Depreciation allowable. Proposed Regulation § 1.48-9(b)(4)(ii) would provide that if the basis or cost of energy property is not recovered through a method of depreciation but instead through a deduction of the full cost in one taxable year (e.g., under Section 179), a deduction for depreciation with respect to such property is not allowable to the taxpayer.

Placed in service requirement. The Proposed Regulations would clarify that the taxable year in which energy property is placed in service would be the earlier of the taxable year in which the period for depreciation of such property begins, or the taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function in either a trade or business or in the production of income, the latter of which is typically determined using a five-factor test derived from IRS guidance and case law. This test provides five common, though not exclusive, factors considered in determining placed in service dates, including:

1. The approval of required licenses and permits;
2. Passage of control of the facility to taxpayer;
3. Completion of critical tests;
4. Commencement of daily or regular operations; and
5. Synchronization of the property into a power grid for generating electricity to produce income.

This standard is consistent with and reaffirms existing placed-in-service rules.

Clarifications Regarding Recapture and Prevailing Wage and Apprenticeship Requirements

Prevailing wage and apprenticeship requirements. Newly proposed Regulation § 1.48-13 provides a definition of an energy project for the PWA requirements, guidance on the 1 MW exception, and the recapture rules for failure to satisfy the PWA requirements.

• Correction and penalty payments. Proposed Regulation § 1.48-13 provides that if a taxpayer claimed the increased credit under Section 48(a)(9)(B)(iii) or transferred a credit portion under Section 6418 and failed to satisfy the PWA requirements under proposed Regulation § 1.45-7(b)-(d) for any period with respect to the alteration or repair of any project during the five-year recapture period and the taxpayer does not make the correction and penalty payments under proposed Regulation § 1.45-7(c), then no penalty is assessed, and the increased credit amount is subject to recapture.

Tax year in issue. To preemptively address issues regarding the five-year recapture period misaligning with tax year ends, the Proposed Regulations provide that a recapture event is determined at the close of the tax year that begins or ends within the five-year recapture period. Under the Proposed Regulations, the increased tax for the recapture amount would be assessed with respect to the taxable year in which the recapture event occurred.

Reporting requirements. Proposed Regulation § 1.48-13 includes annual reporting requirements to verify PWA requirements are met. These requirements are in addition to the previously proposed Regulation § 1.45-7(b)-(d), which created recordkeeping and reporting requirements. Further, the Proposed Regulations provide that taxpayers that claim the 30 percent ITC are required to include with tax returns filed for years including the recapture period, information with respect to the payment of prevailing wages for any alteration or repair of the project during the recapture period (assuming the PWA requirements applied in the construction of the applicable project).

Transferability under Section 6418. The Proposed Regulations confirm the notification requirements for an eligible taxpayer and clarify that a transferee taxpayer is responsible for any amount of increased tax under Section 48(a)(10)(C).

Energy project definition. Proposed Regulation § 1.48-13(d) provides a definition of “energy project” as one or more energy properties operated as part of a singular project, for the following categories: (1) PWA requirements under Section 48(a)(9); (2) domestic content bonus credit amount under Section 48(a)(12); and (3) energy communities bonus credit amount under Section 48(a)(14). Further, Section 45 qualified facilities that are “co-located” with Section 48 energy property will not be considered part of the project unless an election under Section 48(a)(5) is made. Thus, a taxpayer can claim production tax credits (PTC) on the electricity output from a wind, solar or other renewable energy project and an ITC on a co-located battery storage property.

• Multiple Energy Properties may be treated as one project. Subject to conditions, multiple energy properties may be treated as one project, if at any point during the construction of the multiple properties, a single taxpayer owns all the properties, and two or more factors are met as set forth under Notice 2018-59, which factors are incorporated into the Proposed Regulations. These factors are:
  • the energy properties are constructed on contiguous pieces of land;
  • the energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
  • the energy properties have a common intertie;
  • the energy properties share a common substation, or thermal energy off-take point;
  • the energy properties are described in one or more common environmental or other regulatory permits;
  • the energy properties are constructed pursuant to a single master construction contract; or
  • the construction of the energy properties is financed pursuant to the same loan agreement.

  We note that this test may result in some unintended consequences and should be reviewed closely.

• Related taxpayers treated as one taxpayer. Proposed Regulation § 1.48-13(d) provides that related taxpayers are to be treated as one taxpayer in determining whether multiple energy properties are in fact a project. Relatedness is defined under Regulation § 1.52-1(b), typically as members of a group of trades or businesses that are under common control.

1 MW exception. The 1 MW exception applies through proposed Regulation §1.48-13(e), which provides that the increased credit amount is also available under Section 48 for energy projects with a maximum net output of less than 1 MW of electrical or thermal energy. The determination of “nameplate capacity” is expressed in MWs of either electrical or thermal energy.

• Exceptions. Electrochromic glass, fiber-optic solar, and microgrid controllers are not eligible for this exception as they do not generate thermal or electrical energy.
• Measurements. Proposed § 1.48-13(e) provides for specific MW conversion factors.

Retrofitted Property Plus the “80/20” Rule, the Dual Use Rule, and Eligible Basis Provisions

The 80/20 Rule applies to energy property under Section 48.Proposed Regulation § 1.48-14(a) applies the 80/20 Rule to energy property under the Section 48 ITC following comments requesting specific regulations to address the applicability of the 80/20 Rule to energy property. Importantly, the 80/20 test is applied in ITC projects to each “unit of energy property,” which means that all functionally interdependent components owned by the taxpayer or related parties would be tested in the aggregate. Thus, if a taxpayer claims an ITC on a wind farm, the 80/20 test is applied to the entire wind farm rather than to each turbine or other piece of equipment separately. This in turn may influence the decision whether to claim PTCs or an ITC. With respect to PTCs, some repowered turbines may qualify as new while others may not. With respect to ITCs, taxpayers must determine whether the entire project is new due to a repowering.

Dual use property and the 50 percent cliff. Proposed Regulation § 1.48-14(b)(2)(i) modifies the 75 percent cliff in existing Regulation § 1.48-9 to a 50 percent cliff. Specifically, this would require energy property to derive a minimum of 50 percent of energy from a qualifying source during annual measurement periods. If at least 50 percent of the energy is used from qualifying sources, a proportionate amount of the eligible basis of the energy property will be considered to calculate the Section 48 ITC. In addition, proposed Regulation § 1.48-14(b)(2)(ii) allows the dual use rule to permit the aggregation of energy inputs from more than one energy property. Importantly, the ITC must still be prorated to the extent the energy percentage is between 50 percent and 100 percent (and proportionally recaptured to the extent the percentage is reduced). Thus, if the energy percentage is 70 percent in the year the equipment is placed in service, the ITC amount is 70 percent of the ITC that could otherwise be claimed. Note that the dual use rule is not relevant to a battery or other energy storage property.

• The annual measurement period. Proposed Regulation § 1.48-14(b)(2)(iii) provides an annual measuring period for an item of dual use property being any period of 365 (or 366 in leap years) consecutive days, starting on the placed-in-service date.
• Incremental costs. Proposed Regulation § 1.48-14(d)(1) continues to apply the incremental cost of energy property as properly included in the eligible basis of the energy property used to calculate the Section 48 ITC. Under existing Regulation § 1.48-9(k), incremental cost is defined as the excess of the total cost of equipment over the amount that would have been expended for the equipment if the equipment were not used for a qualifying purpose related to the Section 48 ITC. As an illustration, energy property that costs $100 performs a qualified pollution control function as well as a non-qualified function. If it costs $60 to perform the non-qualified function, the incremental cost to the energy property would be the difference of $40.
• Costs includable in the basis of related energy property. Proposed Regulation § 1.48-14(g)(1) provides that only amounts paid or incurred for property are included in the basis of the related energy property. Proposed Regulation §1.48-14(g)(6) would provide that reimbursement for those costs may not be included in the basis of the property.
• Ownership of energy property. Proposed Regulation § 1.48-14(e) provides that taxpayers who own eligible energy property may qualify for the Section 48 credit only to the extent of the taxpayer’s eligible basis in the property itself. Further, where multiple parties hold ownership interests in energy property, each party may be entitled to a credit to the extent of that taxpayer’s fractional interest in the property. These clarifications may help enable more ownership structures involving both tax-exempt and taxable entity owners.

Qualified Interconnection Costs

Qualified interconnection property is not energy property. Proposed Regulation § 1.48-14(g)(2) clarifies that qualified interconnection property is not considered in determining whether an energy property satisfies the domestic content bonus credit amount and the energy communities bonus credit amount. However, under Proposed Regulation § 1.48-14(g), costs paid or incurred for the installation of energy property with a maximum net output of no more than 5 MW are included in the basis of a related energy property.

• 5 MW exception measured at level of energy property. Proposed Regulation § 1.48-14(g)(3) would provide that if an energy project is comprised of multiple energy properties with a combined nameplate capacity of more than 5 MW, each energy property would be eligible to include amounts paid or incurred for qualified interconnection property if each energy property satisfies the 5 MW limitation.
• Maximum net output of energy property. Proposed Regulation § 1.48-14(g)(3) provides that the maximum net output of an energy property is measured only by nameplate generating capacity of the unit when it is placed in service. 

Effective Dates

Taxpayers may generally rely on the Proposed Regulations with respect to property placed in service after December 31, 2022, and during a taxable year beginning on or before the date the final regulations are published in the Federal Register, provided that the taxpayer and all related persons apply the Proposed Regulations in their entirety and in a consistent manner.

With respect to the PWA requirements, taxpayers may rely on that portion of the Proposed Regulations for projects that begin construction on or after January 29, 2023, and on or before the date the regulations are published as final regulations in the Federal Register, provided that, beginning after October 28, 2023, taxpayers follow the portion of the Proposed Regulations that relate to the PWA requirements in their entirety and in a consistent manner. Proposed Regulation § 1.48-13(d) applies to energy projects that begin construction after November 22, 2023.

Proposed Regulation § 1.6418-5(f) would apply special notification rules to credit recaptures under Section 48(a)(10)(C) to taxable years ending on or after the date the final regulations are published.

Request for Public Comments

Treasury and the IRS request comments on all aspects of the Proposed Regulations, in particular the following:

• the need for further guidance with respect to proposed Regulation § 1.48-9(d), which would allow for co-located (shared) qualified facilities eligible for the Section 45 to be treated as an integral part of Section 48 energy property;
• alternative approaches in assessing limitations on the use of hydrogen energy storage property with respect to proposed Regulation § 1.48-9(e)(10)(iv), as well as what documentation is needed to demonstrate that energy property is used to store hydrogen solely used to produce energy;
• whether “second life” batteries or recycled components that may meet the modification rule under proposed Regulation § 1.48-9(e)(10)(v) for energy storage technology should be considered new components for purposes of the 80/20 Rule;
• what types of components may be used to modify existing energy storage technology and whether there are identifiable challenges related to recycled components used to meet the modification rule;
• with respect to Section 48(c)(6)(A)(I), how the exclusion for property primarily used in the transportation of goods or individuals and not to produce electricity should be defined, as well as the specific types of property that may be covered by this exclusion;
• whether “virtual batteries” and similar demand shifting technology excluded by proposed Regulation § 1.48-9(e)(10) should be considered as energy storage technologies;
• further guidance regarding what types of components may be included within the definition of cleaning and conditioning property provided in the definition of qualified biogas property in Section 48(c)(7)(B);
• whether the rules for functionally interdependent property provided in proposed Regulation § 1.48-9(f)(2)(ii) would be sufficient to determine the components that should be included as part of a microgrid controller, or whether another test is needed;
• if additional types of property meet the requirements of proposed Regulation § 1.48-9(f)(3) and could be considered an integral part of energy property;
• whether other methods of measurement with respect to proposed Regulation § 1.48-13(e) may allow electrochromic glass property, fiber-optic solar, and microgrid controllers to qualify for increased credit amounts, provided that the above energy projects generate a maximum net output of less than one megawatt (the One-Megawatt Exception);
• if proposed Regulation § 1.48-13(e)(13) provides suitable tests for measuring the One-Megawatt Exception, or whether an alternative is more suitable;
• comments on the application of the dual use rule to Section 48 after its amendment by the IRA;
• further guidance on whether a rule is needed to address the inapplicability of the dual use rule to microgrid controllers or similar technologies;
• whether the application of the five-megawatt limitation to a single energy property under proposed Regulation § 1.48-14(g)(3) is sufficiently clear; and
• the extent to which multiple energy properties with separate nameplate capacities of less than 5 MW would utilize common power condition equipment for economic or regulatory reasons and/or common interconnection agreements or would instead utilize separate power conditioning equipment and/or interconnection agreements.

A hearing on the Proposed Regulations is scheduled for February 20, 2024, with a deadline for public comments of January 22, 2024.