On Monday, February 13, 2023, the Internal Revenue Service (“IRS”) established the programs for allocating Environmental Justice Solar and Wind Capacity Limitations under I.R.C. § 48(e) and Advanced Energy Project Credits under I.R.C. § 48C.These programs were established via Notice 2023-17 and Notice 2023-18, respectively (collectively, the “Notices”).

These Notices were issued to meet Inflation Reduction Act (“IRA”) requirements that the Secretary of the Treasury establish these programs within 180 days of the enactment of the IRA. See below for a summary of key aspects of the Notices.

§ 48(e) Potentially Increases the ITC for Environmental Justice Projects

Generally, I.R.C. § 48(e) provides for an increase in the Investment Tax Credit (“ITC”) under I.R.C. § 48 in the case of qualified solar and wind facilities which are (1) located in low-income communities, (2) located on Indian land, (3) part of a qualified low-income residential building, or (4) part of a qualified low-income economic benefit project.

This credit increase is only for facilities which are allocated a portion of the annual 1.8-gigawatt capacity limitation by the Department of Treasury (applicable to all taxpayers in the aggregate). This capacity limitation is further divided among the 4 categories of facilities specified in the preceding paragraph as follows:

(1) Project located in a Low-Income Community	700 megawatts
(2) Project located on Indian Land	200 megawatts
(3) Qualified Low-Income Residential Building Project	200 megawatts
(4) Qualified Low-Income Economic Benefit Project	700 megawatts

A taxpayer must submit an application to the IRS in order to receive a capacity limitation allocation. The IRS anticipates accepting applications for qualified low-income residential building projects and qualified low-income economic benefit projects in the third quarter of 2023 and anticipates accepting applications for facilities located in a low-income community and facilities located on Indian land sometime thereafter. An applicant may only submit an application for a facility in one category.

Importantly, facilities are only eligible to receive a capacity limitation before they are placed in service. Further, facilities must be placed in service within four years from the date notification is received regarding a capacity limitation award. The capacity limitations may be awarded by a lottery or other process if selected applications exceed the capacity limitation for each category.

Notice 2023-17 provides for “additional criteria” that may be considered in determining capacity limitation allocations. These additional criteria may include whether the facilities are (1) owned or developed by community-based organizations, (2) encourage new market participants, (3) provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and (4) have a higher degree of commercial readiness. The additional criteria will be described in forthcoming guidance.

§ 48C Advanced Energy Project Credit Program for Manufacturing Facilities

Generally, I.R.C. § 48C establishes a credit for investments in facilities which manufacture certain equipment needed for the production of clean energy, including solar and wind property, fuel cells or energy storage systems, carbon sequestration equipment, and hybrid vehicles or investments to re-equip industrial or manufacturing facilities to reduce their greenhouse gas emissions by at least 20%. The base credit is 6%, while the credit is increased to 30% if the prevailing wage and apprenticeship requirements are met. More information on the prevailing wage and apprenticeship requirements can be found here.

The I.R.C. § 48C credit is subject to an aggregate cap of $10 billion, of which $4 billion must be allocated to projects within census tracts which have not previously received an allocation under I.R.C. § 48C prior to the enactment of the IRA and are census tracts in which (i) a coal mine has closed since December 31, 1999, or (ii) a coal-fired electric generating unit has been retired since December 31, 2009 (or a census tract directly adjoining a census tract described in clauses (i) or (ii)). Notice 2023-18 indicates that the IRS will provide a mapping tool to enable applicants to establish that their project is in a qualified census tract before the application window opens.

Notice 2023-18 establishes the program for the allocation of the I.R.C. § 48C credit amounts. The process includes the submission of a concept paper to the Department of Energy (“DOE”), at which point the DOE will either encourage or discourage the submission of an application, followed by the submission of an application, DOE analysis of the application to determine if eligibility and threshold requirements are met, DOE technical review of the application to form a DOE recommendation and a ranking of the application, and, finally, the IRS’s decision regarding the acceptance or rejection of the application based on the DOE’s recommendation. All application materials must be submitted through the DOE’s eXCHANGE Portal. If portions of the application contain trade secrets, confidential information, privileged information, or information otherwise exempt from Freedom of Information Act disclosure, the applicant is directed to so indicate in the application materials.

The IRS will issue a Denial Letter in the case of rejected applications and an Allocation Letter in the case of accepted applications. After the acceptance of an application, the applicant has two years to notify the DOE that the certification requirements have been met, at which point the applicant will receive a Certification Letter. An applicant will have two years from the date of their Certification Letter to place the project in service and notify the DOE.

An Allocation Letter is only applicable to the taxpayer who requested it. Successors in interest will need to request that the IRS transfer the credit allocation to the successor in interest no later than 30 days prior to the due date (including extensions) of the successor’s federal income tax return for the year in which the transfer occurs.

The application period for the first round of allocations will begin May 31, 2023, and will end on a later date to be specified in future guidance. Concept papers must be submitted by July 31, 2023. This first round will allocate $4 billion of credits, of which approximately $1.6 billion is to be allocated to projects in the coal-specific census tracts described above. We anticipate the application process will be highly competitive for every tranche of allocations. Interested taxpayers should work with their tax advisors to best position their applications.

Baker Botts will continue to monitor IRA guidance and will provide further updates as guidance is released.In the meantime, we would be pleased to assist you in your analysis of the IRA and other clean energy tax incentive matters.

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