Treasury Issues IRA Guidance on Low-Income Community Bonus
On February 13, 2023, the Department of Treasury (the “Treasury”), along with the Internal Revenue Service (the “Service”) and the Department of Energy (the “DOE”), issued Notice 2023-17 (the “Notice”), establishing a program under section 48(e) of the Internal Revenue Code of 1986, as amended (the “Code”), to allocate the “Low-Income Community Bonus” that is available in connection with the Code section 48 Investment Tax Credit (the “ITC”) among eligible wind, solar, or storage projects.1
As background, under the Inflation Reduction Act of 2022 (the “IRA”),2 effective January 1, 2023, Code section 48(e) provides a “bonus” ITC for small projects located in certain low-income communities (such bonus ITC being the “Low-Income Community Bonus”). Specifically, the Low-Income Community Bonus is (i) up to 10% for wind, solar, or storage projects which are less than 5 megawatts and are located in a “low-income community” or on Indian land (as defined in section 2601(2) of the Energy Policy Act of 1992) or (ii) up to 20% for wind, solar, or storage projects which are less than 5 megawatts and are part of a “Qualified Low‑Income Residential Building Project” or “Qualified Low-Income Economic Benefit Project” (“Qualifying Projects”).3
The Low-Income Community Bonus is subject to a “Capacity Limitation” such that the total amount of Qualifying Projects that may claim the Low-Income Community Bonus in a calendar year is subject to a cap based on total nameplate capacity — for each of 2023 and 2024, the Capacity Limitation is 1.8 gigawatts of direct current capacity.
To be eligible for the Low-Income Community Bonus, taxpayers must apply and be granted an allocation of the Capacity Limitation from the Service.4 The Low-Income Community Notice clarifies that the Service will consider a Qualifying Project for a Capacity Limitation allocation only after the DOE provides a recommendation of the Qualifying Project.5
The Notice explains that the Low-Income Community Bonus program will incorporate additional criteria in determining how to allocate the Capacity Limitation among Qualifying Projects. The criteria may include a focus on Qualifying Projects that (i) are owned or developed by community-based organizations and mission-driven entities, (ii) have an impact on encouraging new market participants, (iii) provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and (iv) have a higher degree of commercial readiness.6
The Notice provides that Capacity Limitation is divided amongst the four categories of “low-income communities” —for 2023, the Capacity Limitation for Qualifying Projects (i) located in a “low-income community” is 700 megawatts, (ii) located on Indian land is 200 megawatts, (iii) that are part of a Qualified Low-Income Residential Building Project is 200 megawatts, and (iv) that are part of a Qualified Low-Income Economic Benefit Project is 700 megawatts.7
The Notice explains that if selected Qualifying Projects have an aggregate nameplate capacity that exceeds the Capacity Limitation for a given category, then a lottery may be used to allocate the Capacity Limitation among the selected Qualifying Projects. Alternatively, if a category has excess Capacity Limitation, such excess may be reallocated among the other categories. Additionally, if the total Capacity Limitation for 2023 exceeds the total amount allocated to Qualifying Projects for such year, the excess is carried forward to 2024, and any excess Capacity Limitation in 2024 may be carried forward to 2025 under the section 48E Technology Neutral ITC.
1 Also on February 13, 2023, the Treasury, the Service, and the DOE issued Notice 2023-18, establishing a program to allocate ITCs to eligible advanced energy projects under Code section 48C. See our coverage here.
3 In order to be eligible for the full 30% ITC, a project must meet the prevailing wage and apprenticeship requirements under Code section 48(a)(10) and (11); otherwise, the available ITC is limited to 6% of eligible basis. Our prior coverage of the prevailing wage and apprenticeship requirements can be found here.
4 Only the owner of a Qualifying Project may apply for an allocation of Capacity Limitation.
To be eligible for the Low-Income Community Bonus, Qualifying Projects must be placed in service within four years after the date the taxpayer was notified of a Capacity Limitation allocation for such project. Qualifying Projects placed in service prior to being awarded a Capacity Limitation allocation are not eligible to receive such allocation.
5 Applications will be accepted in a phased approach for 2023. The Treasury and the Service anticipate that applications will be accepted first for Qualifying Projects that are located in a Qualified Low-Income Residential Building Project and Qualified Low-Income Economic Benefit Project in the third quarter of 2023.
6 The Notice states that forthcoming guidance will fully describe these additional criteria.
7 For each Qualifying Project owned by a taxpayer, the taxpayer may apply for an allocation of Capacity Limitation in only one category. Taxpayers that do not receive an allocation of Capacity Limitation will be permitted to apply for future allocations after 2023.
“Low-income community” includes a population census tract where (i) the poverty rate for such tract is at least 20%, (ii) in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80% of statewide median family income, or (iii) in the case of a tract located within a metropolitan area, the median family income does not exceed 80% of the greater of statewide median family income or the metropolitan area median family income.
A facility will be treated as part of a Qualified Low-Income Residential Building Project if such facility is installed on a residential rental building which participates in an affordable housing program and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building.
A facility will be treated as part of a Qualified Low-Income Economic Benefit Project if at least 50% of the financial benefits of the electricity produced by such facility are provided to households with income of less than 200% of the poverty line applicable to a family of the size involved or 80% of area median gross income. For purposes of a Qualified Low-Income Economic Benefit Project, electricity acquired at a below-market rate will be considered a financial benefit.
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.