Treasury Issues Final Regulations on Low-Income Communities Bonus

On August 10, 2023, the Department of Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) issued final regulations (the “Final Regulations”)¹ providing additional guidance to taxpayers on the “Low-Income Communities Bonus” (“LICB”) available under section 48(e) of the Internal Revenue Code of 1986, as amended. These Final Regulations adopt and modify the Proposed Regulations² published in the Federal Register on June 1, 2023. In addition to the Final Regulations, Treasury and the IRS published Revenue Procedure 2023-27, providing the application process for taxpayers applying for an allocation of the LICB.

Generally, projects which are eligible for the LICB include solar and wind projects with a nameplate capacity of less than 5MW (AC), and certain storage projects which are installed “in connection” with such wind and solar projects. Qualifying projects applying for the LICB must be located in one the following qualifying areas: (i) a “low-income community”; (ii) Indian land; (iii) a “low-income residential building project”; or (iv) a “qualified low-income economic benefit project.”³ The Final Regulations provide additional details to assist taxpayers in determining whether their projects are located in a qualifying area.⁴ Additionally, the Final Regulations uphold the definition of “single project” previously provided in the Proposed Regulations for all purposes of the LICB  (i.e., multiple facilities may be aggregated as a “single project” for purposes of the LICB).⁵  The Final Regulations also clarify that a “single project” determination is based on the relevant facts and circumstances and no one factor is determinative.⁶

The Final Regulations retain the allocation of credit volume based on front of the meter vs. behind the meter facilities, but reduce the amount allocated to eligible residential behind-the-meter facilities from 560 MW to 490 MW.

The Final Regulations also retain the concept that certain facilities which satisfy “Additional Selection Criteria”⁷ may be given priority consideration. Qualifying wind and solar facilities owned by a tax equity partnership are eligible for priority consideration if there is a partner entity that meets the Ownership Criteria and such entity has at least a 1 percent interest in partnership items and is a managing member or general partner of the partnership. The Final Regulations clarify that tax equity partnerships are not excluded from eligibility of the LICB.

Importantly, the Final Regulations eliminate the phases for the LICB allocation. The application process for all four categories will open this fall, and the awards will be allocated in the order in which the applications are received by the IRS from the Department of Energy. Applications will generally be reviewed on a rolling basis, except that applications submitted within the first 30 days of opening the portal will be reviewed simultaneously.

Applications will be reviewed and recommended until the IRS has allocated the Capacity Limitation with respect to each qualifying category in a program year. The Final Regulations allow Treasury and the IRS to assess initial capacity and allocations before making any Capacity Limitation changes for 2024 applications. Capacity Limitation between categories may also be adjusted at the discretion of Treasury and the IRS.

The Department of Energy has published a webpage that provides information and resources to taxpayers applying for the LICB, including a map of low-income communities and access to the application portal.

¹ Final Regulation TD 9979 (available here).

² Proposed Regulation REG 110412-23. 
Please see our prior alerts here and here on the LICB for more detail on each qualifying category.

³ Qualifying projects within categories (i) and (ii) will receive a 10% bonus credit, and qualifying projects within categories (iii) and (iv) will receive a 20% bonus credit.  These percentages remain unchanged from the Proposed Regulations.

⁴ The Final Regulations apply a “Nameplate Capacity Test” for purposes of determining whether a project is located in a qualifying area.

⁵ Treasury and the IRS have set forth the single project approach in Notice 2018-59 for purposes of the section 48 investment tax credit and section 45 production tax credit and, per the Final Regulations, believe the incorporation of this concept to the LICB will prevent abuse among taxpayers when applying for the LICB.

⁶ The Final Regulations also clarify and modify terms and applicability of terms related to financial benefits in categories (iii) and (iv).

⁷ The “Additional Selection Criteria” include “Ownership Criteria” and “Geographic Criteria.”  “Ownership Criteria” includes an owner of a qualified wind or solar facility that is a Tribal enterprise, an Alaska Native Corporation, a renewable energy cooperative, a qualified renewable energy company meeting certain characteristics, or a qualified tax-exempt entity.  Facilities meeting the “Geographic Criteria” need to be located in a “Persistent Poverty County” or in a census tract that is designated in the Climate and Economic Justice Screening Tool map as disadvantaged based on whether the tract is either (a) greater than or equal to the 90^th percentile for energy burden and is greater than or equal to the 65^th percentile for low income, or (b) greater than or equal to the 90^th percentile for PM_2.5 exposure and is greater than or equal to the 65^th percentile for low income. The Final Regulations exclude Geographic Criteria as an Additional Selection Criteria for projects located on Indian Land.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.