IRS Releases Guidance on Energy Community Credit Adder

On April 4, 2023, the Department of Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) released Notice 2023-29 (the “Notice”) providing a high-level overview of the rules they intend to include in forthcoming proposed regulations (the “Proposed Regulations”) for determining (i) what constitutes an “energy community” under Section 45(b)(11)(B) of the Code (and adopted by Sections 45Y(g)(7), 48(a)(14) and 48E(a)(3)(A) of the Code), and (ii) whether a qualified facility, energy project or energy storage technology (a “Facility”) is located in an energy community.  The Proposed Regulations, when issued, will apply to taxable years ending after April 4, 2023, in the meantime, taxpayers may rely on the rules set forth in the Notice.

As detailed in our prior blog post, which may be found here, If a Facility is located in an “energy community,” the production tax credit amount is increased by 10% under section 45(b)(11) of the Code.  Under Section 48(a)(14) of the Code, the percentage increase for the investment tax credit is also 10% if satisfied, but only if the base credit amount is 30%.  If the base credit amount is 6%, the percentage increase is only 2%.

To qualify, under Section 45(b)(11) of the Code, and as adopted by Sections 45Y(g)(7), 48(a)(14) and 48E(a)(3)(A) of the Code, a facility must be located at one of the following: (i) a brownfield site (the “Brownfield Category”), (ii) a metropolitan or non-metropolitan statistical area which (A) has, or had any time during the period beginning in 2010, 0.17% or more direct employment or 25% or more local tax revenues, in either case related to the extraction, processing, transport, or storage of coal, oil or natural gas, and (B) has an unemployment rate above the national average for the previous year (the “Statistical Area Category”), or (iii) a census tract, or a census tract that is adjoining to, in which a coal mine has closed after 1999 or a coal-fired electric generating unit was retired after 2009 (the “Coal Closure Category” and, collectively with the Brownfield Category and the Statistical Area Category, the “Energy Community Categories”).

The Notice provides general rules regarding when a determination regarding a Facility’s location must be made.  For the Production Tax Credit under Sections 45 and 45Y, the determination is made separately for each taxable year of the Facility’s ten year credit period.  However, the Facility will be treated as being located in an Energy Community Category during a taxable year if it is located in an Energy Community Category during any part of the taxable year.  For the Investment Tax Credit under Sections 48 and 48E, the determination is made as of the Facility’s placement in service date.  However, if a taxpayer begins construction of a Facility on or after January 1, 2023 in a location that qualifies as an Energy Community Category as of the beginning of construction date, then, with respect to that Facility, the location will continue to be considered an energy community for the duration of the credit period under Sections 45 and 45Y or on the placed-in-service date under Sections 48 and 48E.  To determine the beginning of construction date, the typical start of construction rules apply.

There are two different tests taxpayers should use to determine whether the Facility is located in an Energy Community Category as of the date(s) set forth above.  The test the taxpayer should use hinges on whether the Facility has nameplate capacity and the details of each test are set forth below.

Finally, the Notice provides additional detail regarding the Energy Community Categories, each of which is detailed below, and an interactive map that reflects currently available data on the Coal Closure Category and the Statistical Area Category.  The map will be updated next month.

The Brownfield Category

Under Section 45(b)(11)(B)(i) of the Code, the Brownfield Category includes a brownfield site as defined in Sections 101(39)(A), (B), and (D)(ii)(III) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. § 9601(39) as real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant (as defined under 42 U.S.C. § 9601) and certain mine-scarred land (as defined in 42 U.S.C. § 9601(39)(D)(ii)(III)).  The Brownfield Category does not include the categories of property described in 42 U.S.C. § 9601(39)(B).

The Notice also provides a safe harbor for the Brownfield Category if one of the following three conditions are satisfied and the site is not described in 42 U.S.C. § 9601(39)(B):

1. The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a brownfield site under 42 U.S.C. § 9601(39)(A);
2. An ASTM E1903 Phase II Environmental Site Assessment has been completed with respect to the site in accordance with the most current applicable version of the Standard Practice for Environmental Site Assessments: Phase II Environmental Site Assessment Process of ASTM International and such assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. § 9601(14) or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33); or
3. For projects with a nameplate capacity of not greater than 5MW (AC), an ASTM E1527 Phase I Environmental Site Assessment (Phase I Assessment) has been completed with respect to the site in accordance with the most current applicable version of the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process of ASTM International. On this point, the Notice was clarified by Notice 2023-45, to provide that the safe harbor only applies if the Phase I identifies the presence or potential presence of a hazardous substance as defined under 42 U.S.C. § 9601(14) or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33).

The Statistical Area Category

Under Section 45(b)(11)(B)(ii) of the Code, the Statistical Area Category includes metropolitan statistical areas (each, an “MSA”) or non-MSAs that (i) have (or had at any time after December 31, 2009) 0.17% or greater direct employment (Fossil Fuel Employment) or 25% or greater local tax revenues (Fossil Fuel Tax Revenue) related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary of the Treasury or her delegate, and (ii) have an unemployment rate at or above the national average unemployment rate for the previous year (as determined by the Secretary of the Treasury or her delegate).  The Notice provides additional detail regarding the Statistical Area Category in the following four areas.

1. Determination of MSAs.  For purposes of the Notice, Appendix A of the Notice provides guidance to determine the delineations of MSAs and non-MSAs.
2. Fossil Fuel Employment.  The list of MSAs and non-MSAs (by county) that have (or had any time after December 31, 2009) 0.17% or greater direct employment related to the extraction, processing, transportation, or storage of coal, oil, or natural gas is in Appendix B of the Notice.
3. Unemployment Rate.  Taxpayers should use the unemployment rates determined using the Local Area Unemployment Statistics annual data to determine whether an MSA or non-MSA has an unemployment rate at or above the national average unemployment rate for the prior year.  The Treasury and the IRS intend to issue a listing identifying the MSAs and non-MSAs that qualify in the Statistical Area Category based on fossil fuel employment after the unemployment data for 2022 becomes available, which should be later this month.  Going forward, the Treasury and the IRS intend to update the listing of the Statistical Area Category based on Fossil Fuel Employment annually, likely in May of each year.  Each subsequent annual release will determine the MSAs and non-MSAs that will qualify under the Statistical Area Category based on fossil fuel employment for the 12- month period starting in May through April of the following year.
4. Fossil Fuel Tax Revenue.  The Treasury and the IRS acknowledge this determination may be particularly challenging and invite public comments addressing the possible data sources, revenue categories, and procedures to determine whether an MSA or non-MSA qualifies under the Statistical Area Category based on Fossil Fuel Tax Revenue.

Coal Closure Category

Under Section 45(b)(11)(B)(iii) of the Code, the Coal Closure Category includes (i) a census tract in which a (A) coal mine has closed after December 31, 1999 (a “Closed Coal Mine”), or (B) coal-fired electric generating unit has been retired after December 31, 2009 (a “Retired Coal-Fired Electric Generating Unit”), or, alternatively, (ii) a census tract adjoining a census tract described in (A) or (B).  Census tracts are directly adjoining if the boundaries touch at any single point. There are many cases where multiple census tracts meet at a single point. If a closed coal mine or retired coal-fired electric generating unit is located in one of the census tracts, then other census tracts sharing the single point would be considered directly adjoining.  Census tracts in the Coal Closure Category are listed in Appendix C of the Notice.

Under the Notice, a Closed Coal Mine includes a coal mine classified as a surface or underground mine that has ever had, for any period of time since December 31, 1999, a mine status of abandoned or abandoned and sealed by the U.S. Department of Labor’s Mine Safety and Health Administration (“MSHA”) in the Mine Data Retrieval System (“MDRS”).  However, Closed Coal Mines listed in the MSHA MDRS are excluded from the Coal Closure Category if they have irregular location information, including Closed Coal Mines with listed latitude and longitude coordinates that do not place the mines in the listed county and state, and mines with latitude and longitude coordinates that only extend to the tenths place.

Additionally, the Notice provides that a Retired Coal-Fired Electric Generating Unit includes an “electric generating unit” classified as retired at any time since December 31, 2009, by the U.S. Energy Information Administration (“EIA”) of the U.S. Department of Energy in the Preliminary Monthly Electric Generator Inventory (EIA Form 860M) or the Electric Generator Inventory (EIA Form 860), depending on the year retired.

An electric generating unit is a coal-fired generating unit according to its classification in the EIA, which differs based on the year retired.  However, like Closed Coal Mines, retired coal-fired generating units are excluded from the Coal Closure Category if they have irregular location information.

The unit must be categorized as a coal-fired electric generating unit at the time it is listed as retired.

Finally, with respect to each Energy Community Category, the Notice provides that the general recordkeeping requirements set forth in Section 6001 of the Code must be met to substantiate a Facility is located in or has been placed in service in an Energy Community Category.

Foley will continue to monitor these developments, including the issuance of forthcoming guidance issued by the Treasury and the IRS with respect to the Energy Community Categories.