Rule2024-28190
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
December 12, 2024
Effective
December 12, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth final rules relating to the energy credit, including rules for determining whether investments in energy property are eligible for the energy credit and for implementing certain amendments made by the Inflation Reduction Act of 2022. The final regulations impact taxpayers who invest in energy property eligible for the energy credit.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 239 (Thursday, December 12, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 239 (Thursday, December 12, 2024)]
[Rules and Regulations]
[Pages 100598-100660]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28190]
[[Page 100597]]
Vol. 89
Thursday,
No. 239
December 12, 2024
Part II
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Part 1
Definition of Energy Property and Rules Applicable to the Energy
Credit; Final Rule
Federal Register / Vol. 89 , No. 239 / Thursday, December 12, 2024 /
Rules and Regulations
[[Page 100598]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10015]
RIN 1545-BO40
Definition of Energy Property and Rules Applicable to the Energy
Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document sets forth final rules relating to the energy
credit, including rules for determining whether investments in energy
property are eligible for the energy credit and for implementing
certain amendments made by the Inflation Reduction Act of 2022. The
final regulations impact taxpayers who invest in energy property
eligible for the energy credit.
DATES:
Effective date: These regulations are effective on December 12,
2024.
Applicability dates: For dates of applicability, see Sec. Sec.
1.48-9(g), 1.48-13(f), 1.48-14(j), and 1.6418-5(j).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, the IRS
Office of the Associate Chief Counsel (Passthroughs and Special
Industries) at (202) 317-6853 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under sections 48 and 6418 of the Internal Revenue Code
(Code) issued by the Secretary of the Treasury or her delegate
(Secretary) pursuant to the authority granted under sections 45(b)(12),
48(a)(3)(D), and (a)(16), 6418(g) and (h), and 7805(a) of the Code
(final regulations).
Section 48(a)(3)(D) provides a specific delegation of authority for
the Secretary to prescribe by regulations performance and quality
standards for energy property after consulting with the Secretary of
Energy.
Sections 45(b)(12) and 48(a)(16) provide specific delegations of
authority with respect to the requirements of section 45(b), including
the prevailing wage and apprenticeship (PWA) requirements of section
45(b)(7) and (8), as incorporated by section 48(a)(10) and (11), with
each stating, ``[t]he Secretary shall issue such regulations or other
guidance as the Secretary determines necessary to carry out the
purposes of this subsection, including regulations or other guidance
which provides for requirements for recordkeeping or information
reporting for purposes of administering the requirements of this
subsection.'' Section 48(a)(10)(C) grants authority for the Secretary
to provide, by regulations or other guidance, for recapturing the
benefit of any increase in the credit allowed under section 48(a)
allowed to an energy project that initially satisfies the PWA
requirements if such energy project should later fail to satisfy such
requirements during the recapture period by applying rules similar to
the rules of section 50(a) of the Code. Section 48(a)(16) provides a
general grant of regulatory authority for section 48(a), by stating:
``The Secretary shall issue such regulations or other guidance as the
Secretary determines necessary to carry out the purposes of this
subsection, including regulations or other guidance which provides for
requirements for recordkeeping or information reporting for purposes of
administering the requirements of this subsection.''
Section 6418(g) provides several specific delegations of authority
to the Secretary with regard to enforcing requirements for valid
transfers of certain Federal income tax credits under section 6418 and
recapturing excessive credit transfers. Section 6418(h) provides a
specific delegation of authority with respect to the transfer of
credits under section 6418, stating, in part, that ``[t]he Secretary
shall issue such regulations or other guidance as may be necessary to
carry out the purposes of this section.''
Finally, section 7805(a) authorizes the Secretary to ``prescribe
all needful rules and regulations for the enforcement of [the Code],
including all rules and regulations as may be necessary by reason of
any alteration of law in relation to internal revenue.''
Background
I. Overview
Section 38 of the Code 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 of the Code, which includes the energy credit
determined under section 48 (section 48 credit). See sections 38(b)(1)
and 46(2). Section 48(a)(1) generally provides that the section 48
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 depends upon
meeting certain deadlines for beginning construction of the energy
property or for placing the energy property in service.
Section 48 originally was enacted by section 2 of the Revenue Act
of 1962, Public Law 87-834, 76 Stat. 960, 963 (October 16, 1962), 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 amounts paid for qualified
interconnection property in connection with the installation of energy
property, and providing an increased credit amount for energy projects
that satisfy prevailing wage and apprenticeship requirements, a
domestic content bonus credit amount, and an increase in credit rate
for energy communities.
The Income Tax Regulations at Sec. 1.48-9 in effect prior to
December 12, 2024 (former Sec. 1.48-9), which provide definitions and
rules for determining whether property is energy property eligible for
the section 48 credit, originally 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.
Thus, former Sec. 1.48-9 has not been updated since 1987, which is
before many of the current types of energy property became eligible for
the section 48 credit.
II. Prior Guidance
Prior to proposing the amendments to the regulations under section
48 being finalized by this treasury decision, the Department of the
Treasury (Treasury Department) and the IRS twice requested comments on
issues to be addressed in these regulations. On October 26, 2015, the
Treasury Department and the IRS published Notice 2015-70, 2015-43
I.R.B. 604, requesting 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, requesting general as well as
specific
[[Page 100599]]
comments on issues arising under section 48, among other sections, that
were amended or added by the IRA.
On August 30, 2023, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-100908-23) in the Federal Register
(88 FR 60018), corrected in 88 FR 73807 (Oct. 27, 2023), corrected in
89 FR 25550 (April 11, 2024), proposing rules regarding the increased
credit amounts available for taxpayers satisfying PWA requirements
established by the IRA (PWA Proposed Regulations). Comments were
requested and a public hearing was held November 21, 2023.
On November 22, 2023, after consideration of all the comments
submitted in response to Notice 2015-70 and Notice 2022-49, and after
consultation with the Department of Energy (DOE), the Treasury
Department and the IRS published a notice of proposed rulemaking and a
notice of public hearing (REG-132569-17) in the Federal Register (88 FR
82188), corrected in 89 FR 2182 (January 12, 2024), proposing rules
that would provide guidance under section 48 (Proposed Regulations). On
February 22, 2024, the Treasury Department and the IRS published a
second correction to the Proposed Regulations in the Federal Register
(89 FR 13293) that re-opened the comment period through March 25, 2024
(Correction). The Proposed Regulations withdrew certain portions of the
PWA Proposed Regulations and re-proposed regulations that would provide
additional guidance on the PWA 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 PWA requirements.
Although the Proposed Regulations withdrew certain portions of the
PWA Proposed Regulations, the Explanation of Provisions section in the
preamble to the PWA Proposed Regulations generally remained relevant.
Therefore, to the extent consistent with the preamble to the Proposed
Regulations, the Explanation of Provisions section of the PWA Proposed
Regulations was incorporated in the preamble to the Proposed
Regulations.
The preamble to the Proposed Regulations did not address written
comments that were submitted in response to the PWA Proposed
Regulations. Any comments received in response to the Proposed
Regulations, including comments on the re-proposed regulations
addressing the PWA requirements specific to section 48, are addressed
in the Summary of Comments and Explanation of Revisions section of this
preamble. The Proposed Regulations did not extend the comment period or
affect the scheduled hearing for the PWA Proposed Regulations. The PWA
Proposed Regulations, other than the portions that were withdrawn, were
adopted as final regulations by Treasury Decision (T.D. 9998), which
was published in the Federal Register (89 FR 53184) on June 25, 2024
(PWA Final Regulations).
On June 21, 2023, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-101610-23) in the Federal Register
(88 FR 40496) proposing rules concerning the election under section
6418 to transfer certain Federal income tax credits, including the
section 48 credit (6418 Proposed Regulations). Proposed Sec. 1.6418-5
of the 6418 Proposed Regulations included proposed rules addressing
notification requirements and the impact of the credit recapture rules
under sections 50(a), 49(b), and 45Q(f)(4) on the transfer of Federal
income tax credits. Comments were requested and a public hearing on the
6418 Proposed Regulations was held on August 23, 2023.
The Proposed Regulations would supplement the 6418 Proposed
Regulations by adding provisions to proposed Sec. 1.6418-5 addressing
notification requirements and the impact of the recapture rules for
failing to satisfy the PWA requirements under section 48(a)(10) if an
election under Sec. 1.6418-2 or Sec. 1.6418-3 has been made. The
preamble to the Proposed Regulations did not address written comments
that were submitted in response to the regulations proposed in the 6418
Proposed Regulations. Any comments received in response to the Proposed
Regulations, including the additions to proposed Sec. 1.6418-5
described in the Proposed Regulations, are addressed in the Summary of
Comments and Explanation of Revisions section of this preamble. The
Proposed Regulations did not otherwise extend the comment period for
the 6418 Proposed Regulations. On April 30, 2024, a Treasury Decision
(T.D. 9993) adopting the 6418 Proposed Regulations as final regulations
(6418 Final Regulations) was published in the Federal Register (89 FR
34770). The 6418 Final Regulations did not finalize the portion of
proposed Sec. 1.6418-5 that was included in the Proposed Regulations.
Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS received 350 written comments
in response to the Proposed Regulations. The comments are available for
public inspection at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request. After
full consideration of the comments received in response to the Proposed
Regulations, these final regulations adopt the Proposed Regulations
with modifications as described in this Summary of Comments and
Explanation of Revisions.
Comments addressing the requirements for energy property are
described in part I of this Summary of Comments and Explanation of
Revisions. Comments addressing the PWA requirements are described in
part II of this Summary of Comments and Explanation of Revisions.
Comments addressing rules applicable to energy property are described
in part III of this Summary of Comments and Explanation of Revisions.
Comments summarizing the statute or the Proposed Regulations,
recommending statutory revisions, or addressing issues that are outside
the scope of this rulemaking (such as revising other Federal
regulations and recommending changes to IRS forms) generally are not
addressed in this Summary of Comments and Explanation of Revisions or
adopted in these final regulations. In addition to modifications
described in this Summary of Comments and Explanation of Revisions, the
final regulations also include non-substantive grammatical or stylistic
changes to the Proposed Regulations. Unless otherwise indicated in this
Summary of Comments and Explanation of Revisions, provisions of the
Proposed Regulations with respect to which no comments were received
are adopted without substantive change.
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(a)(3) and (c).
Section 48(a)(3)(B) through (D) provide general requirements for
all types of energy property. Section 48(a)(3)(B) limits energy
property to property that is constructed, reconstructed, or erected by
the taxpayer or that 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
[[Page 100600]]
quality standards that have been prescribed by the 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, if the
statutory text of 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.
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 related to ``section 38 property'' remain
generally applicable to the section 48 credit.
Sections 1.48-1 and 1.48-2 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
related to requirements for energy property, some of which would be
adopted under proposed Sec. 1.48-9.
1. 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. Former Sec. 1.48-9(m)(1) provided 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.'' Generally,
proposed Sec. 1.48-9(c)(2)(i) would adopt this rule for performance
and quality standards for energy property from former Sec. 1.48-
9(m)(1) by providing that energy property must meet performance and
quality standards, if any, which have been prescribed by the Secretary
(after consultation with the Secretary of Energy) and are in effect at
the time of acquisition of the energy property. The final regulations
adopt this rule as proposed.
2. Performance and Quality Standards for Electrochromic Glass Property
Proposed Sec. 1.48-9(c)(2)(ii)(B) would provide rules for
performance and quality standards for electrochromic glass property by
stating that 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.
A few commenters addressed the performance and quality standards
for electrochromic glass provided in the Proposed Regulations.
Generally, these commenters suggested methods to satisfy the NFRC
rating requirement and were particularly interested in a simulation-
based process. For example, a commenter advocated for a process that
emphasizes simulation-based validation to expedite compliance and
reduce barriers to implementation, particularly given the lengthy
delays associated with physical testing. This commenter stated that
simulations, supported by advanced and reliable modeling software, have
become a standard practice within the industry. Another commenter also
emphasized the need to use simulations to satisfy the NFRC rating
requirement.
In response to these comments, the Treasury Department and the IRS
consulted with the DOE and learned that the existing NRFC and the AERC
ratings systems incorporate simulation methodologies that should
address the commenters' concerns. Accordingly, the final regulations
adopt this rule as proposed.
3. Placed in Service
a. General Rules
Section 48(a) provides that the section 48 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 purposes of the section 48 credit. Under Sec. 1.46-3(d)(1)
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 proposed to adopt the general
rules of Sec. 1.46-3(d)(1) for determining when a taxpayer has placed
an energy property in service. However, 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.
Accordingly, proposed Sec. 1.48-9(b)(5)(i) would provide that the
taxable year in which energy property is placed in service is the
earlier of the taxable year in which, under the taxpayer's depreciation
practice, 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.
A commenter requested that the final regulations provide a
different placed in service rule for energy storage technology. Because
energy storage technology may charge and discharge prior to commercial
readiness, the commenter suggested that energy storage technology
should be treated as placed in service when: (i) such property has all
licenses, permits, and approvals required to store and dispatch power;
(ii) pre-operational testing is complete; (iii) the taxpayer has title
to the property; and (iv) the property is available to store and
discharge power on a regular, commercial basis.
Proposed Sec. 1.48-9(b)(5) would adopt the general placed in
service rules of Sec. 1.46-3(d)(1), which have applied to the section
48 credit since its enactment, with a modification to reflect the
requirement that the property be eligible for depreciation or
amortization. Until the IRA amended section 48, energy storage property
(referred to as ``energy storage technology'' after the IRA amendments)
[[Page 100601]]
was considered a component of energy property. Without providing
specific indicia that an energy property is placed in service, the rule
provided at proposed Sec. 1.48-9(b)(5) would provide general
principles for a taxpayer to determine when an energy property has been
placed in service that are broadly applicable to all types of energy
property, well-understood, and widely relied upon by industry. The
general principles provided by the final rule are sufficiently broad to
address the commenter's concerns. Therefore, the final regulations do
not adopt these comments and instead adopt the placed in service rules
as proposed.
b. Lease-Passthrough Election
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.
Several commenters provided comments relating to the rule for leased
property in the context of qualified biogas property.
A commenter requested clarification on the application of the lease
passthrough election under Sec. 1.48-4 to treat a lessee as having
purchased such energy property from the lessor with respect to any
property comprising a qualified biogas property, including both
component properties considered functionally interdependent as a single
unit of energy property and property treated as an integral part of
energy property. This commenter asked for illustrative examples of the
application of the lease passthrough election in the context of a
renewable natural gas (RNG) qualified biogas property if the equipment
comprising the qualifying biogas production property, including
equipment treated as an integral part of the qualifying biogas
property, is owned by multiple taxpayers.
Another commenter suggested allowing a single taxpayer to
consolidate deemed ownership of an entire qualified biogas property to
permit a more efficient use and/or transfer of the section 48 credit
under the section 6418 credit transfer rules by relying on existing
lease passthrough rules that apply to energy property. The commenter
asserted that this would permit greater qualified investment and use of
the section 48 credit if, for regulatory or environmental permitting
reasons, some portion of the section 48 credit-eligible qualified
biogas property simply cannot be owned by a single or related
taxpayers. The commenter acknowledged that under the 6418 Proposed
Regulations, the transfer of the tax credits to a lessee under a lease
passthrough election will preclude further transfers under section
6418.
Guidance on eligibility for the lease passthrough election is
beyond the scope of the Proposed Regulations because proposed Sec.
1.48-9(b)(5)(ii) merely proposed a rule for determining when property
with respect to which a lease passthrough election is made under Sec.
1.48-4 is placed in service. Guidance on eligibility for the lease
passthrough election is addressed elsewhere, such as in Sec. 1.48-4
and the 6418 Final Regulations. Accordingly, these final regulations do
not adopt these comments.
4. Acquisition of Energy Property
Proposed Sec. 1.48-9(b)(2) would provide 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. This definition was intended to require
that the taxpayer establish tax ownership of the energy property for
Federal income tax purposes. The final regulations modify the
definition in proposed Sec. 1.48-9(b)(2) to make this requirement
explicit.
B. Types of Energy Property
Proposed Sec. 1.48-9(e) would expand the definitions of energy
property provided in former Sec. 1.48-9 to account for new
technologies that were added by amendments to section 48, including by
the IRA. Generally, the definitions of the types of energy property
provided in the Proposed Regulations incorporate the definitions
provided in section 48(a)(3) and (c) but do not provide specific
beginning of construction or placed in service deadlines. Taxpayers
should refer to the current definitions of energy property provided by
section 48 for specific requirements applicable to each type of energy
property. The definitions of the types of energy property provided in
proposed Sec. 1.48-9(e) were developed by the Treasury Department and
the IRS in consultation with the DOE.
Some commenters requested clarification concerning whether a
particular type of technology would fall into one of the categories of
energy property. For example, a commenter requested guidance concerning
what type of energy property would include sewage energy recovery
property and provided three options: geothermal heat pump (GHP)
property by reference to ``underground fluids,'' energy storage
technology, or waste energy recovery property (WERP). A definitive
response to such comments would require the Treasury Department and the
IRS to conduct a complete factual analysis of the property in question,
which may include information that was not provided by the commenters.
Because more information is needed to make the determinations requested
by the commenters, these final regulations do not address the requested
clarifications concerning the categorization of specific technologies.
1. 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, among other
requirements, 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 amount of the section 48
credit with respect to 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. This fraction is
equal to the applicable capacity limit divided by the capacity of the
CHP property. However, CHP
[[Page 100602]]
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 (i) 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 (ii) 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
an 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 that only
achieves 30-percent efficiency, would be permitted to claim a credit
equal to one-half of the otherwise allowable credit.
Proposed Sec. 1.48-9(e)(6)(i) would provide generally that 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). Proposed Sec. 1.48-9(e)(6)(i) would
also provide that 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). Further, proposed Sec.
1.48-9(e)(6)(i) would provide that 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). Proposed Sec.
1.48-9(e)(6)(i) would also provide that 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. 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.
A commenter requested that the final regulations clarify whether a
CHP property would be eligible for the section 48 credit, assuming all
other criteria are met, if the fuel source is exclusively non-renewable
natural gas. There is no requirement that a CHP property use a specific
fuel or feedstock. The Treasury Department and the IRS emphasize that
all CHP property must meet the requirements of section 48(c)(3) and
those provided in proposed Sec. 1.48-9(e)(6)(i), which the final
regulations adopt as proposed.
2. Geothermal Heat Pump Property
Section 48(a)(3)(A)(vii) provides, in part, that energy property
includes 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 (geothermal heat pump or GHP property). Proposed Sec. 1.48-
9(e)(8) would adopt the statutory definition of GHP property 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. Accordingly, proposed Sec. 1.48-
9(e)(8) would provide that GHP property 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.
Several commenters requested revisions to the definition of GHP
property to include recovered heat as a thermal energy source. For
example, representative of these comments, a commenter requested
clarification that equipment used to circulate recovered heat qualifies
as GHP property. This commenter asserted that the same GHP property
that uses a ground heat exchanger as a source or sink can be designed
to operate in a heat recovery mode, simply recycling heat around a
building if the potential exists. Another commenter noted that the use
of GHP property in heat recovery mode should be considered a qualified
energy source for purposes of the calculation to determine whether the
GHP property qualifies as dual use property.
As defined in proposed Sec. 1.48-14(b)(1), the term ``dual use
property'' would mean property that uses energy derived from both a
qualifying source (that is, from an energy property including a
qualified facility for which a section 48(a)(5) election has been made)
and from a non-qualifying source (that is, sources other than an energy
property including a qualified facility for which a section 48(a)(5)
election has been made). As proposed Sec. 1.48-14(b)(2) would further
provide, if dual use property uses energy derived from both a
qualifying source and a non-qualifying source it will qualify as energy
property if its use of energy from non-qualifying sources does not
exceed 50 percent of its total energy input during an annual measuring
period (Dual Use Rule). Further, if the energy used from qualifying
sources is between 50 percent and 100 percent, only a proportionate
amount of the basis of the energy property will be taken into account
in computing the amount of the section 48 credit. For example, if 80
percent of the energy used by a dual use property is from qualifying
sources, 80 percent of the basis of the dual use property will be taken
into account in computing the amount of the section 48 credit.
The Treasury Department and the IRS decline to adopt these
suggested revisions because they would conflict with the statutory
definition of GHP property. Section 48(a)(3)(A)(vii) specifically
provides that GHP property includes equipment that uses the ground or
ground water as a thermal energy source. While the Proposed Regulations
would provide that underground fluids may be included, this is a
clarification that underground fluids other than water may offer
another medium that contains thermal energy from the ground or ground
water. The statute does not include any other thermal energy sources.
For further discussion of the Dual Use Rule see part III.B. of this
Summary of Comments and Explanation of Revisions.
Additionally, a few commenters suggested expanding the definition
to allow GHP property to be used to heat domestic hot water in addition
to a structure. For example, a commenter requested that the final rule
clarify that domestic hot water generation by GHP property is included
in the definition of GHP property. Another commenter asserted that GHP
property eligible for the section 48 credit should also be permitted to
provide hot water generation because it would be counterintuitive if
heating hot water for space conditioning is included in the
[[Page 100603]]
definitions, but heating of domestic hot water is not. The statute
requires GHP property heat a structure or cool a structure; therefore,
the suggestion to expand the definition is not authorized by the
statute. The Treasury Department and the IRS decline to adopt these
suggested revisions. The final regulations adopt this rule as proposed.
A commenter mentioned that the energy property definition in
proposed Sec. 1.48-9(e)(3) concerning geothermal energy property
includes clarifying language on the scope of included property,
specifically addressing production and distribution equipment. The
commenter recommended including similar language for GHP property
described in section 48(a)(3)(A)(vii). The Treasury Department and the
IRS declined to adopt this suggestion in the Proposed Regulations, and
explained in the preamble to the Proposed Regulations that, 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 GHP property, such equipment may be integral to the
function of the GHP property to heat or cool a structure. Thus, energy
distribution equipment may be considered GHP property for the reasons
stated in the preamble to the Proposed Regulations.
3. Waste Energy Recovery Property
Section 48(a)(3)(A)(viii) provides that energy property includes
waste energy recovery property (WERP). Section 48(c)(5) 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)(C)) and
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)(i) would provide that 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. Proposed Sec. 1.48-9(e)(9)(i) would also
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.
Further, proposed Sec. 1.48-9(e)(9)(i) would provide that WERP does
not include any property that has a capacity in excess of 50 MW.
Proposed Sec. 1.48-9(e)(9)(ii) would provide that any WERP that is
part of a system that is a CHP property is not treated as WERP for
purposes of section 48 unless the taxpayer elects to not treat such
system as a CHP property for purposes of section 48.
Several commenters requested that specific technologies, including
``pressure reduction'' equipment or ``pressure letdown'' equipment,
sometimes referred to as ``turboexpanders,'' which generally allow high
pressure gas to expand and produce heat, be added to the examples of
WERP that would be provided in proposed Sec. 1.48-9(e)(9)(i). Another
commenter requested that ``pressure reduction'' equipment be included
as an example of WERP because pipeline transmissions (regardless of
geographic distance) require high pressure, but at pressure letdown
stations and within industrial facilities where the pressure is
reduced, pressure reduction affords an opportunity for energy
collection. A commenter requested that district energy systems paired
with WERP be added to the examples of WERP, while another commenter
suggested adding carbon dioxide power system technology to the examples
of WERP.
In response to these requests, the Treasury Department and the IRS
highlight that proposed Sec. 1.48-9(e)(9) would provide non-exhaustive
examples of buildings and facilities at which WERP may function rather
than examples of technology that may qualify as WERP. This approach
provides a function-oriented approach to determine whether a technology
is WERP that is broad enough to encompass nascent technologies without
rendering the regulations quickly obsolete. Therefore, the final
regulations do not adopt the requested revisions to the definition of
WERP, and the final regulations adopt this rule as proposed.
4. Energy Storage Technology
Section 48(a)(3)(A)(ix), which was added by the IRA, provides 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 kilowatt-hours (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
the section 48 credit.
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 CHP property, or a building or its
structural components.
Commenters requested clarifications regarding the treatment of
energy storage technology co-located with, an integral part of, or
shared with a facility that is otherwise eligible for certain Federal
tax credits. For example, a commenter requested clarification
concerning boundaries between energy storage technology eligible for
the section 48 credit and qualified clean hydrogen production
facilities eligible for the credit under section 45V. Another commenter
requested confirmation that energy storage technology, including a
hydrogen energy storage property, separately qualifies for the section
48 credit regardless of whether it is part of a facility for which a
credit under section 45, 45V, or 48 is or has been allowed. A commenter
also requested confirmation that energy storage technology will be
treated as separate property for section 48 and other Code
[[Page 100604]]
provisions. The Treasury Department and the IRS confirm that energy
storage technology is eligible for the section 48 credit if it
satisfies the requirements of section 48 even if the energy storage
technology is co-located with or shared by a facility that is otherwise
eligible for the section 45, 45V, or 48 credits.
a. Hydrogen Energy Storage Property
Proposed Sec. 1.48-9(e)(10)(iv) would provide that 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. Proposed Sec. 1.48-9(e)(10)(iv) would
also require hydrogen energy storage property to store hydrogen that is
solely used for the production of energy and not for other purposes
such as for the production of end products such as fertilizer. Proposed
Sec. 1.48-9(e)(10)(iv) would also provide a non-exhaustive list of
components of hydrogen energy storage property that would include, but
would not be limited to, a hydrogen compressor and associated storage
tank and an underground storage facility and associated compressors.
In the preamble to the Proposed Regulations, the Treasury
Department and the IRS requested 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 that is solely used for the production of
energy.
A commenter particularly endorsed the approach taken in the
Proposed Regulations by providing that the nameplate capacity
requirement for hydrogen is 0.127 kilograms for 5 kWh. The commenter
suggested this rule be retained in the final regulations.
Generally, commenters disagreed with the requirement that hydrogen
energy storage property must store hydrogen that is solely used for the
production of energy and not for other purposes, which the commenters
referred to as the ``end use requirement.'' For example, a commenter
stated that the final regulations should be revised to align with the
statutory language and asserted that the end use requirement is not in
accord with legislative intent, would cause delays, is unworkable, and
misaligns with the Biden Administration's U.S. National Clean Hydrogen
Strategy and Roadmap. Some commenters asserted that the end use
requirement is simply unworkable due to lack of tracing mechanisms once
hydrogen enters the stream of commerce.
Multiple commenters also asserted that imposing an end use
requirement on hydrogen energy storage property is unsupported by the
statute and would be impossible to administer. Commenters expressed
concerns that the end use requirement would render the credit useless,
impact markets inappropriately, and lead to confusion. Commenters also
asserted that section 48(c)(6)(A)(i) requires only that hydrogen energy
storage property ``store energy'' and does not require that it actually
be used for the production of energy. Another commenter noted that
because hydrogen is a form of energy, that hydrogen storage is per se
energy use.
With respect to administrability, commenters explained the
difficulties of both requiring exclusive energy use and obtaining the
information to make this determination. For example, a commenter stated
that it is too difficult for the storage owner to predict how hydrogen
will be used and another asserted that requiring stored hydrogen to be
used solely for the production of energy would, in cases of bulk
storage, be nearly impossible. Another commenter likewise stated that
taxpayers do not have full control of, or even information regarding,
the use of hydrogen once it leaves their storage facilities and will be
unable to have the certainty needed regarding end use to obtain project
financing. This commenter, along with others, also noted the
significant burden of documenting the end use of the stored hydrogen.
This commenter explained that currently there are no recordkeeping or
documentation precedents available for a taxpayer to efficiently
demonstrate the end-use of hydrogen, a fungible molecule, stored in a
taxpayer's hydrogen energy storage property. The commenter asserted
that because there is no available documentation pathway for tracking
hydrogen molecules through to their end use, it would be both
impractical and prohibitively costly for a taxpayer to develop and
implement such recordkeeping practices. Another commenter requested
that the end use requirement conclude with the recapture period.
Lastly, commenters explained how the end use requirement would
limit the usefulness of the credit. For example, a commenter asserted
that the end use requirement would render the section 48 credit largely
useless as a means of encouraging the development of the large-scale
hydrogen storage capability that will be essential to the establishment
of a robust hydrogen ecosystem in the United States. Additionally, a
commenter stated that an end use requirement would cause several
problems, including deterring the provision of hydrogen storage
services to a significant portion of the hydrogen market sector (for
example, for ammonia production). This commenter also requested
clarification regarding the appropriate treatment in a case in which
hydrogen is another step removed from ammonia production with
electricity production as an interim step. Generally, under the
Proposed Regulations, this scenario satisfies the end use requirement.
A commenter noted that the end use requirement would lead to a risk
of creating two separate markets for hydrogen: those that are able to
use the section 48 credit and those that are not. Emphasizing the same
points, another commenter stated that restricting the end-use of the
clean hydrogen to ``energy'' may materially impact the ability of
producers to secure offtake agreements and/or restrict the usage of
hydrogen storage and transportation networks to only certain types of
hydrogen end-uses.
Another commenter noted that energy storage technology neutrality
is very important. This commenter stated that it believes that the
``energy only'' end use requirement would make hydrogen storage a
second (or even third) class technology if compared to battery energy
storage for purposes of the section 48 credit. The commenter added that
one way of reading the positioning of hydrogen and battery storage
within the same statutory provision is that this reflects the intent of
Congress to not favor one form of energy storage over the other. This
commenter further asserts that the absence of an end use requirement
imposed on battery storage property indicates that no such requirement
should be imposed on hydrogen energy storage property.
While the majority of commenters objected to including the end use
requirement, several commenters provided suggestions if the end use
requirement is adopted. Several of these commenters suggested the use
of an allocation rule similar to the Dual Use Rule under proposed Sec.
1.48-14(b)(2) and discussed in part III.B. of this Summary of Comments
and Explanation of Revisions. A commenter suggested revising the
Proposed Regulations to
[[Page 100605]]
require a reasonable allocation between qualifying energy uses and
nonqualifying non-energy uses of stored hydrogen similar to the
requirements found in the Dual Use Rule. Another commenter stated that
the final regulations should provide flexibility and permit any
reasonable method to establish the annual use of the stored hydrogen
similar to proposed Sec. 1.48-14(b)(2)(ii). A commenter proposed that
the final regulations provide a Dual Use safe harbor for a portion of a
hydrogen energy storage property.
Alternatively, several commenters suggested linking the end use
requirement to the rules for the credit for production of clean
hydrogen under section 45V of the Code. These commenters proposed that
hydrogen energy storage be eligible for the section 48 credit
regardless of end use, if the hydrogen stored is at least 50 percent
qualified clean hydrogen under section 45V(c)(2).
Commenters also requested clarifications regarding what would be
considered energy use for purposes of applying the end use requirement.
For example, a commenter requested a clarification that the definition
of energy use is inclusive of an application in which hydrogen is fully
consumed in the manufacturing of a downstream molecule, which is in
turn clearly used in an energy application for which hydrogen would be
qualified if used directly. Another commenter noted that the examples
provided in the preamble to the Proposed Regulations are too narrow and
should be expanded to reflect various uses of hydrogen as energy,
including ammonia as a feedstock for fuel. A commenter asked for
clarification that storage of hydrogen that is solely used as energy
includes hydrogen used as energy for mobility purposes. Finally, a
commenter requested that the final regulations allow for the storage of
hydrogen whose end use is fertilizer for food production, because
prohibiting hydrogen storage used in this way may encourage the
parallel development of hydrogen storage and transportation
infrastructure that could otherwise be shared.
Several commenters also requested clarification regarding
substantiation of the end use requirement. A commenter suggested that
taxpayers be permitted to rely on the use described in commercial sales
contracts without the need to track the ultimate end use of hydrogen by
third-party users. Another commenter asked that taxpayers be required
only to maintain documentation, such as an agreement between the two
parties or a certification, that the immediate purchaser of the stored
hydrogen intends to use it for energy. This commenter stated that
tracking use past the point of immediate purchaser to the end use of
the molecule is impossible and as a result may make the credit
unavailable to a variety of hydrogen storage projects. Another
commenter noted that operators of clean hydrogen transport and storage
systems will need to know what sort of assurances are needed from off-
takers at the limits of their system to satisfy credit eligibility and
ensure limited recapture risk.
Several commenters suggested that the final regulations provide a
method for a taxpayer to demonstrate that a hydrogen energy storage
property was used to store hydrogen solely used for the production of
energy. A commenter recommended that taxpayers be able to meet this
requirement through (i) an affirmative attestation of intent by the
taxpayer that owns the storage property and (ii) a five-year lookback
process, with reasonable threshold tests, to determine whether a
recapture has occurred and what percentage of the credit should be
recaptured. Another commenter recommended that the final regulations
create a rebuttable presumption of energy use allowing taxpayers to
demonstrate energy end use requirements under the relevant facts and
circumstances.
The Proposed Regulations would require that the hydrogen energy
storage property store hydrogen solely use for the production of energy
and not for other purposes such as for the production of end products
such as fertilizer. After consideration of comments received, the
Treasury Department and the IRS agree that section 48(c)(6)(A)(i) does
not require that hydrogen energy storage property store hydrogen that
will be used for the production of energy. The Treasury Department and
the IRS also understand commenters' concerns regarding the
administrative challenges the end use requirement presents for
taxpayers and agree that the final regulations require modification.
Accordingly, the final regulations do not adopt the requirement that
hydrogen energy storage property store hydrogen that is solely used for
the production of energy and not for other purposes such as for the
production of end products such as fertilizer.
Some commenters asserted that the preamble to the Proposed
Regulations indicated that hydrogen energy storage property is not
limited to hydrogen. Since hydrogen may be stored within ammonia or
methanol, commenters requested that the final regulations state that
hydrogen storage property that stores hydrogen in the form of ammonia,
methanol, or another stable medium qualifies as energy storage
technology if such product is produced directly from hydrogen and
subject to any use limitation provided in the regulations. Another
commenter requested that the final regulations clarify that equipment
used to process hydrogen into ammonia, methanol, and other carriers, as
well as storage for such hydrogen carriers, is hydrogen energy storage
property.
The Treasury Department and the IRS decline to adopt the comments
requesting that the final regulations provide that chemical storage,
that is, equipment used to store hydrogen carriers (such as ammonia and
methanol), is hydrogen energy storage property. Section 48(c)(6)(A)(i)
specifically references only hydrogen, not compounds containing
hydrogen. While most vessels designed for hydrogen storage (both above
and below ground) may be capable of storing other gases, they are
usually dedicated to a single gas (and not repurposed) to avoid
contamination and mixing of gases.
Many commenters also provided feedback on the non-exhaustive list
of components of property that may be considered part of hydrogen
energy storage property as would be provided in proposed Sec. 1.48-
9(e)(10)(iv). A commenter endorsed the inclusion of ``compressor and
storage tank'' as a component of hydrogen energy storage property.
Several commenters requested that additional components of property be
added to this list, some by asserting that the components should be
eligible under rules for functionally interdependent or integral
property. Other commenters requested that the final regulations expand
the examples of integral and functionally interdependent equipment to
be more inclusive of existing and future hydrogen energy storage
property technologies.
Specifically, commenters requested that hydrogen energy storage
property include hydrogen liquefaction and related equipment, equipment
required to operate underground hydrogen storage property, as well as
dedicated hydrogen distribution equipment such as pipelines located on
the storage side of custody meters, hydrogen trailers (for example,
cryogenic liquid tankers, or cylinders hauled by modules or chassis)
and railcars. Another commenter proposed that the final regulations
treat hydrogen liquefaction equipment and related equipment in the same
manner as power conditioning and transfer equipment may be treated with
respect to certain energy property that generates electricity.
[[Page 100606]]
The Treasury Department and IRS agree that additional clarity on
the definition of hydrogen energy storage property is warranted. The
Treasury Department and IRS understand that hydrogen liquefaction
equipment may prepare hydrogen for storage in the hydrogen energy
storage property, making such property an integral part of hydrogen
energy storage property.
Section 48(c)(6)(A)(i) provides that energy storage technology does
not include property primarily used in the transportation of goods or
individuals and not for the production of electricity. Pipelines,
trailers, and railcars are property primarily used in the
transportation of goods or individuals not for the production of
electricity. However, hydrogen energy storage property may have
gathering and distribution lines to transport hydrogen within the
hydrogen energy storage property, making such property an integral part
of the hydrogen energy storage property. Therefore, the gathering and
distribution lines used within a hydrogen energy storage property are
not pipelines used to transport hydrogen outside of the hydrogen energy
storage property. The final regulations provide that property that is
an integral part of hydrogen energy storage property includes, but is
not limited to, hydrogen liquefaction equipment and gathering and
distribution lines within a hydrogen energy storage property.
Several commenters requested clarification regarding the costs
included in hydrogen energy storage property. In the context of salt
caverns, a commenter asserted that the final regulations should confirm
that eligible costs for a salt cavern include not only the costs to
acquire and construct the eligible property but also all direct and
indirect costs associated with the development and construction of the
salt cavern and referenced rules under section 263A of the Code.
Another commenter requested clarification regarding what equipment from
an operational storage facility would be includible in basis for
purposes of the section 48 credit. A commenter requested that power-to-
gas methanation facility qualify as hydrogen energy storage.
As stated for other energy properties, the Treasury Department and
the IRS emphasize that the rule for determining what constitutes a unit
of energy property is function-based. Because more information is
needed to make the determinations requested by the commenters, the
final regulations do not adopt these comments.
b. Electrical Energy Storage Property
Proposed Sec. 1.48-9(e)(10)(ii) would provide that 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.
Multiple commenters requested clarification concerning specific
technologies that may be electrical energy storage property. A
commenter requested that the definition be expanded to include
compressed fluid storage in addition to compressed air storage so as to
include liquid and gas applications. Because these applications
generally are used by pipelines, which are property primarily used in
the transportation of goods or individuals and not for the production
of electricity, the Treasury Department and the IRS decline to adopt
these revisions.
Multiple commenters requested that load controllers be described as
an integral part of electrical energy storage technology while other
commenters requested that bidirectional chargers be eligible as energy
storage technology. Another commenter requested that the final
regulations explicitly include thermal batteries capable of storing
energy for conversion to electricity in its non-exhaustive list of
eligible ``electrical energy storage property'' due to confusion
related to thermal energy storage (TES) being a separate category.
As has been noted previously, the Proposed Regulations are intended
to provide a function-oriented method to determine whether a technology
is energy storage technology that is broad enough to encompass nascent
technologies without rendering the regulations quickly obsolete. It is
impossible to enumerate every single technology that may be eligible
for the section 48 credit given the ever-changing nature of the
industry and technological development. Although these regulations do
not list all technologies that may qualify for the section 48 credit,
the Proposed Regulations provide adequate guidance and examples to
illustrate the application of the rules for taxpayers to analyze a
particular technology. The Treasury Department and the IRS, therefore,
do not adopt commenters' requests concerning specific technologies.
Multiple commenters questioned what primarily used in the
transportation in section 48(c)(6)(A)(i) means in the case of
electrical energy storage property. A commenter explained that pipeline
systems can be multi-tasked with a section of the pipe to act as energy
storage and requested that the phrase ``primarily used in the
transportation of goods'' specifically exclude equipment that is mobile
but include stationary property such as pipelines. Another commenter
requested a bright line rule for technologies that are not primarily
used in transportation of goods or individuals to qualify for the
section 48 credit. This commenter suggested that property, including
school buses, that receives, stores, and delivers energy for conversion
to electricity and that is used less than 35 percent of the hours in a
calendar year for transporting goods or individuals is not primarily
used for transportation. In response to these commenters, the Treasury
Department and the IRS note that pipelines and school buses are both
primarily used in transportation. In addition, there are other IRA tax
incentives intended to benefit some technologies for which commenters
seek section 48 credit eligibility. For instance, section 45W provides
a tax credit for electric school buses. Furthermore, a notice of
proposed rulemaking (REG-118269-23) published in the Federal Register
(89 FR 76759) on September 19, 2024, regarding the section 30C
alternative fuel vehicle refueling property credit (30C Proposed
Regulations) proposed a definition for property primarily used in the
transportation of goods or individuals and not for the production of
electricity for purposes of sections 48 and 48E. In particular,
proposed Sec. 1.48-9(e)(10)(vi) of the 30C Proposed Regulations would
provide that energy storage property is primarily used in the
transportation of goods or individuals and not for the production of
electricity, and therefore is not energy storage technology eligible
for the section 48 credit, if a credit is claimed under section 30C for
such property. Accordingly, comments regarding this proposed definition
will be addressed when the 30C Proposed Regulations are finalized.
In the context of a pumped storage hydropower facility, a commenter
suggested that the scope of eligible
[[Page 100607]]
electrical energy storage technology be defined to include all property
necessary to receive, store, and deliver energy for conversion to
electricity, consistent with the definition in section 48(c)(6)(A)(i),
and include all tangible personal property and other tangible property
up to and including the step-up transformer at the substation prior to
transmission to the grid. This commenter also suggested that an example
be included to illustrate these concepts. Another commenter stated that
the final regulations should confirm that the term ``energy storage
technology'' includes all the qualified property up to and including
the step-up transformer at the substation prior to transmission to the
grid, and that this property would include the two reservoirs, the
powerhouse (including the generators, turbines, and associated
electrical equipment), the piping and pumps, the tunnel, substation
equipment, and other integral property.
A definitive response to such comments would require the Treasury
Department and the IRS to conduct a complete factual analysis of the
property in question, which may include information beyond that which
was provided by the commenters. Because more information is needed to
make the determinations requested by the commenters, the requested
clarifications are not addressed in these final regulations.
c. Thermal Energy Storage Property
Proposed Sec. 1.48-9(e)(10)(iii) would provide that 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. The Proposed Regulations
included a non-exhaustive list of examples of thermal energy storage
property.
Commenters requested clarifications on what constitutes thermal
energy storage property. A commenter requested clarification that
thermal energy storage property includes all air-source heat pumps,
electric boilers, and hot water heat pumps, but does not include
fossil-fuel-powered water boilers. The commenter also requested that
the final regulations clarify that ground and air source heat pumps
qualify as energy storage technology and suggested that thermal energy
stored in one medium may be transferred and stored in a second medium
for subsequent use. The commenter also requested that the use of the
term ``subsequent'' in the definition of thermal energy storage
property under section 48(c)(6)(C)(i)(II) not require a specific
interval of time between storage and use for a process to qualify.
Another commenter stated that the point at which the scope of thermal
energy storage property ends is unclear and requested clarification
regarding whether ``equipment'' extends to the thermal energy source
for thermal energy storage property. This commenter also requested
clarity on whether the thermal energy source equipment (for example,
chiller, heat pump, or furnace) may be used for multiple purposes or if
the thermal energy source equipment must be dedicated to the thermal
energy storage property. Another commenter asked whether equipment that
uses thermal energy to heat or cool a structure is also thermal energy
storage property. Some commenters endorsed the proposed examples of
thermal energy storage property, while other commenters requested
additions, such as including ``chilled water'' to ice and electric
boilers that use electricity to heat water and later use this stored
energy to heat a building through the HVAC system.
The Treasury Department and IRS agree that the definition of
thermal energy storage property requires clarification. Thermal energy
storage property is defined, in part, as a system which ``removes heat
from, or adds heat to, a storage medium for subsequent use.'' The
Treasury Department and IRS, in consultation with DOE, understand the
phrase ``adds heat to'' as including equipment that is involved in
adding, or transferring, already-existing heat from one medium to the
storage medium, but not equipment involved in transforming other forms
of energy into heat in the first instance. Equipment that just adds (or
removes) heat includes technologies, like heat pumps, that draw heat
from the ambient air or other stores of heat, and add that heat to a
storage medium. By contrast, equipment that transforms other forms of
energy into heat in the first instance, for example through combustion
or electric resistance, is not property that ``removes heat from, or
adds heat to'' a storage medium and is therefore not an eligible
component of a thermal energy storage property. For example, a
conventional gas boiler with an integrated storage tank would not
generally be thermal energy storage property. While the gas boiler
elements would not be part of such property, the integrated storage
tank, however, may be thermal energy storage property if it otherwise
meets the thermal energy storage property definition. Further, an air-
to-water heat pump with a thermal storage tank, for example, would
generally be thermal energy storage property provided that it otherwise
meets the thermal energy storage definition. This could be the case
even if the heat pump also serves a purpose in the connected HVAC
system's real-time heating or cooling of a building. In that case, the
thermal storage tank would be thermal energy storage property and the
heat pump may also qualify as part of that eligible property to the
extent the taxpayer's costs exceed the cost of an HVAC system without
thermal storage capacity that would meet the same functional heating or
cooling needs as the heat pump system with a storage medium, other than
time shifting of heating or cooling.
The Proposed Regulations included an example of 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. The
Treasury Department and IRS acknowledge that this example needs to be
refined to more precisely delineate the scope of eligible thermal
energy storage property. Whereas the heated bricks and equipment that
adds heat generated by the furnace to those bricks, or removes heat
from the bricks, is eligible thermal energy storage property, the
electric furnace equipment that transforms energy into the thermal
energy in the first instance is not. The final regulations clarify that
thermal energy storage property does not include property that
transforms other forms of energy into heat in the first instance and
this example has been revised accordingly in the final regulations.
With respect to the requirement for subsequent use, the Treasury
Department and IRS also agree that additional clarity is warranted. The
statute requires that thermal energy storage property must be able to
perform certain functions, not simply performing heat transfer. Any
heat transfer may take some amount of time and heat does not
immediately dissipate even if no effort is made to store it. While some
may assert that such heat transfer is subsequent use, the Treasury
Department and IRS disagree. A plain reading of the statute indicates
that
[[Page 100608]]
thermal energy storage property does not include property that simply
engages in heat transfer. The thermal energy storage property must be
able to store the heat. The Treasury Department and IRS, in
consultation with DOE, find that a minimum time interval for subsequent
use provides certainty for taxpayers and sound tax administration.
Accordingly, the final regulations clarify that property that ``removes
heat from, or adds heat to, a storage medium for subsequent use'' is
property that is designed with the particular purpose of substantially
altering the time profile of when heat added to or removed from the
thermal storage medium can be used to heat or cool the interior of a
residential or commercial building. The final regulations also provide
a safe harbor for thermal energy storage property. If the thermal
energy storage property can store energy that is sufficient to provide
heating or cooling of the interior of a residential or commercial
building for the minimum of one hour, it is deemed to have the purpose
of substantially altering the time profile of when heat added to or
removed from the thermal storage medium can be used to heat or cool the
interior of a residential or commercial building.
The Treasury Department and IRS have revised the definition of
thermal energy storage property and the examples in the final
regulations to illustrate what constitutes thermal energy storage
property. These final regulations also add that thermal energy storage
property may store thermal energy in an artificial pit, an aqueous
solution, or a solid-liquid phase change material, in addition to the
underground tank or a borehole field already included in the proposed
regulation, in order to be extracted for later use for heating and/or
cooling. The final regulations clarify that a heat pump system that
transfers heat into and out of a storage medium is thermal energy
storage property. However, consistent with Sec. 1.48-14(d), if thermal
energy storage property, such as a heat pump system, includes
equipment, such as a heat pump, that also serves a purpose in an HVAC
system that is installed in connection with the thermal energy storage
property, the taxpayer's basis in the thermal energy storage property
includes the total cost of the thermal energy storage property and HVAC
system less the cost of an HVAC system without thermal storage capacity
that would meet the same functional heating or cooling needs as the
heat pump system with a storage medium, other than time shifting
heating or cooling.
Commenters also requested clarifications regarding whether specific
components may be part of thermal energy storage. A commenter requested
that pipes to distribute stored thermal energy to and within buildings
(including for multiple residential or commercial buildings such as
through a district heating system) and equipment in building heating
and/or cooling systems--such as coils, radiators, and other end-use
equipment--necessary to convey stored thermal energy to building space
or domestic hot water supply be included in thermal energy storage
property.
With respect to the request to include pipes and equipment in
building heating and/or cooling systems, the statutory definition of
thermal energy storage property provides, in part, that it is directly
connected to an HVAC system, not that it is an HVAC system. The
Proposed Regulations would provide a function-oriented method to
evaluate whether property is a functionally interdependent or an
integral part of thermal energy storage property. With respect to the
request to include equipment necessary to convey domestic hot water
supply, the statutory definition further provides, in part, that
thermal energy storage property provides energy for the heating or
cooling of the interior of a residential or commercial building. The
statute does not provide for stored energy for domestic hot water
supply for consumptive use. Therefore, property that provides energy
for domestic hot water supply exclusively for consumptive use and not
for heating or cooling of the interior of such a building is not
eligible under the statute. The final regulations do not adopt these
comments.
Another commenter requested clarification that if property that
would otherwise qualify as thermal energy storage property is connected
to a district heating system that provides energy for the heating or
cooling of multiple buildings, it would nonetheless be considered
``directly connected to a heating, ventilation, or air conditioning
system''. Proposed Sec. 1.48-9(e)(10)(iii) would not preclude thermal
energy storage technology property that is directly connected to more
than one HVAC system from being a thermal energy storage property. The
final regulations do not modify the example.
Commenters also requested modification of the definition of thermal
energy storage property in proposed Sec. 1.48-9(e)(10)(iii). A
commenter suggested adding ``refrigeration'' to ``is directly connected
to a heating, ventilation, or air conditioning system'' because
industrial refrigeration systems are considered part of the HVAC system
in construction. This commenter also joined another in recommending
adding ``industrial'' to ``for use in heating a residential or
commercial building'' to prevent restricting the use of thermal energy
storage in industrial sites and to eliminate confusion regarding
commercial and industrial building types. To maintain consistency with
the statutory text, the final regulations maintain the wording set
forth in section 48(c)(6)(C)(i)(I) and (III) as is.
Commenters also expressed concerns that the language ``directly
connected to . . .'' in proposed Sec. 1.48-9(e)(10)(iii) might exclude
thermal energy storage property that directly functions as a heating
system itself without connecting to an HVAC system. A commenter
suggested providing guidance to clarify that thermal energy storage
property that functions as a self-contained heating or cooling system
is eligible thermal energy storage property under proposed Sec. 1.48-
9(e)(10)(iii). Section 48(c)(6)(C)(i)(I) requires that thermal energy
storage property is directly connected to a heating, ventilation, or
air conditioning system, but does not include the HVAC system itself as
eligible thermal energy storage property. Therefore, these comments are
not adopted because they would be inconsistent with the statute.
However, elements of such a system could constitute eligible thermal
energy storage property.
Additionally, a commenter requested clarification that thermal
energy storage property may be considered battery storage technology
for the purpose of claiming the credit available to residential
customers under section 25D(d)(6) of the Code. The Treasury Department
and the IRS decline to address this request because it is outside of
the scope of section 48 and, therefore, these final regulations.
d. Modifications of Energy Storage Property
Proposed Sec. 1.48-9(e)(10)(v) would provide that with respect to
electrical energy storage property and hydrogen energy storage property
placed in service after December 31, 2022, energy storage technology
that is modified as set forth in proposed Sec. 1.48-9(e)(10)(v) is
treated as electrical energy storage property or hydrogen energy
storage property, except that the basis of any existing property prior
to such modification is not taken into account for purposes of the
section 48 credit. Proposed Sec. 1.48-9(e)(10)(v) applies to any
electrical energy storage property
[[Page 100609]]
and hydrogen energy storage property that either: (A) was placed in
service before August 16, 2022, and would be described in section
48(c)(6)(A)(i), except that such property had a capacity of less than 5
kWh and is modified in a manner that such property (after such
modification) has a nameplate capacity (after such modification) of not
less than 5 kWh; or (B) is 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.
A commenter asked if the section 48 credit is available for
repurposed batteries used to build energy storage systems. Whether a
battery is repurposed and eligible for the section 48 credit requires a
factual determination that is beyond the scope of these regulations.
The 80/20 Rule provides general rules for taxpayers that include some
used components when placing in service an energy property.
Another commenter requested that the requirement that any modified
energy storage property must increase the nameplate capacity of the
energy storage property by 5 kWh or more be removed. Section
48(c)(6)(B) sets forth the 5 kWh requirement for modifications to
energy storage property so it cannot be removed. The final regulations
do not adopt this comment.
Multiple commenters requested clarification that the minimum 5 kWh
capacity increase needed for modifications of energy storage under
section 48(c)(6)(B) be the nameplate capacity not actual capacity
(which may have decreased due to degradation). The commenters explained
that focusing on nameplate capacity will provide greater certainty than
measuring actual capacity. Another commenter explained that nameplate
capacity should be tested at the time of purchase, rather than on the
date of modification, especially due to non-degrading systems and
storage augmentation. The commenter noted that if augmentations are
implemented, the installed energy storage capacity of the energy
storage technology is increased (original installation nameplate
capacity plus the augmentation totaling the amount installed), but the
nameplate capacity of the property and interconnection agreement
remains unchanged.
Section 48(c)(6)(B) provides that, for purposes of the modification
rule, nameplate capacity is examined at the time of the modification
and must result in a nameplate capacity increase from below 5 kWh to
not less than 5 kWh (for energy storage property originally placed in
service before enactment of the IRA) or by at least 5 kWh (for energy
storage technology placed in service after the enactment of the IRA
that is later modified). Consistent with the statute, the Proposed
Regulations would not take into account actual capacity but instead use
nameplate capacity. The only instance in which section 48(c)(6)(B) uses
the term ``capacity'' alone, rather than ``nameplate capacity'', is
nonetheless still a reference to nameplate capacity. Specifically,
section 48(c)(6)(B)(i) refers to property that ``would be described in
subparagraph (A)(i), except that such property has a capacity of less
than 5 kilowatt hours''. The referenced section 48(c)(6)(A)(i) text
makes clear that the 5 kWh capacity threshold is, in fact, a nameplate
capacity threshold. Therefore, for the avoidance of doubt, the final
regulations at Sec. 1.48-9(e)(10)(v)(A) clarify that the relevant pre-
modification capacity is the nameplate capacity. Therefore, other than
the minor clarification noted above, these comments were not adopted in
the final regulations.
Additionally, a commenter requested clarification whether capacity
must be added within the bounds of an existing electrical storage
property enclosure, or whether the enclosure may be expanded or an
additional enclosure added to accommodate the increased capacity.
Another commenter requested clarification that adding new battery racks
to an existing enclosure would be eligible for the section 48 credit if
the nameplate capacity of the new battery rack is at least 5 kWh. The
Proposed Regulations would provide no limitation on the physical space
occupied by an energy storage technology and the final regulations
retain this approach.
5. 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)(7) (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.
Proposed Sec. 1.48-9(e)(11) would adopt the statutory definition
of qualified biogas property. Proposed Sec. 1.48-9(f)(2)(i) 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). The Proposed Regulations adopted this
approach because it provides a function-oriented method 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) would provide examples of functionally interdependent
components of a 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.
Proposed Sec. 1.48-9(e)(11)(i) would clarify that upgrading
equipment is not a functionally interdependent component of qualified
biogas property. The preamble to the Proposed Regulations stated that
the upgrading equipment that is necessary to condition biogas into the
appropriate mixture for injection into the pipeline 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. The
preamble to the Proposed Regulations also stated that 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.
a. Correction and Cleaning and Conditioning Property
The Correction published on February 22, 2024, stated that a
correction was needed to clarify that gas upgrading equipment that is
necessary to concentrate the gas from qualified biogas property into
the appropriate mixture for injection into a pipeline through removal
of other gases such as carbon dioxide, nitrogen, or oxygen, would be
energy property if it is an integral part of an energy property as
defined in proposed Sec. 1.48-9(f)(3). Accordingly, the Proposed
Regulations
[[Page 100610]]
were corrected by revising the following sentence: ``However, gas
upgrading equipment necessary to concentrate the gas into the
appropriate mixture for injection into a pipeline through removal of
other gases such as carbon dioxide, nitrogen, or oxygen is not included
in qualified biogas property.'' to read as follows: ``However, gas
upgrading equipment necessary to concentrate the gas into the
appropriate mixture for injection into a pipeline through removal of
other gases such as carbon dioxide, nitrogen, or oxygen is not a
functionally interdependent component (as defined in paragraph
(f)(2)(ii) of this section) of qualified biogas property.''
The Proposed Regulations and Correction requested 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). The
Treasury Department and the IRS received numerous comments regarding
the components that should be included in qualified biogas property.
Commenters universally supported the inclusion of upgrading
equipment in qualified biogas property and some asserted that the
Proposed Regulations' exclusion of upgrading equipment conflicts with
analogous provisions in the Proposed Regulations that allow the
inclusion of power conditioning and transfer equipment such as that
allowed in offshore wind projects. Most commenters asserted that
upgrading equipment should be considered functionally interdependent to
qualified biogas property and therefore, eligible for the section 48
credit. A commenter requested that biogas energy property include a
definition of system for section 48(c)(7)(A) purposes that includes all
integrated property.
Commenters also expressed concern that the Proposed Regulations and
the Correction unduly limit what would be included as qualified biogas
property. For example, a commenter stated that property used to
capture, clean, condition, upgrade, and perform ``chemical, mechanical,
or thermochemical conversion'' are all necessary to convert biogas into
usable products. Commenters explained that the Proposed Regulations
would allow only biogas property with limited utility to qualify and
would exclude a majority of costs related to biogas property. For
example, a commenter stated that under the Proposed Regulations,
property used to produce the raw biogas from the landfill, remove
sulfur from the biogas, and remove the volatile organic compounds from
the biogas would appear to qualify for the section 48 credit, whereas
property used to remove carbon dioxide, nitrogen, and oxygen from
biogas and to otherwise prepare the gas for injection into a natural
gas pipeline would not qualify for the section 48 credit. The commenter
asserted that the equipment used in these latter processes are
essential components of a RNG system and comprise approximately 85
percent of overall capital investment in an RNG project.
A commenter asserted that the Proposed Regulations read the sale or
productive use language out of the statute. Another commenter stated
that the Proposed Regulations would limit eligibility for the section
48 credit to essentially raw biogas (if it can meet the 52 percent
methane threshold). According to the commenter, raw biogas generally
cannot be used without some treatment due to the contaminants present
in the gas stream and even if the raw biogas can be used, such use is
typically through combustion (that is, burned on-site for electricity
or as process energy), which is excluded under the statute. The
commenter explained that, at best, the Proposed Regulations may allow
some medium-BTU gas, which is biogas that received only limited
treatment to remove certain contaminants, to be eligible for the
section 48 credit. However, medium-BTU gas is not as valuable as RNG
and is typically used locally.
Generally, many commenters agreed that the utility of biogas is
significantly limited without proper cleaning and conditioning. These
commenters stated that, without upgrading, the extracted biogas faces
considerable challenges for marketability because its high moisture
content and corrosive properties make it difficult to safely store,
compress, mix with other gases, transport, inject into the natural gas
system, or market. Consequently, the non-upgraded biogas is of limited
utility, such as on-site combustion to create process heat, generate
electricity, or to be flared into the atmosphere. In contrast, a
commenter described the marketable uses of upgraded RNG as including,
but not limited to, advanced electricity generation in fuel cells,
hydrogen production, advanced liquid fuels for aviation, and RNG for
use in trucking, industrial processes, and space heating.
Generally, commenters requested the final regulations correct the
treatment of ``gas upgrading equipment'' in the Proposed Regulations to
instead treat it as property that ``cleans and conditions'' gas,
asserting that such treatment is consistent with the plain text of the
statute and the intention of Congress. To support this position, a
commenter asserted that the statute and legislative history do not
contemplate any limitation on what property ``cleans or conditions''
gas. Several commenters cited certain congressional statements
regarding the Agriculture Environmental Stewardship Act to support
their reading of the definition of qualified biogas property added to
section 48 by the IRA.
Similarly, many commenters asserted there is a misunderstanding in
the Proposed Regulations that the term ``upgrading'' is interchangeable
with the phrase ``cleaning and conditioning.'' For example, a commenter
stated that the exclusion of upgrading equipment appears contradictory
to the statute, which expressly includes cleaning and conditioning
property. This commenter noted that the Proposed Regulations
misunderstand the ``upgrading'' process, which is an industry verbiage,
but is essentially part of the ``cleaning and conditioning process''
necessary to process biogas to standards that support its productive
use or sale. Another commenter stated that the DOE uses these terms
interchangeably.
Additionally, a few commenters stated that the Proposed Regulations
incorrectly implemented the 52 percent measurement as a ceiling rather
than a floor. For example, a commenter pointed to the preamble to the
Proposed Regulations as mistakenly interpreting that the statute was
enacted to incentivize taxpayers to produce 52 percent methane (and
nothing greater). The commenter stated that this is contrary to the
statute, to the relevant legislative history, and to an understanding
of how the quantities of biogas that can be produced by RNG developers
can be used.
Several commenters also pointed to the reference to ``such gas'' in
the statute to evidence that ``such gas'' refers to biogas not less
than 52 percent methane and captured for sale or productive use. A
commenter asserted that the reference to ``such gas'' provides a two-
prong test. According to the commenter, first the system must convert
the biomass into a gas that is between 52 percent and 100 percent
methane by volume and second the system must capture ``such gas for
sale or productive use, and not for disposal via combustion''; thus, in
the commenter's view, the reference to ``such gas'' is to gas described
in the first prong.
Another commenter stated that the reference to ``such gas''
includes biogas that is at least 52 percent methane by volume. The
commenter concluded therefore, that the statute does not exclude from
qualified biogas property
[[Page 100611]]
cleaning and conditioning equipment that is used to process biogas that
is already 52 percent methane by volume.
Another commenter stated that the statute uniquely and broadly
defines the term ``cleaning and condition property'' not as the
Proposed Regulations suggest, which limits its applicability to
instances in which an otherwise ineligible property needs cleaning and
conditioning to be eligible. Instead, the commenter noted that the
Proposed Regulations' interpretation of section 48(c)(7)(B) ignores the
reference to ``such gas,'' referring to the definition in section
48(c)(7)(A), which clearly states ``any property which is part of such
system which cleans or conditions such gas.'' The commenter asserted
that the term ``such gas'' refers to biogas that is not less than 52
percent methane and captured for sale or productive use, as
confirmation that cleaning and conditioning equipment for gas that has
already met the conditions set forth in section 48(c)(7)(A), is
qualified biogas property.
Commenters also objected to the exclusion of gas upgrading
equipment provided in the Proposed Regulations because commenters
assert that it could negatively impact investment and financing for
biogas projects, especially those on small farms, agricultural
projects, and municipal projects. A commenter, who works with smaller
scale farms including dairy farms, asserted that the upgrading
equipment is integral to the cleaning and conditioning process, and
crucial for achieving energy output suitable for productive use or
sale, especially for projects in rural and remote communities. The
commenter concluded that the limitation on upgrading equipment provided
in the Proposed Regulations will prevent projects from moving forward
and disproportionately impact small agricultural projects.
Several commenters asserted that the statute supports redefining
the components of property that are considered functionally
interdependent to a qualified biogas property. A commenter suggested
redefining qualified biogas property as property that is placed in
service to upgrade biogas for sale or a productive use beyond the point
that such gas is typically vented or flared. This commenter explained
that this definition properly places the focus on property used to
convert an unproductive substance (such as landfill gas) into a
productive substance (such as RNG).
Another commenter agreed with the inclusion of the gas upgrading
equipment as integral property but stated that the Correction is
limited to technology specific to upgrading for pipeline injection and
therefore, is out of line with the technology neutral definition in the
statute. The commenter asserted that upgrading, processing, or
reforming should be viewed without limitation to specific technology
and that many biomass resources may not be close to natural gas
pipelines or have other limitations on pipeline injection. The
commenter further stated that the focus should be on the components
required for property that captures such gas for sale or productive
use. Therefore, if additional onsite steps are required to process raw
biogas that meets the minimum 52 percent methane content threshold into
a usable product, whatever the product may be, then the property
necessary to take those steps should be considered qualified biogas
property.
The Treasury Department and the IRS agree with the commenters that
the proposed rule addressing gas upgrading equipment is too
restrictive. As commenters explained, upgrading equipment is used
interchangeably with cleaning and conditioning equipment and such
equipment may be needed to make the biogas suitable for sale or
productive use. The Treasury Department and IRS also agree that
specific upgrading equipment should not be identified for injection
into a pipeline. Therefore, the final regulations provide more
generally that gas upgrading equipment is cleaning and conditioning
property.
Commenters requested clarifications regarding what types of
equipment are considered qualified biogas property, including as
functionally interdependent components or as property integral to the
qualified biogas property. For example, a commenter requested that a
list of equipment be included as qualifying biogas property in the
final regulations including gas removal equipment, pressure and
temperature control equipment, moisture removal equipment, compression
equipment, thermal oxidizer equipment, gas recycling equipment, and
synthetic methane production equipment. Another commenter proposed
revisions to the example in proposed Sec. 1.48-9(e)(11)(i) to include
as qualified biogas property cleaning and conditioning equipment used
to remove toxins or any other impurities from raw biogas or concentrate
the gas into the appropriate mixture for sale or productive use through
removal of other gases such as carbon dioxide, nitrogen, or oxygen. A
commenter requested the inclusion of landfill municipal solid waste as
a renewable resource to produce renewable natural gas as energy
property because such a system may implement thermal gasification and
other relevant technologies. Another commenter suggested that qualified
biogas property should include the pipeline and compression equipment
necessary to transport the gas from the production plant to the common
carrier pipeline.
Another commenter suggested that the Proposed Regulations be
modified to specifically provide that the property comprising a biogas
conversion/concentration and capture system, including any property
that is part of such system and that cleans and conditions, is a single
unit of energy property (collectively referred to as a RNG Production
System). This commenter also suggested that the gas upgrading equipment
necessary to concentrate the gas into the appropriate mixture for
injection into a pipeline through the removal of other gases and
impurities is a functionally interdependent component of the RNG
Production System. This commenter also described a second type of
property, a landfill gas collection system (LFG Collection System), and
noted that the LFG Collection System is property that is an integral
part of, but not functionally interdependent with, the RNG Production
System because the placing in service of an LFG Collection System is
not dependent upon placing in service the RNG Production System, but
the LFG Collection System is used directly in and essential to the
completeness of the intended function of the RNG Production System.
While this commenter's focus was on landfills, the commenter noted the
same analysis would apply to other collection systems such as anaerobic
digesters operating at farms. Some commenters asserted that anaerobic
digesters were functionally interdependent property, while others
asserted that anaerobic digesters were integral property.
After consultation with the DOE, the Treasury Department and IRS
understand that the methane content of biogas in an anaerobic digester
can vary between 44% and 68%. Thus, if biogas processed by an anaerobic
digester consists of not less than 52% methane and all other statutory
requirements are met, an anaerobic digester would be a unit of energy
property. Commenters explained that although biogas exiting an
anaerobic digester might not be put to productive use, the statute
requires that qualified biogas property capture the gas ``for sale or
productive use.'' To illustrate, if a taxpayer places in service
[[Page 100612]]
an anaerobic digester, which generates biogas meeting the not less than
52% methane requirement, and sells the biogas to another taxpayer who
in turn places in service cleaning and conditioning property to clean
such biogas, each taxpayer has a qualified biogas property and may be
eligible for the section 48 tax credit. On the other hand, if the
biogas in the anaerobic digester does not meet the not less than 52%
methane requirement, then such digester is not, by itself, a qualified
biogas property. Nevertheless, the anaerobic digester still may be an
integral part of other qualified biogas property, such as a system that
cleans and conditions the biogas.
The Treasury Department and the IRS intend that the final
regulations provide a function-oriented approach to determining what
property is considered energy property, including qualified biogas
property. The Proposed Regulations provided examples of types of
property that are included as qualified biogas property, which were
intended to be illustrative but not exclusive. Therefore, the final
regulations do not include additional examples of property that is
included as qualified biogas property but do clarify that property that
is an integral part of qualified biogas property includes, but is not
limited to, a waste feedstock collection system, landfill gas
collection system, and mixing and pumping equipment.
b. Flaring Allowance
The preamble to the Proposed Regulations explained that a commenter
to Notice 2022-49 stated that some properties that produce electricity
from gas using a combustion process may flare waste or tail gas,
including during commissioning or maintenance periods. This commenter
recommended a de minimis exception. In response to this concern, the
Proposed Regulations requested comments regarding whether such an
exception is necessary and what should be considered de minimis for
this purpose.
All comments received in response to this request were in favor of
an exception. Some comments pointed to the overarching purpose of the
qualified biogas property and noted that nominal leakage should not
prevent property from qualifying. For example, a commenter asserted
that if the overarching purpose of the biogas is for sale or productive
use, then the combustion of a de minimis portion should not prevent a
property that produced such gas from being a qualified biogas property.
Similarly, a commenter recommended allowing a de minimis exception for
flare waste or tail gas so that otherwise eligible biomass systems will
not be disqualified from the credit due to small amounts of leakage
arising from normal business operations.
Another commenter pointed to the benefit of hazard reduction
associated with nominal flaring. This commenter stated that flaring in
appropriate circumstances should not disqualify a facility, because
``flares are often required as a safety and emissions hazard reducer to
be used in case of emergency, accidental release, start-up and shut-
down procedures, and other rare occurrences.''
The Treasury Department and the IRS understand commenters' concerns
regarding whether flaring performed for commissioning, maintenance,
safety, or other reasons may impact eligibility for the section 48 tax
credit. Qualified biogas property is defined, in part, as capturing
biogas ``for sale or productive use, and not for disposal via
combustion.'' The Treasury Department and the IRS interpret this
statutory requirement to not impact a qualified biogas property that
combusts, or flares, some biogas under standard operating conditions,
provided the primary purpose of the qualified biogas property is sale
or productive use of biogas and any flaring complies with all relevant
Federal, State, regional Tribal, and local laws and regulations. After
consulting the DOE, the Treasury Department and the IRS understand that
flare permits are specific to a given biogas facility design.
Determining the amount of flaring appropriate for safety purposes is
specific to each qualified biogas property and enforcing that limit is
best left to relevant Federal, State, regional, local, and/or Tribal
regulators. Flaring performed in accordance with applicable permits
from relevant Federal, State, regional, local, and/or Tribal regulators
should not jeopardize a qualified biogas property's eligibility for the
section 48 credit. Accordingly, the final regulations at Sec. 1.48-
9(e)(11) provide that while a qualified biogas property generally may
not capture biogas for disposal via combustion, combustion in the form
of flaring will not disqualify a qualified biogas property, provided
the primary purpose of the qualified biogas property is sale or
productive use of biogas and any flaring complies with all relevant
Federal, State, regional, Tribal, and local laws and regulations.
c. Point of Measurement
Proposed Sec. 1.48-9(e)(11)(ii) would provide that the methane
content requirement described in section 48(c)(7)(A)(i) and in the
Proposed Regulations is measured at the point at which gas exits the
biogas production system, which may include an anaerobic digester,
landfill gas collection system, or thermal gasification equipment. This
measurement point was described in the Proposed Regulations as 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 to fuel an electricity generation unit.
Several commenters requested clarification regarding the point of
measurement for the methane content requirement. A commenter
specifically requested clarification regarding the point at which the
gas exits the biogas production system. Several commenters noted that
the point of measurement provided in the Proposed Regulations was
incorrect because it is too early in the process. These comments
responded to the Proposed Regulations as well as the Correction. This
sentiment generally is consistent with the commenters' view that biogas
upgrading equipment should be considered eligible biogas property.
One commenter stated that the Correction does not address the
measurement point for the methane content requirement for purposes of
determining whether the definition of ``qualified biogas property'' is
met. The commenter asserted that the final rule must clarify that the
52 percent methane content requirement is measured at the point at
which the biogas is going to be sold or put to productive use, which
would be after the biogas has been passed through the cleaning and
conditioning and/or gas upgrading equipment. The commenter suggested
that a change should be made regardless of whether gas upgrading
equipment is considered ``integral'' or ``functionally
interdependent.'' The commenter submitted another comment after the
Correction was issued urging that the methane content of 52 percent
should be measured at the point at which the gas is ready for sale or
applicable productive use, that is, at the end of the cleaning and
conditioning process. Several commenters supported these comments and
incorporated them into their own comments.
Another commenter similarly stated that the methane content should
be measured at the end of the cleaning and conditioning process, which
would be the point at which the biogas is going to be sold or put to a
productive use, to ensure it consists of at least 52 percent methane.
Many commenters have asserted that the 52 percent measurement is a
floor (not a
[[Page 100613]]
ceiling).Therefore, even if the measurement point were to occur
earlier, taxpayers that later upgrade the biogas could still satisfy
the 52 percent requirement.
The Treasury Department and the IRS agree that the point of
measurement in the Proposed Regulations was too early in the biogas
production process, which could potentially frustrate compliance with
the ``sale or productive use'' requirement. Therefore, the final
regulations adopt at Sec. 1.48-9(e)(11)(ii) the rule that the methane
content requirement described in section 48(c)(7)(A)(i) and in the
Proposed Regulations is measured at the point at which the biogas exits
the qualified biogas property.
6. Microgrid Controllers
Section 48(a)(3)(A)(xi) provides 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)).
Proposed Sec. 1.48-9(e)(12)(i) would provide generally that a
microgrid controller is equipment that is part of a qualified microgrid
and is designed and used to monitor and control the energy resources
and loads on such microgrid. A qualified microgrid is 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)). Proposed Sec. 1.48-9(e)(12)(ii) would
provide that for purposes of proposed Sec. 1.48-9(e)(12), a qualified
microgrid includes an electrical system that is capable of operating in
connection with the larger electrical grid, regardless of whether a
connection to the larger electrical grid exists.
The preamble to the Proposed Regulations requested comments on
whether the rules for functionally interdependent property as would be
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. A few commenters
advocated for the application of the functional interdependence
standard to microgrid controllers. For example, one commenter stated
that the functional interdependence standard is thoughtful, provides
direct language applicable to the definition of microgrid controllers,
and creates an easy and thorough way to identify the multi-faceted
infrastructure that goes into microgrid controllers to generate and
store energy.
However, several commenters requested that particular components of
property be listed specifically in the definition of microgrid
controllers: optimization software, communications software,
communications equipment, incoming service, cables, wiring, ethernet
switches, computer hardware, load controllers, programmable logic
controllers, meters and relays, building management systems, local
human management interface screens, protective relays, breakers,
routers, and other hardware necessary to monitor and control the energy
resources and loads on a qualified microgrid.
Additionally, two commenters specifically requested the inclusion
of switchgear in the definition of microgrid controllers. One of the
commenters explained that switchgear is the true backbone of the
microgrid controls system. However, the commenter also pointed out that
switchgear is an essential part of any building's electrical operations
with or without a microgrid. This commenter also noted that because
switchgear is a critical piece of a building's infrastructure, it is
usually also owned by the building owner. The commenters generally
suggested that if switchgear is owned by the building owner but paid
for by the taxpayer that owns the microgrid controller, then the cost
of the switchgear should be included in the basis of the taxpayer's
section 48 credit for the microgrid controller similar to the inclusion
of interconnection property costs in the credit basis of certain lower-
output energy properties.
The two commenters also suggested that if switchgear is part of an
existing building, and a microgrid controller is added in a case in
which a taxpayer is applying the 80/20 Rule, then the switchgear should
not be taken into account for purposes of the 80/20 Rule. For example,
one of the commenters explained that switchgear in an existing building
may be sufficient for connecting microgrid controls with relevant
distributed energy resources and load resources either as is or with
some additional pieces of equipment and because all microgrid control
components will connect through the switchgear, it is critical that the
integrated but standalone microgrid control equipment is not considered
as retrofitting of the switchgear in existing buildings under the 80/20
Rule. The other commenter likewise recommended that equipment
integrated into switchgear to enable the installation of a microgrid
controller should not be considered retrofitted equipment but a
separate purchase of functionally interdependent energy property.
The Treasury Department and the IRS consulted with the DOE and
confirmed that while switchgear may be a necessary part of a microgrid,
switchgear is neither functionally interdependent nor integral to a
microgrid controller. Switchgear plays a vital role in ensuring the
reliability and safety of microgrids by managing power distribution,
providing protection, and maintaining system integrity. However, the
microgrid controller is responsible for the overall management and
optimization of a microgrid's energy resources and its interaction with
the main grid. For example, in the building context, technically a fuse
or circuit breaker could be considered a switchgear, in which case they
would exist in buildings with or without microgrid control. As a
result, switchgear is not part of the energy property defined as a
``microgrid controller'' and is not taken into account for purposes of
the 80/20 Rule. For further discussion of the 80/20 Rule see part
III.A. of this Summary of Comments and Explanation of Revisions.
After considering comments requesting that the final regulations
add more examples of specific components eligible as part of a
microgrid controller, the Treasury Department and the IRS decline to do
so. The Treasury Department and the IRS have further considered the
unit of energy property as applied to microgrid controllers and
conclude that the proposed rule is clear.
Commenters also requested clarification concerning what is included
as a ``microgrid'' for purposes of section 48. Two commenters requested
the adoption of language clarifying that an eligible microgrid includes
an electrical system that is
[[Page 100614]]
capable of operating in connection with the larger electrical grid
regardless of whether the microgrid is physically connected to the
electrical grid. Another commenter noted that until it is clarified
that single-family homes with systems greater than 4 kW are eligible
``microgrids,'' tax equity investors likely will be reluctant to
finance the installation of load controllers associated with rooftop
solar, storage, and residential microgrid installations. Similarly,
another commenter asserted that the term ``qualified microgrid''
applies both to microgrids as they are conventionally known, which
could involve many households or businesses, and to ``nanogrids,''
which usually involve a single household. Regarding the request for
clarification about a microgrid needing to be physically connected to
the electrical grid, proposed Sec. 1.48-9(e)(12)(ii) already provides
that a qualified microgrid includes an electrical system that is
capable of operating in connection with the larger electrical grid,
regardless of whether a connection to the larger electrical grid
exists. Regarding the other comments, proposed Sec. 1.48-9(e)(12)(i)
adopts the statutory definition of 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. This
definition encompasses a wide range of technologies. To the extent that
such ``nanogrids'' used in single family homes meet the definition
under the statute and proposed Sec. 1.48-9(e)(12)(i), it is
unnecessary to change the definition to identify this certain
technology. The proposed rule is adopted without change.
C. 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 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, 46 FR 7287-01,
to provide additional guidance regarding the definition of energy
property. 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 states that ``[a] number of comments
cited specific legislative history to the effect that wind energy
property includes 'transfer equipment.' '' 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. T.D. 7765
adds transfer equipment, but not transmission lines, to the definition
of wind energy property.
Former 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 related to the functioning of those items. This provision 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.
Former 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 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, guidance published
in the Internal Revenue Bulletin 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
components that 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 also 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 cites Revenue Ruling 94-31, 1994-1 C.B. 16, in stating 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 [for which section 38 property
may function] 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.
Notice 2018-59 also explains that property that is ``functionally
interdependent'' to the generation of electricity is treated as a unit
of energy property. Further, Notice 2018-59 provides that certain other
property integral to the production of electricity is included in
determining what costs to include in the basis of energy property and
the date on which construction of the energy property 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, section 7.02(3) and (4) of Notice 2018-59 explain that
fences are not integral to the production of
[[Page 100615]]
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 if
the energy property it initially houses is replaced.
One challenge in defining components that are included in energy
property is determining the components that 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 DOE 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 guidance published in the Internal Revenue
Bulletin issued previously by the Treasury Department and the IRS.
Further, consistent with prior guidance, proposed Sec. 1.48-
9(f)(1) would provide the general rule that an energy property includes
a unit of energy property that meets the requirements for energy
property, is not excluded from energy property, and is of a type of
energy property included in section 48(a)(3). Property owned by the
taxpayer that is an integral part of an energy property is treated as
energy property. Energy property does not include any electrical
transmission equipment, such as transmission lines and towers, or any
equipment beyond the electrical transmission stage. With the exception
of the modification of energy storage technology (as provided in
proposed Sec. 1.48-9(e)(10)(iii)) and the application of the 80/20
Rule (as provided in proposed Sec. 1.48-14(a)(1)), energy property
does not include equipment that is an addition or modification to an
existing energy property.
1. Unit of Energy Property
Proposed Sec. 1.48-9(f)(2)(i) would provide, in part, that the
term unit of energy property means 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)). For rooftop solar energy
property, all components of property that are installed on a single
rooftop would also be considered a single unit of energy property under
the Proposed Regulations.
A commenter requested additional examples regarding the ``unit of
energy property'' with respect to electrical energy storage and other
energy property. For example, the commenter requested an example
illustrating that an individual battery capable of operating on its own
or with other batteries is a ``unit of energy property.'' The commenter
asserted that this should be the clear result if such a battery can
``operate apart from other energy properties,'' including, for example,
a single storage container with multiple battery packs. The commenter
noted that this is also consistent with prior guidance published in the
Internal Revenue Bulletin regarding wind farms. The commenter asserted
that if under this prior guidance, the addition of a new wind turbine
is treated as the addition of a new unit of energy property, then the
same rule should apply to batteries. A definitive response to such
comments would require the Treasury Department and the IRS to conduct a
complete factual analysis of the property in question, which may
include information beyond that which was provided by the commenters.
Because more information is needed to make the determinations requested
by the commenters, the requested clarifications are not addressed in
these final regulations.
With respect to solar energy property, some commenters suggested
that the Proposed Regulations did not clearly draw the line between the
unit of energy property and property integral to the unit of energy
property. For example, a commenter stated that the final regulations
need to clarify that a unit of solar energy property includes all solar
panels, racks, wires, cables, and equipment connected through a single
inverter (rather than all property through the transformer). This
commenter referred to Example 1 in proposed Sec. 1.48-9(f)(5)(i) and
recommended adding an example (or modifying the existing example) to
clarify the components in the unit of solar energy property. This
commenter explained that this is necessary to comport with the
definition of a unit of energy property as all functionally
interdependent components, since each group of components connected
through an inverter may be operated independently. Similarly, a
commenter requested that the final regulations clarify that a solar
project may have multiple units of energy property connected through a
single inverter. Another commenter also requested a new or revised
example to illustrate that for a larger-scale ground-mounted solar
array, a ``unit of energy property'' is a single string or block of
panels connected to each other and through a common inverter.
As highlighted by commenters, solar energy property may be
configured in different ways. The Treasury Department and IRS agree
with commenters that clarity on how the definition of a unit of energy
property is applied to solar energy property is warranted. Under the
Proposed Regulations, a unit of energy property means 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)). In applying
this definition to a solar energy property, the Treasury Department and
IRS view the unit of energy property as all the solar panels that are
connected to a common inverter, which would be considered an integral
part of the energy property, or connected to a common electrical load,
if a common inverter does not exist. Accordingly, a large, ground-
mounted solar energy property may be comprised of one or more units of
energy property depending upon the number of inverters. The example in
the final regulations is updated to reflect this. The final regulations
adopt the definition of unit of energy property as proposed.
For rooftop solar energy property, all components of property that
are installed on a single rooftop would also be considered a single
unit of energy property under the Proposed Regulations. The final
regulations adopt this rule as proposed.
2. Functional Interdependence
Proposed Sec. 1.48-9(f)(2)(ii)(A) would provide that except as
provided in proposed Sec. 1.48-9(f)(2)(ii)(B), with respect to
components of a unit of energy property, the term functionally
interdependent means that 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 store electricity, thermal energy, or hydrogen
as provided by section 48(c) and as described in proposed Sec. 1.48-
9(e).
Proposed Sec. 1.48-9(f)(2)(ii)(B) would provide that in the case
of solar process heat equipment, fiber-optic solar energy property,
electrochromic glass property, GHP property, qualified biogas property,
[[Page 100616]]
and microgrid controllers, with respect to components of such property,
the term functionally interdependent means that 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).
Many commenters requested that taxpayers be permitted to claim a
credit for a functionally interdependent piece of property without
owning the entire unit of energy property. These comments addressing
ownership are discussed in part III.D. of this Summary of Comments and
Explanation of Revisions.
Other commenters asserted that the statute does not require
ownership of a unit of energy property; instead, the taxpayer must only
own something that fits the relevant definition of ``energy property.''
These commenters stated that the proposed definitions of the unit of
energy property based on ``functional interdependence'' and integral
property have no basis in section 48. A commenter stated that section
48 does not require or permit the Treasury Department or the IRS to
discriminate between types of energy property, whether based on
functionality, ownership, or otherwise. This commenter referred to the
flush language at section 48(a)(3)(D): ``[energy property] shall not
include any property which is part of a facility the production from
which is allowed as a credit under section 45 for the taxable year or
any prior taxable year.'' The commenter said this language clearly
signals that Congress recognizes that property may be part of a
facility, but that the term ``property'' represents something less than
a facility. The commenter also referred to Technical Advice Memorandum
8528001 (January 8, 1985) for the principle that components of property
that may function together can also retain their separate identity for
tax purposes. Lastly, the commenter stated that section 48 is focused
on capitalized expenditures on items of property that are tangible
personal property for Federal income tax purposes that are used in a
trade or business. As a result, the commenter asserted that to define
the types of property that qualify for the section 48 credit, taxpayers
should focus on items of property that are integral to a process that
Congress has chosen to incentivize, for example, the production of
energy using certain inputs. This commenter requested the removal of
the functional interdependence standard at proposed Sec. 1.48-9(f) and
asserted that while this standard is needed for section 45 to determine
a qualified facility and for beginning of construction purposes, this
standard is not needed for purposes of section 48.
Another commenter stated that the Proposed Regulations contradict
the language and intent of the IRA by distinguishing between
``functionally interdependent'' components and ``integral parts'' of
energy property to determine the owner or owners of energy property who
may claim the section 48 credit. The commenter noted that this
distinction contravenes the plain text of section 48, which permits the
section 48 credit to be claimed by the owner of energy property if the
original use of that energy property began with such owner.
The concept of a unit of energy property also is intertwined with
the discussion of the 80/20 Rule in part III.A. of this Summary of
Comments and Explanation of Revisions. In the context of the 80/20
Rule, a few commenters also did not agree with this concept. For
example, a commenter highlighted the statutory language and pointed out
that certain definitions of energy property use the word ``equipment''
as opposed to ``system.'' A commenter explained that some energy
properties are defined as equipment that serves a function, such as
solar energy property defined in section 48(a)(3)(A)(i) and GHP
property defined in section 48(a)(3)(A)(vii). This commenter contrasted
those definitions with statutory definitions of other types of energy
property as comprising a system, such as the definition of CHP property
in section 48(c)(3), thermal energy storage property as defined in
section 48(c)(6)(C)(i), and qualified biogas property as defined in
section 48(c)(7). The commenter concluded that the ``unit of energy
property'' concept as provided in proposed Sec. 1.48-9(f)(2)(i) is
appropriate for energy properties defined as systems, but it should not
be applied to energy properties defined as equipment.
Another commenter made a similar point about misalignment of the
``unit of energy property'' concept by focusing specifically on its
application to geothermal energy property. The commenter stated that
despite the statute defining ``energy property'' at the equipment
level, ``equipment used to produce, distribute, or use energy derived
from a geothermal deposit,'' the Proposed Regulations use the term
``unit of energy property,'' a term defined more expansively, such that
it could be interpreted to be equivalent to an entire facility in the
case of geothermal energy property. By using the term ``unit of energy
property,'' the commenter asserted that the Proposed Regulations give a
misleading appearance that the rules comport with the statutory text of
section 48 but define that term so that it is functionally equivalent
to the term ``facility'' as applied in section 45.
In the context of microgrid controllers, some commenters agreed
with the application of the functional interdependence standard. A
commenter stated that microgrids are highly customizable, and the
functional interdependence standard as proposed would allow
accommodation of the different engineering requirements of qualified
microgrids to future-proof the definition and allow for technological
advances. This commenter agreed that the functional interdependence
standard is sufficiently flexible for microgrid controllers.
The statute supports the Proposed Regulations' definition and use
of the terms ``functionally interdependent'' and ``unit of energy
property.'' Additionally, these concepts have been adopted in previous
guidance published in the Internal Revenue Bulletin under section 48,
particularly Notice 2018-59, which provides guidance regarding the
beginning of construction rules for the section 48 credit.
There are three key reasons for requiring an energy property to
include all functionally interdependent components that are part of a
unit of energy property. First, the statutory definition of each type
of energy property as provided in section 48(a)(3) and (c) is included
at proposed Sec. 1.48-9(e). The unit of energy property definition at
Sec. 1.48-9(e)(2) aligns with these statutory definitions by
encompassing the property required to generate electricity or perform
the required function as described in the statute. If a taxpayer owns
merely a component of property within a larger unit of energy property
and is not required to place in service the entire unit of energy
property, then in some cases there would be no certainty that the
generation of electricity or other statutorily required function would
be satisfied when the taxpayer claims the credit.
Some commenters suggested that this uncertainty could be eliminated
or reduced by a coordinated operating plan among separate taxpayers.
However, section 48 provides a credit only if a taxpayer places in
service ``energy property'' as defined by statute. It does not provide
a credit for placing in service a mere component of energy property,
regardless of whether it is subject to an operating plan. In addition,
taxpayers claim the section 48 credit by
[[Page 100617]]
filing Form 3468, Investment Credit, with their Federal income tax
return. The IRS has no authority to compel taxpayers to coordinate tax
credit claims or share tax return information with other taxpayers. Any
taxpayer claiming a section 48 credit must satisfy the statutory
requirements, as described by Congress, for each type of energy
property, and the functional interdependence standard provided in the
Proposed Regulations would ensure that the statutory requirements are
met.
Second, focusing on the statutory language in section 48(a)(1),
which 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,'' the definition of the unit of
energy property using a functional interdependence standard is
consistent with how the term ``placed in service'' has been interpreted
by the courts and developed in various forms of guidance. Proposed
Sec. 1.48-9(b)(5) largely incorporates the general rules provided by
Sec. 1.46-3(d)(1) for determining when a taxpayer has placed a
property in service for the section 48 credit. An energy property is
considered ``placed in service'' in the earlier of the taxable year in
which, under the taxpayer's depreciation practice, the depreciation of
such energy 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.'' See Sec. Sec. 1.46-3(d)(1) and
1.167(a)-11(e)(1)(i).
To determine the taxable year in which depreciation begins, it is
the energy property described in section 48(a)(3)(A) that must be
depreciable. See section 48(a)(3)(C). As stated earlier, this energy
property cannot be a mere component that would be depreciated in
isolation from the rest of the components that would make up a unit of
energy property. Treating individual components within a unit of energy
property as an energy property would make it practically impossible to
determine the taxable year in which the depreciation of components that
comprise an energy property begins.
The Tax Court has said that ``when an individual component that is
designed to operate as a part of a larger system is incapable of
contributing to the system in isolation, it is not regarded as placed
in service until the entire system reaches a condition of readiness and
availability for its specifically assigned function.'' Green Gas Del.
Statutory Tr. v. Commissioner, 147 T.C. 1, 52 (2016), aff'd, 903 F.3d
138 (D.C. Cir. 2018). The Tax Court further explained that components
``are not to be considered placed in service separately from the system
of which they are an essential part.'' Olsen v. Commissioner, T.C. Memo
2021-41, aff'd 52 F.4th 889 (10th Cir. 2022). See also Sealy Power,
Ltd. v. Commissioner, 46 F.3d 382, 390 (5th Cir. 1995), aff'g in part,
rev'g in part on other grounds T.C. Memo. 1992-168; see Pub. Serv. Co.
v. United States, 431 F.2d 980, 984 (10th Cir. 1970) (holding that
individual components of a power plant could not be considered
separately because no component ``would serve any useful purpose'' on
its own). As demonstrated by these rulings, courts have long
interpreted the placed in service requirement to apply to all of the
functionally interdependent components of a unit of property that must
be placed in service collectively.
Lastly, in amending section 48 for taxable years after the
enactment of the IRA, Congress did not contradict or displace these
concepts, which had already been established in guidance published in
the Internal Revenue Bulletin. In Notice 2018-59, 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). Further, 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 to generate electricity. Notice
2018-59 relies upon the rationale provided in Revenue Ruling 94-31,
1994-1 C.B. 16, 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.
3. Integral Part of an Energy Property
Proposed Sec. 1.48-9(f)(3)(i) would provide that for purposes of
the section 48 credit, property owned by a taxpayer is an integral part
of an energy property owned by the same taxpayer if it is used directly
in the intended function of the energy property as provided by section
48(c) and as described in proposed Sec. 1.48-9(e) and is essential to
the completeness of the intended function. Property that is an integral
part of an energy property is energy property. A taxpayer may not claim
the section 48 credit for any property not owned by the taxpayer that
is an integral part of the taxpayer's energy property. Multiple energy
properties (whether owned by one or more taxpayers) may include shared
property that may be considered an integral part of each energy
property so long as the cost basis for the shared property is properly
allocated to each energy property. The total cost basis of such shared
property divided among the energy properties may not exceed 100 percent
of the cost of such shared property. In addition, property that is an
integral part of an energy property that is also shared by a qualified
facility (as defined in section 45(d)) will not be considered property
that is not energy property under proposed Sec. 1.48-9(d). This means
that property that is also used by a qualified facility (as defined in
section 45(d)) may still be energy property.
Proposed Sec. 1.48-9(f)(3)(ii) would provide that property that is
an integral part of energy property includes power conditioning
equipment and transfer equipment used 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). Power conditioning equipment includes, but is
not limited to, transformers, inverters, and converters, which modify
the characteristics of electricity or thermal energy into a form
suitable for use or transmission or distribution. Parts related to the
functioning or protection of power conditioning equipment are also
treated as power conditioning equipment and include, but are not
limited to, switches, circuit breakers, arrestors, and hardware and
software used to monitor, operate, and protect power conditioning
equipment.
Transfer equipment includes equipment that permits the aggregation
of energy generated by components of energy properties and equipment
that alters voltage to permit transfer to a transmission or
distribution line. Transfer equipment does not include transmission or
distribution lines. Examples of transfer equipment include, but are not
limited to, wires, cables, and combiner boxes that conduct electricity.
Parts related to the functioning or protection of transfer equipment
are also treated as transfer equipment and may include items such as
current transformers used for metering, electrical interrupters (such
as circuit breakers, fuses, and other switches), and hardware and
software used to monitor, operate, and protect transfer equipment.
Power conditioning equipment and transfer equipment that are
integral to an energy property may be integral to another energy
property or used by a qualified facility (as defined in section
[[Page 100618]]
45(d)), so long as the total cost basis of the integral property is not
exceeded for purposes of the section 48 credit claimed with respect to
any energy property or qualified facility that share such property.
Proposed Sec. 1.48-9(f)(3)(iii) would provide that roads that are
an integral part of an energy property are integral to the activity
performed by the energy property such as onsite roads that are used for
equipment to operate and maintain the energy property. Roads primarily
for access to the site, or roads used primarily for employee or visitor
vehicles, are not integral to the activity performed by an energy
property.
Proposed Sec. 1.48-9(f)(3)(iv) would provide that fencing is not
an integral part of an energy property because it is not integral to
the activity performed by the energy property. A commenter disagreed
that fencing is not integral and asserted that concerns of national
security dictate the fences, along with security systems and monitoring
devices, be treated as integral to electricity generation. Fencing is
not considered property integral to an energy property because it is
not essential to the completeness of the intended function of an energy
property, whether electricity generation or another specific function
of energy property. This rule originally was provided in Notice 2018-59
and was included in the Proposed Regulations. The proposed rule is
adopted without change.
For the various section 48 energy properties, commenters requested
confirmation that certain property is an integral part of an energy
property. A commenter requested clarification that an HVDC (high-
voltage direct current) power system is either a ``unit of energy
property'' or a ``functionally interdependent component'' of an
offshore wind facility. If the HVDC power system is used directly in
the intended function of the energy property and is essential to the
completeness of the intended function, then the HVDC power system would
be an integral part to an energy property, and thus, treated as part of
that energy property. However, because the generation or storage of
electricity or thermal energy is not dependent upon the placing in
service of an HVDC power system, it is not a functionally
interdependent component of an energy property and not a separate
``unit of energy property.'' Further, the Proposed Regulations included
an offshore wind example, retained in these final regulations, that
illustrates the application of the energy property rules and addresses
this commenter's concern.
Another commenter requested that the final regulations clarify that
software that operates, monitors, or protects the project applies more
broadly than power conditioning and transfer equipment and may be
considered property integral to an energy property. The commenter
asserted that certain types of software used as a part of energy
management systems, battery management systems, and microgrid
controllers should be considered property integral to an energy
property. This commenter also requested that software that optimizes
and automates integral parts also be eligible. Finally, this commenter
believed that the final regulations should clarify that a taxpayer who
owns an energy property can include software costs in the basis of the
energy property to compute the section 48 credit. Another commenter
stated that the definition of power conditioning equipment expressly
includes software used to ``monitor, operate, and protect'' such
equipment and requested this definition be modestly expanded. As
discussed in this part I.B.6. of the Summary of Comments and
Explanation of Revisions, software may be integral to different types
of energy property, including microgrid controllers. Therefore,
software that optimizes and automates may be integral if it meets the
integral property rule in Sec. 1.48-9(f)(3). To the extent the
commenter is asking whether software costs may be capitalized, that
issue is beyond the scope of these regulations. The proposed rules are
adopted without change.
In the context of qualified biogas property, commenters requested
additional examples of what components may be integral property.
Specifically, a commenter asked for clarification that mobile trailers
or containers used to transfer biogas are integral to biogas energy
property. The final regulations do not adopt these comments, as these
regulations are meant to apply to all energy properties and do not
provide an exclusive list of components of property that may be
included in energy property. The final regulations do provide certain
examples of property that is an integral part of qualified biogas
property including, but not limited to, a waste feedstock collection
system, a landfill gas collection system, and mixing or pumping
equipment.
Additionally, a few commenters requested clarification regarding
the determination of when construction begins in cases in which two or
more energy properties share integral property. The commenters proposed
that the beginning of construction on one energy property does not
determine when construction begins on another energy property, even if
they share property integral to both energy properties. The Treasury
Department and the IRS have addressed the beginning of construction
rules in several pieces of Internal Revenue Bulletin guidance. The
Proposed Regulations do not address these rules and they are beyond the
scope of the final regulations.
In the context of solar energy property, a commenter requested that
the Treasury Department and the IRS confirm that power conditioning
equipment, including transformers, is not considered a component of a
unit of energy property; rather, power conditioning equipment is an
``integral part'' of energy property. This commenter noted that the
example included in proposed Sec. 1.48-9(f)(5)(i) says this, but
requested that the Treasury Department and the IRS clarify that the
language in this example, ``[a]ll components of the Property, up to and
including the transformer are either functionally interdependent
components of the Property or are integral parts of the Property,''
means it is the transformer that is the ``integral part'' and the other
solar components that are the functionally interdependent components of
the property. This same commenter also requested that gen-tie lines be
clarified as integral property. The final regulations, at Sec. 1.48-
9(f)(3)(ii), provide that power conditioning and transfer equipment is
considered an integral part of an energy property and provide a
nonexclusive list of types of property that are considered power
conditioning equipment, including transformers, and transfer equipment.
Another commenter requested confirmation that offshore generating
assets and components of island-based hydropower facilities qualify for
the section 48 credit. This commenter also requested that similar rules
and examples as those provided in the Proposed Regulations for offshore
wind facilities apply to marine and hydrokinetic energy property. As
discussed in more detail in part III.F. of this Summary of Comments and
Explanation of Revisions, offshore wind facilities and qualified
hydropower facilities are both qualified facilities under section 45(d)
for which a taxpayer may make an election to claim the section 48
credit in lieu of the section 45 credit. Whether certain assets are
included in an offshore wind facility or qualified hydropower facility
as defined
[[Page 100619]]
in section 45(d) is beyond the scope of these final regulations.
4. Property Excluded From Energy Property
Proposed Sec. 1.48-9(d)(2) would provide that energy property does
not include power purchase agreements, goodwill, going concern value,
or renewable energy certificates. A commenter requested additional
clarification and examples of the potential bifurcation of tax basis
between renewable energy certificates and an associated energy
property. A definitive response to this comment would require the
Treasury Department and the IRS to conduct a complete factual analysis
of the renewable energy certificates and associated energy property,
which may include information beyond that which was provided by the
commenters. Because more information is needed to provide the
clarification requested by the commenters, the requested clarification
is not addressed in these final regulations. The final regulations
adopt the rule as proposed.
II. Rules Relating to the Increased Credit Amount for Satisfying
Certain Prevailing Wage and Apprenticeship Requirements and the Energy
Project Rule
Section 48(a)(9) provides for an increased credit amount for energy
projects for taxpayers who satisfy certain requirements. Section
48(a)(9)(A)(i) provides a general rule that in the case of any energy
project that satisfies the requirements of section 48(a)(9)(B), the
amount of the credit determined under section 48(a) (determined after
the application of section 48(a)(1) through (8) and (15), and without
regard to section 48(a)(9)(A)(i)) is equal to such amount multiplied by
5.
Section 48(a)(9)(A)(ii) provides that for purposes of section
48(a), the term ``energy project'' means a project consisting of one or
more energy properties that are part of a single project.
Section 48(a)(9)(B) provides that a project meets the requirements
of section 48(a)(9)(B) if it is one of the following: (i) a project
with a maximum net output of less than 1 megawatt of electrical (as
measured in alternating current) or thermal energy (One Megawatt
Exception); (ii) a project the construction of which begins before the
date that is 60 days after the Secretary publishes guidance with
respect to the requirements of section 48(a)(10)(A) and (11) (BOC
Exception); and (iii) a project that satisfies the requirements of
section 48(a)(10)(A) and (11) (PWA requirements).
Section 48(a)(10) provides rules with respect to the prevailing
wage requirements (Prevailing Wage Requirements) under section 48,
including the special recapture provision under section 48(a)(10)(C).
Section 48(a)(10)(B) provides that rules similar to the correction and
penalty procedures for a failure to satisfy the Prevailing Wage
Requirements under section 45(b)(7)(B) apply, and those rules generally
apply prior to a recapture event under section 48(a)(10)(C). Section
48(a)(11) provides that rules similar to the rules of section 45(b)(8)
apply with respect to the apprenticeship requirements (Apprenticeship
Requirements).
Under the BOC Exception in section 48(a)(9)(B)(ii), taxpayers may
claim the amount of the increased credit without satisfying the PWA
requirements if construction ``begins before the date that is 60 days
after the Secretary publishes guidance with respect to the [PWA
requirements].'' The Treasury Department and the IRS published Notice
2022-61, 2022-52 I.R.B. 560, on November 30, 2022, providing initial
guidance with respect to the PWA requirements and starting the 60-day
period described in those sections. To qualify for the BOC Exception, a
taxpayer must begin construction of a section 48 energy project before
January 29, 2023. Unless the One Megawatt Exception applies, taxpayers
who do not meet the BOC Exception under section 48 would need to
satisfy the applicable PWA requirements to claim the increased amount
of credit.
A. PWA Requirements
Comments on the general PWA requirements (including comments that
referenced section 48 but addressed the PWA requirements more
generally) were addressed in the PWA Final Regulations. Comments
received regarding the specific PWA requirements under section 48, the
One Megawatt Exception under section 48, and the recapture rules
contained in section 48(a)(10)(C) were not addressed in the PWA Final
Regulations and are addressed in this Summary of Comments and
Explanation of Revisions.
To the extent consistent with this Summary of Comments and
Explanation of Revisions section of these final regulations, the
Summary of Comments and Explanation of Revisions section of the PWA
Final Regulations is incorporated in these final regulations.
Therefore, general comments addressed in the preamble to the PWA Final
Regulations are not addressed again in this Summary of Comments and
Explanation of Revisions.
The PWA Final Regulations provide generally applicable rules on the
PWA requirements. These final regulations generally adopt by cross-
reference those rules in the PWA Final Regulations promulgated under
section 45(b)(7) and (8); specifically, in Sec. 1.45-7 (Prevailing
Wage Requirements), Sec. 1.45-8 (Apprenticeship Requirements), and
Sec. 1.45-12 (recordkeeping and reporting). Consistent with the PWA
Final Regulations, the PWA requirements under section 48 apply with
respect to the creditable portion of an energy project within the
meaning of section 48(a)(9)(A) and these final regulations.
As stated in the preamble to the PWA Final Regulations, the
Treasury Department and the IRS have determined that given the
complexity of the PWA requirements, the uncertainty regarding the
potential retroactive effects of the PWA requirements, and the benefits
to tax administration gained with consistency across the various Code
sections containing PWA requirements, a transition rule is appropriate.
The PWA Final Regulations provide that any work performed before
January 29, 2023 (that is, the date that is 60 days after the
publication of Notice 2022-61) is not subject to the PWA requirements,
regardless of whether there is an applicable BOC Exception. This
transition rule also applies for taxpayers that may initially satisfy
the BOC Exception, but later fail to meet the BOC Exception (for
example, by failing to meet certain continuity requirements). These
taxpayers must satisfy the PWA requirements for construction,
alteration, or repair (as applicable) that occurs on or after January
29, 2023, but do not need to meet the PWA requirements for work that
occurred prior to that date. For those reasons described in the
preamble to the PWA Final Regulations, this transition rule also
applies to the PWA requirements under section 48 and is adopted by
reference into Sec. Sec. 1.45-7 and 1.45-8 in these final regulations.
The PWA Final Regulations also provide a limited transition waiver
for the penalty payment with respect to the correction and penalty
procedures described in section 45(b)(7)(B) for a failure to satisfy
the Prevailing Wage Requirements. The PWA Final Regulations provide
that the penalty payment is waived with respect to a laborer or
mechanic who performed work in the construction, alteration, or repair
of a qualified facility on or after January 29, 2023, and prior to June
25, 2024, if the taxpayer relied upon Notice
[[Page 100620]]
2022-61 or the PWA Proposed Regulations for determining when the
obligation to pay prevailing wages began, provided the taxpayer makes
the appropriate correction payments to the impacted workers within 180
days of June 25, 2024. These final regulations clarify that this
limited transition waiver applies to section 48 provided the taxpayer
makes the appropriate correction payments to the impacted workers
within 180 days of the publication of these final regulations.
Similarly, these final regulations also allow taxpayers to use
Notice 2022-61 for determining when construction begins for purposes of
the applicable percentage of labor hours performed by qualified
apprentices required under section 48(a)(11) (by reference to section
45(b)(8)) in satisfying the Labor Hours Requirement described in Sec.
1.45-8. These transition rules are explained further in the preamble to
the PWA Final Regulations.
The PWA Final Regulations provide special rules applicable to
Indian Tribal governments. These final regulations also adopt by cross-
reference the special rules with respect to Indian Tribal governments
under Sec. 1.45-7 for purposes of the Prevailing Wage Requirements.
B. Section 48(a)(10)(C) Recapture Rules
Section 48(a)(10)(C) authorizes the Secretary, by regulations or
other guidance, to provide for recapturing the benefit of any increase
in the credit allowed under section 48(a) by reason of section
48(a)(10) with respect to any project that does not satisfy the
requirements under section 48(a)(10)(A) (after application of section
48(a)(10)(B)) for the period described in section 48(a)(10)(A)(ii) but
that does not cease to be investment credit property within the meaning
of section 50(a). The period and percentage of such recapture is to be
determined under rules similar to the rules of section 50(a).
Proposed Sec. 1.48-13(c)(9) provides a rule to coordinate the
recapture of an increase credit amount in a prior taxable year with
recapture under section 50(a) in a current taxable year. These final
regulations do not adopt proposed Sec. 1.48-13(c)(9) because the
proposed rule may have resulted in an inaccurate calculation of the
amount of the ``aggregate decrease in credit allowed'' calculated under
section 50(a). Section 50(a) and Sec. Sec. 1.47-1, 1.47-2, and 1.50-1
provide rules governing recapture of the investment credit, including
the section 48 credit.
Proposed Sec. 1.48-13(c)(3)(i) would provide generally that the
increased credit amount under proposed Sec. 1.48-13(b)(3) is subject
to recapture for any project that does not satisfy the Prevailing Wage
Requirements in Sec. 1.45-7(b) through (d) and proposed Sec. 1.48-
13(c)(1) for any period with respect to an alteration or repair of such
project during the five-year period beginning on the date such project
is originally placed in service (five-year recapture period) (but that
does not cease to be investment credit property within the meaning of
section 50(a)). Further, proposed Sec. 1.48-13(c)(7) would provide
that, in addition to the general reporting requirements described in
Sec. 1.45-12, a taxpayer that has claimed an increased credit amount
under proposed Sec. 1.48-13(b)(3) or transferred a specified credit
portion under section 6418 that includes an increased credit amount
under proposed Sec. 1.48-13(b)(3) is required to provide to the IRS,
information on the payment of prevailing wages with respect to any
alteration or repair of the project during the five-year recapture
period at the time and in the form and manner prescribed in IRS forms
or instructions or in publications or guidance published in the
Internal Revenue Bulletin.
Commenters requested more detail on the ``annual prevailing wage
compliance report'' because the Proposed Regulations do not specify
what information is required to be reported to the IRS. A commenter
noted that the Proposed Regulations do not provide any applicable
procedures if the IRS should disagree with the completeness of the
information or provide detail on the scope of prevailing wages for an
alteration or repair. The commenter further asserted that the guidance
should avoid imposing any additional burdens on the taxpayer and
creating any further uncertainty with respect to the already
substantial compliance obligations created by the PWA Proposed
Regulations.
The details requested by these commenters were addressed in the PWA
Final Regulations. The PWA Final Regulations provided definitions of
terms, including what constitutes an alteration or repair, and detail
on the required recordkeeping and reporting for the purposes of the PWA
requirements. Further, as provided in the Proposed Regulations,
information on the payment of prevailing wages with respect to any
alteration or repair of the project during the five-year recapture
period is to be provided in the form and manner as described in IRS
instructions or in publications or guidance published in the Internal
Revenue Bulletin. Accordingly, these comments are not addressed again
in this Summary of Comments and Explanation of Revisions. These final
regulations do clarify that if there is no alteration or repair that
occurs during the relevant year during the five-year recapture period,
then the taxpayer is deemed to satisfy the Prevailing Wage Requirements
for that year.
Proposed Sec. 1.6418-5(f) would provide rules addressing the
notification requirements and the impact of recapture under section
48(a)(10)(C). The final regulations update the rules in proposed Sec.
1.6418-5(f) because the 6418 Final Regulations, which included updated
recapture rules in Sec. 1.6418-5, were published after publication of
proposed Sec. 1.6418-5(f). Thus, it is necessary to update Sec.
1.6418-5(f), which was reserved in the 6418 Final Regulations, in these
final regulations to ensure consistency with the updated recapture
rules in the 6418 Final Regulations.
C. Definition of Energy Project
Section 48(a)(9)(A)(ii) defines the term ``energy project'' as a
project consisting of one or more energy properties that are part of a
single project. Proposed Sec. 1.48-13(d)(1) would provide that, for
purposes of the increased credit amount under section 48(a)(9) and
proposed Sec. 1.48-13(b) and (c), the domestic content bonus credit
amount under section 48(a)(12), and the increase in credit rate for
energy communities provided in section 48(a)(14), the term ``energy
project'' means one or more energy properties (multiple energy
properties) that are operated as part of a single energy project.
Proposed Sec. 1.48-13(d)(1) would provide that multiple energy
properties will 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
provided in proposed Sec. 1.48-13(d)(2)) and any two or more of the
following factors are present:
(i) The energy properties are constructed on contiguous pieces of
land;
(ii) The energy properties are described in a common power
purchase, thermal energy, or other off-take agreement or agreements;
(iii) The energy properties have a common intertie;
(iv) The energy properties share a common substation, or thermal
energy off-take point;
(v) The energy properties are described in one or more common
environmental or other regulatory permits;
[[Page 100621]]
(vi) The energy properties are constructed pursuant to a single
master construction contract; or
(vii) The construction of the energy properties is financed
pursuant to the same loan agreement.
Proposed Sec. 1.48-13(d)(2) would define the term ``related
taxpayers'' and provide a related taxpayer rule. Proposed Sec. 1.48-
13(d)(3) would require consistent treatment as an energy project.
1. Challenges for Project Structures
The Treasury Department and the IRS received several comments
regarding the energy project definition, and commenters raised concerns
regarding the single project rule. Emblematic of commenters' views, a
commenter summarized its concerns that the Proposed Regulations would
expand the definition of a ``project'' by potentially grouping energy
properties that would not commonly be considered as a single energy
project if those energy properties were paid for under the same
construction contract or financing agreement, even if the properties
were operated separately. The commenter explained that the problems
caused by the grouping of multiple energy properties as a single
project are particularly acute for behind the meter solar facilities in
different locations that are typically sized to provide power for their
respective dedicated sites. This commenter described several concerns
including geographic and time disparity, the impact on small bidders,
the ability to plan around the proposed definition's factors, and the
impact on domestic content bonus credit amount requirements. Another
commenter stated that the single project rule in the Proposed
Regulations would capture energy properties located on contiguous
parcels that are owned by the same tax equity partnership (which is
overinclusive and does not take into account projects for which the
owner of each project is a disregarded special purpose entity), yet the
energy properties are subject to separate permits, separate power
purchase agreements, separate substations and gen-tie lines, separate
construction contracts, and separate construction loans and permanent
debt, and ownership of the underlying real estate is separate.
A commenter explained that typically, each project partnership will
have a separate engineering, procurement, and construction (EPC)
agreement. If, for example, project partnerships A, B, C, and D hold
four separate energy properties and four separate EPC agreements are
entered into on four separate dates, that would create four distinct
prevailing wage rates that need to be tracked for prevailing wage
purposes. If all four energy properties owned by the four project
partnerships are deemed to be a single energy project, then each
project partnership would still have to determine separately whether it
met the PWA requirements due to the differing prevailing wage rates
from the various dates the EPC contracts were signed. The commenter
suggested that if any one of the four energy properties comprising the
single energy project does not meet the PWA requirements, then none
would be treated as meeting the requirements.
Another commenter explained that the single project rule would make
thousands of separate residential rooftop systems one ``energy
project,'' because two of the factors (common construction and loan
agreements) always will be met. This commenter explained that these
systems generally are constructed under the same EPC contract and
financed via the same debt facility purely as a matter of convenience
and not because the systems are intended to be operated together as a
single project. Therefore, the commenter explained that all rooftop
photovoltaic (PV) solar systems installed by any individual EPC
contractor (even if installed years apart and in separate States)
potentially could be treated as one energy project under the Proposed
Regulations. This commenter also raised concerns that this approach
creates uncertainty and is thus administratively unworkable with regard
to the timing of credit claims.
Several commenters had concerns and requested clarification
regarding the application of the single project rule to co-located
energy property and energy storage technology (such as solar energy
property and battery storage). A commenter explained that battery
storage co-located within the solar array would meet the criteria that
the projects be contiguous to one another (indeed integrated), and
other criteria could apply as well, for example, that both types of
energy property are part of the same construction contract and subject
to the same permits. This commenter explained that the listed criteria
in the Proposed Regulations appear to be focused on traditional energy
generating projects, which makes sense if there are multiple energy
properties that should be treated as a single energy project but could
inadvertently bring energy storage technology under the umbrella of a
section 45 credit solar project. Additionally, several commenters
requested that if the single project rule is adopted in final
regulations, such regulations should confirm that ``[s]ection 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),'' as
stated in the preamble to the Proposed Regulations.
Another commenter provided an example of a project in a school
district (District) for which potentially varying PWA requirements must
be met. The District installs solar energy properties on a school,
district offices, and a supply warehouse located across separate non-
contiguous locations within the District boundaries. The District
issues a single series of tax-exempt bonds to finance construction
costs at all properties. After a single request for proposal, the
District selects a single contractor to construct the energy properties
at each location. Even if the District were to send out requests for
proposals for each separate property, the same contractor may be
selected for all sites. In addition, although the District could issue
separate series of bonds for each site, those bonds may be considered a
single issue under Sec. 1.150-1. Under the Proposed Regulations, the
various solar energy properties would be considered a single energy
project even though the energy properties are distinct and located
miles apart.
Many commenters proposed alternatives to the Proposed Regulations'
definition of energy project. Several commenters recommended re-
instituting the facts and circumstances single project test from Notice
2018-59. A commenter also suggested allowing taxpayers an option, but
not a requirement, to elect to have multiple energy properties be
``treated as one energy project'' if they meet the single project rule
with two factors and common ownership found in the Proposed
Regulations. This commenter stated that if the Proposed Regulations'
definition of energy project is retained, the rule should change the
timing for analyzing common ownership from ``at any point during the
construction'' to ``when the energy property is placed in service.''
This commenter also suggested removing the related taxpayer rule and
instead providing an option to elect to be treated as one taxpayer.
Another commenter proposed that the final regulations could instead
create a rebuttable presumption under which taxpayers can avoid having
multiple energy properties treated as a single energy project by
demonstrating that the project covers multiple technologies, taxpayers,
taxable years, or interconnection agreements.
[[Page 100622]]
A commenter proposed that to the extent that the Treasury
Department and the IRS are concerned with the potential for abuse, the
final regulations could require meeting three or four factors before
mandating single project treatment. Alternatively, consistent with the
approach taken in regulations under section 48(e) (T.D. 9979, 88 FR
55506 (Aug. 15, 2023), corrected in 88 FR 59446 (Aug. 29, 2023),
corrected in 88 FR 87903 (Dec. 20, 2023)), these final regulations
could limit the application of the facts and circumstances
determination to smaller projects (that is, under five megawatts).
Another commenter offered as an alternative that the final regulations
add a requirement for satisfaction of an additional factor or factors
(that is, more than two) and provide that aggregation will only occur
if the projects are clearly operated together. Another commenter
similarly suggested that three factors should be met.
Additionally, one commenter suggested that, if the rule were
retained, further clarification is needed regarding what qualifies as a
loan agreement and whether the definition of ``energy project'' applies
to projects of any size. This commenter requested that the final
regulations clarify that the definition does not include tax equity
positions. This commenter also recommended that the final regulations
align the effective date of the new energy project definition with the
construction of an energy property or an energy project beginning on or
after January 29, 2023, to eliminate any confusion regarding the new
definition and to mitigate additional risk to taxpayers.
A commenter supported the Proposed Regulations' definition of
energy project in a comment submitted in response to the PWA Proposed
Regulations stated that the Treasury Department and the IRS should make
clear that a taxpayer seeking the increased credit rate for satisfying
the PWA requirements cannot subdivide projects and construction
contracts to evade the PWA requirements. The commenter stated that
certain factors, including ownership and proximity, should determine
whether multiple qualified facilities or units of equipment constitute
one single qualified facility for purposes of determining whether the
One Megawatt Exception applies. For example, with respect to solar
projects, the commenter suggested that multiple energy properties
should be treated as one single project if they are owned by a single
legal entity, or the energy properties are constructed and/or installed
in the same general geographic location or on adjacent or contiguous
pieces of land. The same general geographic location may include more
than one State, provided that the multiple energy properties are on
adjacent or contiguous pieces of land.
Overall, commenters expressed a view that the single project rule
as drafted in the Proposed Regulations would apply to an overly broad
range of energy properties and lead to illogical groupings and
practical difficulties in complying with various bonus credit amounts
and increased credit rates under section 48. Based on the concerns
raised in these comments, the Treasury Department and the IRS
acknowledge that additional flexibility is warranted. See part II.C. 4
of this Summary of Comments and Explanation of Revisions.
2. Facts and Circumstances Approach
Commenters asserted that a facts and circumstances approach should
be applied to the definition of energy project. Several commenters
raised concerns about inconsistency with prior guidance published in
the Internal Revenue Bulletin with regard to the beginning of
construction rules applicable to section 48. Commenters also stated
that the Proposed Regulations would implement the energy project
definition differently than a similar rule provided in the beginning of
construction guidance and Notice 2022-61 (which addresses the
application of PWA requirements), by mandating single-project treatment
if common ownership and any two factors are met, rather than applying a
facts and circumstances test. Similarly, commenters stated that
regulations under section 48(e) for the Low-Income Communities Bonus
Credit Program provide a single project definition that uses a facts
and circumstances test.
The Treasury Department and the IRS confirm that the definition of
energy project in the Proposed Regulations adopts a different approach
than the facts and circumstances test used in other tax guidance. These
comments requesting alternatives to the Proposed Regulations'
definition of energy project are not adopted because the increased
credit rate for satisfying the PWA requirements, the domestic content
bonus credit amount, and the increase in the credit rate for energy
communities under section 48 require a greater degree of certainty for
taxpayers and the IRS. Further, the Low-Income Communities Credit
Program is a competitive, allocated credit program which requires an
application; the section 48 credit does not. This difference in the
process for claiming the section 48 tax credit supports the need for a
more specific approach for the credit. Accordingly, the definition of
energy project in these final regulations provides particular and
specific requirements rather than a facts and circumstances approach.
3. Interaction With Domestic Content Bonus Credit Amounts
Several commenters asserted that the definition of ``energy
project'' in proposed Sec. 1.48-13(d) is inconsistent with the initial
domestic content guidance set forth in Notice 2023-38, 2023-22 I.R.B.
872. A few commenters stated that the application of the single project
rule in the Proposed Regulations may cause any co-located energy
properties to be aggregated for domestic content bonus credit amount
purposes. The commenters suggested that this aggregation of different
classes or categories of energy property as a single project is
inappropriate and may create significant issues in qualifying for the
domestic content bonus credit amount, including potentially distorting
the domestic content calculation by overinclusion of costs for energy
storage technology.
Commenters provided specific examples with domestic content bonus
credit amount implications. In one such example, a taxpayer places a
solar array in service in 2023 and then places a battery energy storage
system (BESS) associated with the array in service in 2026.
Construction of the BESS began, for example, by clearing and grading at
the site of the BESS in 2023. The solar array and the BESS are on
contiguous parcels and share a common substation. Under the proposed
rule, the array and the BESS would be treated as a single energy
project. The array would qualify for the domestic content bonus credit
amount, but the addition of the BESS would put the energy project below
the applicable percentage calculation for domestic content purposes,
despite the ``project'' involving different technologies and different
tax years. The taxpayer may be unable to avoid this result for projects
with limited access to substations or if required upgrades would exceed
the value of the domestic content bonus credit amounts, and thus may
choose not to add new BESS to the grid, in clear contravention of
Congressional intent. However, assuming no other factors under the
single project rule are present, the taxpayer could avoid this result
simply by placing the BESS on a non-contiguous parcel, a result that is
likely to be technically inefficient, and more importantly, is
inconsistent with the intent of the domestic content bonus
[[Page 100623]]
credit as set forth by Congress in the IRA.
Another commenter provided additional feedback on domestic content
issues arising from placing different types of energy property in
service in different taxable years. This commenter explained that if
multiple energy properties were treated as a single project for
purposes of the domestic content bonus credit amount, then the energy
properties would be tested on a combined basis for the steel, iron, and
manufactured components requirements. This could affect situations in
which different types of energy properties are co-located, and the
domestic content bonus credit amount could be pursued for one type of
energy property but not for the other type of energy property.
According to the commenter, the result likely would be that foreign
products would be sourced for both types of energy property. Further,
the commenter noted that combined testing would raise questions
regarding the impact to energy properties that are placed in service
years apart. For example, the commenter noted that if an earlier phase
of an energy project did not qualify for the domestic content bonus
credit amount, then it would likely be impossible for a later phase of
the project to qualify if tested on a combined basis. Alternatively,
the commenter noted that if an earlier phase of an energy project
qualified for the domestic content bonus credit amount, then it could
later become ineligible for the domestic content bonus credit amount if
a later phase of that energy project caused the project to fail to meet
the domestic content requirements.
Another commenter stated that the Proposed Regulations' definition
of energy project would deter many taxpayers from attempting to satisfy
the domestic content bonus credit amount requirements and disqualify
otherwise qualifying energy properties. This commenter explained that,
increasingly, procurement decisions are made earlier in the project
life cycle due to long lead times. Therefore, the commenter noted that
a developer might be able to secure enough domestic equipment or steel
to allow one energy property to satisfy the domestic content bonus
credit amount requirements but not enough for additional energy
properties. However, the commenter stated that if these multiple energy
properties were aggregated and treated as a single energy project, that
energy project likely would not qualify for the domestic content bonus
credit amount since the combined domestic cost percentage would be
unlikely to satisfy the adjusted percentage rule as defined in Notice
2023-38.
Some commenters asserted that the Proposed Regulations' definition
of energy project should apply only to energy properties that are
within the same category for purposes of section 48. These commenters
also requested clarification that energy storage technology such as a
BESS is treated as an ``energy project'' separate from solar energy
property and other categories of energy property for purposes of the
domestic content bonus credit amount. For example, a commenter
highlighted the concern that ``energy project'' may be read broadly to
apply to all energy properties that are owned by the same taxpayer and
co-located, even if the energy properties are of different classes or
categories and have separate pathways to eligibility. This commenter
requested that the final regulations clarify the ``energy project''
definition by providing that the reference to ``one or more energy
properties'' in section 48(a)(9)(A)(ii) should be properly interpreted
to refer only to the same class or category of energy property. The
commenter concluded that a better approach to the definition of
``energy project'' would be to treat specific types of energy property,
such as solar, wind, and other categories, as separate from energy
storage technology property even if co-located, owned by the same
taxpayer, and sharing common facilities and infrastructure.
Section 48 applies the domestic content bonus credit amounts to an
entire energy project defined as one or more energy properties that are
part of a single project. As a result, all types of energy property,
including energy storage technologies that meet the criteria as would
be provided in proposed Sec. 1.48-13(d) are included within an energy
project for purposes of the domestic content bonus credit amount. As
noted earlier, the Treasury Department and the IRS recognize that
additional flexibility is warranted with respect to the definition of
energy project. The final regulations revise the definition of energy
project to allow the taxpayer to choose when to assess the factors of
an energy project, either at any point during construction or during
the taxable year energy properties are placed in service. However,
multiple types of energy property may be appropriately treated as a
single energy project in certain situations. Accordingly, the final
regulations do not adopt comments requesting that an energy project
must be limited to energy properties of the same type.
4. Revisions to Definition of Energy Project
The Treasury Department and the IRS agree with commenters that the
Proposed Regulations' definition of energy project, described as
ownership plus two factors, is too rigid and could have unintended
impacts, such as preventing small rooftop solar installations from
being eligible for the One Megawatt Exception and treating multiple
energy properties that are located in different States as a single
energy project. Further, the Treasury Department and the IRS understand
that the ``at any point during construction'' language in the Proposed
Regulations may be problematic for taxpayers, potentially grouping
energy properties that will be placed in service in different taxable
years.
In response to the concerns raised by commenters, the definition of
energy project is modified in the final regulations. The Proposed
Regulations would have required two or more factors to be present. In
the case of multiple energy properties owned by a taxpayer, the final
regulations require that four or more factors be present and that the
factors may be assessed, at the taxpayer's choice, either at any point
during construction or during the taxable year the energy properties
are placed in service. The Treasury Department and the IRS understand
that taxpayers require flexibility given the varied landscape of energy
property development and financing structures. However, the Treasury
Department and the IRS disagree that a facts and circumstances analysis
should be applied to the definition of energy project. Energy project
is the statutory term for the unit of property to which the PWA
requirements, the domestic content bonus credit amount, and the
increase in credit rate for energy communities are applied. In
addition, in promulgating these final regulations pursuant to the
express delegation of authority in section 48(a)(16), the Treasury
Department and the IRS determined that using particular and specific
factors in the definition of energy project will increase certainty for
taxpayers and the IRS. That increased certainty will promote sound tax
administration and help to carry out the purposes of section 48(a).
Separately, a commenter requested confirmation that an energy
project will be deemed placed in service when the final energy property
within the energy project is placed in service. Section 48(a)(9)(A)(ii)
defines an ``energy project'' as a project consisting of one or more
energy properties that are part of
[[Page 100624]]
a single project. Because the PWA requirements, the domestic content
bonus credit amount, and the increase in credit rate for energy
communities are each applied at the energy project level, the
determination of whether an energy project meets any of these
requirements cannot be made before the last of the multiple energy
properties within such energy project are placed in service.
Accordingly, the final regulations clarify the definition of energy
project consistent with this comment.
Further, the final regulations do not adopt proposed Sec. 1.48-
13(d)(3). The Proposed Regulations would have provided that, if
multiple energy properties are treated as a single energy project for
beginning of construction purposes with respect to the section 48
credit, then the multiple energy properties also will be treated as a
single energy project for purposes of the PWA requirements, the
domestic content bonus credit amount, and the increase in credit rate
for energy communities. The Treasury Department an
[…truncated; see source link]Indexed from Federal Register on December 12, 2024.
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.