Notice 2023-18 provides guidance on the advanced energy manufacturing tax credit. Except for explaining the application process, it did little more than parrot the statutory language in section 48C and promised subsequent guidance to address remaining issues. However, it did provide some interesting insights.
Briefly, section 48C provides for an investment tax credit of 30 percent of the eligible basis of a factory that can serve any one of a litany of environmentally friendly purposes that includes manufacturing components of clean energy power plants, carbon capture equipment and light to heavy duty electric or fuel cell vehicles. The foregoing is a partial list: an appendix to the guidance provides six pages of detail on what types of factories qualify for the program.
Importantly, the notice acknowledges that section 48C provides Treasury authority to allow other types of factories “designed to reduce greenhouse gas emissions” with an example of “equipment used to reduce emissions of industrial processes.” Therefore, despite the title of section 48C referring to “energy,” the program has the potential to apply to more than just factories making components for clean energy generation plants.
The 30 percent credit is reduced to 6 percent if the construction of the factory is not performed by workers (i) being paid prevailing wages as determined by the Department of Labor and (ii) apprentices. This requirement also applies to any “alteration or repair” of the factory. These requirements do not apply to the operation of the factory, but the guidance provides that DOE may prioritize factories that will “promote high quality jobs.”
If a factory receives an allocation of a section 48C credit, then output of the factory is not eligible for the credit for manufacturers of components of clean energy plants under section 45X. The parameters of section 48C are described in more detail in our prior blog post.
Unlike most federal tax credits, the section 48C has an application and allocation process. That is even if a factory meets the requirements of the program, the IRS can decline to allocate any credit to the factory.
The notice provides that the IRS has delegated to the Department of Energy (DOE) all but the final decision with respect to the application and evaluation process. “DOE will provide a recommendation and ranking only if it determines a [factory] has a reasonable expectation of commercial viability and merits recommendation. ”The IRS will consider a factory’s application “only if DOE provides a recommendation and ranking for” it.
The first round of the program will begin on May 31, 2023. There will be at least one subsequent round.
Mapping Tool for Determining Coal Communities
Congress has appropriated $10 billion for the section 48C tax credit program, and only that amount of tax credits can be allocated. At least 40 percent of the $10 billion must be allocated to factories in a census tract or an adjoining a census tract in which a coal fired plant or a coal mine was shuttered. A coal mine must have been shuttered after 1999, while a coal fired power plant must have been shuttered after 2009. The guidance provides that the IRS may opt to allocate more than 40 percent of the $10 billion to factories in such coal communities.
Significantly, the notice refers to a map that will be published which will allow applicants to determine if their proposed site is in an a “coal” census tract: “An applicant will be able to determine whether its project is located in a § 48C(e) Energy Communities Census Tract using the mapping tool that will be referenced in the additional § 48C(e) program guidance” (emphasis added).
The prospect of a mapping tool is good news to developers. Consultants are marketing energy community databases, but developers are finding that one consultant’s database may not agree with another’s database.
The section 48C 40 percent allocation is limited to “coal” census tracts as described above. Outside of section 48C, coal census tracts are a subset of the definition of “energy community” that siting a clean energy generation project in results in ten percentage points more investment tax credit or a ten percent higher production tax credit.
The energy community adder for clean energy generation projects (but not the section 48C advanced manufacturing tax credit) are available in statistical areas that had in any year since 2010 either (i) at least 17 percent fossil fuel employment or (ii) 25 percent local tax revenue from the fossil fuel industry and in the prior year have higher unemployment than the national average. It would be tremendously helpful to clean energy generation developers if the coming “mapping tool” also addressed those qualifications.
Process Starts with a Concept Paper
The notice provides that the process starts with an aspiring applicant submitting a concept paper to the DOE. For the first round, the concept papers are due to DOE by July 31, 2023. Concept papers are submitted by uploading them to https://infrastructure-exchange.energy.gov.
After reviewing the paper, the DOE will respond to the concept paper with an “encouraging” or “discouraging” recommendation. If the recommendation is discouraging, the party may request a meeting with the DOE. Further, a discouraging recommendation does not bar the party from submitting an application, but it seems unlikely such an application would be viewed favorably by the DOE.
If an application is “certified” (i.e., allocated a portion of the $10 billion of tax credits), the applicant has two years from the certification date to complete the factory and place it in service. If the plans for the factory change materially from what is in the concept paper of the application, the applicant must notify the IRS and DOE of the change. Tax credits that are allocated to a factory that is not ultimately placed in service will be reallocated in a subsequent round.
 See I.R.C. § 45X(c)(1)(B).
 See I.R.C. §§ 45(b)(11), 48(a)(14).