IRS Publishes Initial Guidance on Section 48C(e) Advanced Energy Project Tax Credit

The Internal Revenue Service (IRS) released its initial guidance (the Advanced Energy Project (AEP) Notice, Notice 2023-18) establishing procedures for taking advantage of the renewed and expanded qualifying advanced energy project credit program authorized under the Inflation Reduction Act (IRA, specifically Tax Code Section 48C(e)). The program uses a tax credit of up to 30 percent of the qualified investment to incentivize certain investments in clean energy manufacturing. The program gives preference (40 percent of the allocated credits, or $4 billion of credits) to projects located in certain census tracts that historically relied on the coal industry for jobs and economic security. Examples of projects that might qualify for the $10 billion tax credit program include fuel cell manufacturing, geothermal electricity component manufacturing and critical minerals processing facilities. Treasury expects to allocate $4 billion of credits in the first round (of at least two rounds) and will be issuing additional guidance before the program application launches on May 31, 2023.

The most critical part of the AEP Notice is the detail it provides on the application process and timeline for an advanced energy project to receive an allocation of Section 48C(e) tax credits:

• First, as a condition for being considered for the first round of credits (Round 1), taxpayers must submit concept papers to the Department of Energy (DOE) through the eXCHANGE portal between May 31 and July 31, 2023. Additional program guidance detailing technical review criteria is expected to be released before DOE begins accepting concept papers. Taxpayers who miss the July 31 concept paper deadline (associated with DOE Review Stage 1) will not be eligible for Round 1 AEP tax credits.
• Second, upon review of the concept paper, DOE will send the taxpayer a letter of encouragement if it has determined that the project has a reasonable expectation of commercial viability and merits recommendation based on the criteria provided in the AEP guidance. Alternately, DOE may send the taxpayer a letter of discouragement (which are not eligible for debriefings), but such a letter does not disqualify a taxpayer from submitting an application. Either way, as long as the taxpayer submitted a concept paper by the deadline and received a DOE Review Stage 1 response, it can then submit a Section 48C(e) application (also through the eXCHANGE portal). Note that the end-date for the Round 1 application period has not yet been established. The application is joint in that it covers both the DOE recommendation and the IRS certification.
• Third, once the application has undergone compliance and technical review (DOE Review Stage 2), DOE will recommend that the IRS either accept or reject the application and will rank each accepted application relative to the others. It is unlikely that taxpayers that received letters of discouragement in DOE Review Stage 1 will receive recommendations for acceptance in DOE Review Stage 2. The IRS will then decide whether or not to allocate AEP credits to the project. Taxpayers that do not receive allocations will be able to request a DOE debriefing of their denial (so that DOE can communicate to the taxpayer the strengths and weaknesses of the rejected application so that such taxpayer might be more successful in a future round). Taxpayers that receive allocations will have two years to notify DOE that they have satisfied the certification requirements, at which point they will have another two years to notify DOE that the project has been placed in service. The credit is claimed on the tax return for the taxable year in which the project was placed in service.

Of importance to the renewed and expanded AEP tax credit is its size—totaling as much as 30 percent of the qualified investment. However, that rate is only available if the taxpayer satisfies prevailing wage and apprenticeship (PWA) requirements. Without that, the credit loses 80 percent of its value (the rate goes down to six percent of the qualified investment). Taxpayers seeking the higher rate must confirm (both when they submit their Section 48C(e) applications and when they have placed their projects in service) that they intend to and then actually did satisfy the PWA rules. The IRS issued separate guidance—the PWA Notice—on these rules (you can read more about that guidance here).

Concept Paper Requirements: The concept paper should make clear that the project in question satisfies the eligibility requirements, meets the definition for a qualifying advanced energy project (the AEP Notice provides this definition, see below), and has a reasonable expectation of commercial viability (among other factors for determining merit). If the project doesn’t meet certain preliminary eligibility criteria, then DOE won’t consider the application (and if DOE does not provide a recommendation for the application, the IRS will not consider it). Additionally, if plans for a project change significantly after the project’s Round 1 concept paper and application have been submitted (with a change in census tracts being an example of a significant change), then the project could be ineligible for consideration in Round 1.

Additional guidance is expected to be released before DOE starts accepting concept papers (and such guidance will include the instructions for filing concept papers and further details of information required to be submitted for DOE Review Stage 2). It will be important for developers to begin work on their concept papers early so that they can present the strongest case for their project when the application process opens. DOE recommendations to the IRS will include a ranking of projects in descending order of merit, and once all of the $4 billion of Round 1 AEP tax credit allocations have been exhausted, the remaining pool of projects will have to wait for Round 2 for a chance at the credits (DOE will stop recommending and ranking projects at that time).

Importantly, the AEP Notice outlines certain policy factors that may influence the DOE Review Round 1, Stage 2 recommendation determination. Applications will be evaluated and ranked based, in part, on whether they further the following goals of the program:

1. Avoid or reduce greenhouse gas emissions.
2. Benefit the community (for example, by creating high-quality, accessible jobs).
3. Strengthen U.S. industrial competitiveness and clean energy supply chains (for example, projects that address specific gaps or vulnerabilities may receive priority consideration, and specific technologies that might qualify for such priority consideration will be identified in future guidance).

If the project is not eligible for financial assistance from other IRA or similar programs, it may also get priority consideration for a Section 48C(e) credit allocation. Further, projects that have a connection with a foreign country of risk might not receive a recommendation. The AEP Notice indicates that DOE anticipates requiring disclosure of ownership and governance information as well as information on “foreign relationships” and “sources of, and any plans to export, critical minerals.”

Definition of Qualifying AEP: What types of advanced energy projects qualify for the Section 48C(e) credit according to the AEP Notice? Projects that re-equip, expand or establish an industrial or manufacturing facility that produces or recycles:

• Energy from the sun, water, wind, geothermal deposits or other renewable resources.
• Fuel cells, microturbines or energy storage systems and components.
• Electric grid modernization equipment or components.
• Property designed to capture, transport, remove, use or sequester carbon oxide emissions.
• Equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable (or low-carbon and low-emission).
• Property designed to produce energy conservation technologies.
• Electric or fuel cell vehicles, as well as technologies, components or materials for such vehicles (and associated charging or refueling infrastructure).
• Hybrid vehicles with a gross vehicle weight rating of not less than 14,000 pounds, as well as technologies, components or materials for such vehicles.
• Other advanced energy property designed to reduce greenhouse gas emissions (as determined by the Treasury Department).

In addition, certain greenhouse gas emission reduction projects qualify for the Section 48C(e) credit according to the AEP Notice. They include:

• Low- or zero-carbon process heating systems.
• Carbon capture, transport, utilization and storage systems.
• Energy efficiency and reduction in waste from industrial processes.
• Any other industrial technology designed to reduce greenhouse gas emissions (as determined by the Treasury Department).

Finally, the AEP Notice makes clear that certain critical material projects also qualify for the Section 48C(e) credit (examples include industrial facilities that process raw ore, brines, mine tailings, end-of-life products, waste streams and other source materials into critical materials).

Immediate Action Item: The AEP Notice instructs taxpayers wishing to participate in the Section 48C(e) program to start the registration process immediately by creating an account on the eXCHANGE portal. However, project developers and owners should take care to ensure that the appropriate contact point for the business unit is associated with the account.