On May 31, 2023, the IRS issued Notice 2023-44 (the “Notice”), which provides additional guidance on Section 48C, a newly-revived allocation-based investment tax credit for the establishment and expansion of industrial and manufacturing facilities for the production or recycling of property used in renewable energy generation (including solar, wind, and geothermal), transmission, carbon capture, EVs and EV charging, renewable fuel processing, energy conservation, and other emissions-reducing processes (the “Section 48C Credit”). The Notice modifies and clarifies Notice 2023-18, issued in February 2023, which provided detailed mechanical guidance on applying for allocations of the Section 48C Credit.
Background
As reinstated by the Inflation Reduction Act of 2022 (the “IRA”), Section 48C provides a credit equal to 30% of the basis of eligible property for an extremely broad range of clean-energy equipment manufacturing facilities—not just of solar panels, wind turbines, floating offshore platforms and geothermal and hydropower turbines, but also of items such as grid equipment, carbon capture equipment, EVs (and specialized components thereof, including batteries and anode/cathode components), and EV charging stations. The program is capped at an aggregate $10 billion of credits (of which at least $4 billion must be allocated to projects in an energy community described in Section 45(b)(11)(B)(iii) that have not already received Section 48C certifications and allocations (a “Section 48C(e) Energy Community Census Tract”)), with certifications awarded to project sponsors based on various criteria stated in the statute, such as domestic job creation, net impact on greenhouse gas emissions, potential for technological innovation and commercial deployment, levelized cost of generated or stored energy, and project time from certification to completion.
Interaction of Section 45X and Section 48C
Section 45X, which provides a credit for the production of certain “eligible components” of renewable energy equipment such as solar panels and critical minerals, excludes from the definition of “eligible component” any property that is produced at a facility if the basis of any part of the facility is taken into account for purposes of the Section 48C Credit after August 16, 2022. The Notice clarifies through an example that where a manufacturing site contains separate independently functioning production units and the taxpayer receives a Section 48C Credit for one unit but not the other, the non-Section 48C unit—even if it is utilizing items produced by the Section 48C unit—can still produce Section 45X eligible components.
Observation:
- The Notice’s approach to the interaction between Section 45X and Section 48C may give some taxpayers hope that the IRS will take a similarly lenient approach to the interplay between Section 45V and Section 45Q. Commentators have expressed concern about situations where hydrogen production and carbon capture take place on the same site but pursuant to different process trains, arguing that taxpayers should be able to claim both Section 45V and Section 45Q credits (notwithstanding the statutory rule that no Section 45V credit is allowed for clean hydrogen produced at a facility that includes carbon capture equipment for which a Section 45Q credit is allowed).
Application Process and Deadlines
The Notice restates, with relatively minor modifications, the detailed two-step framework and deadlines set forth in Notice 2023-18 for Section 48C Credit allocations. For Round 1 of the program, which will allocate $4 billion of Section 48C Credits, the taxpayer must first submit a “concept paper” to the Department of Energy (“DOE”), through the eXCHANGE portal at https://48c-exchange.energy.gov/ (which will open no later than June 30, 2023) and no later than noon Eastern Time on July 31, 2023, to which the DOE will provide a letter of encouragement or discouragement. Regardless of the DOE’s response, the taxpayer may then submit a Section 48C(e) application through the eXCHANGE portal, which will then be assessed for eligibility and threshold requirements before undergoing technical review for four key criteria (commercial viability, greenhouse gas emissions impacts, strengthening U.S. supply chains and domestic manufacturing for a net-zero economy, and workforce and community engagement) and ranking alongside the other applications, in each case, by the DOE. The DOE will then provide a recommendation of acceptance or denial to the IRS, which will accept or reject the application based on the DOE’s recommendation and ranking. The IRS will make all Round 1 allocation decisions by March 31, 2024.
Within two years of receiving the IRS’ acceptance of an application for a Section 48C Credit allocation, the taxpayer must upload evidence of having satisfied certain requirements for certification (e.g., all permits necessary to commence construction and documentation demonstrating that commitments and other claims stated in the taxpayer’s Section 48C(e) application have been met, such as offtake agreements) via the eXCHANGE portal and will receive a corresponding certification letter from the IRS; the taxpayer has another two years from receiving the certification letter to place the project into service and must then provide notice of placed in service to the DOE. The Notice also provides procedures for reporting certain significant changes in plans set forth in the concept paper and the Section 48C(e) application; such changes, in some cases, could cause the taxpayer to forfeit its Section 48C Credit allocation.
The Notice states that eligible property placed in service prior to being awarded a Section 48C Credit allocation is not eligible to receive such an allocation. For purposes of this rule and the Section 48C(e)(3) requirement that projects receiving a Section 48C Credit allocation must be placed in service within two years of certification, the year of “placed in service” is defined as the earlier of (1) the taxable year in which depreciation of the eligible property begins under the taxpayer’s depreciation practice and (2) the taxable year in which the eligible property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income.
The Notice contains a revised version of Appendix A from Notice 2023-18, which provides a detailed description of the categories of qualifying advanced energy projects, including unspecified “other” advanced energy property and industrial technology designed to reduce greenhouse gas emissions, as determined by the Secretary of the Treasury. Details pertaining to the DOE application process are contained in a significantly expanded and more detailed version of Appendix B from Notice 2023-18.
Observation:
- The Notice uses a definition of “placed in service” that deviates from the multi-factor common law definition of “placed in service” in potentially significant respects. Taxpayers should be aware that, in some cases, projects may be considered placed in service under the Notice earlier than under current case law.
Identifying Section 48C(e) Energy Community Census Tracts
The Notice states that the determination of whether a project is located in a Section 48C(e) Energy Community Census Tract will be made at the time that the DOE provides recommendations to the IRS and will not be redetermined. A project is treated as located within a Section 48C(e) Energy Community Census Tract if 50% or more of its square footage is in such census tract. Appendix C of the Notice provides a list of Section 48C(e) Energy Community Census Tracts and a map of these census tracts is available at www.energy.gov/infrastructure/48C.
Observation:
- While Appendix C of the Notice is highly similar to Appendix C of Notice 2023-29 (which lists energy communities described in Section 45(b)(11)(B)(iii)), the lists are not completely identical, presumably because the list of Section 48C(e) Energy Community Census Tracts excludes those census tracts that received Section 48C certifications and allocations prior to August 16, 2022.
Section 48C is a powerful tax incentive that has the potential to significantly impact a broad range of equipment manufacturing in the clean energy and EV sectors. While the detailed rules in the Notice, together with prior IRS guidance, provide a robust framework for applying the statute, the practical implementation of the Section 48C(e) program remains to be seen.
For further information, please contact:
Judy Kwok, Partner, Linklaters
judy.kwok@linklaters.com
