LMI bonus credit guidance

LMI bonus credit guidance

June 23, 2023 | By Keith Martin in Washington, DC

The Treasury filled in more detail in late May about new LMI bonus tax credits that are expected to be claimed on some community and rooftop solar installations.

The Inflation Reduction Act authorized an additional 10% or 20% "bonus" investment tax credit to be claimed on small solar and wind projects that are less than 5 MWac in size. It is called an LMI bonus credit because the projects must be in low- and moderate-income areas or be aimed at serving low-income households.

There are 1,800 megawatts in such tax credits each year. Companies must apply to the Internal Revenue Service for an allocation.

They will be hard to claim on 2023 projects. No tax credits will be given to projects that are already in service when the awards are made.

The IRS has not set a date yet to allocate 2023 credits, but the date is expected to be in the fall. It hopes to allocate all of the 2023 tax credits in one round.

The US Department of Energy will review the applications and make recommendations to the IRS.

Developers have four years after receiving an allocation to complete a project. Developers counting on the bonus tax credit will have to view 2023 as a lost year and use any 2023 allocations for projects they install during the period late 2023 through late 2027. The IRS is trying to direct tax credits to projects that would not be built without them.

The latest details are in proposed regulations released in late May.

The IRS answered other questions about the LMI bonus credits in February in Notice 2023-17. (For earlier coverage, see "LMI Bonus Tax Credits" in the March 2023 NewsWire.) The bonus credit is in section 48(e) of the US tax code.

The complexity is vastly out of proportion to the small size of the projects.

Annual Cap

The 1,800 megawatts the IRS has to allocate each year are of DC capacity.

A project must receive an allocation for the full DC capacity — rather than the net or AC capacity — to avoid a haircut in its bonus tax credit. For example, if a project has a nameplate capacity of 5.5 megawatts, but the net capacity is only 4.8 megawatts and it is allocated only 4.8 megawatts of tax credits, then it will only be able to claim 87% of the bonus tax credit (4.8/5.5). This was in the Inflation Reduction Act.

The IRS will allocate 1,800 megawatts a year through the year greenhouse gas emissions from the US fall at least 75% from 2022 levels. It will allocate them at least through 2032 even if greenhouse gas emissions reach this threshold more rapidly.

Four categories of projects qualify potentially for LMI bonus credits.

The IRS will use sub-caps to divide the 1,800 megawatts for 2023 among the four.

An extra 10% investment credit can be claimed on projects that are in low-income census tracts that qualify for new market tax credits or are on Indian land.

An extra 20% investment credit can be claimed on projects mounted on top of multi-tenant buildings whose tenants receive housing assistance or where "at least 50 percent of the financial benefits of the electricity produced" goes to households with incomes below 200% of the poverty line or below 80% of the area median gross income.

The sub-caps for 2023 bonus credits for these categories are as follows: 700 megawatts for projects in low-income census tracts, 200 megawatts for projects on Indian land, 200 megawatts for projects on multi-tenant buildings and 700 megawatts for projects whose electricity benefits lower-income households.

However, the 700 megawatts for projects in low-income census tracts will be further divided, with 560 megawatts reserved for solar panels mounted on dwellings and other "residential behind-the-meter" facilities and only 140 megawatts for "front-of-the-meter" projects that connect directly to the utility grid or that serve businesses.


The proposed regulations addressed 10 topics. The IRS is taking comments through June 30.

It is concerned about developers splitting larger projects in order to remain under the size cap of less than 5 MWac.

This is also a potential issue with rooftop solar installations on multi-tenant apartment buildings. Some owners hope to treat the solar systems on each building as a separate project to stay under a 1-MWac size limit for exemption from the wage and apprentice requirements. (For more details, see "IRS Issues Wage and Apprentice Requirements.")

The IRS said it will use a list of factors in section 7.01(2) of Notice 2018-59. to determine when two or more purported small projects are really one large project.

The LMI bonus credit can be claimed on batteries that are part of a small solar or wind project. However, the batteries must have power ratings that are less than two times the capacity of the generating equipment.

The battery is part of the solar or wind project if it is owned by the same legal entity, is physically adjacent, connects to the same interconnection point and shares the same environmental or "other regulatory" permits.

If the battery is too large, then an LMI bonus credit can still be claimed if the project owner can prove that at least 50% of the electricity used to charge the battery comes from the generating equipment. Presumably this means in the first 12 months after the battery is placed in service. It would be wise to maintain the same charge level for at least the first five years.

The battery is ignored when testing whether the capacity of the project is too large to qualify for a bonus credit.

Projects aiming for a 10% bonus credit in low-income census tracts or on Indian land must have at least 50% of their capacity in such a location.

Sharing Benefits

Projects aiming for a 20% bonus credit because they serve low-income people face a daunting task to prove qualification.

A project on a multi-tenant building whose residents qualify for rent subsidies must share the "financial benefits of the electricity produced . . . equitably among the occupants of the dwelling units of such building."

The IRS said calculation of the financial benefit that must be shared with low-income tenants varies depending on whether the generating equipment is owned by the building owner or by a separate renewable energy supplier.

If the building owner owns everything, then the financial benefit is the greater of two numbers. The calculation starts with the electricity the building draws from the system, times the metered price the building otherwise pays for electricity, plus any revenue earned from selling excess power from the system. The financial benefit that must be shared with low-income tenants is 25% of that number or, if greater, the full amount minus the annual cost to operate the system. These are proxies for the profit margin. The annual cost to operate includes debt service, maintenance, a replacement reserve and other operating costs.

The building owner must have a signed benefits sharing agreement with the tenants.

If a third party owns the solar system and enters into a power purchase agreement or "other contract for energy services" with the building, then the building must share 50% of the bill credits and cash payments for "net excess generation" it receives or, if greater, 100% of that amount minus the subscription fee or other payment it makes for the electricity. This formula works for community solar projects, but not where a building is simply buying electricity from a solar company that owns solar panels mounted on the roof.

In this community solar model, the subscription agreement must bind the building owner to share its savings with low-income tenants.

The IRS has not decided in either case what the effect should be on the calculations if the low-income tenants pay the building for their electricity.

Whatever financial benefit is calculated must be shared equally or in proportion to electricity usage by each tenant who can prove he or she is low income. The IRS did not address the time period for the electricity usage data or low-income status in relation to when the electricity is supplied.

However, the actual sharing may depend on whether the building has a master electricity meter or sub-meters to track electricity used by each dwelling unit. It may not be possible to share the benefits with tenants in proportion to electricity usage in buildings with master meters.

In buildings with sub-meters, the tenants must receive credits on their utility bills for their shares. The credits can affect tenants' utility allowances and annual income for purposes of calculating rent under HUD-assisted housing programs. The US Department of Housing and Urban Development (HUD) has already issued guidance to building owners who participate in community solar programs on how the bill credits affect these two items.

In buildings with master meters, the building must pass the savings through to tenants by other means, such as providing other benefits to tenants beyond those they received before the solar or wind system was put in service.

In some places, the building owner cannot legally or administratively apply bill credits to reduce residents' electricity bills. The IRS asked for suggestions.

Projects that provide at least half the "financial benefit of the electricity" to households below 200% of the poverty line or below 80% of the area median gross income also qualify for 20% bonus credits.

The IRS limited bonus credits for such projects effectively to community solar projects by requiring the projects to serve multiple households.

It said at least half the "total output" from the project must go to qualifying low-income households.

Such households cannot be charged subscription fees that exceed 80% of the bill credits they receive. The IRS said each such household must receive at least a 20% "bill credit discount rate." The "bill credit discount rate" is (A minus B) divided by A, where is A is the bill credits given to household and B is the subscription fees or other payments made by the household to receive the bill credits.

The community solar company must provide proof that each low-income household claimed is in fact low income. Documentation must be presented to the IRS when the community solar project is put in service that identifies each qualifying low-income subscriber, the output allocated to each in kilowatt hours and the method used to verify each household's income.

The permitted forms of proof are household participation in a needs-based government or utility program with income limits at or below the bonus credit thresholds. A state agency may be able to provide verification. If the household is not enrolled in a qualifying program, then the community solar company can produce copies of paystubs or tax returns or rely on income verification through crediting agencies and commercial data sources.

It cannot rely on self-attestations by the households.


Priority will be given to projects that satisfy at least one of two selection criteria. The criteria focus on ownership and location.

If there are more priority projects in a category than there are tax credits for that category, then the IRS will give priority to projects that satisfy both criteria.

No administrative appeals of allocation decisions are possible.

Starting with ownership, priority will be given to projects owned by five types of entities.

One is projects owned directly or indirectly at least 51% by Indian tribes. Ownership is not defined. The tribe must have the power to appoint and remove more than half the individuals who are on the board.

Another favored owner is any consumer or purchasing cooperative formed to buy electricity for its members that owns at least 51% of the project. It must be controlled by members who are either low-income households or workers. Each such member must have an equal vote.

A "qualified renewable energy company" will also receive priority. It must be at least 51% owned by individuals or favored types of entities (Community Development Corporation, agricultural or horticultural cooperative, Indian tribe, Alaska native corporation or native Hawaiian organization) and have fewer than 10 full-time equivalent employees and less than $5 million in gross receipts the previous year. Companies under common control will be combined for purposes of testing the number of employees and gross receipts.

In addition, it must have installed or operated the types of projects that qualify for LMI bonus credits at least two years before applying for a bonus credit and installed or operated at least 100 kilowatts of such projects in low-income census tracts that qualify for new markets tax credits or on Indian land. It is possible the applicant will not have to have both types of experience, but rather only the type most relevant to the category of project for which it is applying for a bonus credit.

Projects owned by tax-exempt charities, religious organizations, state or local governments or governments of US territories like Puerto Rico and Guam, Indian tribes and rural electric cooperatives will also receive priority.

Turning to location, priority will be given to projects in "per-sistent poverty counties" where at least 20% of the residents have experienced high rates of poverty over the past 30 years, using US Department of Agriculture data, or in census tracts designated as "disadvantaged" in a "climate and economic justice screening tool" known as CEJST.

The IRS has a checklist of documents that must be submitted by applicants.

Applicants must report to the US Department of Energy after a project is placed in service and submit additional documents at that time.


If there is a change in a project after it is awarded a bonus credit, the project can lose the right to the credit or have to repay the Treasury if the bonus credit has already been claimed.

The IRS wants to discourage material changes in project plans, such as significant reductions in project size that could use up part of the 1,800-megawatt cap that could have gone to other applicants.

A project will be disqualified after receiving an allocation if one of five things happens before the project is placed in service.

The five are the location changes, the nameplate capacity increases above the 5 MWac limit or decreases by at least 2 kilowatts or, if greater, by 25% of the allocation awarded, the project cannot satisfy the financial benefits tests as planned, it is not placed in service within four years, or the allocation was made based on ownership priority selection criteria that are no longer satisfied.

An exception has been made to accommodate tax equity arrangements where the developer's ownership of the project drops during the first five years after the project is placed in service to give a tax equity
investor an interest. Ownership must revert to the original owner or the original applicant must have a "right of first refusal" to take back the project.

The bonus tax credit will be recaptured if any one of five events happens during the first five years after the project is placed in service. However, an owner can cure if it acts to restore eligibility within 12 months after becoming aware of the failure (or after it should reasonably have been aware).

The recapture events are failure to provide the required financial benefits (including the minimum 20% discount to any household) or to allocate savings properly among tenants, the building that the project serves drops out of a covered housing program, or the project "output" is 5 MWac or greater, unless the project owner can prove the increase is not attributable to the original project but to one that has been so extensively rebuilt as to qualify as a different project.

The bonus credit is just that: an addition to the base investment tax credit of 30%. The base credit would be recaptured if the project were sold. Presumably the bonus credit would be recaptured at the same time.