Essential Insights on Treasury's Transferability Guidelines
Our insights on important components of the Treasury's guidance on transferability, including the very positive, and somewhat less positive, announcements.
On June 14th, the US Treasury released guidance on the tax credit transferability mechanisms established by last year’s Inflation Reduction Act. This highly anticipated announcement provides proposed regulations for credit transfers under Section 6418. In this article, we will share initial insights and takeaways from the guidelines, and share thoughts on their effect on clean energy financing moving forward.
The overall industry reception to this week’s guidance appears positive, as it has largely followed expectations that market participants were anticipating. The guidance provided three key things to enable more investment into renewable energy projects:
- Certainty that corporate taxpayers can utilize the credits as intended, as well as clear guidelines that will allow transactions to move forward.
- A clear delineation of the risks and who will be responsible for them.
- A relatively low-burden process for registering, transferring, and claiming the credits.
Takeaways from Treasury guidance were largely positive
1. Clarity on transfer mechanics
Sellers electronically pre-register with the IRS, receiving a project identification number associated with each tax credit eligible property. Sellers and buyers must file a transfer election statement, which includes the registration number and is attached to the seller's and buyer's tax returns.
The transferee and transferor may file their returns in any order, as long as the transferee return is for the taxable year in which the eligible credit is taken into account under the rules of section 6418.
The IRS has released an FAQ with more details on the transfer process.
2. Narrows risk to buyer on tax credit recapture
As expected, recapture risk sit with the buyer; however, the risk to the buyer is narrowed through the following clauses:
- The Proposed Credit Transfer Rules expressly permit indemnification relating to recapture of the buyer by the seller
- A change in upstream ownership of a partnership or S corp does not cause recapture for the buyer of the credit, although this would trigger recapture to the shareholder or partner who sold their interests.
This is one of the most positive outcomes of the proposed regulations. Developers are often structured as partnerships, some with many different equity owners. Subjecting tax credit buyers to the risk of upstream changes of control that inadvertently cause recapture is a difficult risk to manage, and would likely not be covered by tax credit insurance. Additionally, sponsors may opt to continue using some form of backleverage (where a partner in the partnership that owns a project is the borrower, as opposed to the partnership itself), instead of negotiating forbearance agreements from lenders.
Unfortunately this does not change the risk profile to a developer, and they will still need to think carefully about structuring deals to avoid recapture.
3. Proceeds to buyer are tax-exempt
Another large positive for prospective buyers is that income made from a purchase of a tax credit is non-taxable. If a buyer pays $45M in cash for a $50M credit, they would not be taxed on the $5M proceeds. This is also beneficial for sellers, as it should create a market equilibrium that is closer to the true cost of the credit, and help them extract more value from their sales.
4. Supports activities of partnerships and intermediaries
The guidance confirms that partnerships or S corps may qualify as eligible taxpayers or transferee taxpayers. This opens up additional transaction structures, and seems to enable syndication mechanisms similar to those in existing tax equity transactions.
Guidance also confirmed that intermediaries can support transactions without violating the rule against second transfers, which is helpful clarification that should allow third party financial institutions and platforms, such as Reunion, to assist with facilitating transactions.
5. Credits can be purchased in advance
As expected, advanced purchases of eligible credits are permitted, as long as the cash payments are made within the specified period. In an industry that deals with a long timeframe and complex, large-scale projects, this is a welcome clarification that should narrow the timing gap, and allow sellers additional opportunity to find short-term financing from lenders and investors.
6. Credits can be factored into estimated taxes
In accordance with advanced purchases, buyers will be able to think ahead by tax planning credit acquisitions. “A transferee taxpayer may also take into account a specified credit portion that it has purchased, or intends to purchase, when calculating its estimated tax payments, though the transferee taxpayer remains liable for any additions to tax in accordance with sections 6654 and 6655 to the extent the transferee taxpayer has an underpayment of estimated tax.”
This is particularly meaningful, as a tax credit purchaser can calculate estimated tax payments in anticipation of future purchases of tax credits. From a time value of money standpoint, this accretes value to the purchaser in the context of forward purchases of tax credits.
7. Flexibility on 20% excess transfer fee
There is a 20% fee for excess credit transfer, but this “does not apply if the transferee taxpayer demonstrates to the satisfaction of the Secretary that the excessive credit transfer resulted from reasonable cause.” The guidance provided specific examples of what constitutes reasonable cause, and generally reflects standard due diligence efforts that Reunion would facilitate with respect to transactions on our platform.
8. Timeline for opening of registration portal
Lastly, the guidance confirms that the portal for registering and filing elections should open in late 2023. This should not be limiting, as most market participants expect that deals agreed upon in pre-registration will be able to be filed normally once registration opens later this year. The formal filings on the portal will provide for greater market transparency, and ensure that the same credits are not transacted twice.
Several takeaways from Treasury guidance were less positive
9. Lessees in lease pass through transactions are not allowed to transfer credits
This is one of the biggest surprises of the guidance, as most market participants had been expecting that such transfer would be allowed, and a number of transactions have closed based on this assumption. Given that a lessor is explicitly allowed to pass through an ITC at FMV (as opposed to cost), this could be the first indication that the IRS will be heavily scrutinizing transactions that step up basis.
In general, basis step up is a topic that is controversial, important, complicated and subject to interpretation. Most importantly, challenges to qualified basis are the most likely meaningful risk that a tax credit transferee assumes. We will be doing a deeper dive in this area in the near future; stay tuned.
10. Base and bonus credits must be sold in vertical slices
A seller has flexibility on the amount of credits they would like to sell, and can sell credits from one facility to multiple buyers. However, base and bonus credits cannot be sold separately; each buyer must receive a “vertical” tranche that includes a pro rata portion of base and bonus credits.
Said differently, all tax credit purchasers buying tax credits from a particular project are buying the same credit; if there is a reduction of credit, all purchasers will suffer a pro rata reduction. Sponsors were hoping to be able to sell different tranches of credits, at different pricing and risk profiles. While it is possible to synthetically allocate risk amongst a set of credit purchasers through contractual means, it remains unclear whether this will emerge as a common practice.
11. Passive loss rules continue to apply
While the guidance proposes that active/passive rules are expected to apply, they are requesting further comments. For the time being, we believe that it will remain challenging for individuals to participate in tax credit sales, other than to offset passive income.
Conclusion
Treasury Guidance was widely applauded by the clean energy industry for providing clarity on how project developers and investors can take advantage of transferable tax credits, a key financing tool of the Inflation Reduction Act. One goal of the IRA is to attract wider participation in clean energy financing through tax credits; Treasury guidance has provided the clarity that corporate investors will need to move forward with clean energy tax credit purchases. According to Treasury Secretary Janet Yellen, “More clean energy projects will be built quickly and affordably, and more communities will benefit from the growth of the clean energy economy."
Reunion is excited to play a part in accelerating the clean energy transaction. To learn more, please reach out to us at info@reunioninfra.com.
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On April 25, the Treasury and IRS published final regulations for the Inflation Reduction Act’s tax credit transfer mechanism. The IRS also published a press release and updated their transferability FAQs.
The final regulations carried few surprises – other than, perhaps, arriving earlier than some market participants predicted – and preserved the status quo set by the June 2023 guidance.
At Reunion, we welcomed this "non-event" and the clarity it provided, and wanted to highlight several key consistencies.
Highlights from the final regulations
Individuals, trusts, estates, and closely held C corporations remain largely on the sidelines
Despite “many comments” calling for a change, widely held C corporations will remain the primary buyers of transferable tax credits. While this decision will likely decrease overall liquidity in the tax credit market, it will also limit the potential for fraud and abuse.
Passive activity rules generally limit individuals, trusts, estates, and closely held C corporations to applying transferable tax credits to passive income – not active income. The final regulations did not adjust this stance. (However, a potential exception exists for certain closely held C corporations, which allows them to offset active income with tax credits.)
Deprecation cannot be transferred
The IRS did not change its stance on depreciation. As the FAQ states, “Only a taxpayer that has an ownership interest in the project may claim tax depreciation. Transferability does not allow depreciation benefits to be transferred.”
Bonus credits cannot be sold separately
The IRA created three bonus, or adder, credits, which can increase the value of a clean energy project’s tax credits:
- Energy communities
- Low-income communities
- Domestic content
The Treasury’s June guidance stated that bonus credits cannot be sold separately from a project’s other credits. A developer cannot, in other words, sell its base credits to one company and its bonus credits – perhaps at a different price per credit – to another company.
Instead, all credits must be sold as “vertical slices” and be pari passu to one another. In practice, if a single project has multiple buyers for its credits, all buyers have the same risk exposure.
April’s regulations did not change the Treasury’s position.
The "intends to purchase" provision remains unchanged
Tax credit buyers can still "take into account a specified credit portion that it has purchased, or intends to purchase, to calculate its estimated tax payments." Of course, buyers remain liable for any underpayments.
The regulations clarified that the "intends to purchase" language "illustrates that all the requirements of proposed §1.6418-2(b) do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations."
Generators of §45X, §45V, and §45Q credits can make facility-specific elections for transferability or direct pay
An advanced manufacturer’s decision to use transferability or direct pay to monetize their §45X tax credits need not be binary. If a manufacturer has multiple facilities, they can make the transferability-or-direct-pay decision at the facility level. If a manufacturer only has one facility, however, their decision is binary.
The same optionality holds true for the §45V PTC for clean hydrogen and §45Q PTC carbon capture, although the timing of the election varies by credit:
- §45V PTC: The direct pay/transfer election is made during the taxable year the qualified clean hydrogen production facility is placed in service
- §45Q PTC: The direct pay/transfer election is made during the taxable year the “single process train” is placed in service
- §45X AMPC: The direct pay/transfer election is made during the taxable year in which eligible components are produced
Importantly, because the §45X election is made during the taxable year in which an eligible component is produced, production facilities that predated the IRS may be eligible for the credit.
Advanced cash payments for multi-year PTCs are not permitted – but borrowing against expected future tax credit payments is permitted
Although “upfront payments for PTCs determined in future taxable years are standard in tax equity transactions,” the final regulations stated that transferred PTCs must be paid for in cash one year at a time. This holds true for ten- and 12-year PTCs.
Permitting advanced payments would “raise several complex legal and administrative issues, such as whether an excessive credit transfer has occurred or if the eligible taxpayer has gross income if prepaid eligible credits were not transferred in a later tax year."
On an encouraging note, the final regulations specifically state that “there is no prohibition on either a transferee taxpayer” – that is, a tax credit buyer – “or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement.”
Intermediaries can serve as brokers but not dealers
The final regulations, unsurprisingly, left unaltered the assumed role of tax credit intermediaries (like Reunion) in the transferability market. Intermediaries can serve as brokers and facilitators in tax credit transfers, helping to match and advise buyers and sellers.
Intermediaries cannot, however, serve as dealers, effectively taking ownership of a tax credit with the intent of transferring/selling it again.
“Required minimum documentation” remains the same
The final regulations acknowledge calls for an increase to the amount of required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer to make a valid transfer.
Nonetheless, the Treasury and IRS left the required minimum unchanged. Perhaps as a nod to the validity of increasing the required minimum, the final regulations remind market participants that, “...while the required minimum documentation requirements are the same for all taxpayers, any particular agreement between an eligible taxpayer and transferee taxpayer may go beyond the required minimum documentation based on the arrangement of the parties. The proposed regulations allowed sufficient flexibility for market participants to determine if more information is necessary in a particular transaction, while balancing the burden of producing the required minimum documentation required to make a transfer election.”
The final regulations also remind market participants that "§6418(g)(2)(B) specifically places a due diligence responsibility on the transferee taxpayer."
Improvements likely coming to the pre-registration portal
The IRS opened the tax credit pre-registration portal in December to significant fanfare. But, as with any brand-new IT system, there have been calls for improvement.
While the IRS would not commit to set application review times, it left the door open to "continue to review the efficiency of the registration portal, including functionality responses from the public, to determine whether changes should be implemented or whether additional guidance or publications should be issued."
Plenty more guidance to come in the next 20-ish business days
In Norton Rose Fulbright’s annual Cost of Capital call, the panelists aptly brought attention to the Congressional Review Act, which “is a tool Congress can use to overturn certain federal agency actions.”
With respect to the Inflation Reduction Act, an incoming Congress (backed by a Trump administration) could use the CRA to unwind IRA regulations that were issued within 60 legislative days of the previous Congress.
Although the exact date for the beginning of the 60-day window remains to be seen, it’s potentially in late May or early June. This gives the Treasury and IRS a little over 20 business days to issue a backlog of IRA-related guidance and regulations.
The IRS 2023-2024 Priority Guidance Plan details what guidance the IRS is prioritizing through the end of the plan year, which is June 30, 2024.
Discuss the regulations with Reunion
Please contact Reunion's transactions team to understand how these final regulations could impact your organization's plans to purchase clean energy tax credits.
The market for clean energy tax credit transfers has accelerated rapidly in 2024, as corporate tax and treasury leaders see a significant new opportunity to reduce tax liabilities and increase corporate cash availability.
A complete transferable clean energy tax credit transaction, from identifying the opportunity to closing the deal, can be summarized in seven key steps.
Duration
Varies by company.
Goals and activities
How Reunion helps
Through an introductory call, Reunion's transactions team can equip your company with insights on eligibility, appropriateness, market dynamics, and risk. We can also help your team prepare a business case/investment committee memo and provide supporting materials. For larger organizations, Reunion has organized tax credit "workshops," which we have found are particularly effective for aligning multiple functional teams.
Key resources
- Transferable tax credit handbook
- How early investors are approaching clean energy tax credits
- Sample business case or investment committee memo (by request)
Duration
One to three weeks.
Goals and activities
How Reunion helps
Reunion takes a "push" and "pull" approach when helping companies find projects that most align with their needs. On the "push" front, we curate a list of tax credit opportunities based on the criteria we identified in step one and share it with your team. For many companies, we do this on a rolling basis as new projects join our platform. On the "pull" front, we provide your team with access to our managed tax credit marketplace, where we have over $7B (and growing) in near-term tax credits available.
Once your team has the right project(s) in mind, Reunion will populate our form term sheet on your company's behalf. We'll levarage our market intelligence to ensure your proposal is competitive and assist you in negotiating key terms, like timing of payment, indemnification, and tax credit insurance.
Key resources
- Tax credit marketplace
- Transferable tax credit transactions tracker
- Unlocking the economic benefits of tax credits before payment
- Sample term sheet (by request)
Duration
One to two weeks.
Goals and activities
How Reunion helps
Reunion helps companies perform a "fatal flaw" due diligence analysis and produce a summary memo outlining Reunion’s opinion on project risks. From that point, we consult with your team to assess risks and recommend appropriate mitigation strategies. Importanty, this step ensures alignment of incentives: we do not want to move a transaction forward unless there is a high probability of success.
We also provide validated market intelligence to compare your proposed transaction to the risk/reward profile of similar tax credit opportunities in the market.
Key resources
- Buying and selling clean energy tax credits
- What should corporations expect to pay for clean energy tax credits?
- Due diligence checklist (by request)
Duration
Two to six weeks. The precise duration depends largely on the number and relatively complexity of projects in the transaction.
Goals and activities
How Reunion helps
Reunion spearheads the due diligence process by:
- Creating a data room and ensuring that all relevant documents are organized
- Producing a checklist to help you navigate the due diligence items
- Advising when and wheree specialized tax or legal expertise is needed
Key resources
- Due diliegence checklist (by request)
Duration
This step is optional and runs in parallel to step 4.
Goals and activities
How Reunion helps
Reunion can help companies decide if insurance is an appropriate risk mitigation tool for their transaction. If we collectively determine that tax credit insurance makes sense, we can advise on insurance offerings, including the scope of coverage – e.g., structure, qualification, recapture, PWA, bonus credit adders – and where gaps might exist.
We can also help you validate that the insurance policy is appropriately sized and includes penalties and tax gross-up and contest costs.
Key resources
Duration
This step runs in parallel to step 4.
Goals and activities
How Reunion helps
Reunion streamlines the negotiation process for buyers and sellers by providing a template legal document and helping parties focus on the most pertinent deal topics.
Key resources
Duration
Ongoing duration depending on credit type.
Goals and activities
How Reunion helps
Our transactions team will issue both parties reminders about filing requirements and deadlines, including tax forms and compliance. In subsequent tax years/quarters, Reunion will provide early acccess to new deals.
Key resources
Reunion’s team of clean energy and tax credit experts are here to support you through the entire process of buying and conducting due diligence on IRA tax credits. We draw on our deep expertise to help you navigate tax credit transactions, and our marketplace features the widest pool of tax credit opportunities available in the industry.
Our key differentiators include:
- Widest pool of high quality tax credits: We curate opportunities from our $7B marketplace, featuring 6+ supported technologies and projects ranging from under $3M to $300m+
- Extensive educational materials: We offer an extensive resource library featuring content on financial, legal, and market-related topics pertaining to IRA tax credits
- Hands-on due diligence: We support buyers throughout the transaction process, ensuring that the due diligence is performed at high quality and that risks are minimized upfront, saving you time and expense
- Industry-leading transaction team: Our transaction team consists of industry veterans, with experience raising $5+ billion in clean energy project financing `with partners such as US Bank, JP Morgan, Wells Fargo, Bank of America, Key Bank, PNC, Nord/LB, D.E. Shaw, First Reserve, and over a dozen Fortune 500 companies
- Market intelligence tools: Available upon request, we offer proprietary insights on tax credit pricing and data on key trends
Reunion is excited to host quarterly “office hours” for clean energy developers who would like to learn more about our marketplace and get a pulse on the overall transferability market.
We'll hold office hours on a quarterly basis
We will generally hold office hours on a quarterly basis and open registration one or two months in advance. Each session will be limited to 50 developers on a first-come, first-served basis.
Designed for clean energy developers and manufacturers
Our office hours are designed for clean energy developers and manufacturers who have transferred, or are planning to transfer, IRA tax credits over the next 12 months. Developers need not have projects in Reunion's marketplace to participate.
Co-hosted by Reunion's founders
Reunion's founders, Billy Lee and Andy Moon, will co-host the hour-long sessions.
Billy and Andy pioneered solar financing structures with tax equity and private equity investors, leading some of the first solar transactions with institutions such as US Bank, JP Morgan, Wells Fargo, Bank of America, Key Bank, PNC, Nord/LB, D.E. Shaw, and First Reserve.
Questions welcome!
We want our office hours to be interactive, so please bring any questions you have, whether related to current market conditions, pricing, or commercial terms.
You're welcome to ask questions beforehand.
The latest energy community guidance, which meaningfully expanded the number of qualifying areas, placed the 10% adder back in the spotlight for the transferable tax credit marketplace. At the same time, Reunion has observed a marked increase in the number of projects in our marketplace claiming the energy community bonus.
While our transferable tax credit handbook goes deep on energy communities, we wanted to share a comprehensive (and refreshed) look at the adder.
Our guide begins with the basics, so we invite you to jump ahead.
- Background and scope
- Credit and project eligibility
- Diligence
- Guidance
- Annual updates to areas qualifying as energy communities
- Resources
The Inflation Reduction Act created three bonus credits, or "adders"
The Inflation Reduction Act (IRA) created three "bonus" credits that can increase the value of a clean energy project's transferable tax credits:
- Domestic content: 10% bonus
- Energy community: 10% bonus
- Low-income community: 10% or 20% bonus
The energy community adder provides a 10% bonus credit
The energy community bonus provides a 10% increase to a project's credit value if the underlying project is located in an energy community (and meets prevailing wage and apprenticeship requirements).
A utility-scale solar project, for instance, that meets PWA requirements would receive tax credits worth 30% of its eligible cost basis. If the same project is located in an energy community, it would receive tax credits worth 40% of its eligible basis.
The IRA defines three types of energy communities
To qualify for the energy community bonus, a project must be located in at least one of three energy community "categories."
Category 1: Brownfield
A brownfield site is defined in 42 U.S.C. § 9601(39)(A) as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant" (as defined under 42 U.S.C. § 9601), and includes certain "mine-scarred land" (as defined in 42 U.S.C. § 9601(39)(D)(ii)(III)). A Brownfield site does not include the categories of property described in 42 U.S.C. § 9601(39)(B).
Three types of sites qualify as a brownfield under a safe harbor:
- Existing brownfield: Brownfields that are already tracked by a federal, state, territorial, or federally-recognized Indian tribal brownfields program. Many states, like Idaho and New York, have their own brownfields programs with supporting maps. A valid brownfield site could be tracked by a state program but not a federal program, and vice versa
- Phase II assessment: A Phase II Assessment has been completed with respect to the site and such Phase II Assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. § 9601(14), or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33)
- Phase 1 assessment (for projects with a nameplate capacity of not greater than 5MWac): A Phase I Assessment has been completed with respect to the site and such Phase I Assessment identifies the presence or potential presence on the site of a hazardous substance, or a pollutant or contaminant.
Category 2: Coal closure
A census tract (or directly adjoining census tract):
- in which a coal mine has closed after 1999; or
- in which a coal-fired electric generating unit has been retired after 2009
Category 3: Statistical area
A "metropolitan statistical area" (MSA) or "non-metropolitan statistical area" (non-MSA) that has (or had at any time after 2009):
- 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
- has an unemployment rate or above the national average unemployment rate for the previous year
The scope of "direct employment" is determined by ten NAICS codes.
No double bonus for multiple energy communities
If a clean energy project is located in two energy communities – a brownfield site within a coal community, for instance – the bonus remains 10%. Developers cannot double up.
Bonus credits cannot be sold in stand-alone tranches
Bonus credits are not treated differently from base credits for the purpose of transferability. Treasury guidance released in June 2023 specified that all transferable credits must be sold as “vertical slices” and be pari passu to one another, as opposed to “horizontally” bifurcating bonus credits from base credits.
Four IRA credits are eligible for the energy community bonus
The IRA created 11 transferable tax credits, four of which are eligible for the energy community bonus:
- §45 PTC: Electricity produced from certain renewable resources
- §45Y PTC: Clean electricity production credit
- §48 ITC: Energy credit
- §48E ITC: Clean electricity investment credit
§48 and §48E ITC eligibility determined on placed-in-service date
For projects that claim an investment tax credit under §48 or §48E, eligibility for the energy community bonus credit is determined on the date that the project is placed in service (PIS) and is not tested again.
Because eligibility is determined on a PIS date that is subject to potential delays, developers should think carefully about how to incorporate the statistical area category into their financial assumptions.
The statistical area category is determined annually, based on the prior year's unemploment rate. As the IRS FAQs state, "Because an MSA's or non-MSA's status as an energy community depends on its unemployment rate for the previous year, an MSA or non-MSA that qualifies as an energy community in one period might not qualify as an energy community in a later period if its unemployment rate for the previous year falls below the national average."
§45 and §45Y PTC eligibility determined annually with a beginning-of-construction safe harbor
For projects that claim a production tax credit under §45 or §45Y, eligibility for the energy community bonus credit must be determined every year during the ten-year PTC period. Theoretically, a wind project could qualify one year under the statistical area category but not qualify the following year because of a change in employment rates.
However, the IRS created a safe harbor for PTC projects with beginning-of-construction dates on or after January 1, 2023. If the project owner determines that the project is eligible for the energy community bonus credit on the date construction is considered to have started for tax purposes, then the project will qualify for the bonus credit for the entire ten-year PTC period and is not tested again.
"Legacy" §45 PTCs are not eligible for energy community bonus
Projects that generate §45 PTCs that were placed in service before December 31, 2022 are not eligible for the energy community bonus, even if the project happens to be located in an energy community and is within its ten-year period of credit generation.
The December 31, 2022 date is set in the IRA itself (H.R.5376).
50% of a project's nameplate capacity (or square footage) must be in an energy community
A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that a project is capable of producing on a steady-state basis during continuous operation under standard conditions.
For battery storage projects, at least half (50%) of the storage capacity, as measured in megawatt hours, should be in an energy community.
Lastly, for projects that do not generate nor store energy, like biogas, the 50% threshold is measured on a square footage basis.
When performing due diligence on the energy community bonus, it's helpful to approach the process based on the credit type and energy community category.
Credit type
ITCs
Tax credit buyers should request documentation that demonstrates when and where the project was placed in service. Then, buyers and their advisors should crosswalk that location to an appropriate energy community siting resource, like one of the IRS's appendices. (We provide links to these appendices in the guidance section of this post.)
When validating a project's location, it's important to keep the "50%" rule in mind.
PTCs
Due diligencing the energy community bonus for PTCs is effectively the same as ITCs, although buyers will want to validate when and where the project began construction (versus when and where the project was placed in service). Once again, it's important to keep the "50%" rule in mind.
Energy community category
As far as each category is concerned, the statistical area and coal closure categories are relatively straightforward from a due diligence standpoint: the IRS has published lists of areas that qualify for each. The brownfield category, however, may present a slightly more nuanced due diligence process.
Statistical area
It's important to recall that the statistical area category changes every year, based on the prior year's unemployment rate. As we'll discuss below, the IRS is obligated to publish updates to this category every year, generally in May.
Coal closure
Unlike the statistical area category, the coal closure category cannot shrink – that is, once an area qualifies as a coal closure, it remains as such for the duration of the energy community bonus.
However, the coal closure category can expand, and we fully expect it to do so. According to a 2022 analysis by the Energy Information Agency (EIA), nearly a quarter of the operating U.S. coal-fired fleet is scheduled to retire by 2029. Every closure will add more census tracts to the list of areas eligible for the energy community bonus.
Brownfield
The IRS has not published – and, as far as we know, has no plans to publish – a consolidated list of areas that qualify as brownfields for purposes of the energy community bonus. In fact, the DOE energy community map doesn't even include federally-recognized brownfield sites. (The EPA, however, maintains a list of federally-recognized brownfields in its cleanups in my community map.)
We doubt the IRS or any federal agency will publish a definitive list of brownfields. There are simply too many moving parts across federal, state, local, and tribal brownfields programs.
So, an opinion from an environmental attorney may be warranted, and the scope of the opinion will vary based on which of the three brownfields safe harbors a project is claiming.
Latest guidance expands the number of areas that are eligible for the energy community bonus
The most recent IRS guidance, Notice 2024-30, broadened eligibility for the energy community bonus through two key changes:
- Expansion of the "nameplate capacity attribution rule"
- Inclusion of two additional NAICS codes – which are in our list above – for determining the fossil fuel employment rate for a statistical area category
Expansion of the nameplate capacity attribution rule
The "nameplate capacity attribution rule" pertains to projects with offshore generation – namely, offshore wind – that have a nameplate capacity but are not located within a census tract, an MSA, or a non-MSA. The rule, essentially, allows developers to allocate their offshore nameplate capacity onshore for purposes of qualifying for the energy community bonus.
Prior to Notice 2024-30, the attribution rule generally allowed offshore wind projects to qualify for the energy community bonus if their power-conditioning equipment closest to the point of interconnection was in an energy community.
Notice 2024-30 expanded the nameplate capacity attribution rule to include not only power-conditioning equipment, but also supervisory control and data acquisition (SCADA) equipment.
SCADA equipment must be owned by the developer and located in an "energy community project port." To qualify as an energy community project port, a port must:
- Be used "either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance" of the project
- Have a "significant long-term relationship" with the project, meaning the developer owns or leases all or part of the port for a minimum term of ten years
- Be the location at which staff employed by, or working as independent contractors for, the project are based and perform functions essential to the project's operations. Essential functions include "management of marine operations, inventory andhandling of spare parts and consumables, and berthing and dispatch of operationand maintenance vessels and associated crews and technicians"
Inclusion of two additional NAICS codes
Notice 2024-30 added two additional NAICS codes for determining the fossil fuel employment rate for a statistical area category:
- 2212: Natural gas distribution
- 23712: Oil and gas and pipeline and related structures construction
These NAICS codes cover workers in local gas distribution companies and construction workers on oil and gas pipelines.
According to Norton Rose Fulbright, "The biggest additions to the list of potentially eligible counties are in six Midwestern states: Minnesota (57), Missouri (57), Illinois (28), North Dakota (23), Wisconsin (23) and Indiana (20)."
The IRS has released five pieces of energy community guidance, with regulations to come soon
Energy community regulations should arrive by June 30, 2024
As Notice 2024-30 notes, proposed regulations are forthcoming. Until then, "taxpayers may rely on the rules described in sections 3 through 6 of Notice 2023-29, as previously clarified by Notice 2023-45 and modified by section 3 [of] this notice, for taxable years ending after April 4, 2023."
Based on the Q2 update to the IRS 2023-2024 Priority Guidance Plan, energy community regulations should arrive before the end of the current "plan year," which concludes on June 30, 2024.
Where to find the latest guidance
The IRS and Treasury maintain lists of IRA-related guidance, including guidance specific to the energy community adder. Although the lists generally overlap, there may be differences based on when each website was last updated.
Below is a close look at all the guidance that's been released through March 2024.
Notice 2022-51: Request for Comments on Prevailing Wage, Apprenticeship, Domestic Content, and Energy Communities Requirements under the Inflation Reduction Act of 2022
- Date: October 5, 2022
- News release: IRS
- Companion documents: N/A
Notice 2023-29: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: April 4, 2023
- News release: IRS
- Companion documents: Appendix A, Appendix B, Appendix C
Notice 2023-45: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
Notice 2023-47: Energy Community Bonus Credit Amounts or Rates (Annual Statistical Area Category Update and Coal Closure Category Update)
- Date: June 15, 2023
- News release: IRS
- Companion documents: Appendix 1, Appendix 2, Appendix 3
Notice 2024-30: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: March 22, 2024
- News release: IRS
- Companion documents: Appendix 1, Appendix 2
Expect energy community eligibility updates every May, beginning in 2024
According to Notice 2023-29, "The Treasury Department and the IRS intend to update the listing of the Statistical Area Category based on Fossil Fuel Employment annually. These updates generally will be issued annually in May."
The first update should arrive in May 2024 – that is, next month.
DOE, EPA, and IRS have provided energy community eligibility and project siting resources
U.S. federal agencies who are responsible for administering or managing parts of the energy community bonus credit have published several key resources that are valuable to buyers, sellers, and their advisors:
- Department of Energy (DOE): Energy community map
- IRS: Frequently asked questions
- DOE National Energy Technology Laboratory (NETL): Frequently asked questions
- Environmental Protection Agency (EPA): RE-powering America's land initiative
- EPA: Cleanups in my community
- Interagency working group: Energy community tax credit bonus
To learn more, you can download our 100-page transferable tax credit handbook or start a conversation with our transactions team.
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