comments addressed the methane requirements in the
statutory definition by commenting on how and when methane content
should be measured and whether methane monitoring is required. After
consideration and coordination with the Department of Energy, the
proposed regulations would adopt a rule addressing the production point
at which methane content must be measured. Proposed Sec. 1.48-
9(e)(11)(ii) would provide that the methane requirements described in
section 48(c)(7)(A)(i)(I) and section 48(c)(7)(A)(i)(II) are measured
at the point at which gas exits the biogas production system (which may
include an anerobic digester, landfill gas collectors, or thermal
gasification equipment) of a qualified biogas property. This is the
point at which a taxpayer generally must determine whether it will
convert the biogas to fuel for sale or use it directly to generate heat
or fuel an electricity generation unit.
12. Microgrid Controllers
Section 48(a)(3)(A)(xi) was added by the IRA to provide that energy
property includes microgrid controllers. Section 48(c)(8)(A) defines a
microgrid controller as equipment that is part of a qualified microgrid
and designed and used to monitor and control the energy resources and
loads on such microgrid. Section 48(c)(8)(B) defines a qualified
microgrid as an electrical system that includes equipment that is
capable of generating not less than 4 kW and not greater than 20 MW of
electricity; is capable of operating in connection with the electrical
grid and as a single controllable entity with respect to such
electrical grid, and independently (and disconnected) from such
electrical grid; and is not part of a bulk-power system (as defined in
section 215 of the Federal Power Act (16 U.S.C. 824o)).
In response to Notice 2022-49, the Treasury Department and the IRS
received several comments requesting clarification on the definition of
microgrid controllers, with some commenters suggesting a broad
interpretation and others suggesting a narrow interpretation.
Additionally, several commenters identified certain components that
should be included as part of an eligible microgrid controller.
Several commenters asserted that the focus of the microgrid
controller definition should be on capability and not the availability
of an interconnection with the utility grid. In response to these
comments, proposed Sec. 1.48-9(e)(12)(ii) would clarify that an
eligible microgrid includes an electrical system that is capable of
operating in connection with the larger electrical grid whether or not
the microgrid is physically connected to the electrical grid. For
example, a microgrid located in a remote area that does not have a
larger electrical grid to which it can physically connect can still be
a qualified microgrid.
After consideration of these comments, proposed Sec. 1.48-
9(e)(12)(i) would adopt the statutory definition of a microgrid
controller. The Treasury Department and the IRS request comments on
whether the rules for functionally interdependent property provided in
proposed Sec. 1.48-9(f)(2)(ii) would be sufficient to determine the
components that should be included as part of a microgrid controller,
or whether another test is needed due to the specific role of microgrid
controllers and their components.
13. Other Property Included in Section 48
Because future legislation may add additional types of energy
property to section 48, proposed Sec. 1.48-9(e)(13) would provide that
any other property specified by section 48 as energy property is
treated as energy property for purposes of these proposed regulations.
The general rules and requirements applicable to energy property
provided in these proposed regulations would also apply to such
property.
D. Definition of Energy Property and Scope of Included Components
Since shortly after the enactment of section 48, energy property
eligible for the section 48 credit has been
[[Page 82198]]
interpreted by the Treasury Department and the IRS to include, in
addition to energy generation property, costs related to components
such as power conditioning equipment, transfer equipment, and parts
related to the functioning of that equipment.
On November 9, 1978, the Energy Tax Act of 1978, amended section 48
by adding a new subsection (then section 48(l)) to define ``energy
property.'' Public Law 95-816, 92 Stat. 2174. On January 23, 1981, the
Treasury Department and the IRS promulgated T.D. 7765 to provide
additional guidance regarding the definition of energy property. 46 FR
7287-01. The preamble to T.D. 7765 states that ``[i]n response to
comments, the definition of solar energy property was expanded to make
it clear that it includes storage devices, power conditioning
equipment, transfer equipment, and property solely related to the
functioning of those items. However, such equipment does not include
transmission equipment.''
The preamble to T.D. 7765 also provides that ``[a] number of
comments cited specific legislative history to the effect that wind
energy property includes `transfer equipment.' '' The preamble to T.D.
7765 defines ``transfer equipment'' as including equipment that permits
the aggregation of electricity generated by several windmills and
equipment that alters voltage in order to permit transfer to a
transmission line. The preamble to T.D. 7765 concludes that transfer
equipment is specifically added to the definition of wind energy
property, however, transfer equipment does not include transmission
lines.
Existing Sec. 1.48-9(d)(3) defines ``solar energy property'' as
equipment that uses solar energy to generate electricity, and includes
storage devices, power conditioning equipment, transfer equipment, and
parts solely related to the functioning of those items. This section
also provides that solar energy property used to generate electricity
includes only equipment up to (but not including) the stage that
transmits or uses electricity.
Existing Sec. 1.48-9(e) defines ``wind energy property'' as
consisting of a windmill, wind-driven generator, storage devices, power
conditioning equipment, transfer equipment, and parts solely related to
the functioning of those items. Section 48(a)(3) no longer includes
wind energy property as a type of energy property. However, qualified
wind facilities (including qualified offshore wind facilities) may be
qualified investment credit facilities that a taxpayer may elect to
treat as energy property if they meet all the requirements provided in
section 48(a)(5).
While not specifically addressed in section 48, Internal Revenue
Bulletin guidance interpreting section 48 has provided that
functionally interdependent components, are considered components of
energy property eligible for the section 48 credit. In Notice 2018-59,
2018-28 I.R.B. 196, the Treasury Department and the IRS clarified what
components are considered part of an energy property. Section 7.01(1)
of Notice 2018-59 states that an energy property generally includes all
components of property that are functionally interdependent (unless
such equipment is an addition or modification to an energy property).
Notice 2018-59 provides that components of property are functionally
interdependent if the placing in service of each component is dependent
upon the placing in service of each of the other components in order to
generate electricity. Further, Notice 2018-59 relies upon the rationale
provided in Revenue Ruling 94-31, 1994-1 C.B. 16, to provide that
functionally interdependent components of property that can be operated
and metered together and can begin producing electricity separately
from other components of property within a larger energy project will
be considered an energy property.
In the context of defining ``section 38 property,'' Sec. 1.48-
1(d)(4) provides that ``section 38 property'' is ``used as an integral
part of one of the specified activities if it is used directly in the
activity and is essential to the completeness of the activity.''
Section 1.48-1(d)(4) also provides that ``[p]roperty shall be
considered used as an integral part of one of the specified activities
if so used either by the owner of the property or by the lessee of the
property.'' Notice 2018-59 incorporates the concept of integral
property from Sec. 1.48-1(d) to provide that certain property that is
an integral part of an energy property is included in energy property
for purposes of the section 48 credit. While Notice 2018-59 explained
that property that is ``functionally interdependent'' to the generation
of electricity was treated as a unit of energy property, it also
provided that certain other property that was integral to the
production of electricity are included in determining what costs to
include in the basis of energy property and the date on which
construction began. Section 7.02(1) of Notice 2018-59 includes an
example illustrating that, while a transmission tower located at a site
where energy property is located is not energy property because
transmission is not an integral part of the activity performed by the
energy property, a custom-designed transformer that steps up the
voltage of electricity produced at an energy property to the voltage
needed for transmission is power conditioning equipment, which is an
integral part of the activity performed. In addition, section 7.02(2)
of Notice 2018-59 explains that onsite roads used to operate and
maintain the energy property are integral to the production of
electricity, but not roads used primarily to access the site or
primarily for employee or visitor vehicles. Similarly, sections 7.02(3)
and (4) of Notice 2018-59 explain that fences are not integral to the
production of electricity nor are buildings, unless the building is
essentially an item of machinery or equipment, or a structure that
houses property that is integral to the activity of an energy property
if the use of the structure is so closely related to the use of the
housed energy property that the structure clearly can be expected to be
replaced when the energy property it initially houses is replaced.
In response to a request for comments regarding the definition and
scope of energy property in Notice 2015-70, several commenters
requested that the regulations provide a specific list of eligible
components and define each type of component. Commenters specifically
requested that the regulations provide definitions for conversion
equipment, power conditioning equipment, transfer equipment, and other
property commonly used in conjunction with energy property. Further,
some commenters requested that the regulations include safety equipment
such as electrical panels, rapid shut-down equipment, and utility
disconnection equipment as eligible components when used in conjunction
with energy property. Conversely, several commenters recommended that
the regulations not provide a technical definition or list of
components because innovations in energy property may require that such
a definition would need to be continually updated.
Commenters requested that the regulations be clarified to include
as energy property all components located before the point at which
voltage of the electricity is increased to the voltage of the
transmission line, referred to as the ``separation point,'' such as
step-up transformers, dead end structures, switches, switch gear
buildings, voltage regulators, and hardware and software used to
monitor, operate, and protect such property. Additionally, one
commenter requested that the
[[Page 82199]]
regulations be clarified to include as energy property all components
located beyond the separation point, such as switches, circuit
breakers, lighting or surge arrestors, and metering equipment, if the
use of such components is primarily related to the functioning or
protection of components located at or before the separation point.
One challenge in providing definitions of what components to
include in energy property is in determining what components are common
to all energy property, without limiting or constraining future
technological advances. To avoid limiting future energy technologies,
the Treasury Department and the IRS consulted with the Department of
Energy and determined that the best option is to adopt a function-
oriented approach to describe the types of components that are
considered energy property. Accordingly, proposed Sec. 1.48-9(f) would
adopt the concepts of functional interdependence and property that is
an integral part of an energy property as provided in Internal Revenue
Bulletin guidance issued previously by the Treasury Department and the
IRS.
1. Unit of Energy Property
Proposed Sec. 1.48-9(f)(2)(i) would provide that a unit of energy
property consists of all functionally interdependent components of
property (as defined in proposed Sec. 1.48-9(f)(2)(ii)) owned by the
taxpayer that are operated together and that can operate apart from
other energy properties within a larger energy project (as defined in
proposed Sec. 1.48-13(d) and discussed in part II.C of this Summary of
Comments and Explanation of Provisions).
2. Functional Interdependence
Proposed Sec. 1.48-9(f)(2)(ii) would provide that components of
property are functionally interdependent if the placing in service of
each component is dependent upon the placing in service of each of the
other components in order to generate or to store electricity, thermal
energy, or hydrogen, or otherwise perform its intended function as
provided in section 48(c) and as described in proposed Sec. 1.48-9(e).
Energy property, with certain exceptions, includes all components
necessary to generate or store electricity or thermal energy for
transmission, distribution, or use up to (but not including) the stage
that transmits, distributes, or uses electricity or thermal energy. In
the case of qualified biogas property, microgrid controllers,
electrochromic glass property, and fiber-optic solar energy property,
components of such energy property are functionally interdependent if
the placing in service of each component is dependent upon the placing
in service of each of the other components in order to perform the
intended function of the energy property as provided by section 48(c)
and as described in proposed Sec. 1.48-9(e). Additionally, energy
property generally would not include equipment that is an addition or
modification to an existing energy property unless the rules regarding
retrofitted energy property described in proposed Sec. 1.48-14(a) and
part III.A. of this Summary of Comments and Explanation of Provisions
apply.
3. Integral Part of an Energy Property
Proposed Sec. 1.48-9(f)(3)(i) would provide that property owned by
a taxpayer that is an integral part of an energy property owned by that
same taxpayer is energy property. To be part of an energy property,
such property must be used directly in the intended function of the
energy property as provided by section 48(c) and as described in Sec.
1.48-9(e) and be essential to the completeness of the intended
function. Proposed Sec. 1.48-9(f)(3)(ii) would describe power
conditioning equipment and transfer equipment, and would provide that
such components, and parts related to the functioning of those
components, are energy property when they meet the definition of
integral part provided in Sec. 1.48-9(f)(3)(i).
Many commenters requested clarification on the eligible components
of an offshore wind facility. Proposed Sec. 1.48-9(f)(5)(iii) would
provide an example that applies the integral part rule to include power
conditioning and transfer equipment as part of a qualified offshore
wind facility but excludes transmission and distribution equipment from
being part of the qualified offshore wind facility. This example is
consistent with the view of the Joint Committee on Taxation in the
General Explanation of Tax Legislation Enacted in the 116th Congress,
JCS 1-22 (February 2022). According to that document, ``[q]ualified
offshore wind facilities are qualified wind facilities . . . and
include property owned by the taxpayer necessary to condition
electricity for use on the electrical grid such as subsea cables and
voltage transformers.'' Id. at 498.
Furthermore, consistent with Notice 2018-59, proposed Sec. 1.48-
9(f)(3)(iii) would provide as further examples of integral property
onsite roads that are used for equipment to operate and maintain the
energy property. Section 1.48-9(f)(3)(iii) would also clarify that
roads primarily for access to the site, or roads used primarily for
employee or visitor vehicles, are not integral parts of an energy
property. Proposed Sec. 1.48-9(f)(3)(iv) and (v) would also provide
that fences and buildings (also referred to as structures) are
generally not integral parts of an energy property because they are not
integral to the activity of the energy property. However, a building
may be an integral part of a unit of energy property if it is
essentially an item of machinery or equipment, or a structure that
houses property that is integral to the activity of an energy property,
if the use of the structure is so closely related to the use of the
housed energy property that the structure clearly can be expected to be
replaced when the energy property it initially houses is replaced. The
Treasury Department and the IRS request comments on whether additional
types of property meet the requirements provided in proposed Sec.
1.48-9(f)(3) and could be considered an integral part of an energy
property.
4. Location of Energy Property
Section 48 and the existing regulations thereunder are silent
regarding the credit eligibility of components of an energy property
located in different locations. However, the Treasury Department and
the IRS have provided analogous guidance regarding the credit
eligibility of offsite components for the residential energy efficient
property tax credit under section 25D of the Code (section 25D credit).
In Notice 2013-70, 2013-47 I.R.B. 528, the Treasury Department and
the IRS provided guidance addressing the eligibility for the section
25D credit for offsite components of solar electric property.
Specifically, Q&A <greek-i>25 of Notice 2013-70 addressed the issue of
whether a taxpayer that installs solar panels as part of solar electric
property other than directly on the taxpayer's home may claim the
section 25D credit. Q&A <greek-i>25 concluded that the taxpayer would
be able to claim the section 25D credit because the solar electric
property expenditure was made for property that, consistent with the
requirements of the section 25D credit, uses solar energy to generate
electricity for use in a dwelling unit that is used as a residence by
the taxpayer. The fact that the solar panels were not directly located
on the taxpayer's home did not change the analysis or the eligibility
of the taxpayer's expenditure for purposes of the section 25D credit.
Similarly, Q&A <greek-i>26 of Notice 2013-70 addressed a scenario
in which a taxpayer purchases solar panels that are
[[Page 82200]]
placed on an offsite solar array (community solar project) and
connected to the local public utility's electrical grid that supplies
electricity to the taxpayer's residence. The taxpayer enters into a
direct contractual arrangement with the utility to allow the taxpayer
to provide electricity to the electrical grid using a net metering
system that measures the amount of electricity produced by the
taxpayer's solar panels and transmitted to the electrical grid and the
amount of electricity used by the taxpayer's residence and drawn from
the electrical grid. The contract states that the taxpayer owns the
electricity transmitted by the solar panels to the electrical grid
until drawn from the electrical grid at his residence. Q&A <greek-i>26
determined that offsite solar panels under this type of contractual
arrangement with a utility that supplies electricity to the taxpayer's
residence also meet the definition of a solar electric property
expenditure eligible to claim the section 25D credit. In response to
Notice 2015-70, many commenters referenced Notice 2013-70 when
requesting that existing Sec. 1.48-9 be modified to allow components
of energy property to be situated in different locations without
affecting the eligibility of the energy property for the section 48
credit.
After consideration of the comments received, the Treasury
Department and the IRS have determined that if property is a
functionally interdependent part of an energy property (as defined in
Sec. 1.48-9(f)(2)(ii)), or an integral part of an energy property (as
defined in Sec. 1.48-9(f)(3)(i)), such property is part of an energy
property regardless of where it is located. Proposed Sec. 1.48-9(f)(4)
would adopt this position.
5. Property Excluded From Energy Property
Proposed Sec. 1.48-9(d)(2) would also clarify that certain types
of intangible property, such as power purchase agreements, renewable
energy certificates, goodwill, and going concern value, are not energy
property because they are not functionally interdependent with other
components of an energy property as defined in proposed Sec. 1.48-
9(f)(2)(ii) and are not an integral part of an energy property as
defined in proposed Sec. 1.48-9(f)(3)(i).
II. Rules Relating to the Increased Credit Amount for Prevailing Wages
and Apprenticeships
The IRA amended several sections of the Code including section 48
to provide increased credit amounts for taxpayers who satisfy certain
requirements, including an increased credit amount for satisfying
prevailing wage and apprenticeship (PWA) requirements. This same
increased credit amount is also generally available under certain
sections of the Code including section 48 with respect to energy
projects with a maximum net output of less than one megawatt (One-
Megawatt Exception). Additionally, this same increased credit amount is
available under certain sections of the Code including section 48 if
beginning of installation or beginning of construction (BOC) occurs
before January 29, 2023 (BOC Exception).
The Treasury Department and the IRS issued proposed Sec. 1.48-13
as part of the August Proposed Regulations to provide guidance
concerning the increased credit amount available for taxpayers
satisfying the PWA requirements. This notice of proposed rulemaking
withdraws Sec. 1.48-13 as proposed in the August Proposed Regulations
and reproposes in a new Sec. 1.48-13 (proposed Sec. 1.48-13) the
substance of the withdrawn rules with minor changes and additional
rules with respect to the increased credit amount available for
taxpayers under section 48(a)(9).
Proposed Sec. 1.48-13 would provide special rules affecting the
basis of energy property that include: (i) the definition of an energy
project for purposes of the PWA requirements as well as other
delineated purposes discussed in part II.C of this Summary of Comments
and Explanation of Provisions and (ii) guidance concerning the One-
Megawatt Exception discussed in part II.D of this Summary of Comments
and Explanation of Provisions. These proposed regulations also provide
guidance on the recapture rules under section 48(a)(10)(C) applicable
to failures to satisfy the PWA requirements.
A. General Rules
For properties placed in service after December 31, 2022, the
section 48 credit is generally six percent of the basis of energy
property described in section 48(a)(2)(A)(i) and two percent of the
basis of energy property described in section 48(a)(2)(A)(ii). If a
taxpayer satisfies the PWA requirements, the One-Megawatt Exception, or
the BOC Exception, then the section 48 credit for the basis of each
energy property placed in service during the taxable year is multiplied
by five.
To satisfy the prevailing wage requirements under section
48(a)(10)(A) and (B) (Prevailing Wage Requirements), a taxpayer must
ensure that any laborers and mechanics employed by the taxpayer or any
contractor or subcontractor in: (i) the construction of any energy
project, and (ii) the alteration or repair of that energy project (for
the five-year period beginning on the date such project is originally
placed in service), are paid wages at rates not less than the
prevailing rates for construction, alteration, or repair of a similar
character in the locality in which that energy project is located as
most recently determined by the Secretary of Labor, in accordance with
subchapter IV of chapter 31 of title 40, United States Code (Davis-
Bacon Act). Section 48(a)(10)(B) provides that rules similar to the
rules of section 45(b)(7)(B) apply for purposes of the correction and
penalty related to the failure to satisfy the Prevailing Wage
Requirements.
Section 48(a)(10)(C) provides a recapture rule applicable to
failures to satisfy the Prevailing Wage Requirements with respect to
alterations or repairs that occur during the five-year period after the
energy project is placed in service (section 48(a)(10)(C) recapture).
Specifically, section 48(a)(10)(C) instructs the Secretary, by
regulations or other guidance, to provide for recapturing the benefit
of any increase in the credit allowed by the Prevailing Wage
Requirements with respect to failures to satisfy the Prevailing Wage
Requirements during the five-year period after the energy project is
placed in service. Section 48(a)(10)(C) clarifies that the failures
during the five-year period remain subject to the correction and
penalty provisions in section 45(b)(7)(B) (as referenced in section
48(a)(10)(B)) and provides that the period and percentage of the credit
that is recaptured is determined under rules similar to the rules in
section 50(a). Subject to the section 48(a)(10)(C) recapture (including
the correction and penalty provisions in section 45(b)(7)(B)), the
taxpayer is deemed at the time the energy project is placed in service
to satisfy the Prevailing Wage Requirements for alterations or repairs
for the five-year period beginning after such project is originally
placed in service. Section 48(a)(11) provides that rules similar to the
rules of section 45(b)(8) apply for purposes of the apprenticeship
requirements.
The August Proposed Regulations provided guidance for taxpayers
claiming an increased credit amount under section 48(a)(9)(A)(i) with
respect to an energy project that satisfies the PWA requirements, the
One-Megawatt Exception, or the BOC Exception. The August Proposed
Regulations provided that to satisfy the PWA requirements, the energy
project must meet the
[[Page 82201]]
Prevailing Wage Requirements of section 48(a)(10)(A) and proposed Sec.
1.45-7(b)-(d), the apprenticeship requirements of section 45(b)(8) and
proposed Sec. 1.45-8, and the recordkeeping and reporting requirements
of proposed Sec. 1.45-12. In addition, under the August Proposed
Regulations, to satisfy the Prevailing Wage Requirements with respect
to section 48(a)(10)(A)(ii), a taxpayer also would be required to
ensure that any laborer and mechanic employed by the taxpayer or any
contractor or subcontractor in the construction of any energy project,
as well any alteration or repair of an energy project in the five-year
period beginning on the date a project is placed in service, are paid
wages at rates not less than the prevailing rates for construction,
alteration, or repair of a similar character in the locality in which
the energy project is located in accordance with the Davis-Bacon Act.
The August Proposed Regulations also provided that the increased credit
amount was subject to section 48(a)(10)(C) recapture for any project
that failed to satisfy the Prevailing Wage Requirements in proposed
Sec. 1.45-7 with respect to an alteration or repair of such project
for the five-year period beginning on the date such project is
originally placed in service (but that does not cease to be investment
credit property within the meaning of section 50(a) of the Code).
B. Section 48(a)(10)(C) Recapture Rules
The Treasury Department and the IRS have determined that additional
guidance on the section 48(a)(10)(C) recapture rules is necessary.
Proposed Sec. 1.48-13 would provide additional guidance on the section
48(a)(10)(C) recapture rules related to the Prevailing Wage
Requirements. The proposed regulations also provide other minor
technical corrections to the August Proposed Regulations.
In addition to largely restating the general rules in the August
Proposed Regulations, proposed Sec. 1.48-13 would clarify that a
taxpayer that has claimed an increased credit amount under section
48(a)(9)(A)(i) and 48(a)(9)(B)(iii) but failed to satisfy the
Prevailing Wage Requirements set forth in proposed Sec. 1.45-7(b)-(d)
with respect to any period during the five-year period beginning on the
date a project is placed in service is subject to section 48(a)(10)(C)
recapture of a portion (up to 100 percent) of the increased credit
amount. Proposed Sec. 1.48-13 would also clarify that the failure to
satisfy the Prevailing Wage Requirements in proposed Sec. 1.45-7(b)-
(d) with respect to any period during the five-year period beginning on
the date a project is placed in service remains subject to the
correction and penalty provisions in proposed Sec. 1.45-7(c)(1).
Section 48(a)(10)(C) requires that the recapture period and
percentage of such recapture be determined under rules similar to the
rules of section 50(a). Consistent with that requirement, proposed
Sec. 1.48-13 would also clarify that the five-year recapture period
under section 48(a)(10)(C) would begin on the day an energy project is
placed in service and end on the day that is five full years after the
placed-in-service date. Proposed Sec. 1.48-13 would also provide that
each 365-day period (366-day period in case of a leap year) within the
recapture period is a separate recapture year. The proposed regulations
would provide that the recapture amount is determined consistent with
the percentages set forth in section 50(a) based on the year in which
the section 48(a)(10)(C) recapture event is determined to have
occurred.
The Treasury Department and the IRS understand that the five-year
recapture period is unlikely to align with a taxpayer's taxable year.
The proposed regulations would provide that whether a section
48(a)(10)(C) recapture event has occurred is determined at the close of
taxable year that begins or ends within the five-year recapture period.
In addition to the reporting and recordkeeping requirements contained
in proposed Sec. 1.45-12, the proposed regulations would provide for
an annual information reporting requirement that verifies compliance
with the Prevailing Wage Requirements following the close of each
recapture year consistent with the forms and instructions prescribed by
the IRS. The IRS anticipates that the annual compliance reporting
obligation will be made at the time the taxpayer files its income tax
or other annual return following the close of each recapture year.
Under proposed Sec. 1.48-13, if the increased credit amount is
subject to section 48(a)(10)(C) recapture, then the increase in tax
under chapter 1 for the recapture of the increased credit amount would
be assessed with respect to the taxable year in which the section
48(a)(10)(C) recapture event occurred. The proposed regulations also
clarify that a taxpayer whose increased credit amount is subject to
section 48(a)(10)(C) recapture may still be entitled to the base amount
of the energy credit under section 48(a) if they meet the requirements
to claim the credit. Additionally, the proposed regulations clarify the
application of the transferability rules under section 6418 to a
section 48(a)(10)(C) recapture event and include a proposed addition to
Sec. 1.6418-5 confirming the notification requirements for an eligible
taxpayer and that a transferee taxpayer is responsible for any amount
of tax increase under section 48(a)(10)(C).
C. Definition of Energy Project
Under section 48(a)(9)(A)(ii), an energy project is a project
consisting of one or more energy properties that are part of a single
project. Proposed Sec. 1.48-13(d) would provide a definition of
``energy project'' for purposes of the increased credit amount for the
PWA requirements (provided by section 48(a)(9)), the domestic content
bonus credit amount (provided by section 48(a)(12)), and the increase
in credit rate for energy communities (provided in section 48(a)(14)).
For these purposes, the term energy project means one or more energy
properties that are operated as part of a single project. Section 45
qualified facilities that are co-located with section 48 energy
property will not be considered part of an energy project (unless they
elect under section 48(a)(5) to be treated as energy property).
Multiple energy properties would be treated as one energy project, if
at any point during the construction of the multiple energy properties,
they are owned by a single taxpayer (subject to the related taxpayer
rule discussed later in this part) and any two or more of the following
factors (also set forth in section 7.01(2)(a) of Notice 2018-59 as
factors indicating that multiple energy properties are operated as part
of a single project) are present:
1. The energy properties are constructed on contiguous pieces of
land;
2. The energy properties are described in a common power purchase,
thermal energy, or other off-take agreement or agreements;
3. The energy properties have a common intertie;
4. The energy properties share a common substation, or thermal
energy off-take point;
5. The energy properties are described in one or more common
environmental or other regulatory permits;
6. The energy properties are constructed pursuant to a single
master construction contract; or
7. The construction of the energy properties are financed pursuant
to the same loan agreement.
Under proposed Sec. 1.48-13(d)(2), related taxpayers would be
treated as one taxpayer in determining whether multiple energy
properties are treated as an energy project. Related taxpayers would be
defined as members of a group of trades or businesses that are under
[[Page 82202]]
common control (as defined in Sec. 1.52-1(b)).
Proposed Sec. 1.48-13(d)(3) would also provide that if multiple
energy properties are treated as a single project for beginning of
construction purposes with respect to the section 48 credit, the
multiple energy properties would also be treated as one energy project
for purposes of the PWA requirements, the domestic content bonus credit
amount, and the increase in section 48 credit rate for energy
communities. This rule would apply to an energy project for which
construction begins after the date final regulations are published in
the Federal Register.
D. One-Megawatt Exception
Section 48(a)(9)(B)(i) and Sec. 1.48-13 of the August Proposed
Regulations would provide that the increased credit amount is also
available under section 48 with respect to energy projects with a
maximum net output of less than 1 MW of electrical (as measured in
alternating current) or thermal energy. The August Proposed Regulations
do not address how to determine the maximum net output of a project.
The Department of Energy has advised the Treasury Department and
the IRS that for energy projects that generate electricity, the
determination of an energy project's nameplate capacity will provide
the necessary guidance to determine the maximum electrical generating
output in MWs of electrical (as measured in alternating current) or
thermal energy that the unit is capable of producing on a steady state
basis and during continuous operation under standard conditions.
Proposed Sec. 1.48-13(e) would thus provide a rule for the
determination of nameplate capacity as expressed in MWs of electrical
(as measured in alternating current) or thermal energy. Because
electrochromic glass property, fiber-optic solar, and microgrid
controllers do not generate electricity or thermal energy, these energy
properties are not eligible for the One-Megawatt Exception. The
Treasury Department and the IRS request comments on whether other
methods of measurement may allow these energy properties to use the
One-Megawatt Exception.
Under proposed Sec. 1.48-13(e)(1), the nameplate capacity for an
electrical generating unit would mean the maximum electrical generating
output in MWs that the unit is capable of producing on a steady-state
basis and during continuous operation under standard conditions, as
measured by the manufacturer and consistent with the definition
provided in 40 CFR 96.202. Where applicable, those rules provide that
the International Standard Organization (ISO) conditions are used to
measure the maximum electrical generating output.
Proposed Sec. 1.48-13(e)(2) through (4) would provide rules for
energy storage technologies. Generally, electrical energy storage
property would look to the storage device's nameplate capacity in MWs
under proposed Sec. 1.48-13(e)(2). As with energy properties that
generate electricity, nameplate capacity for an electrical energy
storage property would mean the maximum electrical generating output in
MWs that the unit is capable of producing on a steady state basis and
during continuous operation under standard conditions, as measured by
the manufacturer and consistent with the definition provided in 40 CFR
96.202.
Proposed Sec. 1.48-13(e)(3) would provide that for thermal energy
storage property, taxpayers must use the equivalent value of 3.4
million British Thermal Units per hour (mmBtu/hour) for heating and 284
tons for cooling to determine whether the thermal energy storage
property satisfies the One-Megawatt Exception (Btu per hour/3,412,140 =
MW). The Treasury Department and the IRS request comments on whether
these tests are suitable or whether another test should apply for
measuring the One-Megawatt Exception for thermal energy storage
property.
Proposed Sec. 1.48-13(e)(4) would provide that for hydrogen energy
storage property, 1 MW is equivalent to 3.4 mmBtu/hour, and using the
higher heating value of hydrogen, this can be converted to 10,500 scf
per hour. Therefore, proposed Sec. 1.48-13(e)(4) would provide that
for a hydrogen energy storage property to satisfy the One-Megawatt
Exception, an eligible hydrogen producing, or hydrogen storage energy
property must be designed to have a maximum net output of less than 3.4
mmBtu/hour of hydrogen or equivalently 10,500 scf per hour of hydrogen.
Proposed Sec. 1.48-13(e)(3) through (5) would provide that to
apply the One-Megawatt Exception to energy projects that produce
thermal energy or fuels, taxpayers must use the equivalent value of 3.4
million British thermal units (mmBtus) per hour (Btu per hour/3,412,140
= MW). For certain technologies that produce fuels, such as qualified
biogas property (proposed Sec. 1.48-13(e)(5)), hydrogen energy storage
property (proposed Sec. 1.48-13(e)(4)), and specified hydrogen
production facilities (as defined in section 48(a)(15)(C)) (proposed
Sec. 1.48-13(e)(4)), taxpayers may use equivalent maximum fuel volume
flows in standard cubic feet (scf) per hour to assess the One-Megawatt
Exception. Taxpayers can use equivalent volume flows using the default
high heat value conversion factors found in Table C-1 to Subpart C of
Part 98, Title 40 of the Greenhouse Gas Reporting Rule promulgated by
the Environmental Protection Agency. Otherwise, taxpayers may calculate
their own equivalent volumetric flow if the heat content of the gas is
known.
For property generating thermal energy, proposed Sec. 1.48-
13(e)(3) would provide that the equivalents for 1 MW that should be
used are 3.4 mmBtu/hour for heating and equivalently 284 tons for
cooling should be used to determine whether the energy property
satisfies the One-Megawatt Exception. Proposed Sec. 1.48-13(e)(3)
would also specify that for projects delivering thermal energy to a
building or buildings, the One-Megawatt Exception can be assessed as
either the aggregate maximum thermal output of all individual heating
or cooling elements within the building or buildings or as the maximum
thermal output that the entire project is capable of delivering to a
building or buildings at any given moment.
III. Rules Applicable to Energy Property
A. Retrofitted Energy Property (80/20 Rule)
The Treasury Department and the IRS have published several pieces
of Internal Revenue Bulletin guidance regarding the eligibility of
retrofitted equipment added to qualified facilities and energy property
for purposes of the section 45 and 48 credits. In Notice 2016-31, 2016-
23 I.R.B. 1025, the Treasury Department and the IRS considered the
application of the Five Percent Safe Harbor provided in section 5.01 of
Notice 2013-29, 2013-20 I.R.B. 1085, to retrofitted qualified
facilities for purposes of applying the beginning of construction
requirement to the section 45 credit. Section 6.01 of Notice 2016-31
cites to Revenue Ruling 94-31 and Notice 2008-60, 2008-2 C.B. 178, for
the concept that a qualified facility may qualify as originally placed
in service even though it contains some used property, provided the
fair market value of the used property is not more than 20 percent of
the qualified facility's total value (that is, the cost of the new
property plus the value of the used property). This concept has become
known as the ``80/20 Rule.''
Similarly, Notice 2018-59 addressed the application of the 80/20
Rule to retrofitted energy property for purposes
[[Page 82203]]
of the applying the beginning of construction rules to the section 48
credit. Section 7.05(1) of Notice 2018-59 provides that retrofitted
energy property may qualify as originally placed in service even though
it contains some used components of property, provided it satisfies the
80/20 Rule. Further, this section of the notice provided that, for
purposes of the 80/20 Rule, the cost of the new energy property
includes all properly capitalized costs of the new energy property.
In response to requests for comment in Notice 2015-70 and Notice
2022-49, several commenters requested that the regulations address the
applicability of the 80/20 Rule to energy property for purposes of the
section 48 credit. After consideration of the comments, proposed Sec.
1.48-14(a) would apply the 80/20 Rule to energy property for purposes
of the section 48 credit.
B. Dual Use Property
Existing Sec. 1.48-9 includes a dual use equipment rule (Dual Use
Rule). The preamble to T.D. 8147 notes that the regulations prior to
amendment by T.D. 8147 required that equipment must use only energy
from a single qualifying source (solar energy property, wind energy
property, or geothermal equipment) to qualify as energy property. In
changing from a single source rule to the Dual Use Rule, the preamble
to T.D. 8147 explained that the Treasury Department and the IRS
reconsidered the legislative history of the investment tax credit and
determined that, ``while Congress did not intend that property that
does not use qualified energy be eligible for the business energy
credit as solar, wind, or geothermal property, Congress also did not
intend to adopt an all or nothing rule for dual use solar, wind, or
geothermal energy property.''
Accordingly, the Dual Use Rule in existing Sec. 1.48-9 provides
that a solar energy property, wind energy property, and geothermal
equipment are eligible for the section 48 credit to the extent of the
property's basis or cost allocable to its annual use of energy from a
qualified source, provided the use of energy from ``non-qualifying''
sources does not exceed 25 percent of the total energy input of the
property during an annual measuring period. Notably, the Dual Use Rule
provided in Sec. 1.48-9 also precludes an energy property from
receiving and aggregating energy from a combination of qualifying
sources (solar energy property, wind energy property, and geothermal
equipment). Because the Dual Use Rule requires that a solar energy
property, wind energy property, or geothermal equipment must use a
minimum of 75 percent of energy from a qualified source during an
annual measuring period to qualify for a section 48 credit. This rule
became known as the ``75-percent Cliff.''
The Dual Use Rule provided in existing Sec. 1.48-9 also provides
that, if in the first annual measuring period, the applicable
percentage (based on usage from a qualifying source) is between 75
percent and 100 percent, only a proportionate amount of the eligible
basis of the energy property should be taken into account in computing
the amount of the section 48 credit. If less than 75 percent of the
energy used is from qualifying sources, then the eligible basis is
zero, and the property is not eligible for the section 48 credit.
1. Alternatives to the 75-Percent Cliff
In response to Notice 2015-70, many commenters requested that the
regulations be modified to reduce the Dual Use Rule's current 75-
percent Cliff to a 50-percent Cliff. Commenters cited as support for
this proposal the statutory language of section 25D(d)(1), which allows
for full credit eligibility if a solar water heating property receives
at least 50 percent of its energy inputs from the sun. Applying this
premise to the investment tax credit under section 48 would allow an
energy property to be eligible for 100 percent of the section 48 credit
if it receives at least 50 percent of its energy input from a
qualifying source but would render the energy property ineligible for
the section 48 credit if less than 50 percent of its energy input is
from a qualifying source. Commenters asserted that a 50-percent Cliff
would be more equitable than the 75-percent Cliff.
Several commenters also recommended that the regulations be
modified to provide that if greater than 50 percent of energy received
by an energy property is from a qualifying source that the energy
property is eligible for a full section 48 credit. Conversely, if the
energy property receives less than 50 percent of its energy input from
a qualifying source, the qualifying basis of the energy property is
reduced incrementally for the annual measuring period. Importantly,
this rule would reduce the credit but not disqualify the energy
property entirely from credit eligibility. The benefit of adopting this
rule is that it would eliminate the ``all or nothing'' dynamic of the
current 75-percent Cliff and, as a result, would provide certainty that
an energy property will remain credit eligible. The main obstacle to
adopting this rule is that it would be expensive for taxpayers to
measure with great accuracy the relative amounts of energy input from
different qualifying sources.
Many commenters suggested changing the Dual Use Rule to a ``Primary
Use Rule'' modeled on the ``Primary Use'' Test for asset class
depreciation determinations, changes in use, and for asset disposition
purposes. According to commenters, this approach is popular because the
Primary Use Test could be performed at the same time (on the placed in
service date) and manner in which the taxpayer determines the primary
use of the asset for depreciation purposes. The challenge of this
approach is that it also depends upon taxpayers correctly using the
depreciation asset class determination procedures and reporting any
changes in primary use to the IRS for recapture. Moreover, the scope of
the Primary Use Test seems inappropriate for the section 48 credit
because the Primary Use Test merely serves to determine how the
property is depreciated rather than whether the property can be
depreciated. Applying this test to determine credit eligibility may
increase, beyond what was intended, the credit available to a taxpayer.
After consideration of the comments, the Treasury Department and
the IRS have determined it would be most consistent with statutory
intent to reduce the applicable threshold of the Dual Use Rule to 50
percent resulting in the adoption of a 50-percent Cliff. Therefore,
proposed Sec. 1.48-14(b)(2)(i) would require an energy property to
derive a minimum of 50 percent of energy from a qualifying source
during an annual measuring period. Similar to the operation of the 75-
percent Cliff in existing Sec. 1.48-9, if the energy used from
qualifying sources is between 50 percent and 100 percent, only a
proportionate amount of the eligible basis of the energy property will
be taken into account in computing the amount of the section 48 credit.
If less than 50 percent of the energy used is from qualifying sources,
then the eligible basis is zero, and the property is not eligible for
the section 48 credit. The Treasury Department and the IRS recognize
that the Dual Use Rule is no longer relevant to determining the
eligibility of energy storage technology placed in service after
December 31, 2022, because the IRA added energy storage technology as
an energy property effective for property placed in service after
December 31, 2022. However, the Dual Use Rule may still have other
applications under section 48. The Treasury Department and the IRS
request comments on the application of the Dual Use Rule to
[[Page 82204]]
section 48 after its amendment by the IRA.
2. Aggregation of Energy Inputs
While T.D. 8147 significantly amended existing Sec. 1.48-9 to
permit 25 percent of energy used by energy property from non-qualifying
sources, it did not allow the aggregation of energy from multiple
energy properties to be treated as energy from qualifying sources for
purposes of the Dual Use Rule.
In response to Notice 2015-70, several commenters requested a
revised rule to permit taxpayers to calculate credit basis by
aggregating all inputs from qualifying sources that would otherwise
individually qualify for the section 48 credit (all types of energy
property and any qualified facilities for which an election is made to
claim the section 48 credit as a ``qualified investment credit
facility'' under section 48(a)(5)). After consideration of the comments
received, proposed Sec. 1.48-14(b)(2)(ii) would revise the Dual Use
Rule to permit the aggregation of energy inputs from more than one
energy property.
3. Measurement Period
Existing Sec. 1.48-9(c)(10)(iv) and (d)(6) provides that an annual
measuring period is the period during which the portion of dual use
property's basis or cost allocable to use of energy from a qualified
source is measured. An annual measuring period for an item of dual use
property is defined as the 365-day period beginning with the day it is
placed in service or a 365-day period beginning the day after the last
day of the immediately preceding annual measuring period.
In response to Notice 2015-70, several commenters requested that
the regulations provide a clarification of the annual measurement rules
applicable to dual use property. Several of these commenters' concerns
were tied to energy storage technology. Because the IRA now includes
energy storage technology as eligible property, many of these specific
concerns may have been eliminated. However, the proposed regulations
would still address these concerns by adopting these annual measurement
rules for application to the Dual Use Rule. Accordingly, a taxpayer may
claim the section 48 credit when it places an energy property in
service, and all relevant time periods, including depreciation and
recapture, begin on that date. After consideration of the comments,
proposed Sec. 1.48-14(b)(2)(iii) would provide that an annual
measuring period for an item of dual use property is any period of 365
consecutive days (366 days in a leap year) beginning with the day the
dual use property is placed in service.
4. Dual Use Property and Microgrid Controllers
Certain equipment is necessary for a microgrid controller to
perform its functions, but such equipment may also have been required
to be installed even without the presence of a microgrid. An example is
a communications system (for example, a local ethernet network or a
commercial wireless network). A microgrid controller must be connected
to a communications system to operate properly. Such a communications
system could be considered part of the microgrid controller itself.
However, the communications system could also be used for other
purposes and may not be dedicated to the microgrid system. The Dual Use
Rule would be inapplicable in this scenario because the scenario does
not involve the use of energy derived from both a qualifying source and
from sources other than a qualifying source (non-qualifying source).
The Treasury Department and the IRS request comments on whether a rule
is needed to address this situation for microgrid controllers or other
potentially similar situations for which the Dual Use Rule would not
apply.
C. Energy Property That Could Be Eligible for Multiple Credits
Section 48 and the existing regulations thereunder are silent
regarding the eligibility of components of energy property for multiple
credits. However, in Notice 2013-70, the Treasury Department and the
IRS considered the ability of a single taxpayer to claim section 25D
and section 48 credits for different uses of the same energy property.
In Q&A <greek-i>27 of Notice 2013-70, a taxpayer purchased and
installed solar electric property to generate electricity for the
taxpayer's residence. The taxpayer also expected the solar electric
property to generate excess electricity that would be sold to a
utility. Q&A <greek-i>27 determined that the taxpayer may not claim the
section 25D credit for the full amount of the solar electric property
expenditure because the property not only generates electricity for use
in the taxpayer's residence, but it also generates electricity for sale
by the taxpayer. As a result, the taxpayer may only claim the section
25D credit for the portion of the solar electric property expenditure
that relates to the electricity generated for use in the taxpayer's
home. However, the taxpayer may be able to claim the section 48 credit
for a portion of the solar electric property expenditure if the
requirements of section 48 are satisfied. Notice 2013-70 did not
separately analyze whether the taxpayer had met the requirements to
claim the section 48 credit.
Several commenters requested a modification of the regulations to
allow section 48 credit eligibility in scenarios involving different
taxpayers that claim different credits related to different components
of an energy property. This may also occur in situations in which
different taxpayers own components of energy property as discussed in
part III.E.1 of this Summary of Comments and Explanation of Provisions.
After consideration of these comments, proposed Sec. 1.48-14(c)(1)
would provide that the same energy property may be eligible for both
the section 48 credit and another credit subject to certain limitations
that proposed Sec. 1.48-14(c)(2) would provide.
D. Incremental Cost
Existing guidance under section 48 provides that only the
incremental cost of energy property is included in the eligible basis
for purposes of determining the section 48 credit. Existing Sec. 1.48-
9(k) defines incremental cost as the excess of the total cost of
equipment over the amount that would have been expended for the
equipment if the equipment were not used for a qualifying purpose
related to the section 48 credit. The existing regulations provide as
an example, a scenario in which energy property costing $100 performs a
pollution control function as well as a non-qualifying function. The
example states that it would cost $60 solely to perform the non-
qualifying function, thus the incremental cost to the energy property
would be $40.
The Treasury Department and the IRS received no comments regarding
the incremental cost rule in response to Notice 2015-70. Thus, proposed
Sec. 1.48-14(d)(1) would continue to apply this incremental cost
approach and would provide that only the incremental cost of energy
property is included in the eligible basis of the energy property for
purposes of computing the section 48 credit.
E. Special Rules Concerning Ownership
1. Separate Ownership of Energy Property
Section 48 and the existing regulations thereunder are silent
regarding whether the components of an energy property can be owned by
multiple taxpayers. In Revenue Ruling 78-268, 1978-2 C.B. 10, the
Treasury Department and the IRS addressed a situation involving four
owners that shared a common tenancy in an electric
[[Page 82205]]
generating facility: two investor-owned utilities, a tax-exempt
cooperative, and a tax-exempt municipality-owned utility. The specific
issue raised in this Revenue Ruling was whether ownership by the tax-
exempt entities disqualified the entire electric generating facility
from the investment tax credit. Former section 48(a)(4) effectively
stated that property owned by a tax-exempt entity could not be
investment tax credit property. Revenue Ruling 78-268 concluded that
the two investor-owned utilities were eligible for the investment tax
credit despite the fact that the electric generating facility was not
credit-eligible property in the hands of the tax-exempt entities. This
revenue ruling has been interpreted to stand for the proposition that
fractional interests in common tenancies should be treated as separate
assets for Federal income tax purposes.
Several commenters requested the adoption of a rule that separate
parties that own an interest in energy property are eligible for the
section 48 credit to the extent of their fractional ownership
interests. Further, these commenters also requested the adoption of a
rule that, if components of energy property are owned by separate
taxpayers, each taxpayer would be eligible for the section 48 credit to
the extent of their cost basis in the components of energy property
that they own. These commenters cite Revenue Ruling 78-268 as support
for the proposition that fractional interests in common tenancies
should be treated as separate assets for Federal income tax purposes.
Many commenters requested that the regulations address situations
involving energy property with multiple owners, such as solar condos
and community solar facilities. These commenters requested that the
regulations be clarified to state that shared ownership does not affect
the credit eligibility of an energy property, regardless of the
ownership structure. To support this position, several commenters cite
to section 25C(e)(1) (redesignated as section 25C(f)(1) of the Code by
the IRA) and section 25D(e)(5) that treat a tenant-stockholder (as
defined in section 216 of the Code) in a cooperative housing
corporation (as defined in section 216) as making his or her
proportionate share (as defined in section 216(b)(3)) of any
expenditures of such corporation. Similarly, sections 25C(f)(1) and
25D(e)(6) treat an individual member of a condominium management
association as having made the individual's proportionate share of any
expenditures of such association. As a result, a tenant-stockholder in
a cooperative or a member of a condominium association may claim a
section 25C or 25D credit for their proportional share of the
expenditure of the cooperative or condominium association for credit
eligible property.
Several commenters expressed concerns about credit eligibility and
the ownership of offshore wind property. For example, a group of
commenters requested confirmation that certain transfer and power
conditioning equipment necessary to deploy offshore wind is eligible
for a section 48 credit, but also that the transfer and power
conditioning equipment is eligible for section 48 even if owned by a
separate entity from the entity that owns the offshore wind turbines or
if the transfer and power conditioning equipment is shared between
multiple offshore wind facilities as part of a shared transmission
solution.
The Treasury Department and the IRS have determined that a taxpayer
that owns an energy property is eligible for the section 48 credit only
to the extent of the taxpayer's eligible basis in the energy property.
In the case of multiple parties that hold ownership shares in an energy
property, each party is eligible for the section 48 credit to the
extent of the party's fractional ownership interest. Proposed Sec.
1.48-14(e)(2) would adopt this position. Proposed Sec. 1.48-14(e)(4)
also would provide examples illustrating the treatment of multiple
owners of an energy property.
As described in part I.D.3 of this Summary of Comments and
Explanation of Provisions with regard to qualified offshore wind
property, functionally interdependent components do not include power
conditioning and transfer equipment such as subsea cables and voltage
transformers necessary to condition electricity for use on the
electrical grid. However, the power conditioning and transfer equipment
are integral parts of the qualified offshore wind property, and thus,
are energy property. In contrast, transmission and distribution
equipment are not functionally interdependent components of an energy
property nor are they an integral part of an energy property. If the
taxpayer owns both the unit of energy property and at least a portion
of the related power conditioning and transfer equipment, that taxpayer
would be able to calculate the section 48 credit on the eligible basis
of the energy property, including the taxpayer's basis in the integral
power conditioning and transfer equipment. In the case of multiple
parties that hold ownership shares in an energy property, each party is
eligible for the section 48 credit to the extent of its fractional
ownership interest. If power conditioning and transfer equipment owned
by one taxpayer is an integral part of an energy property owned by an
unrelated taxpayer, the taxpayer that owns the power conditioning and
transfer equipment would not be eligible for the section 48 credit but
the taxpayer that owns the energy property would be eligible for the
section 48 credit.
For example, if Taxpayer A owns only power conditioning and
transfer equipment that is an integral part of an energy property owned
by unrelated Taxpayer B, Taxpayer A would not be eligible for the
section 48 credit. However, this would not prevent Taxpayer B from
claiming a section 48 credit on the basis of the energy property that
it owns. In addition, if unrelated taxpayers Taxpayer A and Taxpayer B
jointly own power conditioning and transfer equipment that is an
integral part of a qualified offshore wind facility, but only Taxpayer
B owns the unit of energy property (that is, the qualified offshore
wind facility), only Taxpayer B may claim the section 48 credit. The
amount of Taxpayer B's section 48 credit is calculated by taking into
account both Taxpayer B's share of the basis in the power conditioning
and transfer equipment and Taxpayer B's basis in the unit of energy
property (that is, Taxpayer B's basis in qualified offshore wind
facility).
2. Related Taxpayers
Section 48 does not define the term ``related taxpayers.'' This
term was defined in existing Sec. 1.48-9(q)(10)(i) in the context of
qualified intercity buses. This provision states that related taxpayers
are treated as one taxpayer in determining the increase in operating
capacity of qualifying intercity buses and in determining the qualified
investment in qualified intercity buses for the energy credit. Existing
Sec. 1.48-9(q)(10)(i) also provides that related taxpayers are members
of a group of trades or businesses that are under common control (as
defined in Sec. 1.52-1(b)). The Treasury Department and the IRS
received no comments regarding the related taxpayer rule in response to
Notice 2015-70. As a result, proposed Sec. 1.48-14(e)(3) would
incorporate the rule provided in the existing regulations.
F. Coordination With Other Code Provisions
1. Election To Treat Qualified Facilities as Energy Property
Section 48(a)(5) allows a taxpayer that owns a qualified facility
(as defined in
[[Page 82206]]
section 45(d)) to elect to claim the section 48 credit in lieu of the
section 45 credit. Section 48(a)(5)(A) provides that if the taxpayer
makes an election, the qualified facility will be treated as part of a
qualified investment credit facility, and therefore deemed energy
property eligible for a section 48 credit. A qualified investment
credit facility is defined in section 48(a)(5)(C) as a qualified
facility described in section 45(d)(1)-(4), (6), (7), (9), or (11),
with respect to which no credit has been allowed under section 45, and
for which the taxpayer makes an irrevocable election to claim the
section 48 credit in lieu of any section 45 credit. Qualified
facilities for which a taxpayer is eligible to make an election under
section 48(a)(5) include wind, closed- and open-loop biomass,
geothermal, solar, landfill gas, trash, hydropower, marine and
hydrokinetic facilities.
Only with respect to a qualified investment credit facility,
section 48(a)(5)(D) defines ``qualified property'' as tangible personal
property or other tangible property (not including a building or its
structural components), but only if such property is used as an
integral part of the qualified investment credit facility; with respect
to which depreciation (or amortization in lieu of depreciation) is
allowable; that is constructed, reconstructed, erected, or acquired by
the taxpayer; and the original use of the property commences with the
taxpayer.
Notice 2009-52, 2009-25 I.R.B. 1094, provides taxpayers with
procedures to make an election under section 48(a)(5). Proposed Sec.
1.48-14(f)(6) would adopt the procedures in Notice 2009-52 and, as a
result, Notice 2009-52 will be obsoleted upon the publication of the
final regulations in the Federal Register.
a. Interaction of Section 45 Credit Requirements With Section 48 Credit
In response to Notice 2015-70, several commenters requested that
the regulations address whether and to what extent the definition of
``qualified investment credit facility'' provided in section
48(a)(5)(C) makes the rules that generally apply for determining a
taxpayer's section 45 credit applicable to qualified facilities for
which the taxpayer makes an election. Additionally, Notice 2022-49
requested comments on whether guidance is needed to determine whether a
qualified investment credit facility that elects to claim the section
48 credit in lieu of the section 45 credit is subject to all of the
requirements of section 45, including the requirement that electricity
generated by the qualified investment credit facility be sold to an
unrelated person, and what factors the Treasury Department and the IRS
should consider regarding such guidance. Several commenters responded
and generally were not supportive of imposing the requirements of
section 45 on a qualified investment credit facility that elects to
claim the section 48 credit in lieu of the section 45 credit. One
commenter pointed out, for example, that section 48 only cross-
references specific provisions of section 45(d) and not all of section
45(d) nor all of section 45. This commenter noted that because section
48 is an investment tax credit rather than a production tax credit, the
rationale for requiring sales of energy from a qualified investment
credit facility to unrelated persons is inapplicable.
Section 45(a) sets forth the amount of the production tax credit
for a taxable year. It does not determine whether a facility is a
``qualified facility'' (that definition is set forth in section 45(d)).
Section 45(a) specifies the amount of the credit for a qualified
facility by formula (0.3 cents (increased credit amount under section
45(a)(6) if the requirements of 45(a)(6)(B) are met) multiplied by the
kWh of electricity generated and sold to an unrelated person. This
statutory structure appears to make the requirement that electricity be
sold to an unrelated person relevant only for determining the amount of
the section 45 tax credit, not eligibility for the section 48 tax
credit. Therefore, after consideration of these comments, the Treasury
Department and the IRS have determined that the requirements of section
45 are not imposed on a qualified investment credit facility that
elects to claim the section 48 credit in lieu of the section 45 credit.
Proposed Sec. 1.48-14(f)(1) would adopt this position.
b. Time and Manner of Making Election
Section 2 of Notice 2009-52 provides that, to make the election
with respect to a qualified facility, a taxpayer must claim the energy
credit on a completed Form 3468, Investment Credit, and file such form
with the taxpayer's income tax return for the year in which the
property is placed in service. The taxpayer must make a separate
election for each qualified facility that is to be treated as a
qualified investment credit facility. Proposed Sec. 1.48-14(f)(6)(i)
would adopt this procedure with some modifications. If any taxpayer
owning an interest in a qualified investment credit facility makes an
election under section 48(a)(5), that election would be binding on all
taxpayers that directly or indirectly own an interest in the facility.
Additionally, proposed Sec. 1.48-14(f)(6)(ii) would provide a
similar special rule for partnerships and S corporations, which would
require that the election be made at the entity level and is binding on
all ultimate credit claimants (as defined in Sec. 1.50-1(b)(3)(ii))
who must claim the credit in proportion to their respective qualified
investment in the energy property. The credit is claimed on each
claimant's completed Form 3468, or any successor form(s), and filed
with a timely filed (including extensions) return for the taxable year
in which the partnership or S corporation makes the election.
2. Coordination Between Section 42 and 48 Credits
Section 50(c)(3)(A) provides the general rule that a taxpayer's
basis in an energy property is reduced by 50 percent of the amount of a
section 48 credit determined with respect to the taxpayer's investment
in the energy property. Section 13102(i) of the IRA amended section
50(c) to provide an exception to that rule for property placed in
service after December 31, 2022. As a result, a taxpayer that has
claimed a section 48 credit with respect to its basis in an energy
property is not required to reduce its basis in the energy property
when determining eligible basis for purposes of calculating a low-
income housing credit under section 42 of the Code (section 42 credit).
Accordingly, the basis of energy property may be used to determine a
section 48 credit and may also be included in eligible basis when
determining a section 42 credit.
G. Rules for Certain Lower-Output Energy Properties To Include
Qualified Interconnection Costs in the Basis of Associated Energy
Property
Section 13102(j) of the IRA added section 48(a)(8)(A) to the Code,
which provides that, for purposes of determining the section 48 credit
with respect to energy property (as defined in section 48(a)(3)) that
has a maximum net output of not greater than 5 MW (as measured in
alternating current) (Five-Megawatt Limitation), a taxpayer may include
amounts paid or incurred by the taxpayer for qualified interconnection
property in connection with the installation of the energy property to
provide for the transmission or distribution of the electricity
produced or stored by such energy property. Additionally, these costs
must be properly chargeable to the capital account of the taxpayer.
Section 48(a)(8)(B) defines ``qualified interconnection property''
to mean, with respect to an energy project that is not
[[Page 82207]]
a microgrid controller, any tangible property that is part of an
addition, modification, or upgrade to a transmission or distribution
system that is required at or beyond the point at which the energy
project interconnects to such transmission or distribution system in
order to accommodate such interconnection; either that is constructed,
reconstructed, or erected by the taxpayer, or for which the cost with
respect to the construction, reconstruction, or erection of such
property is paid or incurred by such taxpayer; and the original use of
which, pursuant to an interconnection agreement, commences with a
utility.
Section 48(a)(8)(C) defines an ``interconnection agreement'' as an
agreement with a utility for the purposes of interconnecting the energy
property owned by such taxpayer to the transmission or distribution
system of such utility.
Section 48(a)(8)(D) defines the term ``utility'' for purposes of
section 48(a)(8) as the owner or operator of an electrical transmission
or distribution system that is subject to the regulatory authority of a
State or political subdivision thereof, any agency or instrumentality
of the United States, a public service or public utility commission or
other similar body of any State or political subdivision thereof, or
the governing or ratemaking body of an electric cooperative.
Section 48(a)(8)(E) provides a special rule for interconnection
property. In the case of expenses paid or incurred for interconnection
property, amounts otherwise chargeable to capital account with respect
to such expenses must be reduced under rules similar to the rules of
section 50(c).
1. Qualified Interconnection Property
Notice 2022-49 requested comments on several aspects of the
treatment of qualified interconnection property, specifically the types
of eligible costs, the required documentation, and the Five-Megawatt
Limitation.
Qualified interconnection property costs arise from installation of
tangible property that is part of an addition, modification, or upgrade
to a transmission or distribution system at or beyond the point of
interconnection. Energy property includes all functionally
interdependent property owned by the taxpayer. Additionally, property
owned by the taxpayer that is an integral part of such energy property
is energy property. This may include power conditioning equipment owned
by the taxpayer and used to condition electricity into a form suitable
for use or transmission. However, qualified interconnection property,
which is most similar in function to transmission and distribution
property, is neither property that is a functionally interdependent
component of an energy property nor an integral part of an energy
property. Therefore, qualified interconnection property is not energy
property. Accordingly, proposed Sec. 1.48-14(g)(2) would clarify that
qualified interconnection property is not taken into account in
determining whether an energy property satisfies the requirements for
the domestic content bonus credit amount referenced in section
48(a)(12)(B) and the increase in credit rate for energy communities
provided in section 48(a)(14).
Consistent with section 48(a)(8)(A), however, proposed Sec. 1.48-
14(g) would clarify that, in connection with the installation by a
taxpayer of energy property (as defined in section 48(a)(3)) that has a
maximum net output of not greater than 5 MW (as measured in alternating
current), amounts paid or incurred by the taxpayer for qualified
interconnection property that is required to accommodate the
interconnection are included in the basis of a related energy property.
Additionally, proposed Sec. 1.48-14(g)(3) would provide that the
maximum net output of an energy property is measured only by nameplate
generating capacity of the unit of energy property (or, in the case of
energy storage technology, the nameplate capacity of such energy
storage technology) at the time the energy property is placed in
service.
2. Costs Included in Basis of Related Energy Property
Proposed Sec. 1.48-14(g)(1) would provide that only amounts paid
or incurred by a taxpayer for property that is constructed,
reconstructed, or erected by the taxpayer, or for which the cost with
respect to the construction, reconstruction, or erection of such
property is paid or incurred by such taxpayer, will be included in the
basis of a related energy property. A taxpayer that is reimbursed for
these costs may not include such reimbursed costs in the amount paid or
incurred by the taxpayer for qualified interconnection property.
Proposed Sec. 1.48-14(g)(6) would adopt this rule. In the case of a
utility reimbursing a taxpayer for costs the taxpayer pays or incurs
for qualified interconnection property, the utility should provide the
taxpayer with information regarding such costs by the date on which the
project is placed in service.
The Treasury Department and the IRS are aware of common situations
where a taxpayer could ultimately receive a payment, credit, or service
from another entity, including a utility, related to the costs the
taxpayer pays or incurs for qualified interconnection property. For
example, one taxpayer may place in service energy property and make
payments to a utility with respect to qualified interconnection
property involving the addition, modification, or upgrade to the
utility's transmission system related to such energy property.
Subsequently, a different taxpayer may, at a later date, place in
service energy property and make payments to the same utility related
to the same additions, modifications, or upgrades to the utility's
transmission system that were made in response to the first taxpayer's
interconnection. The utility may pay, credit, or provide services to
the first taxpayer in an amount related to the costs paid by the second
taxpayer. The likely amount or timing of any such payment, credit, or
service would not be known at the time the first taxpayer interconnects
to the utility's transmission system.
The Treasury and the IRS request comment on whether such payment,
credit, or service received by the first taxpayer, as the result of
subsequent payments made to a utility by other parties, should be
treated as a reimbursement to the first taxpayer and impact the amount
of the costs of qualified interconnection property that the first
taxpayer may include in its basis for purposes of the section 48
credit. The Treasury and the IRS also request comment on whether the
costs paid by the second taxpayer should be treated as amounts paid or
incurred for qualified interconnection property in connection with the
installation of the second taxpayer's energy property. The Treasury and
IRS request comment on industry practices relevant to the determination
of costs paid or incurred for qualified interconnection property,
including the accounting treatment of costs paid or incurred for
qualified interconnection property. The Treasury and the IRS also
request comment on whether any clarifications are needed regarding the
tax treatment of amounts paid or incurred for qualified interconnection
property, including reimbursement of costs paid or incurred by a
taxpayer for qualified interconnection costs.
In section 3.02(1)(b)(ii) of Notice 2022-49, the Treasury
Department and the IRS requested comments concerning what type of
documentation, in addition to interconnection agreements and cost
certification reports, is readily available for a taxpayer to
demonstrate that they have paid or incurred interconnection costs.
Taxpayers must retain
[[Page 82208]]
documentation in compliance with section 6001 of the Code. The proposed
regulations do not provide any specific type of required documentation,
and any documentation that satisfies section 6001 will suffice to
substantiate that a taxpayer has paid or incurred qualified
interconnection costs. Commenters to Notice 2022-49 provided feedback
on the documentation that taxpayers may use to substantiate costs paid
or incurred for qualified interconnection property.
Qualified interconnection property is either constructed,
reconstructed, or erected by the taxpayer, or the taxpayer pays or
incurs the cost with respect to the construction, reconstruction, or
erection of such property; and the original use of which, pursuant to
an interconnection agreement, commences with a utility. Therefore, in
some cases, taxpayers will have the necessary information and
documentation on these costs. In other cases, the taxpayers will need
to receive this information from the utility, which, the Treasury
Department and the IRS understand, will be a common scenario. For
situations in which property is constructed, reconstructed, or erected
by a party other than the taxpayer, final information with conclusive
details such as a true-up report with the actual costs, final invoices,
proof of payment or reimbursement, and permission to operate
documentation or any other final project accounting documentation
should be maintained. Other examples of cost documentation records
include, but are not limited to, the interconnection agreement,
interconnection study, signed customer contracts, and cost
certification reports.
3. Five-Megawatt Limitation
Under section 48(a)(8)(A), energy property includes amounts paid or
incurred by the taxpayer for qualified interconnection property in
connection with the installation of energy property only if it has a
maximum net output of not greater than 5 MW (as measured in alternating
current). The addition of amounts paid or incurred by the taxpayer for
qualified interconnection property in section 48(a)(8)(A) is tied to
the installation of ``energy property.'' The statute clearly ties the 5
MW limitation to the energy property; therefore, as long as an energy
property is 5 MW or less, the statute is satisfied. Additionally,
measurement at the level of the energy property provides certainty for
taxpayers and the IRS because it is measured by the energy property's
maximum net output when it is placed in service. Therefore, proposed
Sec. 1.48-14(g)(3) would provide that the Five-Megawatt Limitation
must be measured at the level of the energy property. Proposed Sec.
1.48-14(g)(7) also would provide examples illustrating the application
of this rule.
In accordance with proposed Sec. 1.48-14(g)(3), if an energy
project comprised of multiple energy properties has a combined
nameplate capacity in excess of 5 MW, each of the energy properties
would nonetheless be eligible to include amounts paid or incurred by
the taxpayer for qualified interconnection property if each energy
property satisfies the Five-Megawatt Limitation. The Treasury
Department and the IRS request comments regarding the application of
the Five-Megawatt Limitation to a single energy property, including
whether the definition of an energy property is sufficiently clear for
this purpose. In addition, the Treasury Department and the IRS request
comments regarding the circumstances under which multiple energy
properties each with a nameplate capacity of less than 5 MW would
utilize common power conditioning equipment for economic or regulatory
reasons and/or common interconnection agreements, or would instead
utilize separate power conditioning equipment and/or interconnection
agreements.
4. Non-Application to Certain Types of Energy Properties
The definition of qualified interconnection property specifically
excludes interconnection property installed with respect to an energy
project that is a microgrid controller. Additionally, taxpayers may not
include the costs of qualified interconnection property in the basis of
electrochromic glass property and fiber optic solar energy property
because these types of energy property do not require additions,
modifications, or upgrades to a transmission or distribution system.
Similarly, in the case of energy properties that generate thermal
energy, such as certain geothermal property and qualified biogas
property, this provision is inapplicable.
Effect on Other Documents
Notice 2009-52 will be obsoleted upon publication of the final
regulations in the Federal Register. Notice 2009-52, in relevant part,
provides procedures for taxpayers to make an irrevocable election under
section 48(a)(5) to treat qualified property that is part of a
qualified investment credit facility as energy property eligible for a
section 48 credit in lieu of a section 45 credit.
Proposed Applicability Dates
Except for the provisions of proposed Sec. Sec. 1.48-13 and
1.6418-5(f), these regulations generally are proposed to apply with
respect to property that is placed in service after December 31, 2022,
and during a taxable year beginning after the date final regulations
are published in the Federal Register. Proposed Sec. 1.6418-5(f) is
proposed to apply to taxable years ending on or after the date final
regulations are published in the Federal Register. A taxpayer may rely
on proposed Sec. Sec. 1.48-9, 1.48-14, and 1.6418-5(f) with respect to
property that is placed in service after December 31, 2022, and during
a taxable year beginning on or before the date final regulations are
published in the Federal Register, provided the taxpayer and all
related persons (within the meaning of sections 267(b) and 707(b) of
the Code) apply proposed Sec. Sec. 1.48-9 and 1.48-14 in their
entirety and in a consistent manner.
Proposed Sec. 1.48-13 is proposed to apply to projects placed in
service in taxable years ending after the date final regulations are
published in the Federal Register, and the construction of which begins
after the date final regulations are published in the Federal Register.
However, proposed Sec. 1.48-13(d) is proposed to apply to energy
projects the construction of which begins after November 22, 2023.
Taxpayers may rely on Sec. 1.48-13 with respect to construction of a
property or project beginning on or after January 29, 2023, and on or
before the date these regulations are published as final regulations in
the Federal Register, provided, that beginning after the date that is
60 days after August 29, 2023, taxpayers follow proposed Sec. 1.48-13
in its entirety and in a consistent manner.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of Office of
Management and Budget (OMB) before collecting information from the
public, whether such collection of information is
[[Page 82209]]
mandatory, voluntary, or required to obtain or retain a benefit. A
Federal agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The collections of information in these proposed regulations
contain reporting and recordkeeping requirements that are required to
verify the eligibility of the property for the credit. These
collections of information would generally be used by the IRS for tax
compliance purposes and by taxpayers to facilitate proper reporting and
compliance.
The reporting requirement mentioned within this proposed
regulations with respect to section 48 are in proposed Sec. 1.48-
14(f)(6), which provides the time and manner for a taxpayer to make a
section 48(a)(5)(C) an election to have qualified investment credit
facility property that was placed in service after December 31, 2008,
treated as a qualified investment credit facility for purposes of
claiming the section 48 credit. These requirements are considered
general tax records under Sec. 1.6001-1.
A taxpayer must make a section 48(a)(5)(C) election on a completed
Form 3468 (Investment Credit) (or successor forms, or pursuant to
instructions and other guidance) with the taxpayer's timely filed
return (including extensions) for the taxable year in which the energy
property is placed in service. The taxpayer must make a separate
section 48(a)(5)(C) election for each qualified facility that is to be
treated as a qualified investment credit facility. These collections
are included in Notice 2009-52, 2009-1 C.B. 1094, which is already
approved under OMB Control Number 1545-2145 for all filers. Also, the
election selection is included on, Form 3468, which is already approved
in OMB Control Numbers 1545-0155 for trust and estate filers, 1545-0074
for individual filers, and 1545-0123 for business filers. This proposed
regulation is not changing the collection requirements already approved
by OMB.
These proposed regulations would also include reporting
requirements, in addition to the general reporting requirements set
forth in in Sec. 1.45-12 of the August Proposed Regulations, for
taxpayers that claim an increased credit amount under section
48(a)(9)(B)(iii). These proposed regulations would require taxpayers to
verify compliance with the Prevailing Wage Requirements by providing
information that includes the aggregate information detailed in Sec.
1.45-12 of the August Proposed Regulations during the five-year
recapture period after an energy project is placed in service. The
Secretary may issue forms and instructions in future guidance for the
purpose of meeting these reporting requirements. As set forth in the
preamble to the August Proposed Regulations, these reporting
requirements will be covered under OMB control numbers 1545-0074 for
individuals/sole proprietors and 1545-0123 for business entities. The
IRS has solicited public comments on these requirements and the
associated burdens for trusts and estates and has sought OMB approval
under a new OMB control number (1545-NEW) for trust and estate filers.
This proposed regulation is not changing or creating new collection
requirements not already approved by, or will be approved by, OMB for
the Sec. 1.45-12.
These proposed regulations also describe recapture procedures as
detailed in proposed Sec. 1.6418-5. The reporting of a section
48(a)(10)(C) recapture event will still be required to be reported
using Form 4255, Recapture of Investment Credit. This form is approved
under OMB control numbers 1545-0074 for individuals, 1545-0123 for
business entities, and 1545-0166 for trust and estate filers. The
proposed regulation is not changing or creating new collection
requirements not already approved by OMB.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency determines that a proposal is not likely to
have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires the agency to present an
initial regulatory flexibility analysis (IRFA) of the proposed rule.
The Treasury Department and the IRS have not determined whether the
proposed rule, when finalized, will likely have a significant economic
impact on a substantial number of small entities. This determination
requires further study. However, because there is a possibility of
significant economic impact on a substantial number of small entities,
an IRFA is provided in these proposed regulations. The Treasury
Department and the IRS invite comments on both the number of entities
affected and the economic impact on small entities.
Pursuant to section 7805(f), this notice of proposed rulemaking has
been submitted to the Chief Counsel of Advocacy of the Small Business
Administration for comment on its impact on small business.
A. Need for and Objectives of the Rule
The proposed regulations will provide greater clarity to taxpayers
for purposes of claiming the section 48 credit for energy property. The
proposed rule is expected to encourage taxpayers to invest in
developing new energy properties, including qualified facilities
otherwise eligible for the section 45 credit for which a taxpayer makes
a section 48(a)(5)(C) election. Thus, the Treasury Department and the
IRS intend and expect that the proposed rule will deliver benefits
across the economy that will beneficially impact various industries.
B. Affected Small Entities
The Small Business Administration estimated in its 2018 Small
Business Profile that 99.9 percent of United States businesses meet its
definition of a small business. The applicability of these proposed
regulations does not depend on the size of the business, as defined by
the Small Business Administration. As described more fully in the
preamble to these proposed regulations and in this IRFA, these rules
may affect a variety of different businesses across several different
industries.
The section 48 credit incentivizes the development of energy
property. Because the potential credit claimants can vary widely, it is
difficult to estimate at this time the impact of these proposed
regulations, if any, on small businesses.
The Treasury Department and the IRS expect to receive more
information on the impact on small businesses through comments on this
proposed rule and again when taxpayers start to claim the section 48
credit using the guidance and procedures provided in these proposed
regulations.
C. Impact of the Rule
The proposed regulations will allow taxpayers to plan investments
and transactions based on the ability to claim the section 48 credit.
The increased use of the section 48 credit will incentivize the
development of technologies for energy generation and storage. The use
of the section 48 credit may also lead to additional investment in
electrical grid infrastructure to transport electricity.
[[Page 82210]]
Because the statutory changes that are reflected in the proposed
rules have already been accounted for by Form 3468, the recordkeeping
and reporting requirements should not increase for taxpayers that
already claim the section 48 credit. The Form 3468 already provides the
procedures for taxpayers to make a section 48(a)(5)(C) election. To
make the election, a taxpayer must claim the energy credit with respect
to a qualified investment credit facility property on a completed Form
3468 (Investment Credit) (or successor forms, or pursuant to
instructions and other guidance) and file such form with the taxpayer's
timely filed return (including extensions) for the taxable year in
which the property is placed in service. Although the Treasury
Department and the IRS do not have sufficient data to precisely
determine the likely extent of the increased costs of compliance, the
estimated burden of complying with the recordkeeping and reporting
requirements are described in the Paperwork Reduction Act section of
the preamble.
D. Duplicative, Overlapping, or Conflicting Federal Rules
The proposed rule would not duplicate, overlap, or conflict with
any relevant Federal rules. As discussed above, the proposed rule would
merely provide procedures and definitions to allow taxpayers to claim
the section 48 credit.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These
proposed regulations do not include any Federal mandate that may result
in expenditures by State, local, or Tribal governments or by the
private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial, direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
VI. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has Tribal implications if the rule either imposes substantial, direct
compliance costs on Indian Tribal governments, and is not required by
statute, or preempts Tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. This proposed rule does not have substantial direct effects on
one or more Federally recognized Indian Tribes and does not impose
substantial direct compliance costs on Indian Tribal governments within
the meaning of the Executive order.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to any comments
regarding the notice of proposed rulemaking and partial withdrawal of
notice of proposed rulemaking that are submitted timely to the IRS in
the preamble under the ADDRESSES section. The Treasury Department and
the IRS request comments on all aspects of the proposed regulations.
All comments submitted will be made available at <a href="http://www.regulations.gov">http://www.regulations.gov</a> or upon request for public inspection and copying.
A public hearing has been scheduled for February 20, 2024, at 10
a.m. ET, in the Auditorium at the Internal Revenue Building, 1111
Constitution Ave. NW, Washington, DC. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 30 minutes before the hearing starts. Participants may
alternatively attend the public hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the public hearing.
Persons who wish to present oral comments at the public hearing must
submit an outline of the topics to be discussed and the time to be
devoted to each topic by January 22, 2024. A period of 10 minutes will
be allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the public hearing. If no outline of the topics to be
discussed at the public hearing is received by January 22, 2024, the
public hearing will be cancelled. If the public hearing is cancelled, a
notice of cancellation of the public hearing will be published in the
Federal Register.
Individuals who want to testify in person at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#0b7b7e69676268636e6a7962656c784b627978256c647d"><span class="__cf_email__" data-cfemail="b3c3c6d1dfdad0dbd6d2c1daddd4c0f3dac1c09dd4dcc5">[email protected]</span></a> to have your name added
to the building access list. The subject line of the email must contain
the regulation number REG-132569-17 and the language TESTIFY In Person.
For example, the subject line may say: Request to TESTIFY In Person at
Hearing for regulation number REG-132569-17.
Individuals who want to testify by telephone at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#c1b1b4a3ada8a2a9a4a0b3a8afa6b281a8b3b2efa6aeb7"><span class="__cf_email__" data-cfemail="0a7a7f68666369626f6b7863646d794a637879246d657c">[email protected]</span></a> to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-132569-17 and the language
TESTIFY Telephonically. For example, the subject line may say: Request
to TESTIFY Telephonically at Hearing for REG-132569-17.
Individuals who want to attend the public hearing in person without
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#a7d7d2c5cbcec4cfc2c6d5cec9c0d4e7ced5d489c0c8d1"><span class="__cf_email__" data-cfemail="9bebeef9f7f2f8f3fefae9f2f5fce8dbf2e9e8b5fcf4ed">[email protected]</span></a> to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-132569-17 and the language
ATTEND In Person. For example, the subject line may say: Request to
ATTEND Hearing in Person for REG-132569-17. Requests to attend the
public hearing must be received by 5:00 p.m. on February 15, 2024.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing please contact the
Publications and Regulations Branch of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#5e2e2b3c32373d363b3f2c3730392d1e372c2d70393128"><span class="__cf_email__" data-cfemail="a1d1d4c3cdc8c2c9c4c0d3c8cfc6d2e1c8d3d28fc6ced7">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number) by at least 5:00 p.m. on February 14, 2024.
Drafting Information
The principal authors of these proposed rules are Martha M. Garcia
[[Page 82211]]
and Boris Kukso of the Office of Associate Chief Counsel (Passthroughs
& Special Industries). However, other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Partial Withdrawal of Notice of Proposed Rulemaking
Under the authority of 26 U.S.C. 7805, proposed Sec. 1.48-13
contained in the notice of proposed rulemaking (REG-100908-23) that was
published in the Federal Register on August 30, 2023 (88 FR 60018), is
withdrawn.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by:
0
a. Revising the entry for Sec. 1.48-9; and
0
b. Adding entries in numerical order for Sec. Sec. 1.48-13, 1.48-14,
and 1.6418-5.
The revision and additions read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.48-9 also issued under 26 U.S.C. 48(a)(3)(D)(i) and
(16). * * *
Section 1.48-13 also issued under 26 U.S.C. 48(a)(10)(C) and
(16). * * *
Section 1.48-14 also issued under 26 U.S.C. 48(a)(16). * * *
* * * * *
Section 1.6418-5 also issued under 26 U.S.C. 48(a)(10)(C) and
6418(g) and (h).
* * * * *
0
Par. 2. Revise Sec. 1.48-9 to read as follows:
Sec. 1.48-9 Definition of energy property.
(a) In general. For purposes of the energy credit determined under
section 48 of the Internal Revenue Code (Code), the term energy
property means property that, taking into account the definition of the
term unit of energy property (defined in paragraph (f)(2)(i) of this
section) and of other terms defined in paragraph (b) and other
provisions of this section, meets the requirements of paragraph (c) of
this section and is of a type of energy property set forth in paragraph
(e) of this section. Paragraph (d) of this section provides rules for
property excluded from energy property. Paragraph (f) of this section
provides rules for components included in an energy property. Paragraph
(g) of this section provides the applicability date for this section.
(b) Definitions related to requirements for energy property. For
purposes of section 48 of the Code, this section, Sec. Sec. 1.48-13
and 1.48-14, and any provision of the Code or this chapter that
expressly refers to any of the foregoing, the following definitions
apply:
(1) Construction, reconstruction, or erection of energy property.
The term construction, reconstruction, or erection of energy property
means work performed to construct, reconstruct, or erect energy
property either by the taxpayer or for the taxpayer in accordance with
the taxpayer's specifications.
(2) Acquisition of energy property. The term acquisition of energy
property means a transaction by which a taxpayer obtains rights and
obligations with respect to energy property, including--
(i) Title to the energy property under the law of the jurisdiction
in which the energy property is placed in service, unless the property
is possessed or controlled by the taxpayer as a lessee, and
(ii) Physical possession or control of the energy property.
(3) Original use of energy property--(i) In general. The term
original use of energy property means the first use to which a unit of
energy property is put, whether or not such use is by the taxpayer.
(ii) Retrofitted units of energy property. A retrofitted unit of
energy property acquired by the taxpayer will not be treated as being
put to original use by the taxpayer unless the rules in Sec. 1.48-
14(a) regarding retrofitted energy property (80/20 Rule) or paragraph
(e)(10)(v) of this section regarding modifications of certain energy
storage technology apply. The question of whether a unit of energy
property meets the 80/20 Rule or is modified (as described in paragraph
(e)(10)(v) of this section) is a facts and circumstances determination.
(4) Allowable--(i) In general. For purposes of applying paragraph
(c)(1)(ii) of this section, depreciation (or amortization in lieu of
depreciation) is allowable with respect to energy property if such
property is of a character subject to the allowance for depreciation
under section 167 of the Code and the basis or cost of such property is
recovered using a method of depreciation (for example, the straight
line method), which includes any additional first year depreciation
deduction method of depreciation (for example, under section 168(k) of
the Code). Further, if an Internal Revenue Service adjustment with
respect to the Federal income tax or information return for such
taxable year requires the basis or cost of such energy property to be
recovered using a method of depreciation, depreciation is allowable to
the taxpayer with respect to energy property.
(ii) Exclusions from allowable. For purposes of paragraph (b)(4)(i)
of this section, depreciation is not allowable with respect to energy
property if the basis or cost of such property is not recovered through
a method of depreciation but, instead, such basis or cost is recovered
through a deduction of the full basis or cost of the energy property in
one taxable year (for example, under section 179 of the Code).
(5) Placed in service--(i) In general. Energy property is
considered placed in service in the earlier of:
(A) The taxable year in which, under the taxpayer's depreciation
practice, the period for depreciation with respect to such energy
property begins; or
(B) The taxable year in which the energy property is placed in a
condition or state of readiness and availability for a specifically
assigned function, whether in a trade or business or in the production
of income. Energy property in a condition or state of readiness and
availability for a specifically assigned function includes, but is not
limited to, components that are acquired and set aside during the
taxable year for use as replacements for a particular energy property
(or energy properties) in order to avoid operational time loss and
equipment that is acquired for a specifically assigned function and is
operational but is undergoing testing to eliminate any defects.
However, components acquired to be used in the construction of an
energy property will not be considered in a condition or state of
readiness and availability for a specifically assigned function.
(ii) Energy property subject to Sec. 1.48-4 election to treat
lessee as purchaser. Notwithstanding paragraph (b)(5)(i) of this
section, energy property with respect to which an election is made
under Sec. 1.48-4 to treat the lessee as having purchased such energy
property is considered placed in service by the lessor in the taxable
year in which possession is transferred to such lessee.
(6) Unit of energy property. The term unit of energy property is
defined in paragraph (f)(2)(i) of this section. No provision of this
section or Sec. 1.48-13 or Sec. 1.48-14 uses the term unit in respect
of energy property with any meaning other than that provided in
paragraph (f)(2)(i) of this section.
[[Page 82212]]
(7) Claim. With respect to a section 48 credit determined with
respect to energy property of a taxpayer, the term claim means filing a
completing Form 3468, Investment Credit, or any successor form(s), with
the taxpayer's timely filed (including extensions) Federal income tax
return for the taxable year in which the energy property is placed in
service, and includes the making of an election under section 6417 or
6418 of the Code and corresponding regulations with respect to such
section 48 credit and made on the taxpayer's Federal income tax return
or annual information return.
(c) Requirements for energy property--(1) In general. Energy
property must satisfy each of the requirements of paragraphs (c)(1)(i)
through (v) of this section:
(i) The taxpayer constructs, reconstructs, or erects the property,
or, if the original use of the property commences with the taxpayer,
acquires the property;
(ii) Depreciation (or amortization in lieu of depreciation) is
allowable with respect to the property;
(iii) The property meets the performance and quality standards as
provided in paragraph (c)(2) of this section;
(iv) The construction of the property begins before the date
provided in section 48 of the Code (if any such date is provided); and
(v) The property is placed in service by the taxpayer by the date
provided in section 48 (if any such date is provided).
(2) Performance and quality standards--(i) In general. Energy
property must meet performance and quality standards, if any, which
have been prescribed by the Secretary of the Treasury or her delegate
(after consultation with the Secretary of Energy) and are in effect at
the time of acquisition of the energy property.
(ii) Special rules for performance and quality standards--(A) Small
wind energy property. Small wind energy property must meet the
performance and quality standards in effect at the time of acquisition
of the small wind turbine set forth in the American Wind Energy
Association Small Wind Turbine Performance and Safety Standard 9.1-
2009, or subsequent revisions (AWEA); International Electrotechnical
Commission 61400-1, 61400-2, 61400-11, 61400-12, or subsequent
revisions (IEC); or the ANSI/ACP 101-1-2021, the Small Wind Turbine
Standard, or subsequent revisions (ACP). The certification requirements
applicable to such performance and quality standards are provided in
guidance published in the Internal Revenue Bulletin. See Sec. 601.601
of this chapter.
(B) Electrochromic glass property. To be eligible for the section
48 credit, electrochromic windows must be rated in accordance with the
National Fenestration Rating Council (NFRC) and secondary glazing
systems must be rated in accordance with the Attachments Energy Rating
Council (AERC) Rating and Certification Process, or subsequent
revisions. See paragraph (e)(2)(ii) of this section for the definition
of electrochromic glass property.
(iii) Time of acquisition. For purposes of applying performance and
quality standards, the time of acquisition is the date the taxpayer
enters into a binding contract (as defined in paragraph (c)(2)(iv) of
this section) to acquire the property, or, in the case of property
constructed, reconstructed, or erected by the taxpayer, the earlier of
the date that--
(A) The taxpayer begins construction, reconstruction, or erection
of the property, or
(B) The taxpayer and another person enter into a binding contract
(as defined in paragraph (c)(2)(iv) of this section) requiring the
other person to construct, reconstruct, or erect property and to place
the property in service for an agreed upon use.
(iv) Binding contract. For purposes of this paragraph (c)(2), a
contract is binding only if it is enforceable under State law against
the taxpayer or a predecessor and does not limit damages to a specified
amount (for example, by use of a liquidated damages provision). For
this purpose, a contractual provision that limits damages to an amount
equal to at least five percent of the total contract price will not be
treated as limiting damages to a specified amount. For additional
guidance regarding the definition of a binding contract, see Sec.
1.168(k)-2(b)(5)(iii)(A).
(d) Property that is not energy property--(1) Interaction with
section 45. Energy property does not include any property that is part
of a qualified facility the production from which is allowed as a
credit determined under section 45 of the Code (section 45 credit) for
the taxable year or any prior taxable year. However, see paragraph
(f)(3) of this section for rules regarding property that is an integral
part of an energy property that is also used by a qualified facility.
See Sec. 1.48-14(f)(1) for rules regarding making an election under
section 48(a)(5) of the Code to treat a qualified facility as an energy
property.
(2) Other property. Energy property also does not include power
purchase agreements, goodwill, going concern value, or renewable energy
certificates.
(e) Types of energy property. The types of energy property eligible
for a section 48 credit are:
(1) Solar energy property--(i) In general. Solar energy property is
equipment that uses solar energy to generate electricity, to heat or
cool (or provide hot water for use in) a structure, or to provide solar
process heat, excepting property used to generate energy for the
purposes of heating a swimming pool. Solar energy property includes
solar electric generation equipment (as defined in paragraph (e)(1)(ii)
of this section), solar process heat equipment (as defined in paragraph
(e)(1)(iii) of this section), and equipment that uses solar energy to
heat or cool a structure or provide hot water for use in a structure,
and parts related to the functioning of all such equipment.
(ii) Solar electric generation equipment. Solar electric generation
equipment is equipment that converts sunlight into electricity through
the use of devices such as solar cells or other collectors.
(iii) Solar process heat equipment. Solar process heat equipment is
equipment that uses solar energy to generate steam at high temperatures
for use in industrial or commercial processes.
(2) Fiber-optic solar energy property and electrochromic glass
property--(i) Fiber-optic solar energy property. Fiber-optic solar
energy property is equipment that uses solar energy to illuminate the
inside of a structure using fiber-optic distributed sunlight.
(ii) Electrochromic glass property. Electrochromic glass energy
property uses electricity to change its light transmittance properties
(both visible and near infrared light) in order to heat or cool a
structure. For purposes of section 48, windows, including secondary
windows (also referred to as secondary glazings), that incorporate
electrochromic glass are treated as electrochromic glass property.
(3) Geothermal energy property--(i) In general. Geothermal energy
property is equipment used to produce, distribute, or use energy
derived from a geothermal deposit (within the meaning of section
613(e)(2) of the Code), but only, in the case of electricity generated
by geothermal power, up to (but not including) the electrical
transmission stage. Geothermal equipment includes production equipment
(as defined in paragraph (e)(3)(ii) of this section) and distribution
equipment (as defined in paragraph (e)(3)(iii) of this section).
(ii) Production equipment. For purposes of paragraph (e)(3)(i) of
this section, production equipment is equipment necessary to bring
[[Page 82213]]
geothermal energy from the subterranean deposit to the surface,
including well-head and downhole equipment (such as screening or
slotting liners, tubing, downhole pumps, and associated equipment).
Production, injection, and monitoring wells required for production of
the geothermal deposit qualify as production equipment. If geothermal
energy is used to generate electricity, production equipment also
includes the property necessary to produce electricity. Production
equipment does not include equipment used for exploration and
development of geothermal deposits.
(iii) Distribution equipment. For purposes of paragraph (e)(3)(i)
of this section, distribution equipment is equipment that transports
geothermal energy from a geothermal deposit to the site of ultimate
use. If geothermal energy is used to generate electricity, distribution
equipment includes equipment that transports geothermal fluids between
the geothermal deposit and the power plant. Distribution equipment also
includes components of a building's heating and/or cooling system, such
as pipes and ductwork that distribute within a building the energy
derived from the geothermal deposit.
(4) Qualified fuel cell property. Qualified fuel cell property is a
fuel cell power plant that has a nameplate capacity of at least 0.5
kilowatts (kW) (1 kW in the case of a fuel cell power plant with a
linear generator assembly) of electricity using an electrochemical or
electromechanical process, and an electricity-only generation
efficiency greater than 30 percent. For this purpose, electricity-only
generation efficiency may be calculated by dividing the heat rate of
the fuel cell (for example, kilowatt-hours (kWh) electricity produced
per kilogram (kg) of fuel consumed) by the higher heating value of the
fuel (for example, kWh per kg). A fuel cell power plant is an
integrated system comprised of a fuel cell stack assembly, or linear
generator assembly, and associated balance of plant components that
converts a fuel into electricity using electrochemical or
electromechanical means. A linear generator assembly does not include
any assembly that contains rotating parts.
(5) Qualified microturbine property. Qualified microturbine
property is a stationary microturbine power plant that has a nameplate
capacity of less than 2,000 kW and an electricity-only generation
efficiency of not less than 26 percent at International Standard
Organization conditions. A stationary microturbine power plant is an
integrated system comprised of a gas turbine engine, a combustor, a
recuperator or regenerator, a generator or alternator, and associated
balance of plant components that converts a fuel into electricity and
thermal energy. A stationary microturbine power plant also includes all
secondary components located between the existing infrastructure for
fuel delivery and the existing infrastructure for power distribution,
including equipment and controls for meeting relevant power standards,
such as voltage, frequency, and power factors.
(6) Combined heat and power system (CHP) property--(i) In general.
CHP property is property comprising a system that uses the same energy
source for the simultaneous or sequential generation of electrical
power, mechanical shaft power, or both, in combination with the
generation of steam or other forms of useful thermal energy (including
heating and cooling applications). CHP property must produce at least
20 percent of its total useful energy in the form of thermal energy
that is not used to produce electrical or mechanical power (or
combination thereof), and at least 20 percent of its total useful
energy in the form of electrical or mechanical power (or combination
thereof). The energy efficiency percentage of CHP property must exceed
60 percent (except in the case of CHP systems that use biomass within
the meaning of section 45 of the Code). CHP property does not include
any property comprising a system if such system has a capacity in
excess of 50 MW or a mechanical energy capacity in excess of 67,000
horsepower or an equivalent combination of electrical and mechanical
energy capacities.
(ii) Components excluded. CHP property does not include property
used to transport the energy source to the generating facility or to
distribute energy produced by the facility.
(7) Qualified small wind energy property. Qualified small wind
energy property is property that uses a qualifying small wind turbine
to generate electricity. A qualifying small wind turbine means a wind
turbine that has a nameplate capacity of not more than 100 kW.
(8) Geothermal heat pump equipment. Geothermal heat pump equipment
is equipment that uses the ground, ground water, or other underground
fluids as a thermal energy source to heat a structure or as a thermal
energy sink to cool a structure.
(9) Waste energy recovery property (WERP)--(i) In general. WERP is
property that generates electricity solely from heat from buildings or
equipment if the primary purpose of such building or equipment is not
the generation of electricity. Examples of buildings or equipment the
primary purpose of which is not the generation of electricity include,
but are not limited to, manufacturing plants, medical care facilities,
facilities on college campuses, pipeline compressor stations, and
associated equipment. WERP does not include any property that has a
capacity in excess of 50 MW.
(ii) Coordination with CHP property. Any WERP that is part of a
system that is a CHP property is not treated as WERP for purposes of
section 48 of the Code unless the taxpayer elects to not treat such
system as a CHP property for purposes of section 48.
(10) Energy storage technology--(i) In general. Energy storage
technology includes electrical energy storage property described in
paragraph (e)(10)(ii) of this section, thermal energy storage property
described in paragraph (e)(10)(iii) of this section, and hydrogen
energy storage property described in paragraph (e)(10)(iv) of this
section.
(ii) Electrical energy storage property. Electrical energy storage
property is property (other than property primarily used in the
transportation of goods or individuals and not for the production of
electricity) that receives, stores, and delivers energy for conversion
to electricity, and has a nameplate capacity of not less than 5 kWh.
For example, subject to the exclusion for property primarily used in
the transportation of goods or individuals, electrical energy storage
property includes but is not limited to rechargeable electrochemical
batteries of all types (such as lithium ion, vanadium flow, sodium
sulfur, and lead-acid); ultracapacitors; physical storage such as
pumped storage hydropower, compressed air storage, flywheels; and
reversible fuel cells.
(iii) Thermal energy storage property. Thermal energy storage
property is property comprising a system that is directly connected to
a heating, ventilation, or air conditioning (HVAC) system; removes heat
from, or adds heat to, a storage medium for subsequent use; and
provides energy for the heating or cooling of the interior of a
residential or commercial building. Thermal energy storage property
includes equipment and materials, and parts related to the functioning
of such equipment, to store thermal energy for later use to heat or
cool, or to provide hot water for use in heating a residential or
commercial building. It does not include a swimming pool, CHP property,
or a building or its structural components. For example, thermal energy
storage includes, but is not limited to, thermal ice storage systems
that use electricity to run a refrigeration cycle to produce ice
[[Page 82214]]
that is later connected to the HVAC system as an exchange medium for
air conditioning the building, heat pump systems that store thermal
energy in an underground tank or borehole field to be extracted for
later use for heating and/or cooling, and electric furnaces that use
electricity to heat bricks to high temperatures and later use this
stored energy to heat a building through the HVAC system.
(iv) Hydrogen energy storage property. Hydrogen energy storage
property is property (other than property primarily used in the
transportation of goods or individuals and not for the production of
electricity) that stores hydrogen and has a nameplate capacity of not
less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard
cubic feet (scf) of hydrogen. Hydrogen energy storage property must
store hydrogen that is solely used as energy and not for other purposes
such as for the production of end products such as fertilizer. For
example, hydrogen energy storage property includes, but is not limited
to
[…truncated; see source link]Indexed from Federal Register on November 22, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.