IRS Clarifies Rules Set by the Inflation Reduction Act (IRA)
The Inflation Reduction Act (IRA) amended existing rules and created new rules for renewable energy projects in designated Energy Communities. These new rules impact solar, wind, and energy storage developers as projects located in Energy Communities may qualify for additional tax credits. These credits include the production tax credit (PTC) and the investment tax credit (ITC). Projects claiming the PTC may increase their PTCs by 10%, while projects claiming the ITC may claim up to an additional 10% ITC assuming the project meets the wage and apprenticeship requirements. If a project does not meet wage and apprenticeship requirements, the ITC is reduced to an additional 2%.
In this article, we will discuss how Notice 2023-29 has improved our understanding of Energy Communities and what additional guidance we can expect.
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What are Energy Communities?
Energy Communities are areas where renewable energy projects may qualify for increased tax credits provided by the Inflation Reduction Act.
What was the Initial Guidance on Energy Communities?
The initial guidance on Energy Community can be found here in a previously published LandGate article. More recently, the Internal Revenue Service (IRS) and Treasury Department released additional guidance on April 4, 2023, with Notice 2023-29.
Why was Additional Guidance Needed?
To further define the qualifying characteristics of Energy Communities.
Clarify whether renewable energy projects were “located in” an energy community.
Define the data sources and processes used for qualifying renewable energy projects.
Determine whether any changes to an energy community area (Brownfield, MSA/non-MSA, census tract) affected whether a project qualifies for credits.
Key Takeaways from New IRS Guidance (Notice 2023-29)
The new guidance gives developers and investors more confidence when considering an Energy Community tax credit in their financial models.
The IRS and Treasury Department provided more detailed definitions of the three Energy Community categories (Brownfield, Coal Closure, Statistical Areas).
The IRS and Treasury Department will provide annual lists of MSAs and non-MSAs that meet the unemployment rate requirements for the Statistical Areas category.
For projects located near an Energy Community boundary, the Nameplate Capacity Test and the Footprint Test were outlined to determine if a project qualifies for tax credits.
Some questions still remain unanswered, such as the formula that will be used to calculate fossil fuel tax revenues for Statistical Areas. Further guidance is expected.
Energy Community Categories
A Brownfield site is a real property, expansion, redevelopment, or reuse of a property that may be complicated by hazardous substances or pollutants. Notice 2023-29 created a “safe harbor” for accepting Brownfield sites that meet at least one of the following conditions:
The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a Brownfield
Sites on the Brownfields Properties list on EPA’s “Cleanups in My Community” webpage or on similar webpages
A Phase II Assessment has been completed and confirmed the presence of hazardous substances, pollutants, or contaminants
For projects less than or equal to 5MW (AC), a Phase I Assessment has been completed
Brownfield sites can be found throughout the US, especially in industrial and commercial hot spots. The proximity to populated areas and electrical infrastructure often make them great candidates for renewable energy projects. Especially for community solar and BESS developers as brownfield parcels are typically smaller in size. You can access the Brownfield data layer through LandGate’s PowerData tool.
Coal Closure Census Tracts
The Coal Closure category includes any census tracts, or adjoining tracts, where either a coal power plant closed after December 31, 2009, or a coal mine closed after December 31, 1999. While the definition of these tracts did not change, the IRS did provide information to help confirm whether a project may be in a qualifying Coal Closure tract.
The tract outlines used will be from the 2020 Decennial Census and will be updated every 10 years. It was also stated that census tracts are considered adjoining if their boundaries meet at a single point (ex. If 4 square-shaped census tracts all met at one corner, they would all be considered adjoining tracts). The IRS provided a table of tracts that they believe qualify.
The qualifying coal closure tracts are quite large and make up about 15% of the overall area in the United States. This makes them attractive targets for large-scale solar and wind project developers. You can access the Coal Closure layers through LandGate’s PowerData tool.
The third Energy Community category is the Statistical Areas category. This applies to renewable energy projects located in MSAs (Metropolitan Statistical Areas) or non-MSAs that have, at any time since 2009, met both of the following two criteria:
“0.17 percent or greater direct employment or at least 25 percent of local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas”.
Because calculating historical tax revenues is a complicated process, the IRS has asked for public comment to help create rules. Comments should be submitted by May 4, 2023. Additional information about qualifying fossil fuel tax areas is expected sometime after that date.
Unemployment rate is equal to or above the previous year’s national average.
The Treasury Department and IRS plan to release a list of MSAs and non-MSAs every year in May that meet the unemployment rate requirement. Following the update in May 2023 to the unemployment rate numbers (using 2022 data), the next update will be in May 2024, and so on. That means each list of qualifying MSAs and non-MSAs will be valid for about 12 months (May through April of the following year).
Update (6/19/23): LandGate has updated its Statistical Areas dataset to reflect 2022 unemployment rates. These MSAs and non-MSAs that meet the 2022 unemployment rate requirement are considered energy communities as of January 1, 2023 and will maintain that status until the unemployment rates for 2023 are available (likely in May 2024).
Determining if a Project is Located in an Energy Community
The size and shape of Brownfield sites, census tracts, MSAs, and non-MSAs change over time. Because of this, questions have been raised about how to determine if a renewable energy project is located in an energy community, and whether changes to energy community areas affect a project's eligibility for tax credits.
When Does a Project Qualify for ITCs or PTCs?
When an energy project or energy storage facility is eligible for ‘Energy Community’ tax benefits depends on which tax credit is claimed. For ITC, a project qualifies if it is located in an Energy Community at the “placed in service” date. For PTC, a project must qualify as “located in” an Energy Community every taxable year during the facility’s 10-year credit period. The IRS also added special rules for “Beginning of Construction” to protect developers from changes in Energy Community areas that may impact their investment. If a project begins construction in an area that (at the time) is considered an Energy Community, the location will be considered an Energy Community for the duration of the credit period.
How Much of a Project Must be Located in an Energy Community?
The two tests below can be used to further determine if a project is located in an Energy Community. If a project has a nameplate capacity, it must apply the nameplate capacity test, if a project does not have a nameplate capacity, it may use the footprint test.
The “Nameplate Capacity Test”
50% or more of the project’s nameplate capacity is in an area that qualifies as an Energy Community
The “Footprint Test”
50% or more of the project’s square footage is in an area that qualifies as an Energy Community
Using LandGate’s Solar PowerVal tool, developers can quickly estimate whether a project passes the Nameplate Capacity Test or the Footprint Test. Solar PowerVal also allows for custom input parameters such as the type of solar panel used, spacing, exclusion zones, and setbacks.
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