New Regulations Aim to Boost Clean Energy Investment with Tech-Neutral Tax Credits
The transition towards cleaner energy sources has received a significant boost with the recent release of final regulations by the IRS and Treasury. These regulations, part of the Inflation Reduction Act of 2022, introduce tech-neutral tax credits designed to foster innovation in clean energy projects. The finalized rules, aligning closely with proposed guidelines from May 2024, are set to be published in the Federal Register on January 15, 2025. For a detailed view of these regulations, you can access the unpublished version here.
Understanding Sections 45Y and 48E
Starting in 2025, the newly implemented sections 45Y and 48E will replace the traditional production and investment tax credits found in sections 45 and 48. These provisions adopt a technology-neutral stance, granting credits based on a “zero or negative” greenhouse gas emissions standard. This shift aims to encourage the development of new zero-emissions technologies by providing stable incentives for clean energy investments.
Eligible Technologies for Tax Credits
The regulations maintain a list of technologies presumed to have zero or negative emissions, known as the Per Se List. This includes wind, solar, geothermal, marine, hydrokinetic, and both nuclear fission and fusion projects. Despite taxpayer requests for an expanded list, no new technologies were added. The IRS will annually publish a table detailing greenhouse gas emissions rates for various technologies, and those on the Per Se List are automatically deemed to have zero or negative emissions.
For technologies not on the Per Se List, the first annual emissions table has not been released alongside the final regulations due to the extensive analysis required. The IRS has not committed to a specific timeline for this publication.
Lifecycle Analysis for Combustion and Gasification Technologies
For combustion and gasification facilities, emissions rates must be determined through a comprehensive lifecycle analysis (LCA). This analysis assesses emissions from feedstock generation to electricity production. Taxpayers may need to seek a provisional emissions rate for technologies not listed in the annual table, following a process outlined by the IRS and involving the Department of Energy.
Clarifications on the 80/20 Rule
The final regulations clarify the application of the 80/20 rule for retrofitting facilities. Tax credits for capital expenditures that don’t increase capacity are only available if the 80/20 rule is satisfied, treating the facility as newly placed in service. Facilities previously claiming legacy PTCs or ITCs are generally ineligible for new tech-neutral credits. Notably, if the 80/20 rule is met, tech-neutral credits can be claimed on retrofitted facilities even if legacy credits were previously claimed.
Defining Qualified Facilities and Applying Wage Rules
Credit eligibility under the new regulations is determined on a “qualified facility” basis, a concept central to the tech-neutral guidance. While the definition from the proposed regulations remains, the final rules specify that prevailing wage and apprenticeship rules apply per qualified facility, not per energy project, as was the case under the older section 48 ITC rules. This results in more stringent requirements for new credits under section 48E.
Additional Regulatory Adjustments
- The final regulations confirm that nuclear containment structures are not classified as buildings, allowing them to qualify under the provision that a structure is not a building if it functions as machinery or equipment.
- The “End Use Requirement” for hydrogen energy storage, criticized by many, has been removed, allowing stored hydrogen to be used for various purposes, including fertilizer production.
- A taxpayer must own a fractional interest in an entire unit of a qualified facility to claim the tech-neutral ITC. However, owning all “integral property” is not required, as clarified by an example involving hydropower facilities.
- Notice 2008-60’s applicability to section 45Y is revoked, emphasizing the need for metering devices in qualified facilities and cautioning against sales to related persons.
Potential Impact of the Congressional Review Act
With the final regulations set for publication, the 119th Congress and President Trump can potentially overturn them using the Congressional Review Act. This act allows a final agency rule to be nullified through a joint resolution of disapproval passed by Congress and signed by the President. If successful, the agency cannot reissue the rule in a similar form without new congressional authorization.
Original Story at www.gibsondunn.com