Final Regulations Clarify the Investment Tax Credit Rules
The U.S. Department of the Treasury and the Internal Revenue Service have issued final regulations for the investment tax credit under section 48, providing guidance for projects that start construction by December 31, 2024.
Section 48 of the Internal Revenue Code allows taxpayers generally to claim a 30% investment tax credit ("ITC") for certain types of qualified energy property. The Inflation Reduction Act expanded the types of technologies eligible for the section 48 ITC, such as energy storage technologies. Projects must start construction by December 31, 2024, to qualify for section 48 ITCs.
On December 12, 2024, final regulations under section 48 (the "Final Regulations") were published in the Federal Register. While the Final Regulations were released only shortly before the construction-start deadline, the Final Regulations make a number of helpful clarifications for taxpayers with projects already under way. Further, many of the principles of the Final Regulations are likely to be relevant to clean energy ITCs under section 48E, which are "technology neutral" and which do not have a December 31, 2024, construction-start deadline.
Generally, the Final Regulations are in line with regulations proposed in November 2023 (the "Proposed Regulations"). But, compared to the Proposed Regulations, the Final Regulations expand the universe of property that may qualify for section 48 ITCs:
- Hydrogen Energy Storage. While the Proposed Regulations would have imposed an end-use requirement, the Final Regulations allow all hydrogen storage property to qualify for ITCs, even if the hydrogen is not ultimately used to produce energy.
- Biogas Facilities. Unlike the Proposed Regulations, the Final Regulations allow "upgrading equipment" to be eligible for ITCs. They also clarify that flaring generally will not disqualify biogas property.
- Interconnection Property. The Final Regulations clarify that interconnection property is not subject to the prevailing wage and apprenticeship ("PWA") requirements. They also make clear that interconnection costs can be included as ITC-eligible costs for projects that exceed the five-megawatt limit in the statute, so long as each item of energy property has a nameplate capacity of less than five megawatts.
Like the Proposed Regulations, the Final Regulations provide guidance on general ITC principles. For example, the Final Regulations contain rules for determining when property is considered to be placed in service, whether retrofitted property is eligible for ITCs (under the so-called "80/20 Rule"), and how to apply the "functionally interdependent" and "integral part" tests for determining the scope of ITC-eligible property. They also clarify how recapture rules apply when a project fails to meet the PWA requirements for repairs during the five-year recapture period.
