IRS Clarifies Rules Set by the Inflation Reduction Act (IRA)
The Inflation Reduction Act (IRA) revised existing regulations and established new ones for renewable energy projects in designated Energy Communities, and the IRS recently clarified rules surrounding the IRA. These new regulations affect solar, wind, and energy storage developers, as projects situated in Energy Communities may be eligible for extra tax credits. These credits include the production tax credit (PTC) and the investment tax credit (ITC). Projects utilizing the PTC may enhance their PTCs by 10%, while those using the ITC may claim up to an additional 10% ITC, provided the project meets the wage and apprenticeship requirements. If a project fails to meet these requirements, the ITC is reduced to an additional 2%.
In this article, we will explore how IRS Notice 2023-29 has clarified our understanding of IRA Energy Communities and what further guidance we can anticipate.
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What are Energy Communities?
Energy communities are defined as specific geographic areas that have been historically reliant on fossil fuel production and are transitioning towards renewable energy sources. The Inflation Reduction Act (IRA), passed in 2022, includes provisions that support the development and growth of these communities, aiming to promote economic revitalization and energy transition.
Definition: Energy communities are typically located in regions that have experienced a decline in fossil fuel production, such as coal mining areas, and are characterized by a commitment to renewable energy development.
Tax Incentives: The IRA provides tax credits and incentives for renewable energy projects located in these communities, encouraging investments in solar, wind, and other clean energy technologies.
Job Creation: The act aims to create jobs in energy communities by supporting the transition to renewable energy, thus providing new employment opportunities for workers affected by the decline of fossil fuel industries.
Community Engagement: The IRA emphasizes the importance of involving local stakeholders in the planning and implementation of energy projects, ensuring that the benefits of renewable energy development are shared within the community.
Environmental Justice: The focus on energy communities aligns with broader goals of environmental justice, addressing the disproportionate impacts of climate change and pollution on historically marginalized communities.
Energy communities under the Inflation Reduction Act represent a strategic approach to facilitate the transition from fossil fuels to renewable energy while fostering economic growth, job creation, and social equity in regions that have historically depended on fossil fuel extraction. The act's provisions aim to empower these communities to become leaders in the clean energy economy.
What was the Initial Guidance on Energy Communities?
The initial guidance on Energy Community can be found here. 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?
Elaborate on the criteria that define Energy Communities.
Specify if renewable energy projects are "situated in" an energy community.
Outline the data sources and methods employed to qualify renewable energy projects.
Assess if modifications to an energy community area (Brownfield, MSA/non-MSA, census tract) influence a project's eligibility for credits.
Key Takeaways from New IRS Guidance (Notice 2023-29)
The updated guidance offers developers and investors greater assurance when incorporating an Energy Community tax credit into their financial plans.
The IRS and Treasury Department have clarified the definitions for the three Energy Community categories (Brownfield, Coal Closure, Statistical Areas).
The IRS and Treasury Department will annually release lists of MSAs and non-MSAs that satisfy the unemployment rate criteria for the Statistical Areas category.
For projects situated near an Energy Community boundary, the Nameplate Capacity Test and the Footprint Test were specified to assess eligibility for tax credits.
Some questions remain unresolved, such as the formula that will determine fossil fuel tax revenues for Statistical Areas. Additional guidance is anticipated.
Energy Community Categories
Brownfield
A Brownfield site refers to a real property where expansion, redevelopment, or reuse might be complicated due to the presence of hazardous substances or pollutants. Notice 2023-29 introduced a “safe harbor” for accepting Brownfield sites that satisfy at least one of the following criteria:
The site has previously been evaluated by federal, state, territory, or federally recognized Indian tribal brownfield resources and meets the Brownfield definition
Sites listed on the Brownfields Properties section of the EPA’s “Cleanups in My Community” webpage or similar sites
A Phase II Assessment has been carried out, confirming the existence of hazardous substances, pollutants, or contaminants
For projects of 5MW (AC) or less, a Phase I Assessment has been completed
Brownfield sites are scattered across the US, particularly in industrial and commercial areas. Their closeness to populated regions and electrical infrastructure often makes them excellent candidates for renewable energy projects, particularly for community solar and BESS developers, as brownfield parcels are generally smaller in size.
You can access the Brownfield data layer through LandGate’s PowerData tool.
Coal Closure Census Tracts
The Coal Closure category encompasses any census tracts or neighboring tracts where a coal power plant shut down after December 31, 2009, or a coal mine ceased operations after December 31, 1999. Although the criteria for these tracts remain unchanged, the IRS has provided guidance to assist in determining if a project is located in a qualifying Coal Closure tract.
The tract boundaries utilized will be from the 2020 Decennial Census and will be revised every 10 years. Additionally, it was noted that census tracts are considered adjoining if their boundaries touch at a single point (for example, if four square-shaped census tracts converge at one corner, they would all be deemed 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.
Statistical Areas
The third category within the Energy Community is the Statistical Areas category. This pertains to renewable energy projects situated in MSAs (Metropolitan Statistical Areas) or non-MSAs that have, at any point since 2009, fulfilled both of the following conditions:
“0.17 percent or more direct employment or at least 25 percent of local tax revenues connected to the extraction, processing, transport, or storage of coal, oil, or natural gas”.
Due to the complexity of determining historical tax revenues, the IRS has requested public input to aid in formulating rules. Comments are to be submitted by May 4, 2023. Further details about qualifying fossil fuel tax areas are anticipated after that date.
The unemployment rate is equal to or exceeds the national average of the previous year.
The Treasury Department and IRS intend to publish a list of MSAs and non-MSAs annually in May that satisfy the unemployment rate criterion. Following the May 2023 update to the unemployment rate figures (using 2022 data), the subsequent update will occur in May 2024, and so forth. Consequently, each list of qualifying MSAs and non-MSAs will be applicable for approximately 12 months (from May through April of the following year).
Determining if a Project is Located in an Energy Community
The size and configuration of Brownfield sites, census tracts, MSAs, and non-MSAs evolve over time. Consequently, questions have arisen regarding how to ascertain if a renewable energy project is situated within an energy community, and whether alterations to energy community areas impact a project's qualification for tax credits.
When Does a Project Qualify for ITCs or PTCs?
The eligibility of an energy project or energy storage facility for 'Energy Community' tax benefits varies based on the tax credit claimed. For the ITC, a project qualifies if it is situated in an Energy Community on the "placed in service" date. For the PTC, a project must be considered "located in" an Energy Community throughout each taxable year of the facility’s 10-year credit period. The IRS has also introduced special rules for the "Beginning of Construction" to safeguard developers from changes in Energy Community areas that might affect their investment. If a project starts construction in an area deemed an Energy Community at that time, the location will be regarded as an Energy Community for the entire credit period.
How Much of a Project Must be Located in an Energy Community under the IRA?
The two tests outlined below can help further ascertain whether a project is situated within an Energy Community. Projects with a nameplate capacity should use the nameplate capacity test, while those without can opt for the footprint test.
The “Nameplate Capacity Test”
At least 50% of the project’s nameplate capacity is located in an area designated as an Energy Community.
The “Footprint Test”
At least 50% of the project’s square footage falls within an area designated 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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