IRS updates guidance on environmental justice solar and wind capacity limitation

ARTICLE | September 15, 2023

Authored by RSM US LLP

Executive summary

Additional guidance on low-income communities bonus credit program

Taxpayers investing in certain solar and wind facilities may apply for an allocation of Capacity Limitation to increase the amount of an energy investment credit in the year the facility is placed in service. Treasury and IRS released for publication on Aug. 10, 2023, final regulations and a revenue procedure finalizing the rules and application process for applicants investing in certain solar and wind powered electricity generation facilities. 

IRS updates guidance on environmental justice solar and wind capacity limitation

New guidance

The low-income communities bonus credit program (program or section 48(e) program) is an application-based program that may increase energy credits by either 10 or 20 percentage points. The increased credit is only available to taxpayers that place certain solar or wind property in service in low-income communities and are awarded a capacity limitation allocation under the program’s rules.

Recently, Treasury and IRS released for publication in the Federal Register final regulations providing additional guidance on the program under section 48(e). The new guidance details the program’s rules and application process even though the application portal is not yet ready for use. The regulations provide key definitions, and requirements that must be met in order to qualify for the program. The regulations also

1. provide recapture rules specific to the program,
2. define energy storage technology installed in connection with the solar or wind facility,
3. define financial benefits for the two applicable project categories and
4. define and describe the additional selection criteria for potential applicants.

The regulations apply to tax years ending on or after Oct. 14, 2023.

In addition to the final regulations, IRS and Treasury also released an advanced version of Rev. Proc. 2023-27. The revenue procedure provides guidance necessary to implement the program, such as the information an applicant must submit, the application review process, and the manner of obtaining an allocation under the program. The revenue procedure also advises potential applications of the program to register and apply through a portal created by the Department of Energy (DOE). The application process for the program is set to open in the fall, and awards will commence by the end of the year.

Prior guidance

Our previous alert covers the establishment of the section 48(e) program through Notice 2023-17, issued on Feb. 13, 2023. Later, on June 1, 2023, Treasury and the IRS published a notice of proposed rulemaking that essentially supplemented the initial guidance. RSM US LLP also covered the notice of proposed rulemaking in a previous alert.

Washington National Tax takeaways

With the issuance of the final regulations and the revenue procedure, it is imperative that taxpayers pursuing wind and solar projects in an eligible low-income community, carefully consider all of the guidance released in efforts to qualify for the program. Applications will be submitted through the DOE portal that is expected to be launched in fall 2023. Interested taxpayers should review the program requirements in anticipation of submitting applications within a short timeframe at the end of the year. Solar and wind projects may not be placed in service prior to receiving a capacity limitation allocation if the enhanced credit is to be claimed. That said, timing for solar and wind projects and the program application are of increased importance.

For more information, please consult with your tax advisor.