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Final Regulations: Clean Energy Investment Tax Credit

The IRS has released final guidance for taxpayers who claim the energy credit under Section 48.
  • The IRS has released final guidance for taxpayers who claim the energy credit under Section 48.
  • The final regulations clarify certain questions that arose from the 2023 proposed regulations around ownership and definitions of clean energy property.
  • Qualifying projects beginning before the end of tax year 2024 may be eligible to claim the credit.

Background

Under §48(a)(1), a tax credit is allowed for the energy percentage of the basis of energy property placed in service during a taxable year. Types of energy property are listed in §48(a)(3)(A):

  • solar equipment used to generate electricity or illuminate the inside of a structure
  • equipment used to produce, distribute, or use energy from a geothermal deposit
  • qualified fuel cell property or qualified microturbine property
  • combined heat and power system property
  • qualified small wind energy property
  • equipment utilizing ground or ground water as a thermal energy source
  • waste energy recovery property
  • energy storage technology
  • qualified biogas property
  • microgrid controllers

The Inflation Reduction Act (IRA) amended §48 to expand upon the types of property eligible for a tax credit, adding certain lower-output energy properties, including amounts paid in connection with installation of energy property, and providing an increased credit for projects satisfying prevailing wage and apprenticeship requirements, among other changes.

The IRS released proposed regulations for the updated §48 ITC in 2023 to provide additional requirements and rules generally applicable to energy property. Click here for more information on the provisions contained in the 2023 proposed regulations.

The final regulations released in December of 2024 provide clarification around requirements and definitions for certain types of clean energy property, rules for the increased credit amount for certain prevailing wage and apprenticeship requirements, and additional rules applicable to energy property.

Clarification of Requirements and Definitions of Clean Energy Property

The proposed regulations define an acquisition of energy property as a transaction in which a taxpayer obtains the rights and obligations to such property, including title and physical possession. The final regulations modify the intended definition to require that the taxpayer establish tax ownership in the energy property for federal income tax purposes.

Other modifications to definitions include, but are not limited to, the following:

  • Energy storage technology is eligible for the §48 credit if it satisfies the requirements, notwithstanding that it may be co-located or shared by a facility that is otherwise eligible for §45, 45V, or other 48 credits.
  • Gathering and distribution lines that are used to transport hydrogen with respect to hydrogen energy storage are an integral part of the property and includes, but is not limited to, liquefaction equipment.
  • Equipment that transforms other forms of energy into heat, through combustion or electric resistance, is not property that is an eligible component of thermal energy storage property. Air-to-water heat pump with a thermal storage tank would generally be thermal energy storage property as long as it meets other definitions.
  • Thermal energy storage property must be able to perform certain functions other than simply performing heat transfer.
Forvis Mazars Insight: The final regulations do not clarify whether certain types of technology fall into one of the explicit categories of energy property listed in §48. With the focus on function rather than form of the energy property, the IRS likely issued these final regulations to allow for future advances in technology and not require amendment to existing guidance.

Modifications to Definition of Energy Project

Under the proposed regulations regarding grouping energy properties into a single project, two or more of the factors they list must be present for a property to be considered a single Energy Property. The final regulations modify the definition so that if a taxpayer owns multiple energy properties, four or more factors must be present and assessed at any point during construction or during the taxable year placed in service at the convenience of the taxpayer. The IRS disagreed that a facts and circumstances approach should be used to determine if a property meets the definition of Energy Property.

How Forvis Mazars Can Help

Any company that begins construction for qualifying projects before the end of 2024 may claim the clean energy investment tax credit under §48, but if construction begins in 2025 the project would need to qualify under the new §48E clean electricity investment credit introduced by the IRA which requires energy projects to be “tech-neutral.” The IRS has also released final guidance and administrative guidelines under §48E.

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