IRS Issues Final Regulations on Investment Tax Credits for Energy Projects

The IRS and Treasury finalized regulations for investment tax credits, enhancing flexibility for projects and clarifying eligibility for interconnection and biogas properties.

Last week, the Internal Revenue Service (IRS) and the Department of the Treasury unveiled final regulations related to investment tax credits (ITC) under Section 48 of the Internal Revenue Code.

This announcement builds on the proposed regulations shared in November 2023.

The finalized rules largely retain the framework set forth in the proposed regulations, but there are some key differences.

Various provisions now have slightly different mandatory applicability dates, and taxpayers have been granted some flexibility to apply these regulations to projects already under construction or in operation.

Highlighted Elements of the Final Regulations for the ITC

The Final Regulations bring forth important updates and confirmations from the Proposed Regulations, including:

  • Qualified Interconnection Property: The limit of 5 MW (AC) for qualifying interconnection property, evaluated at the energy property level, remains unchanged from the Proposed Regulations.

    However, the final regulations eliminate the requirement to account for utility reimbursements when determining interconnection costs eligible for the ITC.

    Now, these costs will align with standard income tax principles.

    Moreover, interconnection property will not be subjected to prevailing wage and apprenticeship mandates, nor will it influence compliance with domestic content or energy community bonus credit requirements.

  • Revised Single Project Classification: The regulations have broadened the criteria for categorizing multiple energy properties as one single energy project.

    The initial “ownership plus two factors” test has evolved into “ownership plus four factors.” This adjustment aims to offer taxpayers more flexibility, allowing for analysis at any stage of construction or during the taxable year in which the energy properties are put into service, particularly benefiting projects that don’t fit the traditional definition of a single project.

  • Rethinking the 80/20 Rule: The IRS and Treasury took into account extensive feedback regarding the 80/20 rule in relation to retrofitting energy property for ITC eligibility.

    According to the final regulations, any additions or alterations to existing energy property must adhere to the strict 80/20 test to qualify for the ITC.

  • Clarification on Qualified Biogas Property: The Final Regulations clarify that equipment involved in upgrading gas falls under the category of cleaning and conditioning property, making it eligible for the ITC.

    Additionally, it has been made clear that the flaring of gas will not disqualify biogas properties from being eligible for the ITC.

  • Identifying Maximum Net Output for the 1 MW (AC) Exception: Another significant addition in the Final Regulations allows energy properties producing electricity in direct current to determine their maximum net output in alternating current.

    Taxpayers can choose between the lower of the combined nameplate capacities in direct current or the capacity of the initial component converting direct current to alternating current.

Important Clarifications in the Final Regulations

The preamble to the Final Regulations also reaffirms that energy storage technology qualifies for the ITC as long as it meets Section 48 requirements, even when co-located with facilities that enjoy other tax incentives.

Additionally, the regulations now include references to Treasury Regulations that relate to prevailing wage and apprenticeship conditions within the ITC framework.

Source: Natlawreview