On April 4, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released a notice of intent to issue proposed regulations on qualifying for the energy community bonus credit under Sections 45, 45Y, 48 and 48E (Notice).1 Pursuant to the Inflation Reduction Act (IRA) that was passed last August, eligible taxpayers can receive a bonus of up to 10% in excess of the investment tax credit under Sections 48 and 48E (ITC) and an increase of 10% for the production tax credit under Sections 45 and 45Y (PTC) for clean energy projects and facilities that are located in certain energy communities. The Notice describes rules that the Treasury and the IRS intend to include in forthcoming proposed regulations for determining what constitutes an energy community; whether a qualified facility, an energy project, or an energy storage technology is located in an energy community; and the timing of the determination. The Treasury and IRS intend for the forthcoming proposed regulations to apply to taxable years ending after April 4, 2023, and state that until the issuance of the proposed regulations, taxpayers may rely on the rules described in the Notice.
Energy Community Categories
Section 45(b)(11) identifies three categories of energy communities for purposes of the ITC and the PTC.
- The first category covers brownfield sites (Brownfield Category).
- The second category covers metropolitan statistical areas (MSAs) or non-metropolitan statistical areas (non-MSAs) that have (1) 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas and (2) an unemployment rate at or above the national average unemployment rate for the previous year (Statistical Area Category).
- The third category consists of census tracts (or a census tract directly adjoining such census tract) in which (1) a coal mine has closed after December 31, 1999, or (2) a coal-fired electric generating unit has been retired after December 31, 2009 (Coal Closure Category).
With respect to the Brownfield Category, the Notice clarifies that a brownfield site for purposes of the Brownfield Category is defined in 42 U.S.C. Section 9601(39)(A) as (1) real property whose expansion, redevelopment, or reuse may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant2 and (2) certain mine-scarred land.3 In addition, the Notice provides a safe harbor for brownfield sites. The IRS will accept that a site meets the definition of a brownfield site if it satisfies at least one of the following three conditions (subject to certain exceptions).
- The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a brownfield site under the relevant rules. Potential site lists may be found under the category of Brownfields Properties on the EPA’s Cleanups in My Community webpage or on similar webpages maintained by states, territories, or federally recognized Indian tribes;4
- A Phase II Environmental Site Assessment (Phase II Assessment) has been completed for the site and that Phase II Assessment confirms the presence on the site of a hazardous substance or a pollutant or contaminant; or
- For projects with a nameplate capacity of not greater than 5MW (AC), a Phase I Environmental Site Assessment has been completed for the site.
Statistical Area Category
With respect to the Statistical Area Category, the Notice clarifies the definitions of MSAs5 and non-MSAs6 and provides a method of calculating the 0.17% direct employment figure7 and determining whether an MSA or non-MSA has an unemployment rate at or above the national average unemployment rate for the previous year.8 The Notice acknowledges the challenge of defining the level of fossil fuel tax revenue for an MSA or non-MSA because that data is not readily available from public sources. Therefore, the Treasury and the IRS invite public comments addressing the possible data sources, revenue categories, and procedures to determine whether an MSA or non-MSA collects 25% or more of its local tax revenues from the extraction, processing, transport, or storage of coal, oil, or natural gas.
Coal Closure Category
With respect to the Coal Closure Category, the Notice provides a definition for the terms “census tract,”9 “closed coal mine,”10 “retired coal-fired electric generation unit,”11 and “adjoining” census tracts.12 Appendix C of the Notice provides a listing of the census tracts in the Coal Closure Category.
In addition, the Notice proposes rules pertaining to timing. To qualify for the bonus credit amounts or rates, under the PTC, a qualified facility must be “located in” an energy community, and, under the ITC, an energy project, qualified facility, or energy storage technology must be “placed in service” within an energy community.
For purposes of the PTC, whether a qualified facility is located in an energy community is determined separately for each taxable year of the qualified facility’s 10-year credit period. Furthermore, for purposes of the PTC, a qualified facility is treated as located in an energy community during a taxable year if it is located in an energy community during any part of the taxable year.
For purposes of the Investment Tax Credit, whether an energy project, qualified facility or energy storage technology is placed in service within an energy community is determined as of the placed-in-service date.
For purposes of the PTC and the ITC, if a taxpayer begins construction of an energy community project in a location that is an energy community as of the beginning of construction (BOC) date, then, with respect to that energy community project, the location will continue to be considered an energy community for the duration of the credit period for the PTC or on the placed-in-service date for the ITC. For purposes of determining a BOC date for Sections 45 and 48, the IRS has issued notices under Sections 45 and 48 (BOC Notices) that provide guidance for determining when construction begins.13 For purposes of determining a BOC date under Sections 45Y and 48E, principles similar to those provided in the BOC Notices apply.
An energy community project is treated as “located in” or “placed in service within” an energy community if the project satisfies either the Nameplate Capacity Test or the Footprint Test. An energy community project that has nameplate capacity must apply the Nameplate Capacity Test. An energy community project that has no nameplate capacity must apply the Footprint Test.
Under the Nameplate Capacity Test, an energy community project that has nameplate capacity is considered located in or placed in service within an energy community if 50 percent or more of the energy community project’s nameplate capacity is in an area that qualifies as an energy community. An energy community project’s nameplate capacity percentage is determined by dividing the nameplate capacity of the energy community project’s energy-generating units that are located in an energy community by the total nameplate capacity of all the energy-generating units of the energy community project.
If an energy community project does not have a nameplate capacity (for example, a qualified biogas property), that project applies the Footprint Test. That project is considered located in or placed in service within an energy community if 50% or more of its square footage is in an area that qualifies as an energy community. This percentage is determined by dividing the square footage of the energy community project that is located in an energy community by the total square footage of the energy community project.
A taxpayer claiming the increased credit amount or rate for meeting energy community bonus credit requirements must meet the general recordkeeping requirements under Section 6001 in order to substantiate that an energy community project is located in or has been placed in service in an energy community.
4 Available at https://java.epa.gov/acrespub/stvrp/.
5 The Notice also clarified that, in general, MSAs are groups of counties or county-equivalents that are grouped according to standards determined by the Office of Management and Budget (OMB), within the Executive Office of the President.
6 In general, non-MSAs are defined as nonmetropolitan areas as identified in the May 2021 Metropolitan and Nonmetropolitan Area Definitions published by the Occupational Employment and Wages Statistics division of the US Bureau of Labor Statistics (BLS). Appendix A of the Notice contains the delineations of MSAs and non-MSAs that are used for all purposes of the Notice.
7 For purposes of determining whether an MSA or non-MSA is in the Statistical Area Category based on fossil fuel employment, the relevant direct employment is determined by the number of people employed in the industries, as identified by the 2017 North American Industry Classification System (NAICS) industry code. The fossil fuel employment rate is determined as the number of people employed in the industries identified by the 2017 NAICS codes specified above and as listed in the annual County Files of the County Business Patterns (CBP) published by the Census Bureau divided by the total number of people employed in that area. The fossil fuel employment and total employment for each county in an MSA or non-MSA are aggregated for each year to determine whether the MSA or non-MSA meets the fossil fuel employment threshold of 0.17%. The list of MSAs and non-MSAs (by county) that have (or had any time after December 31, 2009) 0.17% or greater direct employment related to the extraction, processing, transportation, or storage of coal, oil, or natural gas is available in Appendix B of the Notice.
8 For purposes of determining whether an MSA and non-MSA has an unemployment rate at or above the national average unemployment rate for the previous year, the unemployment rates are determined using the Local Area Unemployment Statistics (LAUS) annual data for counties from the BLS. The comparison is made using unemployment rates for the previous calendar year. The county tables report the total number of individuals in the labor force and the total number unemployed. These amounts are then summed for each county within an MSA or non-MSA to determine the total labor force and total number of unemployed individuals. The unemployment rate is calculated by dividing the total number of unemployed individuals within the MSA or non-MSA by the total labor force.
9 The Census Bureau defines census tracts as relatively permanent small-area geographic divisions of a county or statistically equivalent entity defined for the tabulation and presentation of data from the decennial census and selected other statistical programs.
10 The Notice defines a closed coal mine as a coal mine classified as a surface or underground mine that has had for any period of time, since December 31, 1999, a mine status of abandoned or abandoned and sealed by the US Department of Labor's Mine Safety and Health Administration (MSHA) in the Mine Data Retrieval System (MDRS). Closed coal mines listed in the MSHA MDRS are excluded from the Coal Closure Category if they have irregular location information.
11 The Notice defines a retired coal-fired electric generating unit to mean an electric generating unit classified as retired at any time since December 31, 2009, by the US Energy Information Administration (EIA) of the US Department of Energy in the Preliminary Monthly Electric Generator Inventory (EIA Form 860M) or the Electric Generator Inventory (EIA Form 860).
12 Census tracts are directly adjoining if their boundaries touch at any single point. There are many cases where multiple census tracts meet at a single point. If a closed coal mine or retired coal-fired electric generating unit is located in one of the census tracts, then other census tracts sharing the single point would be considered directly adjoining.
13 Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; updated, clarified, and modified by Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479; clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17.