IRS Issues Final Rule on Bonus Tax Credit for Solar and Wind Projects

This week, the U.S. Department of Treasury and the Internal Revenue Service released final rules and procedural guidance related to a bonus credit that taxpayers may be eligible to claim in conjunction with qualified solar or wind facilities under the Section 48 Investment Tax Credit (ITC).

The final rule and guidance released covers the Low-Income Communities Bonus Credit under the ITC. This is one of several credit bonuses included in the Inflation Reduction Act which taxpayers may be able to claim when installing eligible clean energy equipment.

The ITC is most applicable to multifamily projects that include equipment used for clean energy production. This credit is typically associated with solar and wind technology, but also includes geothermal, biogas property and several other technologies. The base tax credit is equal to 6% of the project cost, but the Inflation Reduction Act included several bonus tiers that could max the credit out at 70% of the eligible project cost.

For projects that meet specific prevailing wage and apprenticeship requirements, the base credit of 6% is increased by a factor of 5 to 30%. Projects with a maximum net output of less than 1 megawatt are not subject to the prevailing wage and apprenticeship requirements and qualify for the 30% credit. If the property meets U.S. domestic content requirements, the credit amount increases by 10%. If the project is located in an “energy community,” generally defined as brownfield sites and areas associated with fossil fuels, the credit increases by 10%.

Finally, energy projects that involve a low-income community may be eligible for an additional bonus. Projects on Indian land or located in qualifying areas with high poverty rates may be eligible for a 10% bonus. Projects associated with a qualified low-income residential building, which includes Section 42 Low-Income Housing Tax Credit projects and other covered projects as defined by the Violence Against Women Act, or projects that provide at least half of the financial benefit of the electricity produced to low-income households, may be eligible for a 20% bonus

Unlike the other bonus credit tiers, the Low-Income Communities Bonus Credit is limited to solar and wind technologies. And unlike a typical tax credit that is claimed by the taxpayer if they meet the qualifying requirements, this bonus credit is capacity limited. Known as the “environmental justice solar and wind capacity limitation,” it is limited to 1.8 gigawatts of direct current capacity for each of calendar year 2023 and 2024. This requires eligible projects to compete for an allocation under the environmental justice solar and wind capacity limitation in order to claim the credit bonus. This allocation process is unique to the Low-Income Communities Bonus Credit; the base ITC and other bonus categories are not subject to capacity limits.

The allocation is administered by the Department of Energy (DOE). DOE expects to open up the application portal in the early fall, and more information regarding the application process will be made available here.

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