LMI Bonus Credits
LMI bonus tax credits will be hard to claim on 2023 projects the way the Internal Revenue Service plans to implement the program.
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.
This bonus credit is expected to be claimed mainly on community solar and rooftop solar installations. It can be claimed on batteries that are part of such projects.
It can only be claimed on up to 1,800 megawatts of projects a year. Project owners must apply to the IRS for an allocation. Congress gave the IRS 180 days to issue guidance explaining how the 1,800 megawatts will be allocated.
The guidance, released in February, said the agency will not start accepting applications until the third quarter this year and then only for some types of projects. The applications window will remain open for 60 days. The US Department of Energy will then review the applications and make recommendations to the IRS.
Projects that are already in service for tax purposes when the allocations are made — as opposed to when the applications are filed — will not qualify for an allocation.
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 IRS guidance is in Notice 2023-17. The IRS said it is “interim” guidance and more guidance will follow. The LMI bonus credits are in section 48(e) of the US tax code.
In particular, the Department of Energy is expected to announce additional criteria that projects must satisfy in order to qualify that go beyond the criteria in the Inflation Reduction Act. The IRS said the government may give priority to projects that are owned or developed by “community-based organizations and mission-driven entities” or new market participants and that provide substantial benefits to low-income communities and marginalized individuals, but with an eye on commercial readiness of the projects.
Projects must receive an allocation for the full DC capacity — rather than the net or AC capacity — to avoid a haircut in the 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 said it will divide the 1,800 megawatts for 2023 among four sub-caps.
Four categories of projects qualify potentially for LMI bonus credits.
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 IRS split the 1,800 megawatts for 2023 as follows: 700 megawatts to projects in low-income census tracts, 200 megawatts to projects on Indian land, 200 megawatts to projects on multi-tenant buildings and 700 megawatts to projects whose electricity benefits lower-income households.
The IRS said only the facility owner can apply for tax credits. It is unclear what happens if a project is owned by a developer through a special-purpose project company and that project company is contributed or sold to a tax equity partnership before the project is placed in service. Ownership of the project would be considered to change for tax purposes. Presumably the IRS will let the allocation travel with the project.
The IRS said it will start accepting 2023 applications for projects that qualify for a 20% bonus credit in the third quarter this year. The applications window will open later for projects that qualify for a 10% bonus credit, but it did not say when.
If there are more eligible projects in a category than there is volume cap to allocate, the IRS said the Department of Energy may use “a lottery or other processes” to decide who gets an allocation.
The House Ways and Means Committee staff does not expect the full 1,800 megawatts to be used in any of the first few years. It takes time for the market to learn about a new program.
Community solar advocates have been concerned that rooftop solar companies will use up the full volume cap. Not all residents in low-income census tracts are low income. Splitting the cap among the four categories may help to address that concern.
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.