(Revised April 26, 2023)
The Bureau of Labor Statistics (BLS) published the official 2022 unemployment data, which provides the final puzzle piece for some owners of clean energy projects to be able to determine if their project qualifies as being sited in an energy community. Solving the puzzle is critical as projects in energy communities are entitled to an additional ten percentage points of investment tax credit (e.g., 30 percent to 40 percent) or an additional ten percent of production tax credits (e.g., $27.50 per MWh to $30.24 per MWh). The difference in the value of the tax credits can easily be in the high eight figures for large projects.
The IRS expects to publish its list of areas that qualify as energy communities annually in May. The list published in Notice 2023-29 provides that each release will determine the metropolitan statistical areas (MSAs) and non-metropolitan statistical areas (NMSAs) that qualify under the fossil fuel employment category for the 12-month period beginning in May and ending the following April.
The Fossil Fuel Employment Category
One of the five energy community categories is that the project must be sited in a statistical area with (i) at least .17 percent fossil fuel employment in a year after 2009 and (ii) unemployment in the previous year that is not less than the national average.
The IRS in a revision to Notice 2023-29 (the Notice) modified a special rule to provide that for projects that begin construction after 2022, the test may be satisfied in the year before construction began. Therefore, if a project began construction in 2023, then 2022 is the year the unemployment element can be tested (even if the project is placed in service in 2024 or later).
Further, if a project is outside the special rule due to having begun construction before 2023, but the owner opts for an investment tax credit and the project is placed in service during 2023 (or at least after May 2023 as discussed below), then 2022 is also the year for which unemployment is tested. That is because 2022 is the “previous year” to the tax credit year of 2023 due to the fact that the investment tax credit is available upon the project being placed in service.
How to Calculate Unemployment
The Notice provides the methodology for calculating the average unemployment rate and directs taxpayers to the Local Area Unemployment Statistics (“LAUS”) published by BLS. The task is fairly simple for an MSA, BLS publishes a table annually in April of each year. The unemployment rate for the prior calendar year, for each MSA can be found here.
The Notice provides the roadmap for calculating the average unemployment rate for an NMSA. LAUS publishes tables listing both employed and unemployed persons by county, available here. The aggregate of these two figures is the “labor force” referred to in the guidance. The unemployment rate for the NMSA is calculated by dividing the total number of unemployed individuals (in the aggregate for all counties in the NMSA) by the total labor force for those same counties. For example, for the West Texas NMSA, the calculation requires taxpayers to sum the unemployed persons across all 68 counties and to sum the total labor force for those 68 counties to calculate the average unemployment for the NMSA.
Does the Notice’s Annual Listing Period Starting in May Offer a Second Qualification Opportunity?
The Notice may provide an opportunity for projects which did not qualify as being in an energy community (based on the unemployment criteria not being met), to establish they qualify in the first four months of the next year, using prior year figures.
The BLS unemployment data released in April of each year reflects data for the prior calendar year. The Notice states:
The first listing of the Statistical Area Category based on Fossil Fuel Employment will apply to the period beginning on January 1, 2023. Each subsequent annual release will determine the MSAs and non-MSAs that will qualify under the Statistical Area Category based on Fossil Fuel Employment for the 12- month period starting in May through April of the following year. For example, the energy communities defined by the 2022 unemployment rates will be designated in May of 2023 and will remain in place until the next update, which would likely be in May 2024 after the necessary data becomes available. The update in May 2024 will use 2023 annual unemployment data and will remain in place until the next update, likely in May 2025. This approach is used because of the lag in availability of annual county unemployment rates.
The Notice provides that for “purposes of sections 45 and 45Y, a qualified facility is treated as located in an energy community during a taxable year if it is located in an energy community during any part of the taxable year.” The combination of this reference to “part-of-the-taxable-year” and the rule about the designation lasting for a year starting in May appears to provide project owners claiming a production tax credit under section 45 or 45Y two bites at the apple.
An example demonstrates the significance of this “part of the taxable year” rule combined with the annual convention starting in May: the owner of a wind project has a calendar tax year and has opted to claim production tax credits for its project; the project began construction in 2022, so it does not qualify for the special rule of testing energy community status in the year the project begins construction; the project is placed in service in 2024; further, based on unemployment data from calendar year 2023 that the IRS publishes on May 15, 2024 the project is located in an area the IRS has listed as an energy community; finally, based on unemployment data from calendar year 2024 that the IRS publishes on May 15, 2025, the project is not in an area the IRS has listed as an energy community. The project owner is entitled to claim the production tax credit adder for all of 2024 because the area where the project is located is an energy community in 2024, even if the area was not an energy community for 2023 (i.e., the project met the requirements of being in an energy community from May 15 to December 31, 2024). Further, the owner is entitled to claim the production tax credit adder for all of 2025 because the 2024 designation of the area as an energy community lasts until May 14, 2025.
Are Investment Tax Credit Projects Treated Differently?
The Notice does not expressly extend the “part-of-the-taxable-year” rule to the investment tax credit under section 48 or 48E. Therefore, it appears that if a taxpayer owns two solar projects in the same statistical area and opts for the investment tax credit for each, both projects began construction in 2022 and are accordingly not eligible for the special rule to determine energy community status by using the year construction started, and one is placed in service in April 2024 and one is placed in service in June 2024, one could qualify for the energy community adder and the second might not qualify based on the statistical area’s unemployment rate for 2022 that applied to April 2024 and the unemployment rate for 2023 that applied to June 2024. That seems like an odd result, and it is not clear that it was intended. Possibly, the energy community listing to be published in May 2023 will address whether different treatment was intended for investment tax credit.
How Long Does the Listing Last?
Finally, the notice is not consistent as to how long each listing is in effect. The Notice states: “Each subsequent annual release will determine the MSAs and non-MSAs that will qualify under the Statistical Area Category based on Fossil Fuel Employment for the 12-month period starting in May through April of the following year.” However, two sentences later it states: “The update in May 2024 will use 2023 annual unemployment data and will remain in place until the next update, likely in May 2025.” Is the May 2024 update in effect until April 2025 as the first sentence suggests or until whenever in May 2025 the IRS actually releases the next update. This nuance could be critical to certain investment tax credit projects if the IRS confirms such projects do not have the benefit of the “part year” rule. For instance, two projects each opting for the investment tax credit began construction in 2022 (and are accordingly not eligible for the special rule that looks to the begun construction year); the projects are sited in the same statistical area; further, one project is placed in service on May 1, 2024 and one is placed in service on May 2, 2024; finally, on May 2 the IRS releases a new listing that provides the projects’ statistical area’s energy community status has changed. Does the update released on May 2 apply as of May 2 or May 1? Presumably, the update to be published in May 2023 will answer this question by expressly providing for how long it is in effect.
The other instance in which the IRS publishes changes in tax credit rates mid-year is the inflation adjustment for the production tax credit. However, section 45(b)(2) expressly provides that the adjustment applies to the whole calendar year: the production tax credit amount is “adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the” production tax credit is generated. Therefore, when the IRS published an inflation adjustment in Notice 2022-20 on May 20, 2022, that resulted in an adjustment to production tax credits claimed starting on January 1, 2022. Conversely, the energy community statutory language does not have a similar reference. Therefore, the IRS appears to have a relatively free hand as to when to make the energy community annual updates effective.
 For projects opting for the production tax credit, only to meet the test in the year before construction began if construction begins in 2023 or later. However, if construction began in 2022 or earlier, the project will have to meet the test for each year to qualify for the adder for every year.