IRS preliminary guidance on energy community bonus credit
June 2023
In brief
The Inflation Reduction Act of 2022 extended and expanded a number of tax credits to encourage production of clean energy. As additional incentive, some clean energy credits provide for bonus credits that increase a base credit rate by a percentage for complying with certain social policy-related requirements. On April 4, the IRS and Treasury issued Notice 2023-29, which provides interim guidance in advance of proposed regulations on the bonus credit for locating a facility in an energy community.
Notice 2023-29 advises that taxpayers may rely on the interim guidance pending issuance of proposed regulations, and that the IRS and Treasury anticipate that the regulations will be proposed to apply retroactively to the date of publication of the notice.
The IRS and Treasury previously requested comments on energy communities in Notice 2022-52. Notice 2023-29 requests comments only on the methodology for determining fossil fuel tax revenue. Comments are due by May 4, 2023, and may be submitted on regulations.gov (docket IRS-2023-0014).
For consideration: Although the notice requests specific comments only on determining fossil fuel tax revenue for a statistical area category energy community, taxpayers may want to consider submitting comments on how the notice defines employment related to “the extraction, processing, transport or storage of coal, oil or natural gas (as determined by the Secretary of the Treasury or her delegate…,” which currently is limited to eight NAICS industry codes.
In detail
Background
The energy community bonus credit may be available for the credits for electricity produced from certain renewable resources (Section 45), clean energy production (Section 45Y), energy property (Section 48), and clean energy investment (Section 48E). The energy community bonus generally increases the base credits under these provisions by 10%. However, for the Section 48 and 48E credits, the energy community bonus is 10% only if certain wage and apprenticeship requirements are met in constructing or repairing a facility, and 2% otherwise. For additional information on the wage and apprenticeship bonus credit, see the PwC Insight IRS issues wage and apprenticeship guidance for clean energy bonus credits.
An energy community is either a:
(1) Brownfield site, within the meaning of 42 USC 9601(39) (brownfield category);
(2) Metropolitan statistical area (MSA) or non-metropolitan statistical area with:
(a) At any time after 2009, at least 0.17% direct employment (fossil fuel employment) or 25% local tax revenues (fossil fuel tax revenue) related to the extraction, processing, transport, or storage of coal, oil, or natural gas, and
(b) An unemployment rate at or above the national average (statistical area category); or
(3) Census tract, or area located next to a census tract, where a coal mine closed after 1999 or a coal-fired electric generating unit was retired after 2009 (coal closure category).
Guidance
Definitions
Notice 2023-29 provides the following definitions and explanations of terms.
Brownfield category
A brownfield site is defined in 42 USC 9601(39)(A) as 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. For purposes of the notice, the category includes certain mine-scarred land.
Notice 2023-29 provides a safe harbor that treats a site as meeting the definition of a brownfield site within the meaning of 42 USC 9601(39) if:
(1) The site was previously determined by federal, state, territory, or federally recognized Indian tribal brownfield resources to meet the definition of a brownfield site under 42 USC 9601(39)(A),
(2) An ASTM International Phase II assessment confirms the presence of a hazardous substance or a pollutant or contaminant, or
(3) If a project has a nameplate capacity of not greater than five megawatts, an ASTM International Phase 1 assessment has been completed that identifies the presence or potential presence of a hazardous substance or a pollutant or contaminant.
Statistical area category
MSAs are groups of counties or county-equivalents that are grouped according to standards determined by the US Office of Management and Budget. Non-MSAs generally are nonmetropolitan areas identified in the May 2021 Metropolitan and Nonmetropolitan Area Definitions published by the Bureau of Labor Statistics (BLS). Appendix A of Notice 2023-29 provides a list of MSAs and non-MSAs that are delineated for purposes of the notice.
Fossil fuel employment is based on the number of people employed in industries with certain NAICS codes, as 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 is aggregated for each year to determine whether an MSA or non-MSA meets the 0.17% fossil fuel employment threshold. Notice 2023-29 Appendix B provides a list of MSAs and non-MSAs that meet the fossil fuel employment test.
Observation: The statistical area category includes MSAs and non-MSAs that had a 0.17% fossil fuel employment level “at any time” after 2009. The notice indicates that data published annually by the Census Bureau in the County Files of the County Business Patterns has been used to make that determination. That data provides only an annual snapshot of county-level employment as of each mid-March. However, the BLS also reports employment levels on a monthly basis, which may indicate whether an MSA or non-MSA had the requisite levels of fossil fuel employment “at any time” after 2009 rather than for a particular year.
Whether an MSA or non-MSA has an unemployment rate at or above the national average unemployment rate for the previous year is determined using BLS annual unemployment data. Notice 2023-29 advises that the IRS and Treasury intend to publish each May a list of MSAs and non-MSAs that qualify for the statistical area category based on fossil fuel employment.
Notice 2023-29 states that it does not provide guidance on determining fossil fuel tax revenue because data is not readily available from public sources, and because MSAs and non-MSAs may cover multiple localities with different tax regimes. The notice requests comments addressing possible data sources, revenue categories, and procedures for determining fossil fuel tax revenue.
Observation: Because the IRS and Treasury have not yet identified the areas meeting the unemployment test, an MSA or non-MSA listed in Appendix B may or may not qualify as an energy community after the unemployment rates are applied.
Coal closure category
Census tracts are relatively permanent small geographic divisions of a county or statistically equivalent entity defined for purposes of the decennial census and other statistical programs. Census tracts are directly adjoining if their boundaries touch at any point.
A closed coal mine means a coal mine that for any period of time after 1999 had a status of abandoned or abandoned and sealed, excluding mines that have irregular location information (such as listed latitude and longitude coordinates that do not match the county and state listed).
A retired coal-fired electric generating unit is an electric generating unit classified by the Department of Energy as (1) an electric generating unit and (2) retired at any time after 2009, excluding units with irregular location information.
Appendix C lists census tracks qualifying for the coal closure category
Determination of location in an energy community
Sections 45 and 45Y require a qualified facility to be located in an energy community for any part of a tax year to qualify for the bonus credit for that tax year. Under Section 48 or Section 48E, an energy project, qualified facility, or energy storage technology must be placed in service within an energy community. Thus, eligibility for the bonus credit is determined in the tax year property is placed in service.
Notice 2023-29 treats these timing requirements as satisfied if a taxpayer begins construction of an energy community project on or after January 1, 2023, in a location that is an energy community at the beginning of construction. In that case, the location will be treated as an energy community for the duration of the Section 45 or Section 45Y credit period or on the placed-in-service date for Sections 48 and 48E. Notice 2023-29 provides that when construction begins is determined under earlier guidance, such as Notice 2013-29. For a discussion of guidance determining when property is placed in service for purposes of certain energy credits, see the PwC Insight IRS issues wage and apprenticeship guidance for clean energy bonus credits.
Notice 2023-29 provides that a taxpayer may determine if a project is located or placed in service in an energy community under a nameplate capacity test, for projects that have nameplate capacity, or a footprint test if a project has no nameplate capacity.
A project satisfies the nameplate capacity test if at least 50% of the project’s nameplate capacity is in an area that qualifies as an energy community. A project with offshore energy generation units that has nameplate capacity but has no energy-generating units in a census tract, MSA, or non-MSA applies this test by attributing all of the project’s nameplate capacity to the land-based equipment that conditions the energy generated and is closest to the point of interconnection.
Under the footprint test, a project is treated as located or placed in service in an energy community if at least 50% of its square footage is located in an energy community.
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