The IRS published Notice 2023-29 on April 4, 2023, suggesting regulations for certain clean energy projects to qualify for the energy community bonus credit under Internal Revenue Code (IRC) Section 45 for the production tax credit and IRC Section 48 for the investment tax credit, per the Inflation Reduction Act.
The regulations suggested in Notice 2023-29 also apply to IRC Sections 45Y and 48E for technology-neutral clean energy projects beginning construction after December 31, 2024. Below is more information on how energy communities are determined for purposes of determining if the clean energy production or investment qualifies for the bonus credit.
The Inflation Reduction Act provides for bonus credit amounts of 10% for certain clean energy related production tax credits generated in energy communities under IRC Sections 45 and 45Y. For certain clean energy investment tax credits generated when projects are located in energy communities, under IRC Sections 48 and 48E the energy community bonus is 2% if prevailing wage and apprenticeship requirements aren’t met and 10% if they are.
Notice 2023-29 describes certain rules that the IRS and US Department of Treasury intend to include in forthcoming proposed regulations for determining what constitutes an energy community.
The relevant sections outline three location-based categories of energy communities.
- Statistical area
- Coal closure
The brownfield category includes property where the expansion, redevelopment, or reuse of the property may be complicated by the presence or potential presence of:
- Hazardous substances
- Certain types of mine-scarred land
Note that the brownfield category doesn’t include sites defined in Title 42 US Code Section 9601(39)(B) such as those with planned or ongoing removal actions. A site may have previously been determined to be contaminated, while not qualifying under the brownfield category if it’s already the subject of a clean-up action.
Notice 2023-29 also includes several safe harbor provisions to enable a project to continue qualifying for the bonus credit under the brownfield category as long as it isn’t described in Title 42 US Code Section 9601(39)(B).
Meeting any of the below would qualify a site under the brownfield category.
- Site was previously assessed through federal, state, territory, or federally recognized Tribal brownfield resources as meeting the definition of a brownfield site
- American Society for Testing Materials (ASTM) E1903 Phase II environmental site assessment (ESA) has been completed with respect to the site and the Phase II Assessment confirms the presence of a hazardous substance per Title 42 US Code Section 9601(14) or a pollutant or contaminant per Title 42 US Code Section 9601(33)
- For projects with a nameplate capacity no greater than 5MW (AC), an ASTM E1527 Phase I ESA has been completed with respect to the site.
Certain metropolitan statistical areas (MSA) and Non-MSAs qualify if they:
- Have (or had since December 31, 2009) 0.17% or greater direct fossil fuel employment or
- Have (or had since December 31, 2009) 25% or greater local fossil fuel tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
- Had an unemployment rate at or above the national average for the previous year
Because MSAs and Non-MSAs can encompass large areas and even multiple counties or states, Notice 2023-29 lays out the determination of MSA and Non-MSA areas and includes special considerations for areas such as US territories.
Fossil Fuel Employment
To determine if the employment rate of a particular MSA or Non-MSA meets the requirement for at least 0.17% fossil fuel employment, the notice uses the number of people employed in industries identified within specific 2017 North American Industry Classification System Codes (NAISC codes), such as NAICS code 211 for Oil and Gas Extraction.
The number of people employed within the identified codes for each county in an MSA or Non-MSA is then divided by the total employment for such county, with the aggregate number used to determine if the fossil fuel threshold of 0.17% is met.
Fossil Fuel Tax Revenue
Notice 2023-29 leaves open how fossil fuel tax revenue will be determined. Since an MSA or Non-MSA may cover different counties and even states, which may have different taxing regimes, the treasury has invited additional public comment on the procedures that might be used to determine the fossil fuel tax revenue category. Additional public comment is requested by May 4, 2023.
Fossil Fuel Unemployment
A project must satisfy either the fossil fuel employment test or the fossil fuel tax revenue test and additionally, the fossil fuel unemployment test.
US Bureau of Labor Statistics data will determine the unemployment rate for each MSA and Non-MSA. Annual unemployment rates are generally released in April of the following calendar year (for example 2022 unemployment rates are expected to be released in April 2023).
The treasury and IRS intend to annually update the listing of MSA and Non-MSA that meet the fossil fuel unemployment requirement in May, with the first release in May 2023, which will apply to the period beginning January 1, 2023. Thereafter, each annual release is expected to be effective from May to April of the following year.
Because the 2022 unemployment rates have not been released, projects that began construction or were placed in service after January 1, 2023, will have to wait for the 2022 data to be released to determine if the project’s MSA or Non-MSA meets the fossil fuel unemployment test.
Census tracts, or adjoining census tracts, where a coal mine closed after December 31, 1999, or a coal-fired electric generating unit has been retired after December 31, 2009, qualify.
The US Department of Energy also released a mapping tool that shows census tracts that meet the coal closure category and fossil fuel employment metric. Importantly, the mapping tool doesn’t include data related to the latest unemployment rates or mapping related to the brownfield category. The mapping tool is anticipated to be updated in May 2023 to reflect the 2022 unemployment rates.
Additional Location Requirement Rules
A project must be located or placed in service within an energy community to qualify for the bonus credit. Notice 2023-29 provides guidance for meeting those requirements by examining when a project begins construction.
If a project begins construction in a qualifying energy community, it will be considered to be located in or placed in service within an energy community for the duration of the credit period.
Previous guidance on the prevailing wage and apprenticeship requirements helped clarify the determination of when construction starts.
For projects that might have portions located within an energy community and other portions outside it, a nameplate capacity and footprint test have been developed to help projects determine if they’re within an energy community for purposes of the credit—essentially requiring over half the nameplate capacity or footprint be in an energy community.
An additional special rule was announced for offshore wind facilities such that the nameplate capacity of such facilities is attributable to the land-based power equipment for purposes of determining if the project is in an energy community.
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