Definition of Energy Property and Rules Applicable to the Energy Credit

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10015]</DEPDOC> <RIN>RIN 1545-BO40</RIN> <SUBJECT>Definition of Energy Property and Rules Applicable to the Energy Credit</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document sets forth final rules relating to the energy credit, including rules for determining whether investments in energy property are eligible for the energy credit and for implementing certain amendments made by the Inflation Reduction Act of 2022. The final regulations impact taxpayers who invest in energy property eligible for the energy credit. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on December 12, 2024. <E T="03">Applicability dates:</E> For dates of applicability, see §§ 1.48-9(g), 1.48-13(f), 1.48-14(j), and 1.6418-5(j). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the regulations, the IRS Office of the Associate Chief Counsel (Passthroughs and Special Industries) at (202) 317-6853 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 48 and 6418 of the Internal Revenue Code (Code) issued by the Secretary of the Treasury or her delegate (Secretary) pursuant to the authority granted under sections 45(b)(12), 48(a)(3)(D), and (a)(16), 6418(g) and (h), and 7805(a) of the Code (final regulations). Section 48(a)(3)(D) provides a specific delegation of authority for the Secretary to prescribe by regulations performance and quality standards for energy property after consulting with the Secretary of Energy. Sections 45(b)(12) and 48(a)(16) provide specific delegations of authority with respect to the requirements of section 45(b), including the prevailing wage and apprenticeship (PWA) requirements of section 45(b)(7) and (8), as incorporated by section 48(a)(10) and (11), with each stating, “[t]he Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.” Section 48(a)(10)(C) grants authority for the Secretary to provide, by regulations or other guidance, for recapturing the benefit of any increase in the credit allowed under section 48(a) allowed to an energy project that initially satisfies the PWA requirements if such energy project should later fail to satisfy such requirements during the recapture period by applying rules similar to the rules of section 50(a) of the Code. Section 48(a)(16) provides a general grant of regulatory authority for section 48(a), by stating: “The Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which provides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.” Section 6418(g) provides several specific delegations of authority to the Secretary with regard to enforcing requirements for valid transfers of certain Federal income tax credits under section 6418 and recapturing excessive credit transfers. Section 6418(h) provides a specific delegation of authority with respect to the transfer of credits under section 6418, stating, in part, that “[t]he Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section.” Finally, section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD1">I. Overview</HD> Section 38 of the Code allows certain business credits against the Federal income tax imposed by chapter 1 of the Code (chapter 1). Among the credits allowed by section 38 are the investment credit determined under section 46 of the Code, which includes the energy credit determined under section 48 (section 48 credit). See sections 38(b)(1) and 46(2). Section 48(a)(1) generally provides that the section 48 credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. For most types of energy property, eligibility for the section 48 credit and, in some cases, the amount of the section 48 credit depends upon meeting certain deadlines for beginning construction of the energy property or for placing the energy property in service. Section 48 originally was enacted by section 2 of the Revenue Act of 1962, Public Law 87-834, 76 Stat. 960, 963 (October 16, 1962), to spur economic growth by encouraging investments in various capital projects across many industries including energy, transportation, and communications. Section 48 has been amended many times since its enactment, most recently by section 13102 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The IRA amended section 48 in several ways, including by making additional types of energy property eligible for the section 48 credit, providing a special rule to allow certain lower-output energy properties to include amounts paid for qualified interconnection property in connection with the installation of energy property, and providing an increased credit amount for energy projects that satisfy prevailing wage and apprenticeship requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities. The Income Tax Regulations at § 1.48-9 in effect prior to December 12, 2024 (former § 1.48-9), which provide definitions and rules for determining whether property is energy property eligible for the section 48 credit, originally were published on January 23, 1981 (T.D. 7765, 46 FR 7287). Those regulations were amended on July 21, 1987 (T.D. 8147, 52 FR 27336) to provide rules for dual use property. Thus, former § 1.48-9 has not been updated since 1987, which is before many of the current types of energy property became eligible for the section 48 credit. <HD SOURCE="HD1">II. Prior Guidance</HD> Prior to proposing the amendments to the regulations under section 48 being finalized by this treasury decision, the Department of the Treasury (Treasury Department) and the IRS twice requested comments on issues to be addressed in these regulations. On October 26, 2015, the Treasury Department and the IRS published Notice 2015-70, 2015-43 I.R.B. 604, requesting comments regarding statutory updates to section 48 preceding those made by the IRA. On October 24, 2022, in response to the passage of the IRA, the Treasury Department and the IRS published Notice 2022-49, 2022-43 I.R.B. 321, requesting general as well as specific comments on issues arising under section 48, among other sections, that were amended or added by the IRA. On August 30, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-100908-23) in the <E T="04">Federal Register</E> (88 FR 60018), <E T="03">corrected</E> in 88 FR 73807 (Oct. 27, 2023), <E T="03">corrected</E> in 89 FR 25550 (April 11, 2024), proposing rules regarding the increased credit amounts available for taxpayers satisfying PWA requirements established by the IRA (PWA Proposed Regulations). Comments were requested and a public hearing was held November 21, 2023. On November 22, 2023, after consideration of all the comments submitted in response to Notice 2015-70 and Notice 2022-49, and after consultation with the Department of Energy (DOE), the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-132569-17) in the <E T="04">Federal Register</E> (88 FR 82188), <E T="03">corrected in</E> 89 FR 2182 (January 12, 2024), proposing rules that would provide guidance under section 48 (Proposed Regulations). On February 22, 2024, the Treasury Department and the IRS published a second correction to the Proposed Regulations in the <E T="04">Federal Register</E> (89 FR 13293) that re-opened the comment period through March 25, 2024 (Correction). The Proposed Regulations withdrew certain portions of the PWA Proposed Regulations and re-proposed regulations that would provide additional guidance on the PWA requirements under section 48, including the statutory exception for energy projects with a maximum output of less than one megawatt (MW) and the recapture rules under section 48(a)(10)(C) related to the PWA requirements. Although the Proposed Regulations withdrew certain portions of the PWA Proposed Regulations, the Explanation of Provisions section in the preamble to the PWA Proposed Regulations generally remained relevant. Therefore, to the extent consistent with the preamble to the Proposed Regulations, the Explanation of Provisions section of the PWA Proposed Regulations was incorporated in the preamble to the Proposed Regulations. The preamble to the Proposed Regulations did not address written comments that were submitted in response to the PWA Proposed Regulations. Any comments received in response to the Proposed Regulations, including comments on the re-proposed regulations addressing the PWA requirements specific to section 48, are addressed in the Summary of Comments and Explanation of Revisions section of this pre ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 477k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━