IRS and DOE Publish Details on First Allocation of $10B Section 48C Green Technology Industry Tax Credits Authorized by IRA

The Internal Revenue Service (IRS), the Treasury Department (Treasury), and the Department of Energy (DOE) released Notice 2023-18 (Notice) on February 13, detailing the procedures through which the IRS and DOE will award a first round of allocations of tax credits under Section 48C of the Internal Revenue Code of 1986, as amended (Code), for certain green technology industry equipment manufacturing and recycling facilities and other greenhouse gas emission reduction projects. The Notice responds to the recent refresh of Section 48C credits under the Inflation Reduction Act of 2022 (IRA).

Notice 2023-18 in large part builds upon the framework adopted for prior authorized Section 48C credits. While the Notice reserves for additional guidance regarding the application and review process for Section 48C credits, it does introduce certain new concepts, including those accommodating the expansion of Section 48C under the IRA as well as an explicit authorization for the IRS and DOE to take into account whether a proposed project has connections to a “foreign country of risk” when awarding credits. The Notice provides a July 31, 2023 deadline for submitting initial application materials to DOE to be eligible for the first round of Section 48C credits.

BACKGROUND ON CODE SECTION 48C

The investment tax credit under Code Section 48C was created under the American Recovery and Reinvestment Tax Act of 2009. The Section 48C credit established a 30% tax credit for investments in property used in a “qualifying advanced energy project,” which generally included certain green technology industry equipment manufacturing facilities. The original allocation to this program was $2.3 billion, and the IRS and DOE previously provided “phase I” and “phase II” programs through which the Section 48C credits were awarded (see IRS Notices 2009-72 and 2013-12).

The IRA extended Section 48C and provided an additional $10 billion dollars of credits to be allocated under the new program. Of these authorized credits, at least $4 billion must be allocated to projects located in census tracts (or any directly adjoining tracts) in which a coal mine closed after December 31, 1999, or a coal-fired electric power plant was retired after December 31, 2009, and which had no project receiving any prior Section 48C credits (qualifying energy communities).

Additionally, the IRA modified Section 48C in a manner that significantly expanded the scope of projects eligible for the credit. The IRA’s rejuvenation of this program, however, also includes a new restriction. The IRA subjects the Section 48C credit to new prevailing wage and apprenticeship requirements, which provide an 80% haircut to the prior 30% credit if such requirements are not met. These requirements are detailed further in our previous LawFlash, IRS Publishes Critical Prevailing Wage and Apprenticeship Requirement Guidance for IRA Tax Credits. The new Section 48C credits are eligible for monetization via the refundable and transferable credit provisions enacted by the IRA.

Certain key changes by the IRA to the definition of “qualifying advanced energy project” eligible for the Section 48C credit (if granted through the program established under the Notice) include:

• A qualifying advanced energy project includes a facility that recycles (as opposed to only a facility that produces) certain types of qualifying property and components.
• The list of property qualifying for the Section 48C credit has been significantly expanded. For example, such expanded categories include property designed to produce energy from water, energy storage systems and components, grid modernization equipment and components, property designed to “capture, remove, use, or sequester carbon dioxide emissions,” equipment designed to “refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low emission,” and more.
• A qualifying advanced energy project includes a project to reequip industrial or manufacturing facilities with certain listed categories of equipment designed to reduce greenhouse gas emissions by at least 20%.

The new provisions of Section 48C added in the IRA direct Treasury to establish a new and separate program to consider and award certifications for the additional $10 billion of tax credit allocations under Section 48C. The new provisions also provide that the applicant who has been certified must, within two years, place the project into service, notify the Treasury Secretary that such project has been so placed in service, and provide evidence that the requirements of the certification has been met. If the project has not been placed into service within two years of certification, or if the Treasury Secretary determines that the project has been placed in service at a location materially different than the one specified in the application for the project, such certification is no longer valid.

THE NOTICE

The Notice in large part follows the general application, review and approval process employed under the prior Section 48C credit programs, while updating for changes to Section 48C enacted by the IRA. Specifically, the Notice establishes a general framework for taxpayers to apply for, and the government to grant via allocation, $4 billion of the authorized $10 billion of Section 48C tax credits through a “round 1” allocation process beginning on May 31, 2023. Of the $4 billion round 1 credits, Treasury and the IRS expect approximately $1.6 billion will be allocated to projects located in qualifying energy communities to match the 40% mandate in the statute, although the Notice accepts that this exact allocation may not actually be implemented. The Notice reserves for significant further guidance to be issued by May 31, 2023, which is the date the round 1 Section 48C application period begins. The Notice also contemplates that one or more further Section 48C credit allocation rounds will be authorized in the future through further guidance.

The following provides a general overview of the application, review, and approval process for the round 1 allocation of Section 48C credits set forth in the Notice. All applicant submissions are to be made via an online DOE portal at https://infrastructure-exchange.energy.gov/ (eXCHANGE portal).

• The applicant submits a “concept paper” to DOE between May 31, 2023, and July 31, 2023. The concept paper must generally describe the proposed project, although the Notice, unlike Section 48C prior guidance, does not include further guidance regarding the content of a concept paper. Forthcoming guidance will provide further instructions for filing concept papers.
• DOE evaluates the concept paper (including for proposed project viability) and provides a written response either encouraging or discouraging submission of a formal Section 48C credit application. A DOE response discouraging a formal application submission does not bar the applicant from submitting a formal application, but does reflect DOE’s view that the project is unlikely to receive a recommendation based on the concept paper information submitted.
• The applicant submits a formal Section 48C credit application to DOE. Among other information (including that required in forthcoming guidance), the application must set forth the census tract of the project. The Notice contemplates that the applicant will be able to determine whether its project is located in an eligible energy community tract using a mapping tool that will be referenced in forthcoming guidance. The application also must set forth whether the applicant intends to satisfy the prevailing wage and apprenticeship requirement to be eligible for a 30% credit amount rather than a 6% credit amount. The due date for this submission will be established in forthcoming guidance.
• DOE reviews the Section 48C application for compliance with eligibility and other threshold requirements, including those to be provided in forthcoming requirements. If the application satisfies these initial requirements, DOE conducts a technical review of the application. This evaluation results in DOE making an acceptance or rejection recommendation to the IRS. DOE’s recommendation to the IRS also includes an ordering ranking that compares DOE-accepted submissions against each other. DOE’s recommendation is to be based on a project’s reasonable expectation of commercial viability and application of the review criteria set forth in the Code, the Notice (discussed below), and in forthcoming guidance.
• Based on the DOE report, the IRS decides which applications to accept and how much Section 48C credits to allocate to accepted applications. The amount of Section 48C credits allocated to a project will be based on the applicant’s qualified investment in the project and whether the applicant intends to satisfy the prevailing wage and apprenticeship standard (thereby resulting in a 30% rate), as applied across accepted allocation round 1 applications according to DOE’s rankings until the amount available for allocation is exhausted. The IRS provides written notice of its decisions on acceptance and allocations to the applicants.
• Within two years after receiving a positive allocation acceptance letter from the IRS, the applicant must notify DOE that the applicable permits and other authorizations have been received necessary to commence construction of the project at the planned location. After evaluation, DOE then notifies both the applicant and the IRS that it has received the applicant’s notification that the certification requirements have been met. The IRS then certifies the applicable project by sending a certification letter to the applicant.
• Within two years after receiving such IRS certification letter, the applicant must notify DOE that the applicable project has been placed in service. Failure to provide such notice (reflecting satisfaction of the time-based statutory requirement) results in a forfeiture of allocated credits. DOE notifies the taxpayer and the IRS regarding its receipt or lack of receipt of such placed-in-service notification. Applicants who submitted applications intending to satisfy the prevailing wage and apprenticeship standard must also confirm compliance with this standard, with failure to satisfy this standard and provide notification resulting in a reduction of the Section 48C credit rate from 30% to 6%.
• The applicant claims the Section 48C credit with respect to the project for the taxable year the project is placed in service, although an eligible applicant that self-constructs the project may elect to claim portions of the credit in an earlier tax year as “qualified progress expenditures.”

The Notice also builds on the list of policy factors already included in the text of Section 48C that DOE may consider in evaluating Section 48C credit submissions. These factors, which are to be supplemented in forthcoming guidance, include the following: location in an energy community census tract; eligibility or non-eligibility for DOE grants or other assistance under the IRA or the Infrastructure Investment and Jobs Act (Public Law 117-58); and a project’s ability to address specific gaps, vulnerabilities, or risks in the domestic production of clean energy products.

Importantly, the Notice also expands on the text of the Code and prior guidance by providing that DOE may conduct a review to determine if an applicant has a connection with a “foreign country of risk,” which, under the most recent DOE guidance, consists of China, Russia, Iran, and North Korea. The Notice accordingly anticipates requiring applicants to disclose information regarding board members, ownership structure and foreign relationships, as well as sources of, and any plans to export, critical materials.

Additionally, the Notice provides a procedure under which a successor-in-interest of a preoperational project can apply to receive the benefit of a transferor applicant’s Section 48C credit allocation, which would otherwise be forfeited. The Notice also provides guidelines on change in facts of a project from those set forth in a concept paper or formal application. A significant change in facts, which explicitly includes any change in census tract location of a project but not a failure to satisfy the prevailing wage and apprenticeship requirements, can result in the voiding of a Section 48C credit application or a forfeiture of allocated Section 48C credits.

Finally, the Notice provides specific examples of types of projects satisfying the new expanded Section 48C facility eligibility requirements after the enactment of the IRA. It should be noted that the Notice includes specialized components and equipment for nuclear power reactors or their fuels in the residual category for other advanced energy property designed to reduced greenhouse gas emissions as determined by Treasury.

For additional background on the green technology industry tax credits passed into law with the IRA, refer to our previous LawFlash, Inflation Reduction Act Would Significantly Expand Federal Income Tax Benefits for Green Technology Industry.

FAST APPROACHING DEADLINE

The Notice provides a fast-approaching July 31, 2023 deadline for submitting a concept paper to DOE to be eligible for the round 1 Section 48C credit allocation. Although the Notice does not provide much detail for what needs to be included in a concept paper, potential applicants would be well-advised to begin assembling technical descriptions and third-party expert reports detailing their proposed projects in short order.