Proposed Regs Provide Guidance on Energy Credit

(Parker Tax Publishing November 2023)

The IRS issued proposed regulations that amend the regulations relating to the energy credit under Code Sec. 48 for the tax year in which eligible energy property is placed in service. The proposed regulations also withdraw and repropose, for additional clarity, portions of previously proposed regulations issued in REG-100908-23 regarding the increased energy credit amount available if prevailing wage and registered apprenticeship requirements are met. REG-132569-17.

Background

Code Sec. 38 allows certain business credits against the federal income tax. Among the credits allowed by Code Sec. 38 are the investment credit determined under Code Sec. 46, which includes the energy credit determined under Code Sec. 48. Code Sec. 48(a)(1) generally provides that the energy credit for any tax year is the energy percentage of the basis of each energy property placed in service during such tax year. For most types of energy property, eligibility for the Code Sec. 48 credit and, in some cases, the amount of the Code Sec. 48 credit for which energy property is eligible, are dependent upon meeting certain deadlines for beginning construction of the energy property and for placing the energy property in service.

The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) amended Code Sec. 48 in several ways, including by making additional types of energy property eligible for the Code Sec. 48 credit, providing a special rule to allow certain lower-output energy properties to include qualified interconnection costs in the basis of associated energy property, and providing an increased credit amount for energy projects that satisfy prevailing wage and apprenticeship (PWA) requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities.

The current regulations in Reg. Sec. 1.48-9, which provide definitions and eligibility rules for determining whether property is energy property eligible for the Code Sec. 48 credit, were published in 1981. Those regulations were amended in 1987 to provide rules for dual use property, but have not been updated since 1987, before many of the current types of energy property became eligible for the section 48 credit.

On August 30, 2023, the IRS issued proposed regulations (REG-100908-23) (i.e., the August Proposed Regulations) regarding the increased credit amount available for taxpayers satisfying prevailing wage and registered apprenticeship requirements established by the IRA (August Proposed Regulations). The August Proposed Regulations provided rules addressing the recapture under Code Sec. 48(a)(10)(C) of increased credit amounts from only initially satisfying the prevailing wage requirements under Code Sec. 48(a)(10)(A) and (B).

Proposed Regulations

On November 17, the IRS issued proposed regulations in REG-132569-17 (i.e., the November 17 proposed regulations). Prop. Reg. Sec. 1.48-9(e) expands the types of energy property eligible for the energy credit, including additional types of energy property added by the IRA. Prop. Reg. Sec. 1.48-13 clarifies the application of the credit transfer rules in Code Sec. 6418 to the energy credit recapture rules under Code Sec. 48(a)(10)(C) applicable to failures to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers. Prop. Reg. Sec. 1.48-14(g) clarifies that, in connection with the installation by a taxpayer of energy property that has a maximum output of not greater than 5 megawatts (as measured in alternating current), amounts paid or incurred by the taxpayer for qualified interconnection property that is required to accommodate interconnection are included in the basis of a related energy property under Code Sec. 48(a)(8)(A).

The proposed regulations also provide additional requirements and rules generally applicable to energy property, such as rules regarding: functionally interdependent components; property that is an integral part of an energy property; application of an "80/20 Rule" to retrofitted energy property; dual use property; separate ownership of components of an energy property; property that could be eligible for multiple federal income tax credits; and the election to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit.

Prop. Reg. Sec. 1.48-13 of the August Proposed Regulations provided guidance concerning the increased credit amount available for taxpayers satisfying the prevailing wage and apprenticeship (PWA) requirements. In November 17 proposed regulations, the IRS withdraws and reproposes Prop. Reg. Sec. 1.48-13 with minor changes and additional rules with respect to the increased credit amount for energy projects under Code Sec. 48(a)(9). Prop. Reg. Sec. 1.48-13 provides special rules affecting the basis of energy property that include (1) the definition of an energy project for purposes of the PWA requirements as well as other purposes, and (2) guidance concerning the increased credit amount under Code Sec. 48(a)(9)(B)(i) with respect to energy projects with a maximum net output of less than one megawatt.

For a discussion of the energy credit, see Parker Tax ¶104,315.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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