Energy community bonus credit: New guidance broadens eligibility

TAX ALERT | April 08, 2024

Authored by RSM US LLP

Executive summary: IRS issues guidance for energy communities

The Department of the Treasury and IRS issued new guidance on the energy community bonus credit on March 22, 2024. Notice 2024-30 modifies guidance set forth in previously released Notice 2023-29, clarified by Notice 2023-45, and refines the criteria for qualifying as an energy community and accessing corresponding bonus credit amounts. Qualifying projects and facilities located in energy communities may be eligible for up to a 10% increase in one of the production tax credits under sections 45, 45Y or a 10-percentage point increase in one of the investment tax credits available under sections 48 or 48E.

Key modifications include:

• Expansion of Nameplate Capacity Attribution Rule
• Inclusion of additional North American Industry Classification System (NAICS) codes for purposes of determining the Fossil Fuel Employment rate for the Statistical Area Category

Treasury and the IRS intend to propose regulations that would apply to taxable years ending after April 4, 2023. Until such proposed regulations are issued, for taxable years ending after April 4, 2023, taxpayers may rely on the guidance in sections 3 through 6 of Notice 2023-29 as clarified by Notice 2023-45 and modified by section 3 of Notice 2024-30. RSM US previously covered initial guidance on the energy communities bonus credit.

Energy Communities: An overview

The Inflation Reduction Act (IRA) amended sections 45 and 48 and added sections 45Y and 48E, aiming to enhance credit amounts, commonly referred to as bonus credits, for energy projects, qualified facilities or energy storage technology located in energy communities.

The energy communities bonus credit is a 10% or 10 percentage point increase to one of those four credits contingent upon the fulfillment of specific prevailing wage and apprenticeship criteria. If such requirements are not met, the energy communities bonus credit is reduced to a 2% or two percentage point credit increase.

Notice 2023-29 released April 4, 2023, and modified on April 7, 2023, identified three location-based categories that qualify as energy communities for purposes of sections 45, 45Y, 48 and 48E: Brownfield Category, Statistical Area Category, and Coal Closure Category. The newly released Notice 2024-30 modifies Notice 2023-39 to expand the Nameplate Capacity Attribution rule and adds two NAICS industry codes used for purposes of determining the Fossil Fuel Employment rates for the Statistical Area Category.

Expansion of the nameplate capacity attribution rule

The Nameplate Capacity Attribution Rule applies to energy community projects with offshore generating units which have nameplate capacity but none of which is located in a census tract, metropolitan statistical area (MSA), or non-MSA. The rule allows taxpayers to attribute the energy community project’s nameplate capacity to onshore equipment.

The expansion of the Nameplate Capacity Attribution Rule within the Notice adds a second type of property to attribute nameplate capacity. This modification allows taxpayers to attribute an energy community project’s nameplate capacity not only to land-based power conditioning equipment, but also supervisory control and data acquisition (SCADA) equipment located in Energy Community (EC) Project Ports An EC Project Port is a port used either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance of the EC Project, and with a significant long-term relationship with the EC Project at which staff employed by, or working as independent contractors for, the taxpayer that owns the EC Project are based and perform functions essential to the EC Project’s operations.

Inclusion of additional NAICS codes

An MSA or non-MSA may qualify as an energy community depending on unemployment and local tax revenue statistics connected to fossil fuel industries. In addition to meeting a requirement related to the community’s overall unemployment rate, a community must meet certain requirements related to employment directly in fossil fuel industries or local tax revenues from fossil fuel industries.

Notice 2024-30 adds two new 2017 North American Industry Classification System (NAICS) industry codes to the existing table of eight NAICS industry codes with respect to which fossil fuel employment rates are determined. Industry 2212, natural gas distribution, and industry 23712, oil and gas pipeline and related structures construction, will now be used to determine whether an MSA or non-MSA meet the fossil fuel employment rate threshold.

Washington National Tax takeaways

This notice offers further clarification on the new energy communities bonus credit rules enacted by the Inflation Reduction Act. Developers in the beginning stages of project modeling and construction in areas designated as energy communities should carefully review this guidance to determine their eligibility for the bonus credit.

Given the dynamic nature of employment data and the potential expansion of census tracts qualifying for the coal closure category, it is expected that there will be changes to the designated energy communities.

The ability to attribute an offshore wind facility’s nameplate capacity to SCADA equipment is anticipated to be welcome news to the offshore wind industry. Offshore wind facilities may now be more likely to qualify for the energy community bonus credit. Similarly, the addition of two NAICS industry codes to the fossil fuel employment rate analysis may mean more qualified facilities, energy projects or energy storage technologies will qualify for the energy community bonus credit.

Updates to MSAs and non-MSAs that meet the Fossil Fuel Employment threshold impacted over 30 states. Several states saw the addition of a significant number of communities meeting this threshold, such as California, Georgia, Illinois, Indiana, Minnesota, Missouri and Wisconsin.

Taxpayers are advised to stay informed about these developments. Starting in 2024, the IRS plans to provide additional guidance every May, therefore as of the date of this article, new guidance is expected in less than two months.

The IRS has also published a webpage with frequently asked questions for energy communities, offering details on qualifying as an energy community, determining project location eligibility and identifying brownfield sites for the energy community bonus credit.

For further information, please consult with your RSM US tax advisor.

This article was written by Deborah Gordon, Sara Hutton, Brent Sabot, Heather Rosas and originally appeared on 2024-04-08. Reprinted with permission from RSM US LLP.
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