IRS Clarifies Qualifying Projects for New Energy Tax Credits Under the Inflation Reduction Act

On May 31, the IRS published Notice 2023-44, further defining which projects qualify for the enhanced Section 48C tax credits under the Inflation Reduction Act (IRA). Section 48C offers $10 billion in credits for investments in new, expanded or re-equipped manufacturing facilities producing certain emissions-reducing technologies. The new guidance includes details on the application process and a map of census tract communities.

How Does the New Guidance Clarify What Qualifies as an Advanced Energy Project Under the Inflation Reduction Act?

The recently issued guidance includes expanded definitions and examples for each category of qualifying advanced energy projects, including explicit examples of eligible and ineligible property. The updated Appendix A supersedes the original appendix included in Notice 2023-18.

The notice reinforces the interplay between Section 48C and Section 45X for a single manufacturing site. Sec. 45X provides production tax credits for each clean energy component that is domestically produced, while Sec. 48C provides an investment tax credit for investing to construct, re-equip or expand an industrial or manufacturing facility. Consider a site with two separate production units, each producing a different, but interconnected eligible component. If one of the production units receives a tax credit under Section 48C or 45X, it does not preclude the other production unit from applying for and receiving a tax credit under one of these sections as well. Sec. 45X does specifically state that a taxpayer claiming investment tax credits under Sec. 48C cannot later claim production tax credits (Sec. 45X) for components that are produced and sold at the same facility. The IRS intends to further define the term “production unit” for purposes of the 45X credit in forthcoming guidance.

More Defined Application Process and Timeline

The new guidance states that a two-stage technical evaluation process will be used for Round 1 submissions.  

In Stage 1:

1. Taxpayers will submit a concept paper — no later than Noon EDT on July 31, 2023 — through the eXCHANGE portal, which will open no later than June 30, 2023. 
2. Concept application materials are available to download on the eXCHANGE portal as of May 31, 2023. 

In Stage 2:

1. After the Department of Energy (DOE) reviews the concept papers, the portal will reopen to receive the applications. 
2. Once the DOE has evaluated the applications, they will give their allocation recommendations to the IRS.
3. Taxpayers will be notified of final allocation decisions for Round 1 no later than March 31, 2024.

Key Program Dates for the Inflation Reduction Act’s Energy Tax Credits

Additional Department of Energy Criteria and Priorities

The DOE will be evaluating eligible applications against four technical criteria:

1. Commercial viability. This is a key criterion for determining which projects merit consideration and will help identify projects with the lowest levelized cost and shortest time frame for completion.
2. Greenhouse gas emissions impacts. This will help identify projects with greatest net impacts in avoiding or reducing anthropogenic emissions of greenhouse gases.
3. Strengthening U.S. supply chains and domestic manufacturing for a net-zero economy. This will help identity impacts on domestic job creation and the potential for technological innovation and commercial deployment.
4. Workforce and community engagement. This will look to additional facts that can inform how and to what extent projects will lead to domestic job creation, reduce barriers that might otherwise increase projected completion time, and have an impact on avoiding or reducing local pollution, including non-greenhouse gas air pollution.

All clean energy manufacturing and recycling projects that are qualified advanced energy projects are eligible to apply for the credits; however, the DOE has identified priority areas based on an assessment of the current and anticipated supply chain gaps. 

Round 1 priority areas include:

• Clean Hydrogen – Manufacturing of electrolyzers, fuel cells and associated components
• Electric Grid – Manufacturing of transformers, materials, power electronic and other grid components and equipment
• Electric Heat Pumps – Manufacturing of air-source or ground-source heat pumps components and infrastructure, particularly reversing valves, control circuits, compressors and heat exchangers
• Electric Vehicles – Manufacturing of power electronics, permanent magnets and battery components for use in electric vehicle motors
• Nuclear Energy – Manufacturing of specialized components and equipment for nuclear power reactors or their fuels for both existing reactors and new reactor deployments. 
• Solar Energy – Polysilicon, wafer production facilities, ingot and wafer production tools, and solar glass production facilities 
• Sustainable Aviation Fuels – Manufacturing of equipment needed for low-carbon aviation fuel production 
• Wind Energy – Component production facilities and specialized steel production, particularly for offshore wind, such as monopile-grade steel and towers, recycling of wind components and particularly blades 

How to Know if Your Project is Within an Energy Communities Census Tract

A facility will be treated as located within the Energy Communities Census Tract if it satisfies the Footprint Test. This test provides that 50% or more of the square footage of the facility must be in a qualifying area. The DOE has provided a detailed map as part of Appendix C, which provides a complete list of eligible energy communities.

The additional guidance is very informative and extremely detailed. We recommend you consult your tax adviser to assist with drafting concept papers as well as the overall the application process.

Contact Justin Gartner or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.