Treasury Issues Guidance on Section 48C Credit Allocation Program

On February 13, 2023, the U.S. Department of the Treasury released Internal Revenue Service (IRS) Notice 2023-18, Initial Guidance Establishing Qualifying Advanced Energy Project Credit Allocation Program Under Internal Revenue Code Section 48C(e) (the Notice). The Notice provides “initial program guidance” related to the allocation of the additional $10 billion of qualifying advanced energy project credit under Internal Revenue Code Section 48C (the AETC), which was added by the Inflation Reduction Act of 2022 (the IRA).

The extension and expansion of the AETC was intended to expand U.S. manufacturing capacity and jobs for clean energy technology, and to help ensure a supply of U.S.-manufactured materials for clean energy projects. The amount of the credit is equal to up to 30% of the qualified investment in the establishment, expansion, or re-equipment of a qualifying advanced energy project, which includes certain facilities that produce or recycle specified energy property, including wind, solar and geothermal energy equipment, fuel cells, microturbines, energy storage systems, electric grid modernization equipment, carbon oxide sequestration equipment, and other designated clean energy property.

The total amount of AETC is limited to $10 billion, which will be allocated to taxpayers based on an application process. The Notice contains the initial program guidance for that application process and indicates that additional guidance will be issued in one or more supplemental notices or appendices by May 31, 2023. The Treasury Department and the IRS anticipate providing at least two credit allocation rounds under the program. The U.S. Department of Energy (DOE) will begin accepting submissions for the first allocation round on May 31, 2023.

Department of Energy Review Process

The Notice provides that the AETC allocation program will consist of a two-stage DOE review process, the “concept papers” stage and the “application” stage.

Concept Papers

The first stage of the DOE review process requires a taxpayer seeking an allocation of AETC to submit a concept paper to DOE describing the proposed project. The Notice provides that concept papers will be evaluated against criteria that may include eligibility requirements, definitions for qualifying advanced energy projects, reasonable expectation of commercial viability, and other factors to be described in upcoming guidance. DOE will conduct a preliminary review of concept papers and issue a letter to the taxpayer either encouraging or discouraging the taxpayer to submit an AETC application.

As part of DOE’s review, it will determine which projects are located in “energy community” census tracts and are therefore eligible for an allocation of the $4 billion of AETC that is available only for projects located in those census tracts. A taxpayer will be able to determine whether its project is located in an energy community using the mapping tool that will be referenced in upcoming guidance from the Treasury Department.

DOE will begin accepting concept papers for the first AETC allocation round when the upcoming guidance is issued on May 31, 2023, and concept papers must be submitted to DOE no later than July 31, 2023, for this allocation round.

AETC Application

The second stage of the DOE review process will consist of a review of AETC applications submitted after the concept papers stage. A taxpayer may not submit an AETC application for a project unless it first submitted concept papers for the project by the specified deadline. The Notice provides that DOE will review applications for compliance and threshold requirements to determine whether (1) the project meets the eligibility requirements, (2) the information required by the forthcoming guidance for the AETC program has been submitted, (3) the taxpayer filed timely concept papers, and (4) all other requirements are satisfied. The review will also include an objective examination of applications for DOE recommendation based on technical review criteria and program policy factors to be outlined in the upcoming guidance. DOE will provide recommendations to the IRS regarding allocations of AETC, which will include a ranking of projects to be considered for credit allocation.

AETC Allocation

After the DOE review process, the IRS will accept or reject each AETC application based on DOE’s recommendations and ranking. The IRS will then notify each applicant whether and how much AETC is allocated to the applicant’s project.

The amount of AETC that is allocated to a project reduces the amount of AETC available to the remaining pool of recommended projects. The IRS will make allocations to successive projects according to DOE recommendations and ranking until the amount available for allocation is exhausted.

Certification & Claiming the AETC

Within two years after receiving notice of an AETC allocation from the IRS, a taxpayer must obtain certification of the project from the IRS to be eligible to claim the AETC specified in its allocation letter, or the allocated AETC will be forfeited. To obtain certification, a taxpayer must notify DOE that the certification requirements to claim the AETC have been satisfied by submitting evidence establishing that it has met all requirements necessary to commence construction of the project. The Notice provides that a project is eligible for certification only if the taxpayer has received all permits from federal, state, tribal, and local governmental bodies for construction of the project at the planned location, including environmental authorization or reviews necessary to commence construction of the project. DOE will notify the taxpayer and the IRS that it has received the taxpayer’s notification that the certification requirements have been met. The IRS will then certify the project by sending a certification letter to the taxpayer.

A taxpayer that receives a certification letter will have a two-year period beginning on the date of issuance of the certification letter to place the project in service. If the project is not placed in service within the two-year period, then the certification is no longer valid.

Observations

The Notice contains helpful preliminary information regarding the process to apply for allocations of AETC. It leaves a number of important questions outstanding for future guidance, however, and may not provide a great deal of certainty that a particular project may qualify for the AETC. Given the extensive amount of planning and development required for an expansion, re-equipment, or establishment of an industrial or manufacturing facility, it will be important for the Treasury Department to provide as much certainty as possible to help confirm financing for these facilities. Future guidance likely will answer a number of the unanswered questions and will help with project development going forward.