As sponsors and investors begin to plan projects and investments to take advantage of the Inflation Reduction Act’s ("IRA”) low-income community bonus tax credits (the “LIC Bonus Credit”), some are left wondering if they are seeing double.  The IRA introduced a novel opportunity for a 10 or 20 percentage point adder to the section 48 investment tax credit for projects that begin construction this year or next (the “Now” program).  Taking the Now program’s place in 2025 is the “Later” program, offering the same 10 to 20 percentage point bonus but administered instead under the section 48E clean energy investment tax credit (the “Later” program).  The Later program has the potential to offer bonus tax credits to awarded projects up to, and likely even beyond, 2032.  Though the statutory language of the two new LIC Bonus Credit programs is nearly identical, the Now program is serving as the beta phase while the market reacts to this opportunity for unprecedently high credit rates.

The "Now” Program

To spur green investment in underserved communities, solar and wind facilities with a maximum net output of less than five megawatts, measured in alternating current[1] may be eligible for the LIC Bonus Credit if they fall into one of four categories:

Taxpayers can leverage a New Markets Tax Credit mapping tool (here) or look to the Energy Policy Act’s definition of Indian land to determine whether their projects qualify for the LIC Bonus Credit under categories (1) and (2); the criteria to qualify under categories (3) and (4) are not so straightforward.

Treasury and the IRS issued a notice of proposed rulemaking on May 31, 2023.  The notice provides more details about how to determine whether projects are eligible under the category (3) or (4) criteria.[2]  According to the latest guidance, for a project to qualify for the benefit under category (3), such project must be installed on a residential rental building which participates in a covered housing program[3] or such other affordable housing program designated by Treasury, and the “financial benefits” of the electricity produced by such facility must be distributed equitably among the occupants of such building.  “Financial benefit” is a term of art.  It can be demonstrated through net energy savings equitably passed on to occupants of residential buildings (including lowering operational costs for common areas).[4]  Electricity acquired at a below-market rate will also be considered a “financial benefit” for purposes of both categories (3) and (4).[5]

In order for a low-income economic benefit project to qualify under category (4), at least 50% of the electricity produced at the project must be provided to households with income less than 200% of the poverty line[6] or less than 80% of area median gross income.[7]  The Treasury Department and the IRS may reserve allocations under category (4) exclusively for applicants proving a 20% bill credit discount rate for the low-income households the project will serve.[8] Pursuant to the notice, the bill credit discount rate can be calculated by subtracting all payments made by the low-income customer to the facility owner and any related third parties as a condition of receiving the financial benefit from the financial benefit distributed to the low-income household, then dividing that difference by the financial benefit distributed to the low-income household.[9]  As an example, if a 4 megawatt solar project has the capacity to serve 800 households, 400 low-income households must be enrolled. The remaining 400 households have no income requirement.  The low-income households must receive a 20 cent billing credit for each dollar of renewable energy used, even if energy from the project doesn’t account for a larger portion of the low-income household’s energy use (for example, if the sun doesn’t shine much in January and the low-income household’s share of the solar production for that month is only $10 of electricity – as long as the household gets a $2 billing credit, the project is in compliance).

With respect to category 4 projects, at the time the project is placed-in-service, the low-income subscriber requirements must be satisfied. However, if at any time between placed-in-service and the end of the recapture period (five years from placement in service) the project becomes non-compliant with respect to the number of low-income participants, there is a 12-month grace period to regain the 50% level.  If 50% cannot be achieved within the 12-month grace period, or if the threshold is breached more than once, then recapture will occur using the 20% per-year ITC vesting schedule. 

The LIC Bonus Credit has limitations.  The total projects eligible for the LIC Bonus Credit in any year is limited to 1.8 gigawatts of direct current capacity.  The IRS expects applications will exceed available capacity.

Note, calling this initial phase of the LIC bonus tax credit program the “Now” program may be a bit of a misnomer – guidance published by the IRS in February said the agency does not expect to begin accepting applications until 2023 Q3.  A project will become ineligible for benefits if it is placed in service prior to receiving its allocation, making this adder impractical for wind and solar projects that have offtake or interconnection deadlines.

The May 31 notice requests comments by June 30, 2023.

The “Later” Program

Beginning in 2025, and identical in substance to the “Now” Program, a taxpayer must obtain an allocation from the IRS for its facility, (i) of less than five megawatts alternating current,[10] (ii) located in one of the four categories of low-income community locations discussed above[11] and, (iii) subject to the annual capacity limitation of 1.8 gigawatts of direct current capacity for each calendar year.[12]  However, projects eligible for credits under this section have an annual capacity limitation beginning on January 1, 2025, and ending on December 31 of the applicable year.[13]  The “Later” Program’s annual capacity will be allocated to qualifying projects until at least 2032.  If U.S. greenhouse gas emissions from the production of electricity doesn’t drop to 25% of 2022 levels by 2032, the IRS will continue to allocate the Later Program’s 1.8 gigawatts per year until such emissions threshold is reached.

Though the programs are very similar, the differences in the sections lay in the qualifying years and in the types of eligible projects.

The “Now” Program explicitly limits the availability of the low-income community bonus to small wind and solar projects up to 1.8 gigawatts for each of years 2023 and 2024. Reading Section 48(e)(4)(C) on its own, sponsors of wind and solar projects may worry they could be shut out of the bonus if they do not receive an allocation by the end of 2024.  However, keen observers will notice that, other than the prohibition on facilities that produce electricity through fuel combustion or gasification[14], Section 48E(h)(4)(C) is technology neutral.  Thus, sponsors of wind and solar projects (and sponsors of other qualifying projects, except for fuel combustion or gasification projects) will likely be able to rely on the low-income community bonus after Section 48(e) phases out. The IRS must publish specific guidance on the “Later” Program by January 1, 2025.[15]  “Energy storage technology” is also notably absent from the list of facilities that may qualify under the new Section 48E(h) program, whereas such technology associated with a wind and solar project is eligible under the “Now” program.[16]  

One caveat for sponsors to consider is, though the universe of projects may expand under Section 48E(h)(4), the annual capacity limitation remains at 1.8 gigawatts.  Sponsors should account for this potential increased competition for allocations when submitting an application to the IRS.  With that said, in the event the annual capacity limitation for a year exceeds the amount allocated for the year, the annual capacity limit for the following year will be increased by the amount of the excess, up to and including the year 2024.[17]  Excess from calendar year 2024 may be carried over into calendar year 2025.[18]

Lingering Questions

As a final reminder, a project has four years from the date it receives an allocation to be placed in service under both programs[19] Further guidance from the IRS is expected to address the recapture of benefits from projects failing to remain eligible for the LIC Bonus Credit programs; it is expected that such guidance will follow rules similar to those of Section 50(a).[20]

[1] I.R.C. § 48(e)(2)(A)(ii).

[2] I.R.S. Notice 2023-17.

[3] As defined in (i) § 41411(a) of the Violence Against Women Act of 1994 (34 U.S.C. 12491(a)(3)), (ii) a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, or (iii) a housing program administered by a tribally designated housing entity (as defined in § 4(22) of the Native American Housing Assistance and Self-Determination Act of 1996 (25 U.S.C. 4103(22)).

[4] I.R.S. Notice 2023-17.

[5] I.R.C. § 48(e)(2)(D).

[6] I.R.C. § 36B(d)(3)(A).  

[7] I.R.C. § 142(d)(2)(B). 

[8] I.R.S. Notice 2023-17.

[9] I.R.S. Notice 2023-17.

[10] I.R.C. § 48E(h)(2)(A)(ii).

[11] I.R.C. § 48E(h)(2)(A)(iii).

[12] I.R.C. § 48E(h)(4)(C).

[13] I.R.C. § 48E(h)(4)(C) (“applicable year” as defined in § 45Y(d)(3)).

[14] I.R.C. §§ 48E(h)(2)(A)(i), 45Y(b)(2)(B). 

[15] I.R.C. § 48E(h)(4)(B).

[16] I.R.C. § 48(e)(3).

[17] I.R.C. § 48E(h)(4)(D)(i).

[18] I.R.C. § 48E(h)(4)(D)(ii).

[19] I.R.C. § 48(e)(4)(E)(i); § 48E(h)(4)(E)(i).

[20] I.R.S. Notice 2023-17.