Section 48 of the Internal Revenue Code provides an investment tax credit (ITC) for certain renewable projects, including solar and wind power projects, equal to 30 percent of the qualified investment in the project if prevailing wage and apprenticeship requirements are satisfied. For more about the prevailing wage and apprenticeship requirements, see Holland & Knight's previous alert, "60-Day Clock Is Ticking on Prevailing Wage, Apprenticeship Requirements," Dec. 21, 2022.


Section 48(e) provides for an increase in the ITC for qualified solar and wind facilities that receive an allocation of the bonus referred to as the "Low-Income Community Bonus." Unlike the ITC, the Low-Income Community Bonus requires an allocation of the bonus credit, with 1.8 gigawatts (GW) of direct current capacity available for each of calendar years 2023 and 2024, and zero thereafter (referred to as the "Capacity Limitation"). To be eligible for the bonus, the solar or wind power facilities must have a maximum net output of less than 5 megawatts (MW) of alternative current. Each credit allocation is limited to a project's capacity.

 

Holland & Knight Insight: The limitation to 5 MW projects severely limits the bonus credit's applicability. Community solar and wind projects and portfolios of smaller projects located in the four categories below should consider their possible eligibility for the Section 48(e) bonus credit.

Notice 2023-17, released Feb. 13, 2023, provides further guidance on the procedures and information required to apply for an allocation of Capacity Limitation. The Low-Income Community Bonus allocation provides a 10 percent to 20 percent increase in the credit amount. The exact amount of the bonus amount depends on the category of the project:

 

Category

Bonus Amount

Category 1: Located in a Low-Income Community

10 percent

Category 2: Located on Indian Land

10 percent

Category 3: Qualified Low-Income Residential Building Project 200

20 percent

Category 4: Qualified Low-Income Economic Benefit Project

20 percent



Holland & Knight Insight: Notably, a qualified solar and wind facility that qualifies under Category 1 or 2 and also qualifies under Category 3 or Category 4, will be considered a Category 3 or Category 4 project (as applicable) and eligible for the higher 20 percent bonus. Discussed below, Category 4 (700 MW) has a greater allocation capacity than Category 2 (200 MW). Therefore, a Category 2 project that is also eligible under Category 4 could not only be eligible for a higher bonus credit, but would increase the chance of receiving an allocation due to the larger capacity limitation.

Eligible Project Categories

Category 1: Located in a Low-Income Community

Projects qualify under Category 1 for a 10 percent increase in the ITC if the project is located in a population census tract where either:

  • the poverty rate for such tract is at least 20 percent
  • in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or
  • in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income

Category 2: Located on Indian Land

Projects qualify under Category 2 for a 10 percent increase in the ITC if the project is located on Indian Land. Indian land includes:

  • any land located within the boundaries of an Indian reservation, pueblo, or rancheria
  • any land not located within the boundaries of an Indian reservation, pueblo or rancheria, the title to which is held:
  • in trust by the U.S. for the benefit of an Indian tribe or an individual Indian
  • by an Indian tribe or an individual Indian, subject to restriction against alienation under laws of the U.S., or
  • by a dependent Indian community
  • land that is owned by an Indian tribe and was conveyed by the U.S. to a Native Corporation pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. Section 1601 et seq.), or that was conveyed by the U.S. to a Native Corporation in exchange for such land
  • any land located in a census tract in which the majority of residents are Natives (as defined in Section 3(b) of the Alaska Native Claims Settlement Act (43 U.S.C. Section 1602(b)))
  • any land located in a census tract in which the majority of residents are persons who are enrolled members of a federally recognized tribe or village

Category 3: Qualified Low-Income Residential Building Project

A facility is treated as part of a qualified low-income residential building project if the facility is 1) installed on a residential rental building that participates in an affordable housing program, and 2) the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building.

An affordable housing program includes any of the following:

  • a covered housing program (as defined in Section 41411(a) of the Violence Against Women Act of 1994 (34 U.S.C. 12491(a)(3))
  • a housing assistance program administered by the U.S. Department of Agriculture (USDA) under Title V of the Housing Act of 1949
  • a housing program administered by a tribally designated housing entity (as defined in Section 4(22) of the Native American Housing Assistance and Self-Determination Act of 1996 (25 U.S.C. 4103(22)), or
  • other affordable housing programs as the Treasury Secretary may provide

Electricity acquired at a below-market rate will be considered a financial benefit. Further information is needed to clarify the "financial benefit" prong.

Category 4: Qualified Low-Income Economic Benefit Project

A facility is part of a qualified low-income economic benefit project if at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with either:

  • income of less than 200 percent of the poverty line applicable to a family of the size involved or
  • income of less than 80 percent of area median gross income

Electricity acquired at a below-market rate will be considered a financial benefit. Further information is needed to clarify the "financial benefit" prong.

 

Holland & Knight Insight: Forthcoming guidance will clarify the parameters of "financial benefit," which is a key criterion for receiving the 20 percent bonus credit under Categories 3 and 4. Therefore, to the extent that projects potentially eligible under Categories 3 and 4 do not provide electricity at a below-market rate, such projects may need to wait for clarification from upcoming guidance.

Receiving an Allocation of Credit

As noted above, the total annual Capacity Limitation for the bonus credit is 1.8 GW of direct current capacity for each of calendar years 2023 and 2024. If the annual Capacity Limitation for 2023 is left over following total prior allocations, the excess is carried forward to the next year, but not beyond calendar year 2024. Any excess from calendar year 2024 may be carried forward and applied to the Capacity Limitation for calendar year 2025.

The 2023 Capacity Limitation of 1.8 GW is to be allocated as follows:

Category

2023 Allocation Amount

Category 1: Located in a Low-Income Community

700 MW

Category 2: Located on Indian Land

200 MW

Category 3: Qualified Low-Income Residential Building Project 200

200 MW

Category 4: Qualified Low-Income Economic Benefit Project

700 MW

Applications will be accepted for Category 3 and 4 projects beginning in the third quarter of 2023, with Category 1 and 2 project applications to follow. Detailed guidance of the application process is forthcoming.

Notice 2023-17 clarifies the allocation program's goals are to increase adoption of and access to renewable energy facilities in low-income and other communities with environmental justice concerns, encourage new market participants, and provide social and economic benefits to individuals and communities that have been historically overburdened with pollution, adverse human health or environmental effects, and marginalized from economic opportunities.

To further these goals, the program will consider additional criteria in determining how to allocate the Capacity Limitation, including a focus on projects that are:

  • owned or developed by community-based organizations and mission-driven entities
  • have an impact on encouraging new market participants
  • provide substantial benefits to low-income communities and individuals marginalized from economic opportunities
  • have a higher degree of commercial readiness

The U.S. Department of Energy (DOE) will review the applications for statutory eligibility and additional criteria and provide recommendations to the IRS regarding the selection of applications. DOE will also perform the lottery or other process for allocation. Therefore, unlike the defined statutory eligibility for the ITC, complete eligibility for the bonus eligibility does not guarantee a bonus credit allocation. Based on DOE's recommendation and the process for allocation, the IRS will accept or reject the applicant's request for an allocation of Capacity Limitation. Applicants have four years from the date of IRS acceptance to place the property in service.

 

Holland & Knight Insight: The U.S. Department of the Treasury and IRS have through the summer of 2023 to release additional guidance regarding application procedures for credit allocation, including the parameters regarding "financial benefit" for Categories 3 and 4 and more information on the DOE criteria to be used in reviewing allocations. As with the Section 48C credit allocation (see Holland & Knight's previous alert, "Treasury Department Releases Section 48C Guidance with Billions in Tax Credits Up for Grabs," Feb. 14, 2023), the Low-Income Community Bonus allocation is subject to DOE discretionary authority and partly subjective criteria, making any certainty for the bonus credit virtually impossible.

Given the relatively short timeline for allocations of the Low-Income Community Bonus, taxpayers will need to begin due diligence on potential projects more quickly. Even without additional guidance, taxpayers should evaluate whether any in-process or planned projects fall under one of the four categories.