alerts & publications
IRS Issues Guidance on the Code Section 48C Advanced Energy Project Investment Tax CreditFebruary 27, 2023
On February 13, 2023, the IRS issued Notice 2023-18 (the “Notice”) providing taxpayers with initial guidance on the qualification of applicable projects for the Code Section 48C credit (the “48C Credit”) and the procedure for applying for allocations of 48C Credits under the 48C Credit regime, as expanded by the Inflation Reduction Act.
As modified by the Inflation Reduction Act, the 48C Credit is an investment tax credit of up to 30% of qualifying basis for “advanced energy projects.”1 For this purpose, advanced energy projects include:
- facilities that produce or recycle certain renewable energy equipment, grid modernization equipment, carbon sequestration equipment, energy conservation equipment and electric and fuel cell vehicles (including components or materials for such vehicles, such as batteries, and associated charging or refueling infrastructure);
- equipment used to re-equip an industrial or manufacturing facility to reduce greenhouse gas emissions by 20%; and
- facilities for the processing, refining or recycling of specified “critical minerals.”
The maximum amount of 48C Credits available to taxpayers in the aggregate is $10 billion, of which $4 billion are required to be allocated to projects in specified “energy communities” - census tracts (or tracts adjacent to census tracts) in which coal mines have been closed after 1999 or coal-fired generation facilities have been retired after 2009. In order to claim the 48C Credit, the taxpayer must be allocated a portion of such credits by the Treasury in conjunction with the Department of Energy (the “DOE”). Taxpayers claiming the 48C Credit are precluded from claiming certain other tax credits that would otherwise be available with respect to the property or the activities for which the property is used – including the Code Section 45Q carbon capture credit or the Code Section 45X credit for the production of certain renewable energy components and other items (e.g., wind and solar energy production components, qualifying battery cells and modules, and specified critical minerals).2
The Notice primarily serves to provide initial guidance to taxpayers on the process and timeline for applying for an allocation of 48C Credits. The first allocation round of $4 billion of credits begins on May 31, 2023.3 At a high level, the 48C Credit allocation process set forth in the Notice is as follows:
- Taxpayers are required to submit concept papers to the DOE through an online portal available at https://infrastructure-exchange.energy.gov/. The concept paper describes the proposed project and is used by the DOE to evaluate the proposed project in connection with its eligibility under Code Section 48C. For the first 48C Credit allocation round, concept papers are required to be submitted no later than July 31, 2023.
- After reviewing the concept paper, the DOE will issue a letter to the taxpayer encouraging or discouraging the taxpayer from submitting an application for an allocation of 48C Credits. However, all taxpayers that submit a concept paper by the above deadline may submit such an application irrespective of the DOE’s initial response.
- The taxpayer then submits the 48C Credit application to the DOE for review. The DOE then makes a recommendation as to whether to accept or reject the application and provides a ranking of the submitted applications to the IRS. The DOE’s review includes confirmation as to the project’s qualification under the required criteria for 48C Credits and an evaluation of other criteria for the allocation of 48C Credits set forth in the statute and any relevant additional guidance that has been issued (e.g., an analysis of commercial viability, potential domestic job creation, potential net environmental impact, potential for technological innovation and project completion timeline).
- The IRS then makes a determination regarding the acceptance or rejection of each application based on the DOE’s feedback and notifies the submitting taxpayer of its determination. If the application is accepted, the taxpayer will receive an allocation letter setting forth the allocation of 48C Credits to the applicable project. A taxpayer whose application is rejected may request a debriefing in order to receive feedback on the DOE’s view of the application’s strengths and weaknesses. The debriefing is solely to allow taxpayers to improve applications for future 48C Credit allocations (or, of course, to determine whether to submit an application for future allocations).
- Within two years of receiving an allocation letter, the taxpayer must notify the DOE that applicable certification requirements have been met, after which the DOE provides confirmation to the taxpayer and the IRS. The IRS then certifies the project by providing a certification letter.
- Finally, the taxpayer must notify the DOE (which then notifies the IRS) that the project has been placed in service within two years following the issuance of the certification letter. The taxpayer then claims the 48C Credit on its tax return for the taxable year in which the project was placed in service. Failure to place the project in service within this two-year period results in a forfeiture of the 48C Credit allocation.
Although the Notice does not provide comprehensive guidance on the 48C Credit program, it does provide taxpayers that may be interested in applying for an allocation of 48C Credits with a useful roadmap that will enable taxpayers to begin to prepare for submissions ahead of the May 31, 2023 kick-off date for the acceptance of concept papers (and the date by which the IRS has stated that additional guidance will be forthcoming). Given the limited availability of 48C Credits, this runway should allow taxpayers to evaluate their project’s potential for qualification under the consideration factors set forth in Code Section 48C and applicable guidance, and to begin to prepare the most effective allocation case for such project in this context.
1 The 30% credit is 6% for projects that do not satisfy the wage and apprenticeship requirements. A prior discussion of the wage and apprenticeship requirements, as well as the 48C Credit and other credits discussed herein, can be found here.
2 The Notice provides that additional guidance will be forthcoming on the means by which taxpayers can determine whether an applicable project is subject to this “double benefit” preclusion.
3 The Notice states that additional guidance will be provided by this date. In addition, the Notice provides that approximately $1.6 billion of credits in the first round of allocations will be made for projects in energy communities.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York, Alexander Roberts, an O’Melveny partner licensed to practice law in New York, Jeff Hoffner, an O’Melveny partner licensed to practice law in California, Eric Rothenberg, an O'Melveny of counsel licensed to practice law in New York and Missouri, Dawn Lim, an O'Melveny counsel licensed to practice law in New York, and Bo Chen, an O'Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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