On April 4, 2023, the U.S. Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) released IRS Notice 2023-29 (Notice),1 which provides helpful guidance regarding certain provisions of the Inflation Reduction Act of 2022 (IRA) related to projects located in so-called “energy communities.”
The Notice sets forth certain rules intended to be incorporated into upcoming proposed regulations, which will apply to taxable years ending after April 4, 2023. Until the issuance of such regulations, taxpayers can rely on the rules described in the Notice.
As discussed more fully in this Sidley Update, the IRA made significant changes to the renewable energy tax credit regime. Among those changes were provisions intended to encourage construction of renewable energy facilities in “energy communities.” More specifically, the following projects will be eligible for an increased amount of tax credits:
- renewable energy projects eligible for the production tax credits (PTCs) under Section 45 or 45Y of the Internal Revenue Code of 1986, as amended (Code) and “located in” an energy community
- renewable energy projects eligible for the investment tax credits (ITCs) under Section 48 or 48E of the Code and “placed in service within” an energy community2
“Energy communities” are defined to include any of the following (which the Notice describes as “categories” of energy communities):
Brownfield Category. This category includes “brownfield sites” as defined in Sections 101(39)(A), (B) and (D)(ii)(III) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).
Statistical Area Category. This category includes a metropolitan statistical area (MSA) or non-metropolitan statistical area (non-MSA) that
- at any time after December 31, 2009, has or had (i) 0.17% or greater direct employment (Fossil Fuel Employment) or (ii) 25% or greater local tax revenues (Fossil Fuel Tax Revenues) related to the extraction, processing, transport, or storage of coal, oil, or natural gas
- has an unemployment rate at or above the national average unemployment rate for the previous year
Coal Closure Category. This category includes a census tract (and any directly adjoining census tracts) in which (i) after December 31, 1999, a coal mine has been closed or (ii) after December 31, 2009, a coal-fired electric generating unit has been retired.
As described in greater detail below, the Notice provides welcome clarifications of the various definitions and the rules determining what constitutes an energy community. It also provides helpful guidance on how to determine whether a renewable energy project is “located in” or “placed in service within” an energy community and the timing for making that determination. In addition, the Notice introduces a safe harbor with respect to the Brownfield category.
Clarification of the Definitions and New Safe Harbor
Brownfield Category. As noted above, energy communities include “brownfield sites.” For these purposes, a brownfield site includes real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant (see CERCLA § 101(39)(A)) and certain mine-scarred land (see CERCLA § 101(39)(D)(ii)(III)). Property described in the CERCLA exclusions (see 42 U.S.C. § 9601(39)(B)), such as those planned for Superfund cleanup, listed on the National Priorities List, or otherwise subject to cleanup under a CERCLA administrative order, are not considered brownfield sites under the IRA.
The Notice provides a new safe harbor whereby a project will be considered located on a brownfield site if it satisfies any of the following conditions and does not fall within the CERCLA exclusions:
- 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 CERCLA § 101(39)(A). Although the IRS does not provide a list of such sites, the Notice suggests searching the mapping tool (see here) to find brownfield sites previously assessed by the Environmental Protection Agency (EPA);
- an ASTM E1903 Phase II Environmental Site Assessment has been completed in accordance with the most current applicable standards for environmental site assessments and confirms the presence of a certain hazardous substance, pollutant, or contaminant (excluding, for example, petroleum contamination); or
- the project has nameplate capacity of not greater than 5MW (alternating current, or AC), and an ASTM E1527 Phase I Environmental Site Assessment has been completed in accordance with the most current applicable standards for environmental site assessments.
Statistical Area Category. The Notice defines MSAs by reference to standards determined by the Office of Management and Budget, which are updated every 10 years in accordance with the decennial census of the United States. The last update was in 2018. The Notice defines non-MSAs as identified by the Occupational Employment and Wages Statistics division of the U.S. Bureau of Labor Statistics (BLS). Non-MSAs generally consist of counties or territories that fall outside of MSAs that are grouped together by the BLS in consultation with individual states. The Notice includes as an appendix a comprehensive list of the delineations of MSAs and non-MSAs that are used for all purposes of the Notice.
For purposes of determining the Fossil Fuel Employment percentage, the Notice provides that employees will be included in the Fossil Fuel Employment category if they are employed in industries having the codes listed below under the North American Industry Classification System (NAICS):
|Oil and Gas Extraction
|Drilling Oil and Gas Wells
|Support Activities for Oil and Gas Operations
|Support Activities for Coal Mining
|Pipeline Transportation of Crude Oil
|Pipeline Transportation of Natural Gas
The percentage of Fossil Fuel Employment for the relevant MSA or non-MSA will be determined by dividing the total number of employees included in the Fossil Fuel Employment category by the total number of people employed. The Notice helpfully includes a list of MSAs and non-MSAs that, at any time after December 31, 2009, have had 0.17% or greater Fossil Fuel Employment.
For purposes of determining the unemployment rate for an MSA or non-MSA, the IRS will use the BLS’s Local Area Unemployment Statistics annual data for counties.
The IRS intends to issue a list identifying MSAs and non-MSAs that qualify in the Statistical Area Category based on Fossil Fuel Employment annually (with each issuance expected to occur in May). The first list is expected to be published in May of this year and will apply to the period beginning on January 1, 2023, and ending at the time the updated list is published (in May of 2024). Each subsequent list will determine the MSAs and non-MSAs that qualify in the Statistical Area Category based on Fossil Fuel Employment for the 12-month period beginning in May (when the list is released) through April of the following year. Accordingly, the data used in determining the unemployment percentage at a particular time will be data from a prior year, a shortcoming acknowledged by the IRS and Treasury in the Notice that results from “the lag in availability of annual county unemployment rates.”
The Notice does not include guidance on the manner in which the Fossil Fuel Tax Revenue percentage will be determined. Acknowledging the challenges to determining such percentages due to the lack of appropriate public data, the IRS asks for comments on the issue.
Coal Closure Category. The Notice provides that a coal mine is “closed” if it has a status of “abandoned” or “abandoned and sealed” by the U.S. Department of Labor’s Mine Safety and Health Administration in the Mine Data Retrieval System. Certain mines meeting this criterion were excluded from the IRS’s table due to irregular data; the Notice provides a method for taxpayers to cure these irregularities. Additionally, the Notice provides that a coal-fired electric generating unit will be considered “retired” if it is so classified by the U.S. Energy Information Administration (EIA) in EIA Form 860 or 860M.
The Notice further clarifies that census tracts are considered “directly adjoining” if their boundaries touch at any point.
The Notice provides a list of the Coal Closure category sites in an appendix.
Under the Notice, a project is considered “located in” or “placed in service within” an energy community if it meets either the Nameplate Capacity Test or the Footprint Test (which can be used only if the project has no nameplate capacity).
Under the Nameplate Capacity Test, a project will be treated as located where 50% or more of its nameplate capacity is located. For projects that generate direct current (DC) that then converts into AC, such as solar photovoltaic, the capacity is determined using the DC nameplate. Otherwise, the nameplate capacity in AC should be used. Storage facilities should use as the nameplate the storage usable energy capacity (MWh).
Under the Footprint Test, a project that does not generate power, such as a biogas facility, will be treated as located where 50% or more of the project’s square footage is located.
Additionally, the Notice provides that offshore energy generation facilities with nameplate capacities that are not located in a census tract, an MSA, or a non-MSA may be considered located in an energy community if their land-based power conditioning equipment (that conditions energy generated by the facilities for transmission, distribution, or use and that is closest to the point of interconnection) is located within an energy community. The Notice includes an example providing that an offshore wind facility would nevertheless be considered as located in an energy community if its substation located nearest to the point of land-based interconnection is located in an energy community.
Timing of Determination
The Notice provides certain rules regarding when the determination of whether a project is located in an energy community should be made.
In the case of a PTC-eligible project, the Notice provides that such determination is generally made separately for each taxable year of the project’s 10-year credit period. In the case of an ITC-eligible project, the determination of whether the project is “placed in service within” an energy community is made as of the placed-in-service date.
To address concerns raised by certain developers and investors, the Notice, following an update posted on April 7, 2023,3 provides that in the case of a project that begins construction (within the meaning of previous IRS guidance4) on or after January 1, 2023, in a location that is an energy community as of the beginning of construction date, such location will continue to be treated as an energy community for the duration of the credit period (in the case of PTC-eligible projects) or on the placed-in-service date (in the case of ITC-eligible projects) without regard to changes to the location’s status as an energy community subsequent to the date on which construction began.
Worth noting is that this rule appears to be a one-way rule that favors the taxpayer; if a taxpayer begins construction on a project in a location that is not an energy community at the time construction begins and the location subsequently becomes an energy community during the credit period (in the case of PTC-eligible projects) or on the placed-in-service date (in the case of ITC-eligible projects), the taxpayer should still be entitled to the increased credit amount.
SIDLEY INSIGHT: This rule favorably addresses one of the primary areas of uncertainty relating to the energy community rules. Developers expressed concerns about meeting these rules if an applicable location would have been classified as an energy community prior to the beginning of construction but then was no longer classified as such at the time the project was placed in service. In addition, in the case of a PTC-eligible project, requiring annual determinations of energy community status during each year of the credit period, as is required under the general rule, would present practical difficulties and challenges in financing projects. Similarly, in the case of ITC-eligible projects, it was not clear whether a change in status of an energy community during the recapture period would require recapture of the incremental energy community credits taken in respect of the project. The Notice addresses those concerns in a way favorable to taxpayers.
However, such concerns remain in cases where construction begins prior to 2023, so, as such, additional consideration should be given to such issues for these projects.
In addition, the rule’s reliance on existing “beginning of construction” guidance raises issues on which additional guidance would be helpful (e.g., confirmation that off-site physical work performed outside the relevant energy community can be relied on for purposes of this rule).
1 The Notice was amended on April 7, 2023. See note 3.
2 In the case of PTC-eligible projects, projects located in energy communities are entitled to additional credits equal to 10% of the credits otherwise available (i.e., 110% of the PTC amount). In the case of ITC-eligible projects, the percentage of eligible basis used in determining the ITC amount is increased by 10 percentage points (i.e., from 30% to 40%). The above assumes that the projects satisfy (or are exempt from) the prevailing wage and apprenticeship requirements. Projects that do not satisfy such labor-related requirements will be eligible only for an additional two percentage points in the case of ITC-eligible projects (i.e., from 6% to 8%) or 10% of the reduced PTC amount otherwise available (which equates to 2% of the full PTC amount) in the case of PTC-eligible projects.
3 The initial version of the Notice did not include the requirement that the project begin construction on or after January 1, 2023, to qualify for this special rule. On April 7, 2023, the IRS released an amended version of the Notice with this additional timing requirement. Compare IRS Notice 2023-29, 2023 WL 2860876 (April 7, 2023) with IRS Notice 2023-29, 2023 WL 2808471 (April 4, 2023).
4 See 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.
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