Last week, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) released a notice of proposed rulemaking (NPRM) that modifies the regulations applicable to the Energy Credit under Section 48 of the Internal Revenue Code (Code).  The NPRM also withdraws and repurposes portions of an August proposal on the rules governing the increased credit amount available for taxpayers satisfying prevailing wage and registered apprenticeship requirements established by the Inflation Reduction Act (IRA).  This post summarizes a few key aspects of the NPRM below:

  • Updating Types of Energy Property Eligible for the Energy Credit: The newly proposed regulations would expand upon the definitions of energy property to account for new technologies that were added by amendments to section 48, including by section 13102 of the IRA.  The types of energy property covered by the regulation include: (1) solar energy property; (2) fiber-optic solar energy property and electrochromic glass property; (3) geothermal energy property; (4) qualified fuel cell property (5) qualified microturbine property; (6) combined heat and power system property; (7) qualified small wind energy property; (8) geothermal heat pump equipment; (9) waste energy recovery property; (10) energy storage technology (including electrical energy storage, thermal energy storage, and hydrogen energy storage) (11) qualified biogas; and (12) microgrid controllers.  Wind energy property is not directly considered  “energy property” under section 48.  Still, taxpayers can elect to treat qualified offshore wind facilities (as defined under the section 45 Production Tax Credit) as energy property under Section 48.[1]  Treasury’s proposed guidance clarifies that power conditioning and transfer equipment—such as subsea cables and voltage transformers—are integral parts of a qualified offshore wind facility that can themselves qualify as energy property.  However, energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage.
  • Clarifying Applicability of New Credit Transfer Rules to Failure to Satisfy the Prevailing Wage Requirements:  If a taxpayer satisfies certain Prevailing Wage and Apprenticeship (PWA) requirements, then the section 48 credit for the energy property placed in service during the taxable year is multiplied by five (i.e., from 6% to 30% of qualified investments).  For this credit to be claimed, the taxpayer must ensure that Prevailing Wages are paid during construction of the energy property and for any alteration or repair work that occurs during a 5-year period following the date that the energy project is placed in service.  Section 48 further requires Treasury to provide for recapturing the benefit of any increase in the credit if Prevailing Wages are not paid during the five-year period after the energy project is placed in service.  In August, Treasury and the IRS provided some initial guidance on this recapture procedure that is further clarified in this NPRM.  Among other things, last Friday’s NPRM notes that a taxpayer can avoid recapture for failure to satisfy Prevailing Wage requirements by making correction payments to any workers that received less than the Prevailing Wage rate and paying a penalty to IRS.  Taxpayers that fail to make the correction and penalty payments will be subject to recapture of the bonus credit, with the amount of the bonus credit subject to recapture decreasing depending on the number of years that have passed since the energy project was placed in service. The proposal also clarifies that the five-year recapture period begins on the day any energy project is placed in service and ends on that day that is five full years after the placed-in service date. The IRS also proposed a new regulation — not previously included in the August proposed rule — which requires the taxpayer to submit an annual report regarding its compliance with the Prevailing Wage obligation during the 5-year period after the facility is placed in service.
  • Other Clarifications: The proposed regulations would also provide additional requirements and rules generally applicable to energy property, such as rules regarding: functionally interdependent components; property that is an integral part of energy property; application of an “80/20 Rule” to retrofitted energy property; dual use property; separate ownership of components of energy property; property that could be eligible for multiple Federal income tax credits; and the election to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit. Taxpayers have to make a separate election for each qualified facility that they want to be treated as a qualified investment credit facility.

Treasury and the IRS are accepting comments until January 21, 2024.[2]  A public hearing on these proposed regulations is scheduled to be held on February 20, 2024, at 10 a.m. ET.  Requests to attend the public hearing must be received by 5 p.m. on February 15, 2024.  

[1] Section 48(a)(5) allows a taxpayer that owns a qualified facility (as defined in section 45(d)) to elect to claim the section 48 credit in lieu of the section 45 credit. Section 48(a)(5)(A) provides that if the taxpayer makes an election, the qualified facility will be treated as part of a qualified investment credit facility, and therefore deemed energy property eligible for a section 48 credit.

[2] The comment period is open for 60 days after formal publication in the federal register.  Publication is currently expected on November 22, 2023,

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Martin Levy

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators…

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators, technology companies, and financial institutions on how to better align their business practices with “net zero” commitments. Before joining Covington, Martin was a vetting attorney with the Biden-Harris Presidential Transition, a law clerk at the Eastern District of New York, and an undergraduate environmental law instructor at Boston College.

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Mr. Terenzio advises contractors across a broad range of different issues. His practice includes bid protests, contract claims and disputes, regulatory counseling, and internal investigations.

Before joining the firm, Mr. Terenzio clerked for Chief Judge Susan G. Braden of the Court of Federal Claims.

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Tsitsi M. Mangosho is an associate in the New York Office. She is a member of the Tax and Corporate Groups.