Rule2025-00196
Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit
Primary source
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Published
January 15, 2025
Effective
January 15, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth final regulations regarding the clean electricity production credit and the clean electricity investment credit established by the Inflation Reduction Act of 2022. These final regulations provide rules for determining greenhouse gas emissions rates resulting from the production of electricity; petitioning for provisional emissions rates; and determining eligibility for these credits in various circumstances. The final regulations affect all taxpayers that claim the clean electricity production credit with respect to a qualified facility or the clean electricity investment credit with respect to a qualified facility or energy storage technology, as applicable, that is placed in service after 2024.
Full Text
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[Federal Register Volume 90, Number 9 (Wednesday, January 15, 2025)]
[Rules and Regulations]
[Pages 4006-4127]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00196]
[[Page 4005]]
Vol. 90
Wednesday,
No. 9
January 15, 2025
Part II
Department of Treasury
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Internal Revenue Service
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26 CFR Part 1
Section 45Y Clean Electricity Production Credit and Section 48E Clean
Electricity Investment Credit; Rule
Federal Register / Vol. 90, No. 9 / Wednesday, January 15, 2025 /
Rules and Regulations
[[Page 4006]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10024]
RIN 1545-BR17
Section 45Y Clean Electricity Production Credit and Section 48E
Clean Electricity Investment Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document sets forth final regulations regarding the clean
electricity production credit and the clean electricity investment
credit established by the Inflation Reduction Act of 2022. These final
regulations provide rules for determining greenhouse gas emissions
rates resulting from the production of electricity; petitioning for
provisional emissions rates; and determining eligibility for these
credits in various circumstances. The final regulations affect all
taxpayers that claim the clean electricity production credit with
respect to a qualified facility or the clean electricity investment
credit with respect to a qualified facility or energy storage
technology, as applicable, that is placed in service after 2024.
DATES:
Effective date: These regulations are effective on January 15,
2025.
Applicability dates: For dates of applicability, see Sec. Sec.
1.45Y-1(e), 1.45Y-2(d), 1.45Y-3(d) 1.45Y-4(e), 1.45Y-5(j), 1.48E-1(e),
1.48E-2(h), 1.48E-3(f), 1.48E-4(j), and 1.48E-5(l).
FOR FURTHER INFORMATION CONTACT: Maksim Berger, John M. Deininger,
Martha M. Garcia, Boris Kukso, Nathaniel Kupferman, and Alexander Scott
at (202) 317-6853 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This Treasury decision amends the Income Tax Regulations (26 CFR
part 1) to implement the statutory provisions of sections 45Y and 48E
of the Internal Revenue Code (Code). The regulations contained in this
Treasury decision are issued by the Secretary of the Treasury or her
delegate (Secretary) pursuant to the authority granted under sections
45Y(f), 48E(i) and 7805(a) of the Code (final regulations).
Section 45Y(f) provides an express delegation of authority to the
Secretary to prescribe rules to implement section 45Y, ``including
calculation of greenhouse gas emissions rates for qualified facilities
and determination of clean electricity production credits under section
45Y.'' Section 48E(i) provides an express delegation of authority to
prescribe rules ``regarding implementation of [section 48E].''
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
On August 30, 2023, the Treasury Department and the IRS published a
notice of proposed rulemaking and a notice of public hearing (REG-
100908-23) in the Federal Register (88 FR 60018), corrected in 88 FR
73807 (Oct. 27, 2023), and 89 FR 25550 (April 11, 2024), providing
guidance on the Prevailing Wage and Apprenticeship (PWA) requirements
under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and
179D (PWA proposed regulations).
On November 22, 2023, 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 (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. Among other
matters, the section 48 proposed regulations withdrew and reproposed
Sec. 1.48-13 of the PWA proposed regulations addressing the PWA
requirements under section 48, the rules under section 48(a)(9)(B)(i)
related to an energy project with a maximum net output of less than one
megawatt of electrical (as measured in alternating current) or thermal
energy (One Megawatt Exception), and the recapture rules under section
48(a)(10)(C) related to the prevailing wage requirements. Although the
section 48 proposed regulations withdrew certain portions of the PWA
proposed regulations, the section 48 proposed regulations incorporated
the preamble to the PWA proposed regulations for generally applicable
rules.
On June 3, 2024, a notice of proposed rulemaking (REG-119283-23)
relating to the clean electricity production credit determined under
section 45Y (section 45Y credit) and the clean electricity investment
credit determined under section 48E (section 48E credit) was published
in the Federal Register (89 FR 47792) proposing amendments to 26 CFR
part 1 (proposed regulations). See the Background and Explanation of
Provisions sections of the preamble to the proposed regulations, which
is incorporated in this preamble to the extent consistent with the
following Summary of Comments and Explanation of Revisions.
Additionally, the Treasury Department and the IRS requested comments on
the proposed definition of a qualified facility with a maximum net
output of less than one megawatt (as measured in alternating current)
for purposes of the One Megawatt Exception under section
45Y(a)(2)(B)(i). The proposed regulations incorporated the preamble to
the PWA proposed regulations for generally applicable rules.
On June 25, 2024, the Treasury Department and the IRS published
final regulations (T.D. 9998) in the Federal Register (89 FR 53184)
adopting the PWA proposed regulations (PWA final regulations) with
certain modifications and revisions in response to public comments on
the PWA proposed regulations. Comments received on generally applicable
rules in response to the PWA proposed regulations, including rules that
merely referenced section 48 or 48E, are addressed in the PWA final
regulations. The preamble to the PWA final regulations explained that
comments received regarding the specific PWA requirements related to
the One Megawatt Exception under sections 45Y, 48, and 48E, and the
recapture rules in section 48(a)(10)(C), whether received in response
to the PWA proposed regulations or the section 48 proposed regulations,
would be addressed in future guidance. Because proposed Sec. 1.48E-3
of the PWA proposed regulations generally incorporated the rules of
proposed Sec. 1.48-13, the PWA final regulations did not include final
regulations under section 48E. Proposed Sec. 1.48E-3 of the PWA
proposed regulations and the provisions relating to section 48E of the
proposed regulations would be addressed in future guidance.
On December 12, 2024, the Treasury Department and the IRS published
final regulations (T.D. 10015) in the Federal Register (89 FR 100598)
adopting the section 48 proposed regulations, including the rules for
the PWA requirements in Sec. 1.48-13 (section 48 final regulations).
The Treasury Department and the IRS addressed the comments related to
the PWA requirements with respect to section 48 including the One
Megawatt Exception
[[Page 4007]]
under section 48(a)(9)(B)(i), the recapture rules under section
48(a)(10)(C), and the definition of an energy project in the section 48
final regulations.
As described in the Summary of Comments and Explanation of
Revisions, this Treasury decision adopts the proposed regulations with
certain modifications after full consideration of all comments
received, including comments pertaining to the One Megawatt Exception
under section 45Y(a)(2)(B)(i) and to issues related to the PWA
requirements under section 48E and proposed Sec. 1.48E-3.
Summary of Comments and Explanation of Revisions
I. Overview
The Treasury Department and the IRS received over 1,800 written
comments timely submitted by the August 2, 2024, comment submission
deadline, in response to the proposed regulations, which are available
for public inspection at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request. A
public hearing was held in person on August 12, 2024, and
telephonically on August 13, 2024, at which 36 speakers provided
testimony over the two days. After careful consideration of the
comments and testimony, the proposed regulations are adopted with
modifications as described in this Summary of Comments and Explanation
of Revisions.
Comments summarizing the statute or the proposed regulations,
recommending statutory revisions to sections 45Y and 48E or other
statutes, or addressing issues that are outside the scope of this
rulemaking (such as revising other Federal regulations and recommending
changes to IRS forms) are generally not described 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.
The Treasury Department and the IRS consulted extensively with
scientific and technical experts from across the Federal government,
including personnel from the Department of Energy (DOE), the
Environmental Protection Agency (EPA), and the Department of
Agriculture (USDA), in developing and drafting these final regulations.
The Treasury Department and the IRS had regular working group meetings
with these experts from the time that sections 45Y and 48E were enacted
by the Inflation Reduction Act (IRA) through the drafting and
publication of the proposed and final regulations. These meetings
included discussions on the full range of issues related to determining
greenhouse gas emissions rates for the production of electricity,
petitioning for provisional emissions rates, and determining
eligibility for the section 45Y and 48E credits in various
circumstances. These meetings also included comprehensive briefing and
full consideration of the issues raised in the comments received on the
proposed regulations and proposed Sec. 1.48E-3 of the PWA proposed
regulations. In addition, experts from the DOE, the EPA, and the USDA
reviewed multiple drafts of the proposed and final regulations in their
entirety. The conclusions reached in these final regulations and
explained in this Summary of Comments and Explanation of Revisions were
deeply informed by these working group meetings and the scientific and
technical expertise that was shared in those meetings.
For purposes of this preamble, a provision of the proposed
regulations, for example, Sec. 1.45Y-1 of the proposed regulations, is
referred to as ``proposed Sec. 1.45Y-1.''
II. Rules Specific to Section 45Y
Proposed Sec. 1.45Y-1 provided an overview of proposed Sec. Sec.
1.45Y-1 through 1.45Y-5 and definitions of terms for purposes of
proposed Sec. Sec. 1.45Y-1 through 1.45Y-5, including the terms
``combined heat and power system (CHP) property,'' ``metering device,''
``related person,'' ``unrelated person,'' and ``qualified facility.''
A. Metering Device
Proposed Sec. 1.45Y-1(a)(5)(i) through (iii) defined, for purposes
of section 45Y(a)(1)(A)(ii)(II), the term ``metering device;'' provided
standards for maintaining and operating a metering device for purposes
of section 45Y(a)(1)(A)(ii)(II) and proposed Sec. 1.45Y-1(a)(5),
including by providing that a metering device should meet certain
standards and be properly calibrated, and provided rules related to
monitoring and locating the metering device. Proposed Sec. 1.45Y-
1(a)(5)(iv) provided examples illustrating the rules provided by
proposed Sec. 1.45Y-1(a)(5).
Commenters provided feedback on the definition of ``metering
device.'' Two commenters noted that the proposed regulations defined a
``metering device'' related to ``energy revenue metering,'' and
asserted that metering devices typically measure energy production, not
revenue. The commenters recommended revising the term ``energy revenue
metering'' to ``energy production metering'' in the final regulations.
The Treasury Department and the IRS have determined that, because
energy revenue metering encompasses energy production measurement as
part of its function, the commenters' concern is addressed by the
proposed regulations. Therefore, these final regulations adopt the
definition of metering device as proposed.
Another commenter requested that the final regulations provide
clarifications regarding third-party metering requirements. The
commenter requested that the Treasury Department and the IRS clarify
whether operation of the metering device by a third party could be
fully remote, or if the meter owner must be granted access to the site.
The commenter further requested that the final regulations clarify
whether the meter can be located prior to energy delivery to storage,
or whether it must be located at the point of interconnection. Finally,
the commenter requested clarification regarding whether the section 45Y
credit amount is determined at the point of sale or where the
electricity is metered.
Section 45Y(a)(1)(A) provides, in part, that the amount of the
credit is the kilowatt hours of electricity produced by the taxpayer at
a qualified facility and in the case of a qualified facility which is
equipped with a metering device which is owned and operated by an
unrelated person, sold, consumed or stored by the taxpayer during the
taxable year. Proposed Sec. 1.45Y-1(a)(5)(ii) required a metering
device to meet the requirements of the American National Standards
Institute C12.1-2022 standard, or subsequent revisions, be revenue
grade with a +/-0.5% accuracy, and be properly calibrated and
maintained in proper working order according to the instructions of its
manufacturer. If a metering device satisfies the requirements in Sec.
1.45Y-1(a)(5)(ii), the statutory language of section 45Y(a)(1)(A) would
not prevent operation by a third party to be fully remote. As to
whether the metering device can be located prior to energy delivery to
storage or whether it must be located at the point of interconnection,
the location of the meter should not matter provided the meter meets
the requirements in Sec. 1.45Y-1(a)(5)(ii). Accordingly, the final
regulations adopt
[[Page 4008]]
proposed Sec. 1.45Y-1(a)(5) without change, and do not impose a
specific location requirement for such metering device based on the
lack of such a requirement in the statutory language.
B. Related and Unrelated Persons
Proposed Sec. 1.45Y-1(a)(7) provided a definition of the term
``related person'' and special rules for the treatment of corporations
that are members of a consolidated group (as defined in Sec. 1.1502-
1(h)).
Proposed Sec. 1.45Y-1(a)(11) provided a definition of the term
``unrelated person;'' rules for the sales of electricity to individual
consumers; and an example illustrating the application of these rules.
A commenter requested clarification regarding the sale to an
unrelated person requirement. The commenter pointed to Notice 2008-60,
2008-30 I.R.B. 178, which provides guidance on the section 45 credit by
clarifying that the requirement of a sale to an unrelated person will
be treated as satisfied if the producer of electricity sells
electricity to a related person for resale by the related person to a
person that is not related to the producer. The commenter requested
that the Treasury Department and the IRS likewise confirm that under
section 45Y, a sale to a related person for the purposes of resale to
an unrelated person will also be treated as a sale to an unrelated
person if there is no metering device owned and operated by a third
party.
The Treasury Department and the IRS disagree that the rule in
Notice 2008-60 that is applicable to the section 45 credit, under which
the sale of electricity to a related party with a subsequent sale to an
unrelated party is treated as a sale to an unrelated party, should
apply to the section 45Y credit. Section 45 does not include a
provision similar to section 45Y(a)(1)(A)(ii), which provides that
either (I) a taxpayer must sell the electricity to an unrelated party,
or (II) the taxpayer's qualified facility must be equipped with a
metering device owned and operated by an unrelated person, and the
electricity must be sold, consumed or stored by the taxpayer during the
taxable year. The inclusion of section 45Y(a)(1)(A)(ii) demonstrates
that Congress intended to allow the section 45Y credit for related
party sales only if the taxpayer produces electricity at a qualified
facility that has a metering device owned and operated by an unrelated
person. Congress did not carve out an exception for related party sales
for purposes of resale to unrelated persons and the final regulations
cannot create one. To allow taxpayers to apply the concepts provided in
Notice 2008-60 to the section 45Y credit for sales to unrelated parties
would undermine the metering obligation in section
45Y(a)(1)(A)(ii)(II). Accordingly, the Treasury Department and the IRS
cannot adopt the commenter's recommendation and the rule will be
adopted as proposed.
C. Credit Phase Out
Proposed Sec. 1.45Y-1(c) provided rules for calculating the amount
of the credit under section 45Y(a) and the applicable phase-out
percentages; defined the term ``applicable year'' and provided rules
for determining the applicable year, including rules regarding the use
of certain datasets in determining the applicable year. The definition
of ``applicable year'' also applies for purposes of the section 48E
credit phase-out rules. In the preamble to the proposed regulations,
the Treasury Department and the IRS requested comments on which
datasets are most appropriate to determine the applicable year and why.
Commenters generally agreed with the Treasury Department and the
IRS that the Energy Information Administration's (EIA) Electric Power
Annual and Monthly Energy Review, the EPA Inventory of U.S. Greenhouse
Gas Emissions and Sinks (GHGI), the EPA Greenhouse Gas Reporting
Program (GHGRP), and the Emissions and Generation Resource Integrated
Database (eGrid) are suitable datasets to determine the applicable year
and recommended the final rules adopt one or more of these dataset(s)
as providing the timeliest assessment of emissions to minimize
potential confusion. One commenter suggested using a single annually
published government data source, and recommended the EIA Monthly
Energy Review that delineates electricity sector greenhouse gas (GHG)
emissions for 2022 and the following years.
Review of the comments confirmed that the EIA Electric Power Annual
and the EPA GHGI are well-established data sources that are
representative of the annual GHG emissions from the production of
electricity in the United States. Moreover, the requirement in Sec.
1.45Y-1(c)(4) that both the EIA Electric Power Annual and the EPA GHGI
must be assessed separately increases certainty that emissions from the
power sector meet the required levels.
Another commenter requested that the Treasury Department and the
IRS consider whether a single year drop in GHG emissions of less than
the applicable year threshold followed by GHG emissions increases in
subsequent years should trigger the phase-out of the credits.
Section 45Y(d)(3) describes the term ``applicable year'' as the
later of 2032, or the calendar year in which the Secretary determines
that the annual GHG emissions from the production of electricity in the
United States are equal to or less than 25 percent of the annual GHG
emissions from the production of electricity in the United States for
calendar year 2022. Section 45Y(d)(2) provides that the section 45Y
credit phases out over a four-year period subsequent to the applicable
year. The statutory language describes the applicable year as a single
year, and the credit phase-out begins subsequent to the applicable
year. Based on the statutory language, the phase-out period is a
continual period. Therefore, the statutory language does not grant the
Treasury Department and the IRS authority to reverse a determination
that GHG emissions were at a sufficient level to meet the definition of
the applicable year. For this reason, the comment is not adopted.
D. Qualified Facility
The proposed regulations adopted the statutory definition of a
``qualified facility.'' Section 45Y(b)(1)(A) provides, in part, that a
qualified facility is a facility for which the GHG emissions rate is
not greater than zero. The GHG emissions rate is further defined in
section 45Y(b)(2). Section 45Y(b)(1)(B) provides that a facility is
only treated as a qualified facility during the 10-year period
beginning on the date the facility was originally placed in service.
A commenter asked for clarification regarding changes to a facility
that impact its GHG emissions rate from electricity generation and
whether such changes impact a qualified facility's credit eligibility.
The commenter requested confirmation that a facility that initially
operates with greater than zero GHG emissions but later operates with
not greater than zero GHG emissions can still be considered a qualified
facility under section 45Y. The commenter suggested clarifying that in
the case of such a facility, the 10-year credit period begins when the
facility first becomes a ``qualified facility'' operating at commercial
scale with not greater than zero GHG emissions. The commenter asserted
that providing a different interpretation would disincentivize
facilities that are built with the capacity to produce power with
greater than zero GHG emissions from undertaking such investment.
The Treasury Department and the IRS note that section 45Y(b)(1)(B)
treats a facility as a qualified facility only
[[Page 4009]]
during the 10-year period beginning on the date the facility was
originally placed in service. Generally, a qualified facility is
considered placed in service in the earlier of (i) the taxable year in
which, under the taxpayer's deprecation practice, the period for
depreciation with the respect to such property begins; or (ii) the
taxable year in which the qualified facility is placed in a condition
or state of readiness and availability to produce electricity, whether
in a trade or business or in the production of income. Accordingly, a
facility that initially operates with greater than zero GHG emissions
may later be treated as a qualified facility if it meets the
requirements under section 45Y(b) in a taxable year, but only during
the 10-year period beginning on the date the facility was originally
placed in service. For example, taxpayer places in service a facility
in year 1 that has GHG emission that are greater than zero. In year 6,
the facility has GHG emissions that are not greater than zero and is a
qualified facility under section 45Y. If the facility continues to have
not greater than zero GHG emissions, the facility continues to be a
qualified facility under section 45Y and taxpayer may claim the section
45Y credit until year 10 (years 6 through 10), provided the facility
continues to have not greater than zero GHG emissions for each of the
remaining years. The Treasury Department and the IRS cannot adopt the
commenter's recommendation and the rule will be adopted as proposed.
A commenter asserted that a facility qualifying for a section 45Y
credit should not cease to be a qualified facility if, for a limited
time or in a limited amount, it has a GHG emissions rate above zero
(for example, as a result of a temporary change in fuel or feedstock).
The commenter referenced Notice 2008-60, which it described as allowing
the use of minimal fossil fuels for flame startup and stabilization in
an open-loop biomass facility that qualifies under section 45. The
commenter stated that zero-carbon fuels are not always available. The
commenter emphasized that the proposed regulations under section 48E,
in contrast to those under section 45Y, provide flexibility for
purposes of recapture for those facilities that produce 10 grams of
CO<INF>2</INF>e per kWh. As a result, the commenter requested that the
final regulations allow a facility to claim the section 45Y credit for
the days or months of the year during which the facility produces
electricity with a GHG emissions rate of zero. The commenter asserted
that flexibility is needed for de minimis emissions or periods during
the tax year.
Section 45Y(b)(1)(A) defines a qualified facility as having a GHG
emissions rate from the production of electricity of not greater than
zero. The statute does not provide a de minimis exception and the final
regulations cannot create one. Accordingly, a facility cannot qualify
for the section 45Y credit in a taxable year during the 10-year credit
period after such facility is originally placed in service if such
facility has a GHG emissions rate from the production of electricity of
greater than zero, even if for a limited time or in a limited amount.
However, the Treasury Department and the IRS note that a facility's
failure to qualify for the section 45Y credit in one or more taxable
years does not prevent such facility from qualifying for the section
45Y credit in any other taxable years during the 10-year credit period
after such facility is originally placed in service. The statute allows
a facility a 10-year credit period from the date the facility is
originally placed in service, and a facility can be considered a
qualified facility for any taxable year during such 10-year credit
period in which it satisfies the requirements of the section 45Y
credit.
E. Combined Heat and Power (CHP) Property
Proposed Sec. 1.45Y-1(a)(2) defined ``combined heat and power
(CHP) property.'' Proposed Sec. 1.45Y-1(d) set forth the credit
eligibility requirements for CHP property; provided rules for
determining the energy efficiency percentage of CHP property and for
calculating electricity produced by CHP property; and defined the term
``heat rate'' and provided rules for its calculation.
Section 45Y(g)(2) generally provides special rules for the
calculation of the credit with respect to CHP property. Section
45Y(g)(2)(A)(i) states that ``the kilowatt hours of electricity
produced by a taxpayer at a qualified facility shall include any
production in the form of useful thermal energy by any combined heat
and power system property within such facility.'' Section
45Y(g)(2)(A)(i) requires the thermal energy output from a CHP property
to be included in determining the energy that qualifies for the credit
in contrast to a non-CHP facility, for which only the electricity
generation should be credited. For example, if a CHP property produces
1 kWh of electricity output and 1 kWh of thermal output, then the
taxpayer that owns the CHP property may compute a credit based on
production of 2 kWh of electricity.
Section 45Y(g)(2)(B) provides that the term ``combined heat and
power property'' has the same meaning given such term by section
48(c)(3) (without regard to subparagraphs (A)(iv), (B), and (D)
thereof). Section 48(c)(3)(C)(i) and proposed Sec. 1.45Y-1(d)(2)
define the energy efficiency percentage for purposes of a CHP property
as a 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. Section 45Y(g)(2)(C)(ii)
provides that the term ``heat rate'' means the amount of energy used by
the qualified facility to generate 1 kilowatt hour of electricity,
expressed as British thermal units per net kilowatt hour generated.
Proposed Sec. 1.45Y-1(d)(3)(ii) addressed how to determine the ``heat
rate'' for a qualified facility that includes CHP property that uses
combustion. In the preamble to the proposed regulations, the Treasury
Department and the IRS requested comments regarding the application of
the energy efficiency percentage requirements to CHP property for which
there is no combustion and whether the statutory definition of ``heat
rate'' for this property should be further clarified in the final
regulations.
One commenter addressed the application of the energy efficiency
percentage requirements to CHP property involving nuclear power and
recommended the final regulations adopt the EIA's definition of ``heat
content'' as a substitute for the lower heating value used to calculate
the energy efficiency of a CHP property. The commenter emphasized that
the lower heating value usually applies to combustion fuels, not fuels
such as uranium that are non-combustible, and for non-combustion fuels
the lower heating value should be the same as the heat content. Another
commenter made a similar request that the final regulations permit the
use of a nuclear reactor's maximum licensed thermal output to serve as
the functional equivalent of the lower heating value of fuel sources,
in recognition that nuclear fission does not involve combustion.
A separate commenter requested the final regulations establish a
methodology for taxpayers to determine the energy efficiency percentage
for CHP property using non-combustible fuel sources for which there is
no lower heating value. With respect to the definition of heat rate,
the commenter asserted that the methodology in proposed Sec. 1.45Y-
1(d)(3)(ii)(B) to calculate heat rate does not take into account that
there is no lower heating
[[Page 4010]]
value for CHP property using non-combustible fuel sources. The
commenter further questioned the accuracy of the formula for converting
from BTU to kWh to calculate electricity produced by CHP property
because the formula relies upon a definition of heat rate that does not
account for CHP property using non-combustion fuel sources. The
commenter recommended providing a conversion formula in the final
regulations for CHP property using non-combustion fuel sources.
The Treasury Department and the IRS recognize there is a gap in the
current guidance regarding how to calculate the energy efficiency
percentage and heat rate for fuels without lower heating values as
referenced in section 48(c)(3)(C)(i)(II) and the proposed methodology
in proposed Sec. 1.45Y-1(d)(3)(ii)(B). The lower heating value is
intended to provide a measure for the energy released when a fuel is
combusted under certain conditions. Fuels that are not combusted will
not have a lower heating value, but the amount of energy such fuels
could release under certain conditions can still be measured.
The Treasury Department and the IRS agree with commenters that the
final regulations should permit the use of a nuclear reactor's thermal
output to serve as the functional equivalent of the lower heating value
of fuel sources, in recognition that nuclear fission does not involve
combustion. The final regulations are amended accordingly. With respect
to other technologies, the Treasury Department and the IRS will
continue to consult with experts in order to develop additional
approaches that are either generally applicable or appropriate for
other particular technologies. The final regulations are therefore also
amended to reflect this continuing consideration and to provide
flexibility to prescribe these additional approaches in guidance
published in the Internal Revenue Bulletin. Section 1.45Y-1(d)(2) and
(d)(3)(ii)(B) of the final regulations are revised accordingly.
In addition, for organizational purposes, the definition under
proposed Sec. 1.45Y-1(a)(2) of a unit of a qualified facility for
purposes of CHP property, has been moved within the definition of a
unit of a qualified facility under Sec. 1.45Y-2(b)(2)(i).
F. 80/20 Rule
The 80/20 Rule is designed to broaden the availability of
investment and production tax credits by providing a new original
placed in service date for a qualified facility that includes some
components of property previously placed in service, rather than
requiring the qualified facility to be composed entirely of new
components of property. In the context of section 45Y, the 80/20 Rule
applies at the qualified facility level to the components of property
within the unit of qualified facility. Proposed Sec. 1.45Y-4(d)(1)
provided that for purposes of section 45Y(b)(1)(B), a facility may
qualify as originally placed in service even if it contains some used
components of property within the unit of qualified facility, provided
the fair market value of the used components of the unit of qualified
facility is not more than 20 percent of the total value of the unit of
qualified facility (that is, the cost of the new components of property
plus the fair market value of the used components of property within
the unit of qualified facility).
Although this section focuses on the 80/20 Rule in the section 45Y
context, section III.E. of this Summary of Comments and Explanation of
Revisions describes some comments received on both sections 45Y and
48E. This includes discussion of the interaction between the rule for
addition of a new unit or an addition of capacity (Incremental
Production Rule) and the 80/20 Rule. As described in that section, the
Treasury Department and the IRS agree that the statutory provisions
allowing for new units and additions of capacity provided in sections
45Y(b)(1)(C) and 48E(b)(3)(B)(i) are separate and distinct from the 80/
20 Rule. If a retrofitted facility satisfies the 80/20 Rule, the final
regulations provide that the facility will be treated as newly placed
in service even if the taxpayer also satisfies the provisions regarding
new units and additions of capacity. These final regulations provide an
additional example, in Sec. 1.45Y-4(c)(5)(v) that specifically
addresses decommissioned and restarted facilities. In response to a
comment, the Treasury Department and the IRS removed the reference to a
decommissioned nuclear facility in Example 3 in Sec. 1.45Y-
4(c)(6)(iii) to avoid referring to decommissioned and restarted nuclear
facilities in the additions of capacity rule and the 80/20 Rule.
Additionally, Sec. 1.45Y-4(d)(1) is clarified to confirm that a
qualified facility that meets the requirements of section 45Y(b)(1)(A)
may claim the full section 45Y credit rather than the credit resulting
from the addition of a new unit or an addition of capacity.
While commenters generally supported the need for the 80/20 Rule
for the section 45Y credit, commenters also asked for clarity regarding
the application of the 80/20 Rule. A commenter requested clarification
that a facility that previously qualified for a credit under section 45
or 48 and is later retrofitted may be eligible for a section 45Y or 48E
credit if it satisfies the 80/20 Rule. The Treasury Department and the
IRS agree that if a qualified facility under section 45 or an energy
property under section 48 is later retrofitted in a manner that
satisfies the 80/20 Rule, it will be considered a new qualified
facility and may be eligible for a section 45Y or 48E credit so long as
the qualified facility meets all requirements of section 45Y or 48E.
Another commenter generally stated that under Notice 2018-59, 2018-
28 I.R.B. 196, the 80/20 Rule applies at the property level and not the
project or system level. The commenter requested that the 80/20 Rule
similarly only apply at the property level for the section 45Y credit.
In response to this comment, the Treasury Department and the IRS
confirm that for purposes of the section 45Y credit, the 80/20 Rule
does not apply to a project or system but instead to a qualified
facility. Proposed Sec. 1.45Y-4(d)(1) set forth the 80/20 Rule for
purposes of the section 45Y credit and applies the rule to a
retrofitted qualified facility. The 80/20 Rule applies at the qualified
facility level to the components of property within the unit of
qualified facility. The final regulations retain this application of
the 80/20 Rule to the section 45Y credit.
Another commenter requested clarification regarding how the 80/20
Rule is applied for purposes of section 45Y by comparing its
application to section 48E. The commenter pointed out that proposed
Sec. 1.48E-4(c)(4) looked only to functionally interdependent
components of property (and not integral property) to determine what is
considered new components of the unit of qualified facility, while
proposed Sec. 1.45Y-4(d) did not. This commenter requested
clarification regarding which components are included in the
determination under the 80/20 Rule for purposes of the section 45Y
credit. Similarly, another commenter recommended that the final
regulations define a ``unit of qualified facility'' as the specific
components necessary for the production of electricity and not the
integral property essential to the completeness of that function. With
respect to dam-based hydropower facilities, another commenter supported
proposed Sec. 1.45Y-4(d) permitting existing dam-based hydroelectric
facilities to qualify for the 80/20 Rule. The commenter asked to
confirm that the 80/20 Rule is applied on a turbine-by-turbine basis
and not the whole facility, because individual turbines may be
repowered separately. As noted
[[Page 4011]]
earlier, the 80/20 Rule applies at the qualified facility level to the
components of property within the unit of qualified facility and
therefore in the context of a hydropower facility the 80/20 Rule cannot
be applied on a turbine-by-turbine basis.
The Treasury Department and the IRS decline to modify the proposed
rule in response to these requests for specific applications to
particular technologies. Proposed Sec. 1.45Y-2(b)(2)(i) provided that
for purposes of the section 45Y credit, the unit of qualified facility
includes all functionally interdependent components of property (as
defined in proposed Sec. 1.45Y-2(b)(2)(ii)) owned by the taxpayer that
are operated together and that can operate apart from other property to
produce electricity.
Proposed Sec. Sec. 1.45Y-4(d)(2) and 1.48E-4(c)(3) both provided
that the cost of new components of the unit of qualified facility
includes all costs properly included in the depreciable basis of the
new components of property of the unit of qualified facility. Under
both proposed Sec. Sec. 1.45Y-2(b)(2) and 1.48E-2(b)(2), a unit of
qualified facility only includes functionally interdependent components
of property and not integral property. Thus, the Treasury Department
and the IRS agree with the commenter that only functionally
interdependent property is taken into account to determine whether a
retrofitted qualified facility satisfies the 80/20 Rule for purposes of
sections 45Y and 48E. Proposed Sec. 1.48E-4(c)(4) provided a rule
allowing costs for integral property to be included in determining the
section 48E credit after it has been determined that the qualified
facility has satisfied the 80/20 Rule. Because the section 45Y credit
is a production tax credit calculated based on electricity produced and
not the amount of investment in the qualified facility, there is no
need for a rule similar to proposed Sec. 1.48E-4(c)(4) in the final
regulations under section 45Y.
III. Rules Specific to Section 48E
Proposed Sec. 1.48E-1(b)(1) provided rules for determining the
amount of the credit; defined the term ``applicable percentage;'' and
explained how to determine the applicable percentage for a qualified
facility. Proposed Sec. 1.48E-1(c) provided the credit phase-out rules
and proposed Sec. 1.48E-1(c)(3) defined applicable year for purposes
of the credit phase-out rules by reference to proposed Sec. 1.45Y-
1(c)(3). See section II.C. of this Summary of Comments and Explanation
of Revisions for a discussion of those rules.
A. Organization of Proposed Sec. 1.48E-2
Proposed Sec. 1.48E-2(a) defined a qualified facility for purposes
of section 48E. Proposed Sec. 1.48E-2(b) described the property
included in a qualified facility for purposes of section 48E, defined
the terms ``unit of qualified facility'' as well as ``functionally
interdependent'' and ``integral part'' (both as they apply to a
qualified facility), and provided several examples to illustrate the
rules. Proposed Sec. 1.48E-2(c) provided rules for the coordination of
the section 48E credit with certain other Federal income tax credits
with respect to qualified facilities. Proposed Sec. 1.48E-2(d)
provided rules for determining the qualified investment with respect to
a qualified facility. Proposed Sec. 1.48E-2(e) defined the term
``qualified property.'' Proposed Sec. 1.48E-2(f) defined certain terms
related to requirements for qualified property, including ``tangible
personal property,'' ``other tangible property,'' ``construction,
reconstruction, or erection of qualified property,'' ``acquisition of
qualified property,'' ``original use of qualified property,''
``depreciation allowable,'' ``placed in service'' and ``claim.''
Proposed Sec. 1.48E-2(g) provided rules for energy storage technology
(EST).
The Treasury Department and the IRS determined that the
organization of proposed Sec. 1.48E-2, as it related to qualified
facilities, did not adhere to the organization of section 48E. The
final regulations reorganize Sec. 1.48E-2 to more clearly follow the
organization of section 48E. The Treasury Department and the IRS do not
intend for the reorganization of Sec. 1.48E-2 to create any
substantive differences from the rules as they were provided in the
proposed regulations.
As reorganized, Sec. 1.48E-2(a) of these final regulations
provides the rules for determining the qualified investment with
respect to a qualified facility. Section 1.48E-2(b) defines the term
``qualified facility'' as it relates to section 48E, as well as the
term ``placed in service.'' Section 1.48E-2(c) defines the term
``qualified property.'' Section 1.48E-2(d) provides the rules for
property included in a qualified facility, including a description of
``unit of qualified facility'' and ``integral part,'' and provides
examples illustrating these rules. Section 1.48E-2(e) provides
definitions related to the requirements for qualified property. Section
1.48E-2(f) provides rules for the coordination of the section 48E
credit with certain other Federal income tax credits with respect to
qualified facilities and includes examples to illustrate those rules.
Section 1.48E-2(g) provides rules relating to EST. Finally, the
definition of the term ``claim'' for both a qualified facility and EST
is moved to Sec. 1.48E-1(a)(2) and is modified to also apply to the
other Federal income tax credits described in section 48E(b)(3)(C).
B. Qualified Investment With Respect to a Qualified Facility and
Qualified Property
Proposed Sec. 1.48E-2(d) described a qualified investment with
respect to any qualified facility. Proposed Sec. 1.48E-2(e) defined
``qualified property'' for purposes of proposed Sec. 1.48E-2(a).
A commenter requested that the final regulations clarify that the
qualified property included in a qualified investment in a qualified
hydropower facility includes all the components and property identified
as qualified property in prior guidance under section 48, up through
and including the substation at which the electrical voltage is stepped
up to transmission voltage. Similarly, another commenter asked whether
the scope of qualified property under section 48E(b)(2) includes all
property identified as energy property under section 48(a)(3), unless
explicitly excluded under section 48E.
The Treasury Department and the IRS recognize that some
technologies may be creditable under both sections 48 and 48E. Although
the rules for eligibility differ between the two sections, they share
many overlapping concepts (for example, functional interdependence and
integral property). For those facilities that generate electricity and
for EST that are eligible for both the section 48 and 48E credits, the
Treasury Department and the IRS expect similar property to be eligible.
However, the application of these concepts to a specific facility or
EST is ultimately a fact-specific determination.
That said, unlike section 48, these final regulations are
technology neutral, and the rules are meant to apply to all qualified
facilities. A definitive response to these 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. Energy Storage Technology Overview
1. In General
Proposed Sec. 1.48E-2(g) provided rules defining a unit of EST.
Section 48E(c)(2)
[[Page 4012]]
defines the term ``energy storage technology'' by reference to section
48(c)(6) (noting that the beginning of construction requirement in
section 48(c)(6)(D) does not apply). A commenter suggested clarifying
that EST may include either ``property . . . which receives, stores,
and delivers energy for conversion,'' or ``thermal energy storage
property,'' by reading the ``and'' between sections 48(c)(6)(A)(i) and
(ii) as disjunctive. The Treasury Department and the IRS confirm that
the term ``and'' between sections 48(c)(6)(A)(i) and (ii) is
disjunctive for purposes of section 48E(c)(2) and property described in
section 48(c)(6)(A)(i) or (ii) are included as EST.
2. Functionally Interdependent
Proposed Sec. 1.48E-2(g)(2)(i) provided that, for purposes of the
section 48E credit, a unit of EST includes all functionally
interdependent components of property (as defined in proposed Sec.
1.48E-2(g)(2)(ii)) owned by the taxpayer that are operated together and
that can operate apart from other property to perform the intended
function of the EST. Proposed Sec. 1.48E-2(g)(2)(ii) provided that
components are functionally interdependent if the placing in service of
each of the components is dependent upon the placing in service of each
of the other components to perform the intended function of the EST.
A commenter requested that the Treasury Department and the IRS
explicitly clarify that the section 48E credit can be claimed with
respect to EST that is co-located and used in conjunction with
electricity generation equipment for which the section 45 or 45Y
credits are claimed, without regard to whether the EST would be
considered a functionally interdependent component or an integral part
of the electricity generation equipment under other rules or whether
the EST and electricity generation equipment are owned by the same or
different taxpayers.
Section 48E(a) provides that the clean electricity investment
credit is determined separately with respect to any qualified facility
and any EST. This statutory text establishes an important categorical
distinction between qualified facilities and ESTs. While integral
property may be shared by a co-located qualified facility and an EST, a
unit of qualified facility and a unit of EST cannot share components
for purposes of section 48E. Further, the Treasury Department and the
IRS confirm that an EST is eligible for the section 48E credit if it
satisfies the requirements of section 48E, even if the EST is co-
located with a qualified facility that has claimed the section 45 or
45Y credits. See section III.C.6. of this Summary of Comments and
Explanation of Revisions for additional discussion of comments on co-
located, or ``hybrid,'' projects that include an EST and qualified
facility.
3. Qualified Investment With Respect to Energy Storage Technology
Proposed Sec. 1.48E-2(g)(4) provided that the qualified investment
with respect to any EST for a taxable year is the basis of any EST
placed in service by the taxpayer during such taxable year. Commenters
requested clarification that the entire cost basis of EST property that
converts energy to electricity is eligible for the section 48E credit,
even if some functionally interdependent property is used to produce
heat. The commenters asserted that there is no statutory requirement
that the energy stored be exclusively converted to electricity and that
the Code is silent about any minimum percentage requirement of energy
being converted to electricity.
Proposed Sec. 1.48E-2(g)(6)(i) described electrical energy storage
property as 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.
This definition is adopted from section 48E(c)(2), which defines
``energy storage technology'' including electrical energy storage
property by reference to section 48(c)(6). Because the purpose of an
electrical energy storage property is to receive, store and deliver
energy for conversion to electricity, not to produce thermal energy,
components of property of an energy storage property used to produce
thermal energy would be subject to the incremental cost rule discussed
in section III.G. of this Summary of Comments and Explanation of
Revisions.
4. Placed in Service
Proposed Sec. 1.48E-2(g)(5)(i) provided rules for determining when
an EST has been placed in service for purposes of the section 48E
credit. Notwithstanding the general rules provided in proposed Sec.
1.48E-2(g)(5)(i), an EST with respect to which an election is made
under section 50(d)(5) of the Code and Sec. 1.48-4 to treat the lessee
as having purchased such EST is considered placed in service by the
lessor in the taxable year in which possession is transferred to such
lessee.
Commenters suggested expanding the definition of placed in service
for EST because ``energy storage may charge and discharge prior to
being ready for commercial operation.'' Specifically, a commenter
suggested that EST property should be treated as placed in service when
(i) such property has all licenses, permits, and approval 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.
Instead of providing specific indicia of when an EST is treated as
being placed in service, the rule in proposed Sec. 1.48E-2(g)(5)(ii)
provided general principles for a taxpayer to determine when an EST has
been placed in service that are broadly applicable to all types of EST.
These principles are based upon the placed in service rules provided by
Sec. 1.48-9(b)(5), which generally adopt the placed in service rules
of Sec. 1.46-3(d)(1). The general principles under Sec. 1.46-3(d)(1)
have applied to the section 48 credit since its enactment. These
principles are well-understood, general standards for determining when
property is placed in service, and they are widely relied upon by
industry. The Treasury Department and the IRS view the general
principles provided by the proposed rule as adequate for determining
when EST is placed in service, and as sufficiently broad to address
these commenters' concerns. Therefore, the final regulations adopt the
placed in service rules as proposed.
5. Electrical Energy Storage Property
Proposed Sec. 1.48E-2(g)(6)(i) described electrical energy storage
property as 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 redox flow,
sodium sulfur, and lead-acid); ultracapacitors; physical storage such
as pumped storage hydropower, compressed air storage, and flywheels; as
well as reversible fuel cells.
Commenters asked for clarification regarding what constitutes
property ``primarily used'' in the transportation of goods or
individuals. One commenter suggested that the final regulations
[[Page 4013]]
provide a bright line rule and clarify that property that receives,
stores, and delivers energy for conversion to electricity and is
intended to be used for less than 35 percent of its hours of use in a
calendar year for transporting goods or individuals is not considered
``primarily used in the transportation of goods or individuals.'' In
this commenter's view, property, including a school bus, that receives,
stores, and delivers energy for conversion to electricity that is used
less than 35 percent of its hours of use in a calendar year for
transporting goods or individuals is not primarily used for
transportation. However, the commenter clarified that if electric
school buses paired with a bidirectional vehicle-to-grid (V2G) charger
are permitted to qualify as EST, then the charger itself should not be
considered part of the electrical energy storage property.
The final regulations mirror the language of section 48E(c)(2),
which adopts the definition of EST provided in section 48(c)(6)(A), and
excludes property primarily used in the transportation of individuals
or goods. The Treasury Department and the IRS consider school buses as
primarily used in transportation because the primary reason for a
taxpayer to acquire school buses is to transport individuals, not store
energy, notwithstanding the overall amount of time buses are used to
actually transport individuals. A ``bright line'' test requested by the
commenter is not feasible because any given situation and determination
is fact dependent.
In addition, there are other IRA tax incentives intended to benefit
some technologies for which these commenters seek section 48E credit
eligibility. For instance, section 45W of the Code provides a tax
credit for vehicles such as 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 (September 2024
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. 1.48E-2 provided 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 EST eligible for the section 48E credit, if a credit is claimed
under section 30C for such property. Comments regarding this proposed
definition will be further addressed in the Treasury decision that
finalizes the September 2024 proposed regulations. The Treasury
Department and IRS note that energy storage property for which the
section 30C credit is not claimed may be creditable as EST under
sections 48 and 48E if that property meets the requirements of those
tax credits.
6. Hybrid Systems (Qualified Facility + EST)
Several commenters addressed the treatment of qualified facilities,
such as solar generation facilities, and EST that are co-located, or
so-called ``hybrid'' projects. At least one commenter supported
treating a qualified facility and EST as separate for purposes of the
section 48E credit. The commenter emphasized that such an approach is
critical for the long-term success of the section 45Y and 48E credits,
and importantly, will align with the goal of the domestic content bonus
credit amount to reshore clean energy supply chains.
Other commenters requested that taxpayers be able to elect a single
section 48E credit for hybrid systems, consisting of a qualified
facility and an EST, and sought clarification of whether property
included in a unit of EST may be included in a unit of qualified
facility. A commenter noted that for purposes of rooftop solar and
storage hybrid systems, the EST and the solar energy property are
dependent upon each being placed in service because both are essential
to the completeness of the intended function of the hybrid system.
Commenters asserted that including EST in the definition of ``integral
part'' of a qualified facility and providing examples of dual
eligibility for section 48 and 48E credits during the transition period
would help maintain consistency and reduce administrative burdens. One
commenter recommended modifying proposed Sec. 1.48E-2(b) to clarify
that EST may (but is not required to) be considered an integral part of
a qualified facility. Commenters stated that such a clarification would
align with current guidance for the domestic content bonus credit
amount and the test for determining whether multiple energy properties
will be considered an energy project under the section 48 proposed
regulations. Another commenter stated that this approach would allow
for increased technological flexibility for purposes of the section 48E
credit and would allow residential solar energy developers to continue
claiming a single credit for hybrid systems. A commenter claimed that
adding EST as an integral part of a qualified facility would allow
utility scale solar energy developers the option to claim separate
credits for the EST and the qualified facility under the section 48E
proposed regulations.
Another commenter suggested permitting a taxpayer developing a
hybrid system and claiming the section 48E credit on both the qualified
facility and EST to elect to treat them as a single energy project.
Other commenters requested that the final regulations clarify that even
if qualified facilities and EST are separate categories under section
48E, a taxpayer developing a hybrid system that incorporates both may
file a single Form 3468, Investment Credit, and register only once for
purposes of section 6418 of the Code relating to transfer elections for
eligible credits (section 6418 credit transfer elections).
As noted earlier in section III.C.2. of this Summary of Comments
and Explanation of Revisions, the statutory framework of section 48E
does not support treating a qualified facility and EST as a single
creditable property. Instead, the text of section 48E repeatedly treats
a qualified facility and EST as separately creditable properties.
Accordingly, there is no statutory basis to allow taxpayers an option
to claim a single credit for hybrid systems that include both qualified
facilities and EST. In addition, although beyond the scope of these
final regulations, the Treasury Department and the IRS note that,
because a hybrid system would be considered two separate eligible
credit properties, a taxpayer would need to register them separately
for purposes of making section 6418 credit transfer elections. See
Sec. Sec. 1.6418-1(d) and 1.6418-4.
Some commenters also requested that the final regulations provide
an option to claim a single credit for a hybrid system rather than two
credits, one for the EST and one for the qualified facility, in part,
because those commenters currently enter into a single leasing
agreement with customers for both a solar qualified facility and an
EST. These commenters expressed concern about whether, under the
proposed regulations, they would need to enter into separate contracts
for the solar qualified facility and the EST. These commenters noted
that if they are able to use a single contract, the contract will need
to have separate term lengths for the solar qualified facility and the
EST to satisfy the leasing rules for tax purposes. These commenters
raised the issue that since a solar qualified facility and an EST
generally have different useful lives the leasing rules could not cover
both the solar qualified facility and the EST if they claimed separate
credits.
[[Page 4014]]
The Treasury Department and the IRS are not aware of any case law
or guidance related to leasing rules that would require a taxpayer to
break up the scope of a lease into components before analyzing whether
there is a true lease for tax purposes regardless of the useful life of
different assets included in the lease. In order to claim section 48E
credits for both the solar qualified facility and an EST that are part
of a combined solar qualified facility and EST, a taxpayer must retain
ownership of both at the time such property is placed in service. This
is true regardless of whether there are separate credits or separate
credit calculations required for a solar qualified facility and an EST.
While the final regulations define a unit of property as a qualified
facility or an EST for purposes of section 48E, the final regulations
are not intended to apply more broadly to define what comprises a unit
of property for any other purpose of the Code.
Another commenter requested that the section 48E credit be made
available for pumped storage hydropower property, including if such
property overlaps or shares property with a qualified hydropower
facility that has claimed or will claim the credit under section 45 or
45Y, and that no allocation of costs is required with respect to such
overlapping property.
The Treasury Department and the IRS confirm that an EST is eligible
for a separate section 48E credit if it satisfies the requirements of
section 48E and the section 48E regulations. A taxpayer that makes a
qualified investment with respect to a qualified facility or an EST is
eligible for the section 48E credit only to the extent of the
taxpayer's eligible investment in the qualified facility or EST. As
described in proposed Sec. 1.48E-2(b)(3)(vi), multiple qualified
facilities (whether owned by one or more taxpayers), including
qualified facilities with respect to which a taxpayer has claimed a
credit under section 48E, 45, or 45Y or another Federal income tax
credit, may include shared property that may be considered part of a
qualified investment for each qualified facility so long as the cost
basis for the shared property is properly allocated to each qualified
facility and the taxpayer only claims a section 48E credit with respect
to the portion of the cost basis properly allocable to the qualified
facility for which the taxpayer is claiming a section 48E credit. The
proposed rule addresses the commenter's concerns and will be adopted as
proposed.
7. Thermal Energy Storage Property
Proposed Sec. 1.48E-2(g)(6)(ii) defined thermal energy storage
property as 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. Thermal energy storage property does not include a
swimming pool, CHP property, or a building or its structural
components.
Several commenters requested additional examples of thermal energy
storage property and asked whether specific property would be
considered part of thermal energy storage. For example, a commenter
recommended including an example of thermal energy storage property
that includes phase change materials operating as a battery in place of
a refrigeration cycle to reduce energy consumption in cold storage.
Several commenters requested an example allowing for solar thermal
systems to be treated as thermal energy storage property and noted that
solar thermal systems are explicitly eligible under the section 48
credit. A commenter specifically contended that solar thermal systems
that collect energy from the sun to heat a storage medium (for example,
water) and then provide energy through an HVAC system for a residential
or commercial building should be treated as thermal energy storage
systems under section 48E.
Another commenter suggested clarifying that energy storage
technology includes property capable of discharging both heat and
electricity regardless of how the facility's heat is utilized as long
as the facility has an electrical nameplate capacity of at least 5 kWh
and the taxpayer claims a section 48E credit only on the parts of the
facility that are essential to receiving, storing, and delivering
energy for the conversion to electricity (that is, excluding components
related to discharging heat). A different commenter suggested
clarifying that thermal energy storage property includes property
directly connected to a refrigeration system given that refrigeration
systems are a subset of HVAC systems. Another commenter requested
clarifying that otherwise-qualifying property that operates squarely
within an HVAC ecosystem, or directly in connection with such a system,
and that directly impacts the temperature of air being conditioned by
an HVAC system, is ``directly connected'' to such system within the
meaning of section 48E (and section 48); and non-structural, energy-
saving, portable products that are incorporated into building elements
specifically because of their energy-saving properties are not
themselves ``a building or its structural components,'' and remain non-
structural even if integrated into a ceiling.
Another commenter suggested providing examples of thermal energy
storage property that include thermal ice or chilled water storage
systems that use electricity to run a refrigeration cycle to produce
ice or chilled water that is later connected to the HVAC system as an
exchange medium for air conditioning the building, heat pump systems
that store thermal energy in an underground tank or borehole field to
be extracted for later use for heating and/or cooling, and electric
furnaces that use electricity to heat bricks to high temperatures and
later use this stored energy to heat a building through the HVAC
system. Similarly, a commenter recommended several modifications to the
examples of thermal energy storage in proposed Sec. 1.48E-2(g)(6)(ii):
(i) replace the reference to ``thermal ice storage systems'' with
``chilled water or ice storage systems,'' (ii) acknowledge that tanks
could be above or below ground, and (iii) include ``electric boilers
that use electricity to heat water and later use this stored energy to
provide heat and/or domestic hot water to a building through the HVAC
system.'' Several other commenters suggested clarifying whether the
phrase ``directly connect to'' in proposed Sec. 1.48E-2(g)(6)(ii)
means that thermal storage systems that function as self-contained
heating or cooling systems qualify as thermal energy storage property.
The Treasury Department and the IRS agree that the definition of
thermal energy storage property requires clarification. Proposed Sec.
1.48E-2(g)(6)(ii) defined thermal energy storage property, in part, as
a system which ``removes heat from, or adds heat to, a storage medium
for subsequent use.'' The Treasury Department and the IRS 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 adds that heat to a
storage medium.
[[Page 4015]]
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, as it would generate new heat in the first instance
through combustion and subsequently add that heat to the storage
medium, rather than merely adding existing heat to the storage medium.
While the gas boiler elements would not be part of such property, the
integrated storage tank, 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 it
otherwise meets the definition of thermal energy storage. 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 the thermal energy storage
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. See
section III.G. of the Summary of Comments and Explanation of Revisions
for discussion of the Incremental Cost Rule.
Proposed Sec. 1.48E-2(g)(6)(ii) 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 the 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 via electrical resistance in the first instance is
not. Section 1.48E-2(g)(6)(ii) of the final regulations provides that
thermal energy storage property does not include property that
transforms other forms of energy into heat in the first instance.
With respect to subsequent use, the Treasury Department and the 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 perform 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 commenters asserted that such
heat transfer is subsequent use, the Treasury Department and the IRS
disagree. A plain reading of the statute supports the conclusion that
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 thermal energy. The Treasury Department and the IRS
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 a 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.
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
regulations, in order to be extracted for later use for heating and/or
cooling. The final regulations clarify that sources of thermal energy
that transform other forms of energy into heat, such as electric
boilers, are not thermal energy storage property.
The Treasury Department and the IRS clarified the definition of
thermal energy storage property and the examples in the final
regulations to illustrate what constitutes thermal energy storage
property. The final regulations provide revised examples of thermal
energy storage property, and those examples are intended to be a non-
exhaustive list. The Treasury Department and the IRS have also
determined that the revised description of thermal energy storage
property in Sec. 1.48E-2(e)(6)(ii) provides taxpayers with a
sufficient means to determine whether specific property qualifies as
thermal energy storage property. To the extent that commenters asked
whether additional systems, configurations, or technologies would
qualify as thermal energy storage property, such a determination would
require the Treasury Department and the IRS to conduct a complete
factual analysis of the system, configuration, or technology, which may
include information beyond that which was provided by the commenters.
Because more information is needed to make any such determinations
requested by the commenters, the final regulations do not provide such
additional requested clarifications.
Several commenters recommended clarifying that thermal energy
storage property includes property providing energy for the heating or
cooling of the interior of an industrial building, or other types of
buildings. A commenter asserted that a wide variety of buildings are
served by thermal energy storage, such as city halls, libraries, and
jails, and that the definition of thermal energy storage property
should not be limited to residential or commercial settings. Commenters
requested that property used to convey stored energy and deliver it to
building spaces (such as pipes and pumps), used to distribute stored
thermal energy for heating or cooling or to supply domestic hot water
for consumption in a residential or commercial building, be included
within the definition of thermal energy storage property. One commenter
recommended defining thermal energy storage property to include
equipment, including pipes and pumps, used to distribute stored thermal
energy to and within buildings. The commenter noted that such a
clarification would necessitate incorporation of a dual use rule
consistent with Sec. 1.48-14(b), because thermal energy storage may
use pipes to distribute stored thermal energy to and within buildings
that are also used by non-qualifying sources.
One commenter requested clarifying whether thermal energy storage
property includes liquid desiccant storage systems that use electricity
to store energy in liquid desiccants that remove latent heat from the
air for use in a connected HVAC system. Another
[[Page 4016]]
commenter noted that most solar thermal systems are combination or
hybrid systems that provide thermal storage in the form of water or
another fluid for a variety of applications. Regarding such combination
systems, other commenters recommended clarifying that thermal energy
property includes water heating applications and providing an example
of such applications.
Section 48E(c)(2) defines EST as having the same meaning as under
section 48(c)(6), and section 48(c)(6) defines EST to include thermal
energy storage property. The statutory definition of thermal energy
storage property under section 48(c)(6)(C) provides that such property
is directly connected to a HVAC, 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. To
maintain consistency with the statutory text, the final regulations
maintain the wording regarding eligible building applications set forth
in section 48(c)(6)(C)(i)(III). With respect to property used to
distribute stored thermal energy, such as pipes and pumps, the final
regulations provide a function-oriented method to evaluate whether
property is a functionally interdependent or an integral part of
thermal energy storage property. Beyond the examples included in the
proposed regulations and additional examples added here, commenters
have described a number of additional innovative technologies that
might qualify as thermal energy storage property. However, application
of the functional definition of thermal energy storage property
provided at section 48E(c)(2) (by reference to section 48(c)(6)) would
be necessary to determine if these technologies are, in fact, examples
of qualifying thermal energy storage property. Moreover, the examples
contained in proposed Sec. 1.48E-2(g)(6)(ii) are a non-exhaustive
list. Therefore, the final regulations do not adopt all the recommended
additional examples.
Because section 48E(c)(2) provides that the term ``energy storage
technology'' has the meaning given such term in section 48(c)(6), the
final regulations incorporate modifications made to the section 48
proposed regulations by the section 48 final regulations to clarify the
definition of EST, including with respect to thermal energy property.
8. Hydrogen Energy Storage Property
Proposed Sec. 1.48E-2(g)(6)(iii) provided 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. 1.48E-2(g)(6)(iii) also
provided that hydrogen energy storage property must store hydrogen that
is solely used as energy and not for other purposes, such as for the
production of end products (for example, fertilizer), and set forth
examples of hydrogen energy storage property.
A commenter stated that property storing hydrogen should be at
least 1 GWh in capacity (which is equivalent to 96,554 gallons of
liquid hydrogen storage capacity or about 25.4 metric tons) in order to
qualify as hydrogen energy storage property. The Treasury Department
and the IRS note that section 48E(c)(2) defines ``energy storage
technology'' as having the meaning given such term in section 48(c)(6)
(without the application of the beginning of construction deadline).
Section 48(c)(6) defines ``energy storage technology'' as, in part,
having a nameplate capacity of not less than 5 kilowatt hours.
Accordingly, the final regulations do not adopt the commenter's
suggestion, as doing so would be inconsistent with the statute.
a. End Use Requirement
Numerous commenters disagreed with the requirement that hydrogen
energy storage property must store hydrogen that is solely used as
energy and not for other purposes, which the commenters referred to as
the ``end use requirement.'' Commenters noted that the end use
requirement is not statutorily prescribed and asserted that it would be
difficult, if not impossible, to implement. Commenters asserted that a
single industrial customer may have multiple uses for hydrogen,
sometimes for energy and sometimes for other purposes such as stripping
pollutants from flue gas streams, and that customers are not generally
willing to restrict their use in order to indemnify the hydrogen energy
storage property against investment credit recapture risk. Commenters
also pointed out that hydrogen storage projects may sell to
intermediaries in which case the end use of hydrogen is not necessarily
known, and ensuring that the end use requirement is respected by export
markets would be impossible. A commenter contended that the limited
number of examples and use cases offered in the proposed regulations
raise several questions for taxpayers and hydrogen storage developers.
Some commenters also maintained that the end use requirement would
be inconsistent with the Biden Administration's U.S. National Clean
Hydrogen Roadmap. One of these commenters stated that a major build-out
of hydrogen storage facilities targeting exclusively power sector end
use makes little sense from a strategic perspective. A commenter
asserted that the definition of EST in section 48(c)(6)(A)(i), which
includes ``hydrogen, which stores energy,'' simply recognizes that
hydrogen is inherently a form of energy itself. A commenter also
claimed that section 48(c) only sets out affirmative requirements for
EST and that, therefore, hydrogen storage property that is not
primarily used in the transportation of goods or individuals should
qualify for the section 48E credit regardless of where the stored
hydrogen ends up. Commenters further noted that some energy uses may be
indirect (for example, via intermediary molecules), further
complicating application of an end use requirement.
Commenters also asserted that an end use requirement would
bifurcate and adversely affect the hydrogen market, and that additional
uses for hydrogen, such as feedstock for industrial processes, could
present significant decarbonization opportunities. A commenter asserted
that disallowing the section 48E credit for hydrogen storage from
serving applications such as steel production and iron refining would
be a significant disservice to America and delay or prevent massive
reductions in carbon emissions while hindering U.S. manufacturing of
essential construction materials. Commenters noted that a hydrogen end
use requirement would disadvantage large-scale hydrogen storage
facilities relative to smaller ones.
Commenters expressed concern that hydrogen energy storage is being
unfairly singled out for disadvantageous treatment as compared to other
EST, noting that the proposed regulations do not place an end use
restriction on electricity stored within and discharged from batteries
or other storage technologies; noting that energy withdrawn from
batteries may be used for any purpose without losing its eligibility
status. Commenters contended that the end use requirement would unduly
push potential customers towards using battery-focused solutions
instead of letting batteries and hydrogen solutions compete on equal
footing, or in cases in which no alternative exists, would continue to
extend the use of
[[Page 4017]]
existing technologies, fuels, and processes.
Some commenters supported the principle of an energy-based end use
requirement for hydrogen energy storage property. One commenter sought
clarification that ``energy'' was not limited to electricity
production. Another commenter supported the principle of an energy-
based end use limitation by comparing the statutory text of section
48(c)(6) from three legislative bills, including the version ultimately
enacted by Congress, but opposed the ``solely'' criteria and cited
practical challenges including administrability. Commenters generally
requested that if an end use requirement is maintained that it be
clarified and altered, and safe harbors provided. For example, a
commenter suggested providing a rebuttable presumption of meeting the
end use requirement if a taxpayer can demonstrate that it stored
hydrogen predominantly for energy use.
Commenters also suggested creating a safe harbor as long as the
facility itself uses some of the stored hydrogen for energy or the
facility is an open access facility. A commenter requested flexible
rules for determining the end use of hydrogen, including permitting
taxpayers to assign withdrawn hydrogen based on commercial sales
arrangements, or, alternatively, being able to rely on a mass balance
approach based on the inputs and outputs to the storage property during
the year. Commenters also suggested that the end use requirement
conclude with the end of the 5-year recapture period provided by
section 50. Several commenters suggested inverting the end use
requirement to only disqualify property used to store hydrogen that is
solely used for non-energy end products, or to exempt common carrier
infrastructure from the end use requirement. Another commenter
recommended a rule under which a facility that uses ``qualified clean
hydrogen'' as defined under section 45V of the Code is deemed to
qualify under section 48E if such hydrogen is used to create
electricity.
Several commenters recommended implementing a dual use safe harbor
to permit a taxpayer to claim a reduced section 48E credit when a
portion of stored hydrogen is used for a purpose other than energy.
Commenters noted that a dual use safe harbor could apply if at least
half of the hydrogen in hydrogen energy storage property is used for
energy purposes. In contrast, other commenters were opposed to any dual
use approach to the end use limitation and asserted that such an
approach would be unworkable, requiring ``unknowable, unprovable,
unmonitorable, unauditable facts.''
Commenters asked for clarification regarding what constitutes
energy use of stored hydrogen and what documentation is needed to
demonstrate such energy use. Several commenters were opposed to any
recordkeeping requirements related to the end use of hydrogen and
contended that such requirements would be unduly burdensome to
taxpayers given the fungibility of hydrogen. Another commenter noted
that there are currently no recordkeeping or documentation precedents
available for a taxpayer to efficiently demonstrate the final end use
of hydrogen stored in such taxpayer's hydrogen energy storage property.
The commenter asserted that, as 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.
After consideration of the 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 recognize commenters' concerns regarding the administrative
challenges the end use requirement could present for taxpayers and
agree that it should be removed. The final regulations therefore do not
adopt the requirement that hydrogen energy storage property store
hydrogen that is solely used as energy and not for other purposes such
as for the production of end products like fertilizer.
b. Hydrogen Storage Media
Many commenters provided feedback regarding the qualifying types of
hydrogen storage media. Specifically, a commenter requested expanding
the definition of hydrogen energy storage to include storage of ammonia
and electrolytic hydrogen derivative e-fuels. A commenter also
requested that the Treasury Department and the IRS recognize and
clarify that, unlike electricity, hydrogen is a chemical building block
for other molecules that are capable of more efficiently carrying
hydrogen. According to the commenter, this means that hydrogen can be
stored as a physical material medium such as a metal hydride. The
commenter also requested confirmation that the examples of hydrogen
storage mediums provided in the preamble to the proposed regulations
are non-exhaustive and that the type of storage medium is intentionally
unlimited.
The Treasury Department and the IRS decline to adopt 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 48E(c)(2)
provides that the term ``energy storage technology'' has the meaning
given to such term in section 48(c)(6). Section 48(c)(6)(A)(i) defines
``energy storage technology'' as property (other than property
primarily used in the transportation of goods or individuals and not
for the production of electricity) which receives, stores, and delivers
energy for conversion to electricity (or, in the case of hydrogen,
which stores energy), and has a nameplate capacity of not less than 5
kilowatt hours. Section 48(c)(6)(A) references hydrogen, but not
compounds containing hydrogen.
c. Hydrogen Storage Components and Equipment
Several commenters requested clarifications regarding the
components included in the definition of hydrogen energy storage.
Commenters generally requested that the final regulations expand the
list of integral and functionally interdependent equipment to be more
inclusive of existing and future hydrogen energy storage property
technologies. One commenter noted that while the functional
interdependence test provided by the proposed regulations is helpful,
specifying further what components are considered part of hydrogen
energy storage is paramount. The commenter requested additional
examples that address specific components including equipment needed to
functionally store hydrogen, equipment used to change the phase of
matter, equipment used to liquify hydrogen prior to storage, equipment
used to convert stored hydrogen to ammonia to be used as a carrier of
that stored hydrogen, equipment used to store electrolytic hydrogen
derivative e-fuels, and any related and necessary pipelines. Similarly,
commenters requested that additional components and equipment be
specifically identified as eligible parts of hydrogen energy storage
property, including hydrogen liquefaction and related equipment and
other equipment required to operate underground hydrogen storage
property.
A commenter requested that the final regulations demarcate between
equipment used for hydrogen production, conditioning, transportation,
and storage. The commenter emphasized that a clear demarcation is
necessary to prevent
[[Page 4018]]
gaming the system if storage property would qualify for the section 48E
credit under section 48(c)(6) and the production equipment will, in
many or most cases, be associated with the production tax credit under
section 45V. The commenter suggested that the proper demarcation
between hydrogen production and conditioning, transportation, or
storage equipment is the point at which any post-production
conditioning to remove impurities or to put the hydrogen into a
saleable form is completed. The commenter stated that, in
distinguishing hydrogen production equipment from storage equipment,
the associated conditioning equipment should include all equipment
necessary to treat, process, compress, pump, or perform other physical
action on hydrogen prior to its storage or delivery. The commenter
noted that equipment used to convert hydrogen into ammonia, methanol,
or another hydrogen carrier also should be associated with post-
production processing of hydrogen and not eligible for the section 48E
credit. Similarly, the commenter asserted that equipment, such as
compressors, used to liquify hydrogen (liquefaction) to put it into a
deliverable and salable form should not qualify as hydrogen energy
storage property, including the equipment necessary for liquefaction,
conversion to ammonia, methanol, or other hydrogen carrier, and
dissociation or cracking equipment necessary to convert a hydrogen
carrier back into hydrogen. The commenter emphasized that if
compressors are used in direct connection with storage devices, rather
than to change the form of the hydrogen (for example, from gas to
liquid), compressors are integral to the storage equipment and should
qualify for the section 48E credit. Another commenter stated that the
definition of hydrogen storage property should be limited to tanks and
caverns of scale, and the associated equipment necessary to fill or
discharge hydrogen from those tanks or caverns.
Commenters also requested further guidance on the eligibility of
pipelines as hydrogen energy storage property noting that there are
specific cases in which hydrogen pipelines that are directly connected
to an energy storage facility can operate as hydrogen storage, by
providing additional volumes that can adjust pressure in direct
coordination with the storage facility compression system. One
commenter requested clarification of the term ``primarily'' in the
phrase ``other than property primarily used in the transportation of
goods or individuals'' as applied to pipelines that can be used to
store hydrogen. Another commenter suggested clarifying the scope of
hydrogen storage property with respect to transportation, customer
delivery, and use.
One commenter that opposed the inclusion of pipelines, rail cars,
and truck trailers in the definition of hydrogen storage property,
noted that if hydrogen has been stored in qualified storage property,
such as tanks or underground storage salt caverns, the energy storage
property should end at the valve where the stored hydrogen is delivered
into a pipeline system. Additional commenters recommended limiting the
treatment of hydrogen pipelines as integral or interdependent to
hydrogen storage property. Commenters pointed to Federal Energy
Regulatory Commission (FERC) rulings and applicable case law, such as
Hawaiian Independent Refinery, Inc. v. U.S., 697 F.2d 1063 (Fed. Cir.
1983), which delineate the circumstances under which pipeline systems
would be considered part of the storage facility. One commenter
recommended only including pipelines directly linked to storage
facilities and further recommended that the final regulations more
precisely define the boundary between storage and transportation
infrastructure. This commenter's proposed guideline would define the
boundary between storage and transportation infrastructure by only
considering specific interconnected pipeline segments as part of the
storage system: point-to-point lines starting from the storage facility
and ending at the first intersection point with explicit compression
equipment. Commenters also requested a safe harbor for interconnecting
pipelines whereby the pipelines would be deemed integral or
interdependent to a hydrogen storage facility if (i) the complex is
conceived and designed concurrently, and all offsite interconnecting
pipeline components are placed into service within twenty four months
of the date on which the first such component is placed into service,
and (ii) the offsite interconnecting components are within 100 miles of
the storage facility or within the same State as the storage facility.
Commenters proposed the inclusion of additional examples that would
provide additional specific eligible components and provide
capitalization rules; establish eligibility of pipelines connecting
storage facilities if exclusive to use of those facilities; and
establish eligibility of purification equipment intended to return the
purity of hydrogen post-storage to its purity level upon entering
storage.
A commenter suggested allowing tanks and associated equipment for
the storage of ammonia when used as a hydrogen carrier to qualify for
the section 48E credit but stated that equipment used to disassociate
ammonia into hydrogen (referred to as cracking) is a separate function
from hydrogen storage and should not be treated as hydrogen energy
storage property.
The Treasury Department and the IRS agree that clarifying the
definition of hydrogen energy storage property is warranted. 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. 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.
Section 48E(c)(2) generally defines ``energy storage technology''
as having the meaning given such term in section 48(c)(6). Section
48(c)(6)(A)(i) defines ``energy storage technology'' as excluding
property primarily used in the transportation of goods or individuals
and not for the production of electricity. In general, whether property
is ``primarily'' used in the transportation of goods or individuals and
not for the production of electricity, is dependent on the facts and
circumstances. Pipelines, trailers, and railcars are property primarily
used in the transportation of goods or individuals and not for the
production of electricity. Accordingly, such property generally would
not be considered part of hydrogen energy storage property for purposes
of section 48E.
The Treasury Department and the IRS recognize that there are
specific cases in which hydrogen pipelines that are directly connected
to an energy storage facility can operate as hydrogen storage. Hydrogen
energy storage property may have hydrogen pipelines that are used as
gathering and distribution lines to transport hydrogen within the
hydrogen energy storage property, making such hydrogen pipelines an
integral part of the hydrogen energy storage property. These gathering
and distribution lines are not pipelines used to transport hydrogen
outside of the hydrogen energy storage property. The final regulations
clarify that property that is an integral part of hydrogen energy
storage property includes, but is not limited to, gathering and
distribution lines within a hydrogen energy storage property.
[[Page 4019]]
The Treasury Department and the IRS decline to provide additional
examples of integral equipment and functionally interdependent
equipment in the context of hydrogen energy storage property. The final
regulations provide a function-oriented method to determine whether a
technology is EST that is broad enough to encompass nascent
technologies without rendering the regulations quickly obsolete. It is
impossible to enumerate every technology that may be eligible for the
section 48E credit given the ever-changing nature of the industry and
pace of technological development. Although these regulations do not
list all technologies that may qualify for the section 48E credit, the
final 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.
9. Modification of Energy Storage Technology
Proposed Sec. 1.48E-2(g)(7) provided that with respect to
electrical energy storage property and hydrogen energy storage
property, modified as set forth in proposed Sec. 1.48E-2(g)(7), such
property will be treated as an electrical energy storage property (as
described in proposed Sec. 1.48E-2(g)(6)(i)) or a hydrogen energy
storage property (as described in proposed Sec. 1.48E-2(g)(6)(iii)),
except that the basis of the existing electrical energy storage
property or hydrogen energy storage property prior to such modification
is not taken into account for purposes of proposed Sec. 1.48E-2(g)(7)
and section 48E.
Commenters noted that taxpayers often replace energy storage
equipment to manage the natural degradation of storage assets over time
and to prolong the useful life of these projects, even if such
improvements do not meet a 5-kWh capacity threshold. One commenter
therefore contended that references to nameplate capacity in section
48E are best read to disregard any degradation of the EST between when
it is placed in service and when capacity is added. The same commenter
contended that modifications to EST should be eligible for the section
48E credit if one of the 5kWh nameplate measurement tests under
proposed Sec. 1.48E-2(g)(7)(i) and (ii) are met, regardless of any
degradation that has occurred to the EST's nameplate capacity since its
original in-service date. The commenter requested clarifying that the
nameplate capacity after a modification is the nameplate capacity of
such property before the modification plus the capacity added by the
modification. Another commenter suggested permitting a ``modification
that leads to a demonstrated increase in capacity (measured and
recorded immediately before such modifications) of not less than
5kWh,'' to be eligible for the section 48E credit.
Another commenter explained that nameplate capacity of EST is
typically defined when initial interconnection is approved, meaning
that taxpayers who wish to claim the estimated expenditures of storage
augmentation under section 48E will need to modify the original
interconnection agreement or oversize their assets before placing them
into service. The commenter requested that the section 48E rules
recognize the eligibility of storage augmentation beyond nameplate
capacity and suggested that the estimated expenditures associated with
augmentation of qualifying EST be fully eligible for the section 48E
credit. Another commenter suggested clarifying that augmentation of EST
over time is eligible for the section 48E credit, either by treating
estimated future augmentation costs at the time the EST is originally
placed in service as eligible, with recapture provisions if estimated
costs are not realized, or by treating any costs related to
augmentation that are incurred as part of the upfront investment to
construct an energy storage site as eligible. The commenter described
augmentation as the periodic upgrade to capacity over a project's
lifetime by either adding new inverters and enclosures or recycling
batteries to old enclosures and adding new batteries behind an existing
inverter.
Section 48E(c)(2) defines EST by reference to section 48(c)(6).
Proposed Sec. 1.48E-2(g)(7)(i) and (ii) applied the rules for
modification of EST described in section 48(c)(6)(A)(i). In defining
EST, section 48(c)(6)(A)(i) uses the term ``nameplate capacity.''
Accordingly, the rules for modification of EST apply with respect to
the nameplate capacity of EST, and do not take into account potential
degradation of the EST prior to its modification. The final regulations
clarify that for purposes of the modification rules, the increase in
nameplate capacity is equal to the difference between nameplate
capacity immediately after the modification and nameplate capacity
immediately prior to the modification. To maintain consistency with the
statute, the final regulations do not adopt commenters' suggestions to
measure an increase in nameplate capacity in a different manner.
A commenter also suggested clarifying that a modification is taken
into account whether the increase in capacity is within an existing
enclosure, the existing enclosure is expanded, a new enclosure is added
for the increased capacity, or a new enclosure is constructed to
include both the existing capacity and the added capacity.
Section 48(a)(6)(B) defines modifications of EST without any
reference to physical space limitations. Proposed Sec. 1.48E-2(g)(7)
also does not address limiting modifications of EST based on physical
space. The Treasury Department and the IRS conclude that a modification
of EST is not limited by the physical space occupied by the EST before
or after the modification and adopt the proposed regulations without
change.
D. Rules for Certain Lower-Output Qualified Facilities
Proposed Sec. 1.48E-4(a)(1) provided rules for qualified
facilities with a maximum net output of not greater than 5 megawatts to
include qualified interconnection costs in the basis of an associated
qualified facility. Proposed Sec. 1.48E-4(a)(1) provided that the
qualified investment for a qualified facility includes amounts paid or
incurred by the taxpayer for qualified interconnection property in
connection with the installation of a qualified facility that has a
maximum net output of not greater than 5 MW (as measured in alternating
current) (Five-Megawatt Limitation). Proposed Sec. 1.48E-4(a)(1) also
provided that the qualified interconnection property must provide for
the transmission or distribution of the electricity produced by a
qualified facility and must be properly chargeable to the capital
account of the taxpayer as reduced by the rules in proposed Sec.
1.48E-4(a)(6). Proposed Sec. 1.48E-4(a)(2) defined the term
``qualified interconnection property.'' Proposed Sec. 1.48E-4(a)(2)
further provided that qualified interconnection property is not taken
into account to determine if a qualified facility meets the
requirements for the increase in credit rate for energy communities or
domestic content because qualified interconnection property is not part
of a qualified facility. Proposed Sec. 1.48E-4(a)(3) described the
Five-Megawatt Limitation as a measurement taken at the qualified
facility level. Proposed Sec. 1.48E-4(a)(3)(i) provided that the
maximum net output of a qualified facility is measured only by the
nameplate generating capacity of the unit of qualified facility, which
does
[[Page 4020]]
not include the nameplate capacity of any integral property, at the
time that the qualified facility is placed in service. Proposed Sec.
1.48E-4(a)(3)(i) additionally provided that the nameplate generating
capacity of the unit of qualified facility is measured independently
from any other qualified facilities that share the same integral
property. Proposed Sec. 1.48E-4(a)(3)(ii) provided how the nameplate
capacity at a qualified facility is measured. Proposed Sec. 1.48E-
4(a)(4) defined the term ``interconnection agreement'' and proposed
Sec. 1.48E-4(a)(5) defined the term ``utility.'' Proposed Sec. 1.48E-
4(a)(6) provided that expenses paid or incurred for qualified
interconnection property and amounts otherwise chargeable to capital
account with respect to such expenses must be reduced under rules
similar to the rules contained in section 50(c). Proposed Sec. 1.48E-
4(a)(6) provided that the taxpayer must pay or incur the
interconnection property costs, and therefore, any reimbursement,
including by a utility, must be accounted for by reducing the
taxpayers' expenditure to determine eligible costs. The preamble to
proposed Sec. 1.48E-4(a)(6) explained that a taxpayer that is
reimbursed for these costs may not include such reimbursed costs in the
amount paid or incurred by the taxpayer for qualified interconnection
property. In the case of a utility reimbursing a taxpayer for costs the
taxpayer pays or incurs for qualified interconnection property, the
utility should provide the taxpayer with information regarding such
costs by the date on which the project is placed in service.
The preamble to the proposed regulations explained that the
Treasury Department and the IRS are aware of common situations in which
a taxpayer could ultimately receive a payment, credit, or service from
another entity, including a utility, related to the costs the taxpayer
pays or incurs for qualified interconnection property. For example, one
taxpayer may place in service a qualified facility and make payments to
a utility with respect to qualified interconnection property involving
the addition, modification, or upgrade to the utility's transmission
system related to such qualified facility. Subsequently, a different
taxpayer may, at a later date, place in service a qualified facility
and make payments to the same utility related to the same additions,
modifications, or upgrades to the utility's transmission system that
were made in response to the first taxpayer's interconnection. The
utility may pay, credit, or provide services to the first taxpayer in
an amount related to the costs paid by the second taxpayer. The likely
amount or timing of any such payment, credit, or service would be
unknown at the time the first taxpayer interconnects to the utility's
transmission system.
Additionally, in the preamble to the proposed regulations, the
Treasury Department and the IRS requested comments on several issues
related to reimbursements. The Treasury Department and the IRS
requested comment on whether such payment, credit, or service received
by the first taxpayer, as a result of subsequent payments made to a
utility by other parties, should be treated as a reimbursement to the
first taxpayer and impact the amount of the costs of qualified
interconnection property that the first taxpayer may include in its
basis for purposes of the section 48E credit. The Treasury Department
and the IRS also requested comment on whether the costs paid by the
second taxpayer should be treated as amounts paid or incurred for
qualified interconnection property in connection with the installation
of the second taxpayer's qualified facility. The Treasury Department
and the IRS requested comment on industry practices relevant to the
determination of costs paid or incurred for qualified interconnection
property, including the accounting treatment of costs paid or incurred
for qualified interconnection property. The Treasury Department and the
IRS also requested comment on whether any clarifications are needed
regarding the tax treatment of amounts paid or incurred for qualified
interconnection property, including reimbursement of costs paid or
incurred by a taxpayer for qualified interconnection costs.
In addition to updates discussed in Sections III.D.1 through 6, the
final regulations clarify the definition of an interconnection
agreement in Sec. 1.48E-4(a)(4) by stating that in the case of the
election provided under section 50(d)(5) (relating to certain leased
property), the term includes an agreement regarding a qualified
facility leased by such taxpayer.
1. Qualified Interconnection Property
Some commenters requested clarification on whether certain costs
are considered amounts paid or incurred for qualified interconnection
property. A commenter requested that the final regulations confirm that
equipment required to modify and upgrade transmission or distribution
systems beyond the point of interconnection would be considered
qualified interconnection property.
Section 48E(b)(4) provides that the term ``qualified
interconnection property'' has the meaning given such term in section
48(a)(8)(B). Section 48(a)(8)(B) defines, in relevant part, the term
``qualified interconnection property'' to mean, with respect to an
energy project that is not a microgrid controller, any tangible
property that is part of an addition, modification, or upgrade to a
transmission or distribution system that is required at or beyond the
point at which the energy project interconnects to such transmission or
distribution system in order to accommodate such interconnection.
Proposed Sec. 1.48E-4(a)(2) adopted this definition. The Treasury
Department and the IRS confirm that under this definition, tangible
property required to modify and upgrade transmission or distribution
systems beyond the point of interconnection would (provided the
property satisfies the other requirements of section 48(a)(8)(B)) be
considered qualified interconnection property and eligible for
inclusion in basis for purposes of the section 48E credit.
Another commenter requested that the final regulations expand the
definition of qualified interconnection property to include grid-
enhancing property. A definitive response to this comment would require
the Treasury Department and the IRS to conduct a complete factual
analysis of the property in question, which would include information
beyond that which was provided by the commenter. Because more
information is needed to make the determinations requested by the
commenter, the requested clarifications are not addressed in these
final regulations.
A commenter requested that, in instances in which the taxpayer
funds network upgrades and is then later reimbursed by the transmission
owner, taxpayers not be required to account for any reimbursements of
interconnection-related expenses paid in later years to the taxpayer.
Another commenter requested that in such a scenario, the final
regulations should disregard reimbursements to the extent that the
reimbursement is includable in the taxpayer's gross income. The
commenter also asserted that in circumstances in which the taxpayer
receives a later payment from a customer utilizing the qualified
interconnection property, the taxpayer be permitted to treat the
payments as revenue, rather than reimbursement. One of the commenters
also requested confirmation that taxpayers can include in their basis
qualifying interconnection costs recovered through ``Transmission
[[Page 4021]]
Owner Initial Funding.'' According to the commenters, in certain
regional markets, the transmission owner funds the costs of
interconnection upgrades for which a taxpayer is responsible, and the
taxpayer then reimburses the transmission owner over a certain period,
typically 20 years. The commenters requested that a taxpayer with such
an arrangement be allowed to include the full amount of interconnection
costs that it will ultimately pay over that period in calculating their
section 48E credit for the taxable year that the qualified facility is
placed in service.
The Treasury Department and the IRS note that the statute limits
qualified interconnection property to tangible property. In the case of
a taxpayer that pays costs over 20 years, the commenters do not
describe whether these amounts paid may include amounts that are not
tangible property. To the extent commenters are asking generally about
the inclusion of the full allocated cost of interconnection upgrades
and, therefore, any amounts paid or incurred by the taxpayer for
qualified interconnection property, the Treasury Department and the IRS
recognize these payments could include a number of markups that the
utility that builds and owns the relevant interconnection property
might charge for that property (whether currently or over a later
reimbursement period), such as the markup for a rate of return or other
costs (for example, a tax gross-up). Whether specific costs are
allowable would be a fact-specific inquiry related to, among other
things, whether such costs are incurred with respect to eligible
tangible property. Therefore, the final regulations do not adopt
commenters' suggestion to provide that the full allocated cost of
interconnection upgrades is always eligible, although in many cases it
may be. However, the Treasury Department and the IRS clarify that it is
not determinative whether such costs are charged upfront or over time.
The final regulations under Sec. 1.48E-4(a)(2) also clarify that
for purposes of determining the original use of interconnection
property in the context of a sale-leaseback or lease transaction, the
principles of section 50(d)(4) must be taken into account, as
applicable, with such original use determined on the date of the sale-
leaseback or lease.
2. Interaction With Other Bonus Credit Amounts
Commenters requested that the final regulations clarify the
interaction between the rules for qualified interconnection costs and
the computation of the domestic content bonus credit amount and the
increased credit amount for energy projects located in an energy
community since this clarification was provided in section 48.
Section 48E(b)(4) provides that the term ``qualified
interconnection property'' has the meaning given such term in section
48(a)(8)(B). Section 48(a)(8)(B) defines qualified interconnection
property as distinct from the definition of ``energy property''
provided in section 48(a)(3). Additionally, section 48(a)(8)(A)
includes amounts paid or incurred for qualified interconnection
property meeting certain requirements for purposes of determining the
credit under section 48(a). Similarly, section 48E(b)(1) includes
expenditures paid or incurred by the taxpayer for qualified
interconnection property meeting certain requirements for purposes of
determining a qualified investment under section 48E(a) and defines
qualified interconnection property discretely from a qualified facility
eligible under section 48E(a)(1). Given that qualified interconnection
property is not part of a qualified facility, Sec. 1.48E-4(a)(2)
provides that qualified interconnection property is not taken into
account to determine if a qualified facility meets the requirements for
the increase in credit rate for energy communities or domestic content.
Therefore, no further clarification is needed in the final regulations.
Additionally, because the credit under section 48E(a) is calculated
by multiplying the applicable percentage--which includes any domestic
content bonus credit amount--by the basis of the qualified facility--
which includes amounts paid or incurred by the taxpayer for qualified
interconnection property, qualified interconnection costs are taken
into account in calculating the domestic content bonus credit amount
and the increased credit amounts for energy projects located in an
energy community and for certain facilities placed in service in
connection with low-income communities.
3. Basis Reduction
For purposes of section 48E(b), the term ``qualified
interconnection property'' has the meaning given such term in section
48(a)(8)(B). There are no additional references to section 48(a)(8)
other than section 48(a)(8)(B). As a result, the basis reduction
language in section 48(a)(8)(E), which provides that in the case of
expenses paid or incurred for interconnection property, amounts
otherwise chargeable to capital account with respect to such expenses
are to be reduced under rules similar to the rules of section 50(c), is
not explicitly incorporated. However, the Treasury Department and the
IRS determined that the section 50(c) basis reduction rules apply
because section 50(c) provides for basis adjustments to investment
credit property generally. Section 50(c) has two basis adjustment rules
that could apply to interconnection property, section 50(c)(1) or (3).
Although interconnection property is not part of a qualified facility
as provided in proposed Sec. 1.48E-4(a)(2), qualified interconnection
costs are included in the basis used to calculate the section 48E
credit. Therefore, the Treasury Department and the IRS confirm the
special rule in section 50(c)(3)(A), which provides for a basis
reduction of 50 percent in the case of any section 48E credit, applies
to qualified interconnection property that is properly chargeable to
capital account of the taxpayer which is the amount included in the
basis used to calculate the section 48E credit.
4. Reimbursements and Other Cost Reductions
The proposed regulations requested comment on several issues
related to reimbursement. Generally, the proposed regulations requested
feedback on treatment of reimbursements in common situations in which a
taxpayer could ultimately receive a payment, credit, or service from
another entity, including a utility, related to the costs the taxpayer
pays or incurs for qualified interconnection property. The proposed
regulations also requested comments on the outcome when a different
taxpayer makes payments to a utility for the same additions,
modifications, or upgrades of another taxpayer. Comments were also
requested on industry practices and tax implications of reimbursements.
In response to these requests, a commenter requested the final
regulations clarify that a taxpayer is not required to reduce its
section 48E credit on account of any reimbursement of interconnection
costs in the absence of a fixed right (that is specific in amount and
time) to receive the reimbursement at the time the taxpayer incurs the
interconnection costs. This commenter recommended that the final
regulations include rules that are administrable and provide only a
single credit on qualified interconnection costs (for example, a case
in which another possible section 48E claimant reimburses directly or
indirectly a first claimant).
Other commenters requested clarification of the reimbursement rules
under specific scenarios. One commenter suggested that for cases in
[[Page 4022]]
which the taxpayer funds network upgrades and is later reimbursed by
the transmission owner, the final regulations should avoid accounting
for any reimbursements of interconnection-related expenses paid in
later years to the taxpayer.
Another commenter suggested that including reimbursed
interconnection costs in the credit basis should be based on whether
the amounts are includible in gross income. The commenter stated that
in circumstances in which a utility reimburses a qualified facility
owner under a set schedule, the final rule should disregard the
utility's reimbursements to the extent that the reimbursement is
includable in a taxpayer's gross income. The commenter added that if a
subsequent interconnection customer's use of the qualified
interconnection property results in a later payment or credit to the
taxpayer, the payment or credit should be treated as revenue rather
than reimbursement. The commenter also requested clarification that in
circumstances in which a qualified facility owner pays for qualified
interconnection property without reimbursement, the owner should be
able to utilize the full cost of those facilities in determining its
investment tax credit.
The Treasury Department and the IRS recognize that situations may
arise in which the initial amount paid or incurred for qualified
interconnection property is reduced after the taxable year in which the
taxpayer claims the section 48E credit. The Treasury Department and the
IRS also recognize that other complicated situations may arise in
determining whether a taxpayer has paid or incurred qualified
interconnection costs. The comments received confirmed that these
questions are not unique to the reimbursement of qualified
interconnection costs and may also arise in the context of other tax
credits. Therefore, the determination of whether qualified
interconnection costs have been paid or incurred by the taxpayer and
whether such amounts are reduced by virtue of transactions with the
utility or with a third party should be based on generally applicable
Federal tax principles.
In consideration of the comments, the final regulations revise the
rule under Sec. 1.48E-4(a)(6) regarding reduction to amounts
chargeable to capital account to reflect the application of Federal tax
principles to such transactions in determining the amount a taxpayer
paid or incurred for qualified interconnection costs. The final
regulations at Sec. 1.48E-4(a)(1) explain that if the costs borne by
the taxpayer are reduced by utility or non-utility payments, Federal
tax principles may require the taxpayer to reduce the amount treated as
paid or incurred for qualified interconnection property to determine a
section 48E credit. The final regulations at Sec. 1.48E-4(a)(7) also
include two additional examples related to reducing costs borne by the
taxpayer.
5. Five-Megawatt Limitation
Some commenters provided feedback on the measurement rule for the
Five-Megawatt Limitation provided at proposed Sec. 1.48E-4(a)(3). Two
commenters suggested that the Five-Megawatt Limitation be modified to
clarify the relevant measurement is performed at the point of output
(that is, 5 MW AC at the inverter) rather than nameplate generation
capacity to better align with section 48E(b)(1)(B). As described by one
of the commenters, the text of section 48E(b)(1)(B) does not contain
the words ``nameplate'' or ``capacity'' and instead it specifically
refers to the 5 MW limit by reference to ``output . . . measured in
alternating current'' which, for solar photovoltaic systems can only be
read to refer to post-inverter measurement. Another commenter
recommended that the final regulations refer only to output measured in
alternating current, without presuming that the direct current
nameplate capacity is identical. Additionally, this commenter requested
that the final regulations specifically clarify that qualified
facilities be defined at the inverter level for the limited purpose of
evaluating if they meet the Five-Megawatt Limitation, as this is the
source of any alternating current output.
Measuring output with accuracy and consistency must be done using a
defined standard. The Treasury Department and the IRS conclude that
nameplate generating capacity is the best and most practical measure of
the maximum net output of a unit of qualified facility. Nameplate
generating capacity is an objective and identifiable standard that can
be accurately measured with consistency. Therefore, the Treasury
Department and the IRS do not adopt the comment suggesting changes to
the use of nameplate capacity. The final regulations at Sec. 1.48E-
4(a)(3)(ii) retain the rule that the determination of whether a
qualified facility has a maximum net output of not greater than 5 MW
(as measured in alternating current) is based on the nameplate capacity
of the unit of qualified facility.
Regarding measurement of the Five-Megawatt Limitation in
alternating or direct current, the Treasury Department and the IRS
understand the commenter's concerns and agree that the rule provided in
the proposed regulations should be revised. Section 48E(b)(1)(B)(i)(I)
refers to a maximum net output of not greater than five megawatts (as
measured in alternating current). Proposed Sec. 1.48E-4(a)(3)(ii)
provided for nameplate capacity in alternating current, without
addressing types of qualified facilities, such as solar facilities,
that generate electricity in direct current. Nameplate capacity for
these types of qualified facilities is measured before the facility's
output is converted to alternating current by an inverter. Because an
inverter would be considered property that is an integral part of the
qualified facility and not part of the unit of qualified facility
itself, measuring the nameplate capacity of a qualified facility that
generates electricity in direct current would be difficult under the
proposed regulations.
However, in response to comments, the final regulations provide a
method of measuring nameplate capacity for a qualified facility that
generates electricity in direct current. The final regulations at Sec.
1.48E-4(a)(3)(iii) provide that, for qualified facilities that generate
electricity in direct current, the taxpayer determines whether a
qualified facility has a maximum net output of not greater than 5 MW
(in alternating current) by using the lesser of: (i) the sum of the
nameplate generating capacities within the unit of qualified facility
in direct current, which is deemed the nameplate generating capacity of
the unit of qualified facility in alternating current; or (ii) the
nameplate capacity of the first component of the qualified facility
that inverts the direct current electricity generated into alternating
current. This rule provides flexibility for taxpayers while ensuring
that the maximum net output (in alternating current) of a qualified
facility can be determined in an administrable and reasonably accurate
manner for qualified facilities that generate electricity in direct
current.
A few commenters suggested providing additional examples to
illustrate output rules for interconnection property. Another commenter
recommended finalizing Example 1 in proposed Sec. 1.48E-4(a)(7)(i)
which specified that two section 48E facilities, each with a maximum
output of 5 MW AC, can share--and treat as qualified interconnection
property--a step-up transformer, which is integral to both properties.
In response to commenters that requested additional clarification
of the Five-Megawatt Limitation, the final
[[Page 4023]]
regulations add an additional example under Sec. 1.48E-4(a)(7) as well
as provide clarifications to the existing examples. These
clarifications illustrate the revised method of measuring nameplate
capacity for a qualified facility that generates electricity in direct
current. The clarifications also demonstrate the application of the
Five-Megawatt Limitation in cases in which the nameplate capacity
differs from the maximum output provided in the interconnection
agreement. Specifically, the newly added example describes the
application of the Five-Megawatt Limitation to separate interconnection
agreements for a single qualified facility made up of units of a
qualified facility owned by a single taxpayer. In that example,
although the taxpayer has interconnection agreements with the utility
that each allow for a maximum output of 10 MW (as measured in
alternating current), the taxpayer may include the costs taxpayer paid
or incurred for qualified interconnection property, subject to the
terms of the interconnection agreement, to calculate the taxpayer's
section 48E credits for each of the qualified facilities because each
has a maximum net output of not greater than 5 MW (alternating
current).
6. Energy Storage Technology
Two commenters suggested that the final regulations permit
interconnection costs for stand-alone EST. Both commenters explained
that although sections 48E(b) and (c) do not mention eligible
interconnection costs in the context of stand-alone EST, the term
``qualified interconnection property'' is defined by reference to
section 48(a)(8). Therefore, according to the commenters, this result
is supported because the statutory text of that section expressly
includes ``amounts paid or incurred by the taxpayer for qualified
interconnection property . . . to provide for the transmission or
distribution of the electricity produced or stored by such property.''
These commenters also added that this result would reconcile sections
48 and 48E and would advance the IRA's express policy of encouraging
storage deployment.
Based on the explicit language of section 48E, the Treasury
Department and the IRS disagree that including costs for qualified
interconnection property for a standalone EST is supported by the
statute. Section 48E(c)(1), which describes the qualified investment
with respect to EST, does not refer to qualified interconnection
property.
Section 48E(b)(1) generally provides, in part, that the qualified
investment with respect to any qualified facility for any taxable year
includes the amount of any expenditures which are both paid or incurred
by the taxpayer for qualified interconnection property in connection
with a qualified facility which has a maximum net output of not greater
than 5 megawatts (as measured in alternating current), and placed in
service during the taxable year of the taxpayer. The amount of any
expenditures which are paid or incurred by the taxpayer for qualified
interconnection property must also be properly chargeable to capital
account of the taxpayer. Section 48E(b)(4) defines qualified
interconnection property by reference to section 48(a)(8)(B). While
commenters are correct that the reference to qualified interconnection
property in section 48(a)(8)(A) also refers to ``electricity stored,''
the cross-reference applicable for qualified facilities is to section
48(a)(8)(B) (the definition of qualified interconnection property) and
there is no similar cross-reference in section 48E to support including
the costs of qualified interconnection property for an EST. The overt
omission of a reference to qualified interconnection property in
section 48E(c), which provides rules for determining qualified
investment with respect to an EST is instructive. The clear exclusion
of qualified interconnection property for EST under section 48E(c)(1),
particularly when compared to its inclusion in section
48E(b)(1)(B)(i)(I), demonstrates Congressional intent. Therefore, the
final regulations do not adopt commenters' recommendation that
expenditures paid or incurred by the taxpayer for qualified
interconnection property are includible in the section 48E credit for
EST.
As discussed earlier, the Treasury Department and the IRS
understand that some hybrid systems (such as those for a solar
qualified facility and EST) operate under a single interconnection
agreement.\1\ In these situations, while expenditures paid or incurred
by a taxpayer for qualified interconnection property are not includible
in the section 48E credit for an EST, those expenditures paid or
incurred for qualified interconnection property that are properly
allocated to the qualified facility (for example, the solar qualified
facility) may be included in the credit base for the qualified
facility's qualified investment for the section 48E credit.
---------------------------------------------------------------------------
\1\ In some configurations, the addition of EST to a qualified
facility may have no or limited impact on the interconnection costs
of that hybrid facility.
---------------------------------------------------------------------------
E. 80/20 Rule
As noted earlier, the 80/20 Rule is designed to broaden the
availability of the investment credit by providing a new original
placed in service date for a qualified facility that includes some
components of property previously placed in service, rather than
requiring the qualified facility to be composed entirely of new
components of property. In the context of section 48E, the 80/20 Rule
applies at the qualified facility level to the components of property
within the unit of qualified facility or unit of EST.
Proposed Sec. 1.48E-4(c)(1) provided that for purposes of section
48E(b)(3)(A)(ii), a facility may qualify as originally placed in
service even if it contains some used components of property within the
unit of qualified facility, provided that the fair market value of the
used components of the unit of qualified facility is not more than 20
percent of the unit of qualified facility's total value (that is, the
cost of the new components of property plus the value of the used
components of property within the unit of qualified facility). In
addition to providing a new placed in service date for a qualified
facility that includes some components of property that have previously
been placed in service, the 80/20 Rule also encourages investment in
the retrofitting of existing facilities.
Although this section focuses on the 80/20 Rule in the section 48E
context, section II.F. of this Summary of Comments and Explanation of
Revisions describes comments received on both sections 45Y and 48E. As
described in that section, the Treasury Department and the IRS confirm
that if a qualified facility under section 45 or energy property or EST
under section 48 is later retrofitted in a manner that satisfies the
80/20 Rule, it will be considered a new qualified facility or a new EST
and may be eligible for a section 48E credit so long as the qualified
facility or EST meets all requirements of section 48E. Additionally,
the Treasury Department and the IRS confirm that section 48E does not
refer to a project or system but in the case of section 48E to a
qualified facility and an EST.
1. Relevance of Prior Section 48 Guidance
Prior guidance and regulations under section 48 are not binding for
purposes of section 48E. However, several commenters stated that
application of the 80/20 Rule as proposed violated longstanding
precedent under section 48. These commenters stated that under section
48 as previously applied,
[[Page 4024]]
taxpayers would be allowed to claim the section 48E credit for capital
improvements as well as additions or modifications to existing property
without regard to the 80/20 Rule. Further, some commenters suggested
that the 80/20 Rule as originally applied in the section 48 context was
only relevant for addressing the ``original use requirement'' for
property and was not intended to prevent additions of new property from
qualifying for a credit. These commenters pointed to Example 2 in Sec.
1.48-2(b)(7) and Examples 4 and 5 in Sec. 1.48-2(c), to illustrate
that, in the context of the section 48 credit, the 80/20 Rule was
intended to address the ``original use requirement.'' Consistent with
this view, several commenters asserted that the prohibition against
claiming the section 48E credit for additions that do not meet the 80/
20 Rule (Excluded Costs Rule) is inconsistent with the statute and
regulations and should be removed.
One commenter, like many others that asserted that the application
of the 80/20 Rule for purposes of section 48E is contrary to historical
precedent, also focused on the negative economic impact. The commenter
stated that the proposed regulations would negatively impact the
economics of both existing and future development of clean energy
projects and that existing project investments were based on reasonable
reliance that future capital improvements would be eligible for the
section 48E credit without regard to the 80/20 Rule. Similarly, another
commenter stated it did not see a policy rationale for application of
the 80/20 Rule in the manner provided in the proposed regulations, as
it would lead to uneconomic decisions, such as favoring demolition and
rebuilding instead of capital expenditures to modify an existing energy
property and, like others, pointed to what they view as inconsistency
with more than 60 years of prior investment tax credit (ITC) precedent.
The Treasury Department and the IRS understand the concerns raised
by commenters. However, prior guidance and regulations based on section
48 are not binding for purposes of section 48E. Section 48E provides a
credit only for a qualified investment with respect to a qualified
facility or an EST and not for components of property within a
qualified facility or an EST. For the reasons provided here, the
Treasury Department and the IRS believe that the best interpretation of
``qualified investment with respect to a qualified facility or an EST''
is that if a taxpayer does not place in service a qualified facility or
an EST, a taxpayer is not eligible for a credit. Therefore, the
application of the 80/20 Rule to the section 48E credit in the proposed
regulations benefits taxpayers by providing a path to access the
section 48E credit when less than an entirely new qualified facility or
EST is placed in service.
Section 48E contains several features that require the credit to be
analyzed at the level of a qualified facility or an EST. The PWA
requirements are applied to a qualified facility or an EST under
section 48E(a)(2)(A) and (B). Likewise, determining whether the
increased credit amounts for domestic content and energy communities
also apply to a qualified facility or an EST. Finally, determining
whether a taxpayer may include qualified interconnection property
expenditures is tied to the maximum net output of a qualified facility.
These determinations cannot be made with respect to individual
components of property. This statutory construction clearly
contemplates calculating the credit on the basis of an entire qualified
facility or EST. Applying the 80/20 Rule for purposes of section 48E
provides taxpayers with an opportunity for additions of property to an
existing facility or an EST to be eligible for the section 48E credit
if the rule is satisfied.
Other commenters pointed to what they describe as longstanding
rules that otherwise ITC-eligible improvements made to existing energy
property may qualify for the ITC. One commenter stated that the IRA did
not change this rule in any way. According to this commenter,
application of the 80/20 Rule has always uniquely been relevant for
purposes of the production tax credit (PTC) and is simply not relevant
for purposes of the ITC. The Treasury Department and the IRS affirm the
role of the 80/20 Rule in the ITC context to allow for additions of new
property to an existing facility or EST to be eligible for the section
48E credit if the rule is satisfied.
2. Excluded Costs
Several commenters asserted that section 48E allows a credit for
adding components or making capital additions to a qualified facility.
One commenter concluded that capital improvements should not be
penalized under the 80/20 Rule. According to the commenter, owners of a
qualified facility, such as a solar qualified facility, should be
allowed to upgrade or replace components and claim new section 48E
credits. The commenter pointed to two examples in the existing Treasury
Regulations under section 48 that the commenter stated illustrate the
proper interpretation of the original use requirement in Sec. 1.48-
2(b)(7) and the difference between a reconditioned or rebuilt unit of
property previously placed in service and/or the use of ``some used
parts,'' on the one hand, and the addition of new property or capital
improvements, on the other.
Another commenter stated that the excluded costs described in
proposed Sec. 1.48E-4(c)(5) are unclear because a taxpayer is always
adding new components to used components, and it should be reworded to
clarify that it does not imply that the taxpayer must exclude the cost
of new components when a taxpayer adds them to used components.
Some of these commenters requested that the 80/20 Rule and the
Excluded Costs Rule provided at proposed Sec. 1.48E-4(c)(5) not apply
for section 48E purposes to additions of otherwise eligible new
components of property added to an existing qualified facility on which
a PTC was not claimed. As an example, the commenter asserted that the
owner of a solar qualified facility should be able to make capital
improvements to upgrade or replace existing solar modules or inverters
and claim a new section 48E credit without regard to the 80/20 Rule on
such capital improvements. This commenter stated that the 80/20 Rule
should only apply when a new category of components is added to an
existing qualified facility comprised of different categories of
components (such as wind being added to solar), then that new category
of component should be treated as a separate ``unit of qualified
facility.'' The commenter stated that this result is also consistent
with the IRA generally, which does not prevent a taxpayer from claiming
both a PTC with respect to the output of a qualified facility and an
ITC with respect to any associated EST. The commenter stated that this
is also consistent with Notice 2018-59.
Another commenter explained that the 80/20 Rule has its origins
under the section 48 credit and in the context of the section 48
regulations the phrase, ``some used parts,'' that has been the focus of
the IRS's administrative practice for almost 60 years. According to the
commenter, Rev. Rul. 68-111, 1968-1 C.B. 29, reflects the proper
application of the 80/20 Rule albeit under a prior version of the
section 48 credit. The commenter asserted that the Excluded Costs Rule
in proposed Sec. 1.48E-4(c)(5) distorts the 80/20 Rule by shifting the
focus from the use of ``used parts'' at the time the unit of property
is originally placed in service to ``new'' property and capital
improvements that are added later.
[[Page 4025]]
The Treasury Department and the IRS note that the application of
the 80/20 Rule clarifies that expenditures for components of property
that are not a unit of qualified facility can only qualify if the 80/20
Rule is satisfied, and thus any new property and capital improvements
added later that are not a unit of qualified facility are ineligible
for a section 48E credit unless the 80/20 Rule is satisfied. In
response to the commenters that asserted that section 48E allows a
credit for a component of property rather than a qualified facility,
the Treasury Department and the IRS disagree with commenters'
interpretation of the statutory language. The Treasury Department and
the IRS also emphasize that existing regulations under Sec. 1.48-2 do
not reflect the current version of section 48 and are not applicable to
section 48E. Additionally, a taxpayer who makes a capital improvement
to an existing facility should consider the application of the
Incremental Production Rule provided in Sec. 1.45Y-4(d). Similarly, a
taxpayer that makes modifications to an EST should consider the
application of the rule provided at Sec. 1.48E-2(g)(7).
Another commenter suggested that the purpose of the 80/20 Rule is
to allow a facility that was placed in service prior to January 1,
2025, to nevertheless satisfy the requirement in section
48E(b)(3)(A)(ii) that a qualified facility be placed in service after
December 31, 2024, if a substantial portion of the facility is
reconstructed after 2024.
The Treasury Department and the IRS disagree that the 80/20 Rule is
tied to a particular year. The 80/20 Rule allows a taxpayer to treat an
existing facility as originally placed in service at a later date by
adding new components of property that represent at least 80 percent of
the value of the unit of qualified facility. A retrofitted qualified
facility or EST will be eligible for the section 48E credit if it meets
the requirements of the 80/20 Rule before the section 48E credit phases
out.
3. Recapture
A commenter stated that if the Treasury Department and the IRS
retain the Excluded Costs Rule as written, the final regulations should
further clarify that investment tax credit recapture rules will not
apply to additions of property that do not satisfy the 80/20 Rule.
Generally, recapture under section 48E is governed by section
50(a)(1)(A), which provides for recapture of the credit if property
ceases to be investment credit property. Additions of property that do
not satisfy the 80/20 Rule and that are thus subject to the Excluded
Costs Rule are not included in the calculation of the section 48E
credit. Accordingly, there is no credit to recapture with respect to
such additions of property.
4. Original Use Requirement
Some commenters asserted that the original use requirement applies
only to acquired property, and therefore, the 80/20 Rule is unnecessary
for other types of property. These commenters pointed to section
48E(b)(2)(C), which provides, in part, that qualified property means
property (i) the construction, reconstruction, or erection of which is
completed by the taxpayer, or (ii) which is acquired by the taxpayer if
the original use of such property commences with the taxpayer. This
language was incorporated at proposed Sec. 1.48E-2(f)(3) through (5).
The commenters cited this language to support their view that the
original use requirement applies only to acquired property. Therefore,
according to the commenters, the ``original use'' requirement applies
to property acquired by a taxpayer, but does not apply to property the
construction, reconstruction, or erection of which is completed by the
taxpayer. The commenters concluded that this statutory language
supports the position that capital additions to an existing qualified
facility or EST qualify for the section 48E credit.
The Treasury Department and the IRS disagree with the commenters'
interpretation of the statutory language and corresponding language in
the proposed regulations. The commenters are correct that section
48E(b)(2)(C)(ii) requires original use for acquired property, whereas
section 48E(b)(2)(C)(i) does not mention original use with respect to
property that is constructed, reconstructed, or erected by or for the
taxpayer, however, that is because an original use requirement is
unnecessary in the latter context. The taxpayer that is claiming a
credit for property that it constructed, reconstructed, or erected by
or for such taxpayer will necessarily be the original user of such
property. Although some commenters suggested the 80/20 Rule has
historically been applied in the section 48 context with respect to the
original use requirement, the Treasury Department and the IRS emphasize
that the 80/20 Rule was first applied to the section 48 credit through
guidance issued in the Internal Revenue Bulletin providing beginning of
construction guidance. The Treasury Department and the IRS reiterate
that for section 48E purposes, the 80/20 Rule allows a taxpayer that
retrofits an existing facility to treat such facility as a new
qualified facility or EST.
5. EST
In the context of section 48E, the proposed regulations discussed
the 80/20 Rule for purposes of retrofitting a qualified facility but
did not specifically address the application of the 80/20 Rule to EST.
Some commenters asked if the 80/20 Rule applied to EST. Commenters
requested that the final regulations clarify that the 80/20 Rule also
applies to EST, including battery energy storage systems and pumped
storage hydropower. Another commenter stated that new component
categories, like EST, added to existing facilities should be treated as
separate units of qualifying facility and exempted from the 80/20 Rule.
In response to these comments, the Treasury Department and the IRS
note that the 80/20 Rule applies to EST. The 80/20 Rule, as it is
applied to EST, is a separate rule from the modification of EST
provided by the section 48E(c)(2) reference incorporating section
48(c)(6)(B) (modifications of EST). The final regulations adopt the
application of the 80/20 Rule for EST, and this Summary of Comments and
Explanation of Revisions addresses EST in regard to the 80/20 Rule.
With respect to the addition of EST to a site with an existing
qualified facility, the Treasury Department and the IRS note that an
EST is separate from a qualified facility as discussed in section
III.C.2. of this Summary of Comments and Explanation of Revisions. As a
result, merely adding an EST to a site with an existing qualified
facility does not require application of the 80/20 Rule.
6. Specific Technologies
Some commenters asked for specific clarifications regarding the 80/
20 Rule and particular technologies. A commenter suggested that in the
case of a hydropower facility combined with a pumped storage hydropower
facility, each powerhouse generating unit (turbine or pump turbine,
generator and controls) should be considered a unit of qualified
facility for purposes of the final regulations. Additionally, this
commenter asserted, that, in the case of a wind facility, the
functionally interdependent components of a unit of qualified facility
should be the turbine, tower, and foundation pad. In both cases, the
commenter requested that the 80/20 Rule apply to the functionally
interdependent components of the unit of qualified facility.
For purposes of the section 45Y and section 48E credits, the unit
of qualified facility includes all functionally interdependent
components of property (as defined in proposed Sec. 1.48E-
[[Page 4026]]
2(d)(2)(ii)) owned by the taxpayer that are operated together and that
can operate apart from other property to produce electricity. The final
regulations adopt these rules, which provide a function-oriented
approach to determine if property is considered part of the qualified
facility that generates electricity, to ensure that the final
regulations are broad enough to encompass nascent technologies without
rendering the regulations quickly obsolete. After consideration of the
comments, an example of the application of the 80/20 Rule to a
qualified hydropower production facility has been added to the final
regulations under Sec. 1.48E-4(c)(6)(v). Additionally, the Treasury
Department and the IRS made revisions to Example 3 of Sec. 1.48E-
4(c)(6)(iii), similar to those made for Sec. 1.45Y-4(d)(3)(iii), that
removed the reference to a decommissioned nuclear facility to avoid
referring to decommissioned and restarted nuclear facilities in the
Incremental Production Rule and the 80/20 Rule.
Another commenter specifically asked that the 80/20 Rule be
eliminated for certain types of facilities such as power generation,
thermal generation, or CHP facilities upgraded to be carbon neutral. To
support this request, the commenter noted that the 80/20 Rule
discourages the use of existing infrastructure in CHP applications.
While the Treasury Department and the IRS appreciate the concerns
raised for particular technologies, as described in the preamble to the
proposed regulations, a qualified facility generally does not include
equipment that is an addition or modification to an existing qualified
facility or EST. However, see Sec. 1.48E-4(b) regarding the
Incremental Production Rule.
7. Interaction Between the Incremental Production Rule and the 80/20
Rule
Some commenters were concerned about the interaction of the
Incremental Production Rule and the 80/20 Rule and the provided at
proposed Sec. Sec. 1.45Y-4(c) and 1.48E-4(b). One commenter requested
that the Treasury Department and the IRS make clear that the provision
for retrofitted facilities is separate and distinct from the
requirements for the Incremental Production Rule, and that if there is
any overlap between the two, the 80/20 Rule should control. The
commenter stated that a retrofitted facility that results in the
addition of capacity should be treated as newly placed in service if it
meets the 80/20 Rule (rather than requiring the retrofitted facility to
follow the Incremental Production Rule).
Another commenter recommended clarifying when to apply one rule or
the other in situations in which both the 80/20 and Incremental
Production rules could apply. A commenter also asserted that the
statutory text under sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i),
regarding the Incremental Production Rule, is without regard to the 80/
20 Rule or the facility's original placed in service date, and that,
therefore, Congress sought to incentivize investment in existing
facilities without requiring taxpayers to meet the 80/20 Rule.
Similarly, commenters recommended providing an example of a
decommissioned facility without any reference to the 80/20 Rule, and to
revise Example 3 in proposed Sec. 1.45Y-4(d)(3)(iii), regarding the
80/20 Rule, to remove the reference to decommissioning.
The Treasury Department and the IRS agree that the Incremental
Production Rule provided in sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i)
are separate and distinct from the 80/20 Rule. If a retrofitted
facility satisfies the 80/20 Rule, the final regulations provide that
the facility will be treated as newly placed in service even if the
taxpayer also satisfies the Incremental Production Rule. Separately,
these final regulations provide an additional example, in Sec. 1.48E-
4(b)(5), which specifically addresses decommissioned and restarted
facilities. Additionally, Sec. 1.48E-4(c)(1) is clarified to confirm
that a qualified facility or EST may claim the full available credit
rather than the credit resulting from an addition of capacity. Finally,
Example 3 in Sec. 1.45Y-4(d)(3)(iii) is modified to remove the
reference to decommissioning.
Another commenter requested clarification that even if a facility
placed in service before 2025 (pre-2025 facility) fails the 80/20 Rule,
property that is added to the facility may still qualify for the
section 48E credit under the Incremental Production Rule in section
48E(b)(3)(B)(i). Proposed Sec. 1.48E-4(b)(1) provided, in part, that
the term qualified facility includes either a new unit or an addition
of capacity placed in service after December 31, 2024, in connection
with a facility described in section 48E(b)(3)(A) (without regard to
section 48E(b)(3)(A)(ii)), which was placed in service before January
1, 2025, but only to the extent of the increased amount of electricity
produced at the facility by reason of such new unit or addition of
capacity. Thus, a pre-2025 facility that fails the 80/20 Rule may still
qualify for the section 48E credit under the Incremental Production
Rule. Additionally, the Treasury Department and the IRS confirm that
this rule will apply to a pre-2025 facility regardless of whether it
satisfies the 80/20 Rule.
8. Other Comments
While the majority of commenters that opposed the 80/20 Rule
suggested eliminating it, particularly the Excluded Costs Rule, one
commenter provided an additional recommendation. This commenter
recommended that the proposed regulations be revised to permit
taxpayers to elect either the 80/20 Rule or a rule based on the
original cost of the qualified facility (Original Cost Rule). Under the
Original Cost Rule as proposed by the commenter, a qualified facility
would be treated as originally placed in service, even though it
contains some used components of property, provided the cost of the new
components of the unit of qualified facility is at least 50 percent of
the original cost of the unit of qualified facility. Original cost
would be defined as the unadjusted GAAP book basis at the time the
qualified facility was originally placed in service. The commenter also
explained that this new rule could be limited in its application and
stated that outside of sections 45 and 48 an 80/20 Rule currently
applies to determine eligibility for bonus depreciation under section
168(k)(7) and the carbon oxide sequestration credit under section 45Q
of the Code. Therefore, the commenter requested that the final
regulations adopt an optional Original Cost Rule limited to section 45Y
and section 48E qualified facilities, which would limit the effect to
the section 45Y and 48E credits and permit the 80/20 Rule adopted in
other contexts to remain in place.
The Treasury Department and the IRS understand the commenter's
desire for a less restrictive standard than what the proposed 80/20
Rule provides, but the Treasury Department and the IRS think the 80/20
Rule strikes the appropriate balance between allowing taxpayers
flexibility and creating an incentive for new investment. Therefore,
the final regulations do not adopt the commenter's proposal.
After consideration of all comments expressing opposition to the
80/20 Rule in the context of section 48E, the Treasury Department and
the IRS decline to modify or abandon the 80/20 Rule as requested.
Section 48E(b)(1) provides that the section 48E credit is available for
the qualified investment with respect to any qualified facility for any
taxable year that includes the basis of any qualified property placed
in service by the taxpayer during such
[[Page 4027]]
taxable year which is part of a qualified facility. Section 48E(c)(1)
provides that a credit for the qualified investment with respect to an
EST for any taxable year is the basis of any EST placed in service by
the taxpayer during such taxable year. The 80/20 Rule is designed to
broaden the availability of the section 48E credit to provide a new
original placed in service date for a qualified facility or EST that
includes some components of a qualified facility or EST that have
already been placed in service, rather than requiring the entire unit
of qualified facility or EST to be composed of only new property. The
80/20 Rule also encourages retrofitting an existing qualified facility
or EST provided there is sufficient new investment. As described
earlier in this section on the 80/20 Rule, if a qualified facility
under section 45 or energy property under section 48 is retrofitted in
a manner that satisfies the 80/20 Rule, it will be considered a new
qualified facility and may be eligible for the section 45Y or 48E
credits if the qualified facility meets all of the sections 45Y and 48E
requirements.
Section 48E(c)(2) incorporates the lone express rule for
modification of existing energy property that is found in section
48(c)(6)(B). This special rule is limited to modifications of existing
EST. The inclusion of this specific provision suggests that
modifications of existing EST that do not meet the 80/20 Rule or the
Incremental Production Rule are ineligible for the section 45Y or 48E
credits. Adopting the 80/20 Rule for the section 48E credit is
favorable to taxpayers and encourages substantial additional investment
in existing qualified facilities and EST.
As discussed in section IV.G. of this Summary of Comments and
Explanation of Revisions, the ownership rules provided that the section
45Y and 48E credits are available for an entire unit of qualified
facility or unit of EST and not for individual components of property.
The 80/20 Rule is consistent with the ownership rules because it
ensures that a qualified facility or EST that is retrofitted to a
sufficient extent is considered a new qualified facility or EST,
whereas the addition of mere components is not eligible for the section
48E credit.
F. Qualified Progress Expenditures
Section 48E(d)(1) provides that rules similar to the rules of
former section 46(c)(4) and (d) (as in effect on the day before the
date of the enactment of the Revenue Reconciliation Act of 1990) apply
for purposes of section 48E(a). Footnote 5 of the proposed regulations
explained that the rules provided by Sec. 1.46-5 related to qualified
progress expenditures apply for purposes of section 48E(a).
Several commenters requested that the final regulations provide
additional clarifications related to whether qualified progress
expenditures are allowable for purposes of elective payment elections
under section 6417 (section 6417 elective payment elections).
Commenters requested clarifying the application of qualified progress
expenditure payments to ``applicable entities,'' as defined in section
6417(d)(1), and confirming that progress expenditures permitted by
section 48E are allowable for purposes of section 6417 elective payment
elections. Commenters noted that, while section 6418(g)(4) provides an
explicit statutory prohibition on using the section 6418 credit
transfer election provisions for progress expenditures, a similar
prohibition was not included for section 6417 elective payment
elections and that, therefore, permitting applicable entities to use
the section 48E credit for purposes of section 6417 elective payment
elections is consistent with the statutory text of section 6417.
Given the statutory language under section 48E(d)(1), a taxpayer
can make a qualified progress expenditure election, as provided in
Sec. 1.46-5, to increase its qualified investment with respect to a
qualified facility or EST for the taxable year by any qualified
expenditures made during such taxable year. Section 6417(b)(12)
provides that the section 48E credit is an applicable credit for
purposes of making an elective payment election. The statutory text of
sections 48E(d)(1) and 6417(b)(12), when read in tandem, permit a
taxpayer to make an elective payment election with respect to a section
48E credit determined pursuant to a qualified progress expenditure
election. Therefore, the Treasury Department and the IRS confirm that
for the section 48E credit, qualified progress expenditures are
allowable for purposes of section 6417 elective payment elections but
have determined that no change is necessary in the final regulations.
The final regulations at Sec. 1.48E-4(g) adopt language similar to
footnote 5 from the proposed regulations, that the rules provided by
Sec. 1.46-5 related to qualified progress expenditures apply for
purposes of section 48E(a).
G. Incremental Cost Rule
One commenter requested that the final regulations ``clarify the
application of the `incremental cost''' concept to section 48E.
Incremental cost is the excess of the total cost of equipment over the
amount that would have been expended for the equipment if the equipment
were not used for a qualifying purpose. The regulations under former
Sec. 1.48-9(k) provided the incremental cost rule. The preamble to the
Treasury Decision (TD 7765, 46 FR 7291) that implemented this rule
noted that in many instances one item of property can be used in part
for a qualifying energy purpose and in part for non-qualifying
functions. The preamble to TD 7765 explained that the Treasury
Department and the IRS approached this situation by considering whether
to deny the credit, provide partial credit, or allow a full credit. The
preamble stated that simply denying the credit entirely would
discourage investments, but that, on the other hand, property which
incidentally serves an energy function should not receive the subsidy
of a full energy credit. For these reasons, the Treasury Department and
the IRS viewed the incremental cost rule as the most fair approach.
The Treasury Department and the IRS have determined that a similar
approach should be taken in these final regulations. Section 1.48E-
4(h)(1) provides that for purposes of section 48E, if a component of
qualified property of a qualified facility or a component of property
of an EST is also used for a purpose other than the intended function
of the qualified facility or EST, only the incremental cost of such
component is included in the basis of the qualified facility or EST.
This section also defines the term ``incremental cost'' to mean the
excess of the total cost of a component over the amount that would have
been expended for the component if that component were used for a non-
qualifying purpose. Section 1.48E-4(h)(2) provides an example to
illustrate this rule.
H. Application of Normalization Opt-Out
Proposed Sec. 1.48E-4(g)(4) referred taxpayers to section 50(d)(2)
for application of the normalization rules to the section 48E credit in
the case of certain regulated companies, including rules regarding the
election not to apply the normalization rules to EST (as defined in
section 48(c)(6) of the Code). Several commenters requested that the
final regulations clarify that the normalization opt-out election
provided in section 50(d)(2) is available for the section 48E credit
claimed with respect to an EST, without regard to the date on which
construction of such EST begins. After consideration of the comments,
the requested clarification has been adopted in Sec. 1.48E-4(i)(4).
[[Page 4028]]
IV. Combined Qualified Facilities (Sections 45Y and 48E)
This section covers issues that impact both sections 45Y and 48E
and includes the topics: beginning of construction, property included
in a qualified facility, qualified facilities and specific
technologies, coordination with other credits, integral part, shared
integral property, ownership, the Incremental Production Rule, and the
dual use rule.
Proposed Sec. 1.45Y-2(a) defined a ``qualified facility'' to mean
a facility owned by the taxpayer that is used for the generation of
electricity, is placed in service after December 31, 2024, and has a
GHG emissions rate of not greater than zero (as determined under rules
provided in proposed Sec. 1.45Y-5).
Proposed Sec. 1.48E-2(a) defined a ``qualified facility'' to mean
a facility that is used for the generation of electricity, is placed in
service by the taxpayer after December 31, 2024, and has a GHG
emissions rate of not greater than zero (as determined under rules
provided in Sec. 1.45Y-5).
A. Beginning of Construction
Notice 2022-61, 2022-52 I.R.B. 560, provides guidance regarding the
prevailing wage and apprenticeship (PWA) requirements and provides
guidance for determining the beginning of construction of a facility
for the section 45Y and 48E credits. Section 5 of the Notice provides
that, to determine when construction begins for purposes of sections
30C, 45V, 45Y, and 48E, principles similar to those under Notice 2013-
29, 2013-20 I.R.B. 1085, regarding the Physical Work Test and Five
Percent Safe Harbor apply, and taxpayers satisfying either test will be
considered to have begun construction.
Section 5 of Notice 2022-61 also provides that principles similar
to those provided in certain IRS Notices \2\ regarding the Continuity
Requirement for purposes of sections 30C, 45V, 45Y, and 48E apply.
Section 5 further provides that whether a taxpayer meets the Continuity
Requirement under either test is determined by the relevant facts and
circumstances. Additionally, section 5 states that principles similar
to those under section 3 of Notice 2016-31, 2013-44 I.R.B. 431,
regarding the Continuity Safe Harbor also apply for purposes of
sections 30C, 45V, 45Y, and 48E. Section 5 also provides that taxpayers
may rely on the Continuity Safe Harbor provided the facility is placed
in service no more than four calendar years after the calendar year
during which construction began. For purposes of the section 45Y and
48E credits, Notice 2022-61 continues to apply.
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\2\ Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice
2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-
46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B.
814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025;
updated, clarified, and modified by Notice 2017-04, 2017-4 I.R.B.
541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43,
2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954;
clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479;
clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17.
---------------------------------------------------------------------------
A commenter requested that final regulations clarify that projects
failing to qualify for the section 45 or 48 credits due to a failure to
satisfy continuity requirements may still qualify for the section 45Y
or 48E credits, assuming all other requirements for the section 45Y or
48E credit are satisfied. The commenter contended that a taxpayer may
meet the January 1, 2025, beginning of construction requirement to
qualify for the section 45 and 48 credits, but may not be able to
satisfy continuity requirements under existing IRS guidance by placing
the facility in service within four years after construction began. The
Treasury Department and the IRS confirm that a facility that fails to
satisfy the requirements (including beginning of construction
requirements) for the section 45 or 48 credit, is not disqualified from
claiming either section 45Y or 48E so long as the facility meets all
requirements under those Code sections.
The commenter also noted that sections 45Y and 48E employ a ``start
of construction'' metric for purposes of determining whether a
qualified facility is eligible for the increase in credit rates for
satisfying the domestic content or energy communities bonus, and for
assessing the applicable credit phaseout amounts. The commenter
recommended resolving what they characterized as uncertainty related to
application of beginning of construction rules under existing IRS
guidance to sections 45Y and 48E by adopting modified continuity safe
harbor requirements for determining the beginning of construction. One
such modified safe harbor would permit a taxpayer to apply whatever
rules were applicable to the ``commence construction'' year that
corresponds to the earliest year that would still meet a continuity
safe harbor based on when the facility was ultimately placed in
service.
The Treasury Department and the IRS have determined that the
existing Internal Revenue Bulletin guidance (referred to as the IRS
Notices) adequately addresses the beginning of construction rules
applicable to sections 45Y and 48E. Additionally, modifications to the
beginning of construction guidance provided by the IRS Notices for
sections 45 and 48 are beyond the scope of these final regulations.
B. Property Included in Qualified Facility
Proposed Sec. 1.45Y-2(b) provided a description of the property
included in a qualified facility. Proposed Sec. 1.45Y-2(b)(1) provided
that a qualified facility includes a unit of qualified facility,
defined in proposed Sec. 1.45Y-2(b)(2)(i), and also includes qualified
property owned by the taxpayer that is an integral part of a qualified
facility, defined in proposed Sec. 1.45Y-2(b)(3). Section 45Y is
silent regarding the credit eligibility of components that are part of
a qualified facility but located in different locations. Accordingly,
proposed Sec. 1.45Y-2(b)(1) clarified that any property that meets the
requirements of a qualified facility described in proposed Sec. 1.45Y-
2(b) is part of a qualified facility, regardless of where such property
is located.
Proposed Sec. 1.48E-2(b) provided that a qualified facility
includes a unit of qualified facility, defined in proposed Sec. 1.48E-
2(b)(2)(i), and also includes property owned by the taxpayer that is
integral to the unit of qualified facility, which is defined in
proposed Sec. 1.48E-2(b)(3). For purposes of section 48E, a qualified
facility does not include any electrical transmission equipment, such
as transmission lines and towers, or any equipment beyond the
electrical transmission stage, and generally does not include equipment
that is an addition or modification to an existing qualified facility.
However, the proposed regulations provided two specific exceptions to
that rule: the Incremental Production Rule, and the 80/20 Rule.
A commenter stated that there are inconsistencies between the
definitions of a ``property included in a qualified facility'' in
proposed Sec. 1.45Y-2(b)(1) and ``unit of qualified facility'' in
proposed Sec. 1.45Y-2(b)(2). The commenter stated that the first
definition provides that the qualified facility equals the ``unit of
qualified facility'' plus the ``integral property'', however, the
second definition provides that a ``unit of qualified facility''
equates to ``functionally interdependent components of property.'' The
commenter stated that proposed Sec. 1.48E-2 had similar
inconsistencies. The commenter suggested that the final regulations
include an example to more clearly define a qualified facility. The
commenter also referred to the coordination with other credits in
[[Page 4029]]
proposed Sec. 1.45Y-2(c) and stated that a taxpayer must assume that
what constitutes a ``qualified facility'' under section 45Y, namely,
all functionally interdependent components of property as well as any
integral property, is the same with respect to all other Federal income
tax credits that reference a qualified facility, but that this
definition needs to be made consistent across all the other Code
sections.
The Treasury Department and the IRS do not agree that an ambiguity
exists between the references to a qualified facility. For both
sections 45Y and 48E, the unit of qualified facility is the narrower
definition and includes only the functionally interdependent components
of property. A qualified facility is this ``unit of qualified
facility'' plus integral property. Multiple examples in the proposed
regulations illustrate these concepts.
The Treasury Department and the IRS also do not agree that
taxpayers must assume that the definition of a ``qualified facility''
under sections 45Y and 48E is the same in all other Federal income tax
credits. Each Code section has its own unique definition of a facility
that must be considered; addressing definitions in other Code sections
is beyond the scope of these final regulations. In response to
commenters' concerns, though, the final regulations add additional
examples to illustrate the interaction of Federal income tax credits in
Sec. Sec. 1.45Y-2(c)(3) and 1.48E-2(f)(3). The final regulations at
Sec. Sec. 1.45Y-2(b)(3)(vii) and 1.48E-2(b)(3)(vii) also change the
term ``qualified property'' in proposed Sec. 1.45Y-2(b)(1) to
``property'' as ``qualified property'' is not a term used in section
45Y.
C. Qualified Facilities and Specific Technologies for Purposes of
Sections 45Y and/or 48E
1. Biogas
Commenters stated that the energy feedstock production property
comprising a feedstock processing and treatment system, when owned by
the same taxpayer that owns the electric generation facility placed in
service after December 31, 2024, is either a functionally
interdependent component property operated together with the electric
generation facility or an integral part of that facility. Commenters
asserted that anaerobic digester and gas conditioning components are
used directly in the intended function of the facility and that,
without this feedstock treatment, the electricity production component
would not be able to produce zero or negative GHG electricity.
Accordingly, commenters requested that the final regulations recognize
all components of an electricity production facility, including the
anaerobic digester and gas conditioning equipment as part of a
qualified facility. The final regulations do not adopt these comments
because while the energy feedstock production property described is
generally used to produce fuel that may be used by a qualified facility
to generate electricity, it is not part of such qualified facility
based on the definition of qualified facility for purposes of the
section 45Y and 48E credits.
2. Solar
A commenter encouraged the Treasury Department and the IRS to
explicitly define solar photovoltaic panels used to generate
electricity for an automated shading system as a qualified facility.
The commenter noted that the example in proposed Sec. 1.45Y-
5(c)(1)(iii) already describes the GHG emissions rate for qualified
facilities that produce electricity using solar photovoltaic properties
as not greater than zero and that proposed Sec. 1.45Y-5(c)(2)(iv) also
describes solar photovoltaic power as a type of non-C&G facility.
The Treasury Department and the IRS have determined that the
example in proposed Sec. 1.45Y-5(c)(1)(iii) and the list of non-C&G
facilities in proposed Sec. 1.45Y-5(c)(2)(iv) are sufficient to
address commenter's request as the rules adequately provide that
facilities using solar photovoltaic property to produce electricity are
eligible for the section 45Y and 48E credits assuming the taxpayer
satisfies the other statutory requirements. Accordingly, the final
regulations adopt the proposed rule without change.
3. Nuclear
A commenter requested that the final regulations confirm that
nuclear structures, components, and fuel are part of qualified property
for purposes of section 48E. Similarly, another commenter requested
confirmation that specific components, such as reactor cores, are
included in the qualified investment in a qualified facility under
section 48E. Another commenter suggested adding language to the
definition of integral part with respect to buildings to specifically
address a building used for nuclear fusion or fission. The commenter
specifically requested the final regulations describe a structure or
building that is integral to the intended function of a qualified
facility because it is needed to comply with or maintain required
radiological health and safety conditions as required by a qualified
facility's regulator.
Section 48E(b)(1) generally provides that the section 48E credit is
available for a taxpayer's qualified investment with respect to a
qualified facility, which is the sum of the basis of any qualified
property placed in service by the taxpayer during such taxable year
that is part of such qualified facility and if applicable, qualified
interconnection costs. Section 48E(b)(2)(A) provides, in relevant part,
that qualified property is property which is tangible personal property
or other tangible property (not including a building or its structural
components), but only if such property is used as an integral part of
the qualified facility. Therefore, tangible property, including
structures (other than buildings or their structural components),
components, and fuel, that meets the definition of qualified property
may be included in the credit base of a qualified facility. As provided
in Sec. 1.48E-2(d)(3)(v), generally buildings are not integral parts
of a qualified facility because they are not integral to the intended
function of the qualified facility. Due to the exclusion of a building
or its structural components, this would exclude, for example,
buildings that house nuclear reactor control rooms.
However, as the proposed regulations acknowledged, not all
structures are considered ``buildings'' for the purpose of excluding
buildings and their structural components. Proposed Sec. 1.48E-
2(b)(3)(v)(A) and (B) provided that a structure is not considered a
building if it is essentially an item of machinery or equipment, or if
it houses components of property that are integral to the intended
function of the qualified facility and if the use of the structure is
so closely related to the use of the housed components of property
therein that the structure clearly can be expected to be replaced if
the components of property it initially houses are replaced. The
Treasury Department and the IRS confirm that nuclear containment
structures fall within the exception provided in proposed Sec. 1.48E-
2(b)(3)(v)(A) and (B), which has been adopted and moved to Sec. 1.48E-
2(d)(3)(v)(A) and (B) of the final regulations. Like hydropower dams,
but unlike control room buildings, nuclear containment structures are
integral to the intended function of the qualified facility. Moreover,
given their complexity, technical requirements, Nuclear Regulatory
Commission-mandated testing requirements, severe limits on the time
workers and other personnel can spend inside the structure, and
purpose, nuclear
[[Page 4030]]
containment structures are essentially pieces of specialized equipment.
They ensure the fulfillment of several safety functions at a nuclear
power plant, including: (i) confinement of radioactive substances in
operational states and in accidental conditions; (ii) protection of the
reactor against natural external events and human induced events; and
(iii) radiation shielding in operational states and in accident
conditions.
4. Hydropower
A commenter requested that the final regulations provide additional
examples illustrating the scope of a ``qualified investment credit
facility'' and ``qualified property'' with respect to hydropower.
Another commenter asked that the final regulations confirm that
components of project works as identified in FERC licenses (referred to
by the commenter as physical structures of a project) are integral
property to a hydropower facility and therefore eligible for the
section 48E credit. Specifically, the commenter suggested adopting
principles from the section 48 proposed regulations regarding qualified
offshore wind facilities, whereby all FERC-licensed components of any
kind, including remote islanded hydropower generation components,
including the switchgear or substation housed in an onshore substation,
are either functionally interdependent components of a unit of the
qualified facility or integral parts of a qualified facility.
A definitive response to these comments would require the Treasury
Department and the IRS to conduct a complete factual analysis of the
hydropower 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
final regulations do not provide these requested clarifications.
However, further discussion of relevant components of hydropower
facilities is provided in section IV.E. of this Summary of Comments and
Explanation of Revisions.
5. Section 48 Energy Properties
A commenter suggested that, for purposes of the qualified
investment calculation in section 48E(b), the final regulations should
clarify that the term ``qualified property'' includes any energy
property defined in section 48(a)(3), unless it is specifically
excluded. The Treasury Department and the IRS reiterate that the
determination of whether a qualified facility is eligible for the
section 48E credit depends, in part, on the anticipated GHG emissions
of the facility as determined under section 48E(b)(3)(B)(ii) and Sec.
1.48E-5 of these regulations rather than the technology used. This is
distinct from section 48(a)(3), which identified specific types of
energy property that are eligible for the section 48 credit. See the
discussion of qualified property for section 48E in section III.B. of
this Summary of Comments and Explanation of Revisions. Accordingly, the
Treasury Department and the IRS cannot adopt the commenter's
recommendation and the rule will be adopted as proposed.
6. Facilities That Are Not Used for the Generation of Electricity
A commenter requested that the final regulations provide
flexibility to ensure that the following thermal energy technologies
would not be prohibited from qualifying for the section 45Y and 48E
credits: alternative water thermal sourcing, heat recovery systems for
ventilation air, simultaneous heat recovery, and air source heat pumps.
Similarly, another commenter suggested that thermal production from
non-waste energy recovery should be eligible for the section 45Y credit
and provided sample regulatory language to that effect. Another
commenter suggested that technologies such as air-source heat pumps and
building efficiency retrofits should be eligible for the section 45Y
and 48E credits. Other commenters stated that microgrid controllers,
which are energy property under section 48, should be eligible for the
section 48E credit.
Sections 45Y(b)(1)(A)(i) and 48E(b)(3)(A)(i) define a qualified
facility as a facility which is used for the generation of electricity.
A facility cannot be considered a qualified facility under either
section 45Y or 48E if it does not meet this requirement. However, the
Treasury Department and the IRS note that the section 48E credit
applies to both qualified facilities and EST. Section III.C.1. of this
Summary of Comments and Explanation of Revisions discusses the
definition of EST for purposes of the section 48E credit.
Given the earlier-described comments, and a few comments on other
topics that indirectly suggested that EST that are net consumers of
electricity were nonetheless ``used for the generation of
electricity,'' the Treasury Department and the IRS have determined that
additional clarification of the phrase ``used for the generation of
electricity'' is warranted. The final regulations at Sec. Sec. 1.45Y-
2(a)(1) and 1.48E-2(b)(1)(i) clarify that, for a facility to meet the
requirements of sections 45Y(b)(1)(A)(i) and 48E(b)(3)(A)(i), the
facility must be a net generator of electricity, taking into account
any electricity consumed by the facility.
D. Coordination With Other Credits
Proposed Sec. Sec. 1.45Y-2(c) and 1.48E-2(c) provided rules for
coordination of the section 45Y and 48E credits with other Federal
income tax credits, including those determined under sections 45, 45J,
45Q, 45U, 48, and 48A. Proposed Sec. 1.45Y-1(c)(1) provided, in part,
that a taxpayer that owns a qualified facility that is eligible for
both a section 45Y credit and another Federal income tax credit is
eligible for the section 45Y credit only if the other Federal income
tax credit was not allowed with respect to the qualified facility.
A commenter suggested clarifying that the reference in proposed
Sec. 1.45Y-2(c)(1) to ``another Federal income tax credit'' does not
extend beyond those credits specifically listed in section 45Y(c)(1).
The commenter stated that, although the reference to ``another Federal
income tax credit'' follows a specific reference to specific sections
of the Code, the general reference is ambiguous and may inadvertently
preclude claiming the section 45Y or 48E credits when a taxpayer claims
a non-energy credit such as the credit for increasing research
activities under section 41 of the Code or the advanced manufacturing
production credit under section 45X of the Code.
A commenter requested modifying Sec. 1.45Y-2(c)(1) to permit a
taxpayer to claim the section 45Y credit with respect to a qualified
facility that is co-located with another facility for which a credit
determined under section 45V or 45Z of the Code is allowed. Another
commenter requested that the final regulations clarify that the carbon
capture portion of a bioenergy and carbon sequestration facility is a
section 45Q facility separate from the electricity generating portion
of a qualified facility under section 45Y.
A commenter asked whether the ``anti-abuse provision'' in the
section 45V proposed regulations would bar a taxpayer from claiming the
section 45V credit in addition to either the section 45Y or 48E
credits. Similarly, commenters requested clarifying whether taxpayers
claiming the section 48E credit in a taxable year would be unable to
claim the section 45Q credit in any subsequent year. The commenters
asserted that section 48E(b)(3)(C) only specifically prohibits a
taxpayer from claiming a section 48E credit for a facility for which a
section 45Q credit was claimed ``for the taxable year or any prior
taxable year,'' but does
[[Page 4031]]
not directly state that a taxpayer cannot claim a section 45Q credit
for that facility in a future taxable year.
Some commenters requested that the final regulations prevent
taxpayers from claiming multiple Federal or State tax incentives based
on the same investment in or for the production of clean energy. By
contrast, another commenter requested confirmation that claiming the
section 45Y and 48E credits would not impact a taxpayer's ability to
qualify for other subsidies, grants, or loans from DOE's Loans Program
Office.
In accordance with the statutory language under section
45Y(b)(1)(D), the Treasury Department and the IRS confirm that the
phrases ``another Federal income tax credit'' and ``other Federal
income tax credit'' in proposed Sec. 1.45Y-2(c)(1) refer solely to the
credits claimed under sections 45, 45J, 45Q, 45U, 48, 48A, and 48E.
Similarly, in accordance with section 48E(b)(3)(C), the phrases
``another Federal income tax credit'' and ``other Federal income tax
credit'' in proposed Sec. 1.48E-2(c)(1) refer solely to those credits
claimed under sections 45, 45J, 45Q, 45U, 45Y, 48, and 48A. Moreover,
the provisions under sections 45Y(b)(1)(D) and 48E(b)(3)(C) do not
impact the ability of a taxpayer to claim a credit for a qualified
facility that is co-located with a facility for which a credit under
any Code section is claimed. In general, a taxpayer may claim a section
45Y or 48E credit for a qualified facility that is co-located with
another facility, irrespective of any credit that the co-located
facility claimed.
The determination of what constitutes a qualified facility for
purposes of section 45Q is addressed in regulations under section 45Q
and thus is beyond the scope of these final regulations. However, as
described earlier, a taxpayer may not claim the section 45Y credit and
the section 45Q (or sections 45, 45J, 45U, 48, 48A, and 48E) credit
with respect to the same qualified facility for the taxable year or any
prior taxable year. Nor may a taxpayer claim the section 48E credit and
the section 45Q (or sections 45, 45J, 45U, 45Y, 48, and 48A) credit
with respect to the same qualified facility for the taxable year or any
prior taxable year. An examination of the whether the regulations under
section 45Q prohibit a taxpayer from claiming the section 45Q credit
with respect to a qualified facility for which the taxpayer has claimed
a section 45Y or section 48E credit in any prior taxable year is beyond
the scope of these final regulations. Finally, an examination of the
application of the anti-abuse provision in the section 45V proposed
regulations, or an analysis of Federal or State tax incentives,
including subsidies, grants, or loans from DOE's Loans Program Office,
are also beyond the scope of these final regulations. The final
regulations add examples to Sec. Sec. 1.45Y-2(c)(3) and 1.48E-2(f)(3)
to further illustrate the interaction of sections 45Y and 48E with
other Federal income tax credits.
E. Integral Part
Proposed Sec. 1.45Y-2(b)(3)(i) provided that for purposes of the
section 45Y credit, a component of property owned by a taxpayer is an
integral part of a qualified facility if it is used directly in the
intended function of the qualified facility and is essential to the
completeness of such function. Property that is an integral part of a
qualified facility is part of the qualified facility. Proposed Sec.
1.45Y-2(b)(3)(ii) through (v) applied this rule to different types of
property.
Proposed Sec. 1.48E-2(b)(3)(i) similarly provided that for
purposes of the section 48E credit, a component of property owned by a
taxpayer is an integral part of a qualified facility if it is used
directly in the intended function of the qualified facility and is
essential to the completeness of the intended function. Property that
is an integral part of a qualified facility is part of the qualified
facility. A taxpayer may not claim the section 48E credit for any
property that is an integral part of a qualified facility that is not
owned by the taxpayer. Proposed Sec. 1.48E-2(b)(3)(ii) through (v)
applied this rule to different types of property.
Proposed Sec. 1.48E-2(g)(3) provided that for purposes of the
section 48E credit, property owned by a taxpayer is an integral part of
EST owned by the same taxpayer if it is used directly in the intended
function of the EST and is essential to the completeness of such
function. Property that is an integral part of an EST is part of an
EST. A taxpayer may not claim the section 48E credit for any property
that is an integral part of an EST that is not owned by the taxpayer.
A commenter supported the facility-by-facility approach that
section 48E uses and sought confirmation that taxpayers can determine
section 48E credits on this basis, rather than under the ``energy
project'' definition used in section 48 by which multiple energy
properties would be treated as one energy project if, at any point
during their construction, they are owned by a single taxpayer and meet
two or more of seven factors set forth the in section 48 proposed
regulations.
Section 48 was amended by the IRA to, among other things, provide a
definition of the term ``energy project'' and provide increased credit
amounts for energy property if that property is part of an energy
project that satisfies specified conditions. While sections 45Y and 48E
provide for similar increased credit amounts, the sections 45Y and 48E
apply the increased credit amounts at the level of a qualified facility
rather than an energy project. As a result, taxpayers can only
determine section 48E credits on the facility-by-facility approach
described in the statute and the proposed regulations.
Commenters requested expanding the scope of power conditioning
equipment that is considered an integral part of a qualified facility
to include software that optimizes or automates the function of power
conditioning equipment. Commenters also requested that the final
regulations clarify that software performing similar functions to other
integral parts of the qualified facility, such as energy management
systems, battery management systems, data acquisition systems, and
optimization software, are all considered ``power conditioning
equipment.''
Section 48E(b)(2) defines qualified property, in part, as property
that is tangible personal property, or other tangible property (not
including a building or its structural components), but only if such
property is used as an integral part of the qualified facility.
Software is not tangible property and therefore cannot be integral
property included in the qualified investment of a section 48E
qualified facility. Because the statutory definition limits ``qualified
property'' to tangible property, the final regulations modify the
language in proposed Sec. 1.48E-2(b)(3)(ii) to remove any reference to
software. The same language regarding software that was included in
proposed Sec. 1.48E-2(b)(3)(ii) was also included in proposed Sec.
1.45Y-2(b)(3)(ii). The Treasury Department and the IRS note that, while
the inclusion or exclusion of software does not impact the calculation
of the section 45Y credit, in order to provide uniform definitions that
are consistent with the statutory structure governing both credit
[…truncated; see source link]Indexed from Federal Register on January 15, 2025.
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