The application process for the first round of funding for the Section 48C credit will open May 31, 2023. The IRS will issue additional guidance on the program before the application process opens but the application window closes July 31, 2023, so interested taxpayers should prepare submissions now.
Background on the Section 48C Advanced Energy Project Investment Tax Credit
The Section 48C tax credit incentivizes investments in clean energy and related manufacturing and has been part of the Tax Code since the American Recovery and Reinvestment Act of 2009. It was extended once but allowed to expire at the end of 2013. The Inflation Reduction Act of 2022 (IRA) reinstated the credit and allocated $10 billion in tax credits to investments in qualifying “advanced energy projects” — $4 billion of which must be allocated to projects located in limited “energy community” census tracts that historically economically relied on the coal industry. (Note that this energy community designation is more limited than the census tract designation for the Section 48 energy community tax credit adder. Read more about that tax credit opportunity in McGuireWoods’ April 5, 2023, alert.)
The definition of advanced energy projects is broad, but it can be condensed into three categories:
- Facilities that produce or recycle certain specified advanced energy property, including electric and fuel cell vehicles (including parts or materials for such vehicles, such as batteries, and associated charging or refueling infrastructure), grid modernization equipment, carbon sequestration equipment, renewable energy equipment and energy conservation equipment.
- Equipment to re-equip a factory or industrial site to cut greenhouse gas emissions by 20%.
- Facilities to process, refine or recycle raw ore, brines, mine tailings, end-of-life products, waste streams and other source materials into “critical minerals” identified by the U.S. Geological Survey and/or the Department of Energy.
Section 48C provides its incentive through a tax credit of 30% of the qualified investments in these projects that aid renewable energy or manufacturing in related fields. Taxpayers must adhere to the prevailing wage and apprenticeship (PWA) rules to qualify for that 30% rate; otherwise, the credit rate drops to 6% of the investment. (Read more about PWA guidance in McGuireWoods’ Nov. 30, 2022, alert.)
Unlike many of the energy credits adopted by the IRA, the Section 48C credit must be applied for and granted after a review by the Department of Energy (DOE) and the IRS. The IRS released initial guidance on this renewed and expanded Section 48C credit and the application process in Notice 2023-18.
The main purpose of Notice 2023-18 is to give taxpayers their first instructions on the procedure and deadline for requesting an allocation of Section 48C credits. On May 31, 2023, the DOE is opening the application process for $4 billion in credits, with a to-be-determined plan to open an application process for the balance of the program in the future. Census tracts with closed coal mines and coal power plants will be allocated $1.6 billion of this total amount. The notice’s description of the process, in broad terms, is as follows:
First, between May 31 and July 31, 2023, taxpayers must submit “concept papers” to the DOE via the eXCHANGE site to be considered in this first round of credit allocation. Before this DOE application window opens, more program guidance describing the technical review criteria is anticipated to be published. Taxpayers will not be qualified for this first round of Section 48C credits if they miss the concept paper submission date of July 31.
Second, after reviewing the concept paper, DOE will send the taxpayer either (i) a letter of support if it determines that the project warrants recommendation and has a realistic expectation of commercial viability, or (ii) a letter of discouragement. A taxpayer is not barred from making an application if DOE sends a letter of discouragement. In either case, the taxpayer may submit its final application — although the final date for this application has not yet been established.
Third, after the application has undergone compliance and technical review, DOE will recommend to the IRS whether to accept or reject the application. DOE also will rank each accepted application relative to the others. It is unlikely that taxpayers who received letters of discouragement will receive recommendations for acceptance. The IRS then will decide whether to allocate Section 48C credits to the project.
If a taxpayer goes through the process and does not receive an allocation, it will be able to request a DOE debriefing of the denial. This will grant the taxpayer insight into the strengths and weaknesses of the rejected application so the taxpayer may be more successful in a future round.
Taxpayers that receive allocations will have two years to notify DOE that the certification requirements were met. At that point, the taxpayer will have another two years to notify DOE that the project has been placed in service. The Section 48C credit is claimed on the tax return for the taxable year in which the project is placed in service.
Concept papers should make it clear that the taxpayer’s project in question satisfies the eligibility requirements, meets the definition for a qualifying advanced energy project, and has a reasonable expectation of commercial viability. If the project doesn’t meet preliminary eligibility criteria, then DOE won’t consider the application. Additionally, if plans for a project change significantly after the project’s concept paper and application have been submitted, then the project could become ineligible for consideration.
Importantly, Notice 2023-18 outlines certain policy factors that may positively influence the DOE review specifically:
- Avoiding or reducing greenhouse gas emissions.
- Benefiting the community where the project is located (for example, by creating high-quality, accessible jobs).
- Strengthening U.S. industrial competitiveness and clean energy supply chains. (For example, projects that address specific gaps or vulnerabilities may receive priority consideration, and specific technologies that might qualify for such priority consideration will be identified in future guidance.)
The Section 48C tax credit is mutually exclusive with most other energy tax credits adopted under the IRA in order to prevent taxpayers and projects from double-dipping. Therefore, if the project is not eligible for another IRA tax credit or similar program, it may get priority consideration for a Section 48C credit allocation.
Additional guidance is expected to be released in the coming weeks, before DOE starts accepting concept papers on May 31, 2023. It is critical for taxpayers to begin work on their concept papers now so they can present the strongest case for their project when the application process opens.