Tax Equity News

Low-Income Community Bonus Credit – Final Regulations

Posted by Gabrielle Jacques

August 14, 2023

Posted in Blog article Renewable energy

The community solar and rooftop solar industries were starting to lose hope of claiming the economic justice bonus credits on 2023 projects.  The final regulations[1] and guidance[2] released earlier this week, however, give taxpayers a bit more time to apply for allocations:  depending on the volume of applications, the Department of Energy (DOE) says it plans to accept applications for the 2023 program through early 2024.  The companion revenue procedure provides needed clarity on the application process.

Application Process

DOE accepts and evaluates applications on behalf of the Treasury and will begin accepting applications for the 1.8 GW DC of allocation across all four project categories.  The application portal is not yet open.  The date and time the application portal will open for registration and application submission and additional program resources will be announced in early September.  A DOE webpage has been set up and will be updated in the coming weeks to provide additional information about the application opening date and materials.

Applications submitted in the first 30 days will be treated as submitted on the same date and at the same time and will be reviewed on a rolling basis thereafter.

A project owner is required to provide evidence of compliance with the program requirements on two occasions: at the initial application stage and, if awarded allocation, again when the project is placed in service.  The project needs to be placed in service after receiving an allocation but no more than four years after.  The IRS lists the required documents for the 2023 program in Revenue Procedure 2023-27.

Treasury said it anticipates upwards of 100,000 applications annually.

Eligible Projects

The bonus credit can be claimed on solar and wind projects, but such projects must have a net output of less than 5 megawatts (MW) measured in alternating current (AC).   It can also be claimed on co-located batteries as long as the battery is charged at least 50% by the eligible solar or wind project.  The final regulations clarified that the 50% is based on an annual average.  There is a safe harbor—if the battery’s power rating is less than two times the capacity rating of the connected wind (in kilo Watts (kW) AC) or solar (in kW measured in direct current) facility, it is deemed to meet the 50% test.

The program groups projects into four categories.  The first two categories are location-based and offer a 10 percentage point bonus to the investment tax credit (ITC) rate.  Categories 3 and 4 are benefit-based and offer a 20 percentage point bonus to the ITC rate. 

Location-Based Categories

Category 1: these are projects located in a low-income community.  The final regulations clarify that taxpayers should look to the 2011-2015 American Community Survey (ACS) low-income community data for the New Markets Tax Credit to determine if a project site is in a low-income census tract.  If the ACS low-income community data is updated, taxpayers have a one-year transition period where they can rely on either the 2011-2015 ACS data or the updated ACS data.  There are 700 MW DC reserved for Category 1 projects for 2023.

Category 2: these are projects located on “Indian Land”.[3]  There are 200 MW DC reserved for Category 2 projects for 2023.

Benefit-Based Categories

Category 3: these are projects that are part of a “qualified low-income residential building project.”  Both multi-family and single-family rental properties can qualify. Solar panels installed on external structures on the same or adjacent land (e.g., a carport or shed) will be treated as if they were installed on the residential rental building.

The building must participate in an applicable affordable housing program.  The IRS listed the accepted federal affordable housing programs in the final regulations.  While the Treasury and the IRS declined to include additional housing programs (like state specific housing programs), it said future guidance may expand the list.

The “financial benefits” of the electricity generated by the project must be equitably allocated among the residents.  “Financial benefit” is a term of art.  It can be demonstrated through net energy savings.  At least half of the net energy savings needs to be passed on the tenants.  Additionally, at least half of the building’s low-income occupants must participate and receive financial benefits.

The final regulations create more flexibility to meet the equitably allocated financial benefit requirement.  Financial value can be distributed to building occupants via utility bill savings or under any other method described in guidance from the federal agency that oversees the applicable housing program.

With respect to utility bill savings, the savings can be allocated proportionately among the residents based on a unit’s square-footage or its number of occupants.  The proposed regulations allowed distributing savings based on a unit’s electricity usage.  The final regulations did not adopt this method because it is not permitted under HUD guidance.

There are 200 MW DC reserved for Category 3 projects for 2023.

Category 4: these are projects that are part of a “qualified low-income economic benefit project.”  To qualify under Category 4, at least half of the of the financial benefits of the electricity produced must go to households with incomes below 200% of the poverty line or below 80% of the area median gross income.  The final regulations stressed the significance of the plural use of “households” and declined to allow projects that benefit one single-family residence to qualify.

To merely apply, the project does not have to have any eligible households as subscribers.  However, when the project is placed in service and the awarded allocation is formally claimed, the requirements must be satisfied.  A project will not suffer recapture if a subscriber household's income status changes.

To better align with the community solar business models, the final regulations say that at least 50% of the project’s output must be “assigned” (rather than “distributed” as phrased in the earlier proposed regulations) to qualified households.

Unlike the option for alternative distribution methods available for Category 3 projects, the final regulations said financial benefits for Category 4 must be tied to a household’s utility bill.  Treasury left the door open to add other methods of determining Category 4 financial benefits in future years.

A Category 4 project must provide at least a 20% bill credit discount rate for all of its low-income households.  The bill credit discount is 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 assigned to the low-income household, then dividing that difference by the financial benefit assigned to the low-income household.  The final regulations address situations where a household does not make a direct payment to the project owner.  In cases where the household has no (or only a nominal) cost of participation, the bill credit discount is calculated as the financial benefit provided to the low-income household divided by the total value of the electricity produced by the facility and assigned to the household.

Only front of the meter (FTM) projects can be Category 4 project.  The final regulations say a facility is FTM if it is directly connected to a grid and its primary purpose is to provide electricity to one or more offsite locations via such grid or utility meters with which it does not have an electrical connection; alternatively, FTM is defined as a facility that is not a behind the meter (BTM) facility.  A project is also FTM if at least 50% of its electricity generation on an annual basis is physically exported to the broader electricity grid.

Applicants can rely on “categorical eligibility” to qualify a household as low-income.  Categorical eligibility consists of obtaining proof of household participation in a needs-based Federal (e.g., Medicaid, SNAP, Section 8), State, Tribal, or utility program with limits at or below the qualifying income level for the project.  If a household is not enrolled in a qualifying program, there are additional income verification methods.  The IRS tried to strike a balance between reducing the administrative burden for owners and households and ensuring adequate checks for ensuring that Category 4 projects that receive an allocation are meeting the requirements.  Eligibility based on the applicant (or contractors) collecting self-attestations directly from households is not allowed because Treasury does not believe them to be reliable.  However, the prohibition on direct self-attestation from a household does not apply if a qualifying needs-based government program with income limits relies on self-attestations to verify income.  In that case, the qualifying program’s verification will be respected for purposes of Category 4.

There are 700 MW DC reserved for Category 4 projects for 2023.

[1] Treasury Decision 9979 (Aug. 10, 2023).

[2] Revenue Procedure 2023-27.

[3] “Indian Land” is defined in section 2601(2) of the Energy Policy Act of 1992 (25 U.S.C. 3501(2)).


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