IRS, Treasury Issue Guidance on Low-Income Communities Bonus Credit Allocation

The U.S. Department of the Treasury and the Internal Revenue Service on February 13, 2023, announced the release of guidance providing taxpayers information on the Low-Income Communities Bonus Credit Program under new IRC Section 48(e). 

Notice 2023-17 provides initial guidance on the program design, application process, and criteria that will be considered in determining who will receive an allocation of the annual capacity limitation during calendar year 2023. 

The notice states that further guidance outlining specific criteria of the application procedure and other information necessary to submit an application will be released at a later date. 

Low-Income Communities Bonus Program

The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, introduced a new credit structure whereby renewable energy tax incentives are subject to a base rate of 6% and a “bonus rate” of 30%. To qualify for the bonus rate, facilities must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices.

Additional bonus credits of 10% or 20% are available for certain small-scale projects that qualify for the Low-Income Communities Bonus Credit Program and receive an allocation from the IRS. The additional incentive credits that are generated would be transferable under §6418 for projects placed into service in 2023 and after. 

New Guidance 

The allocation of the Low-Income Communities Bonus Program administered by the Department of Energy comes with broad goals to increase adoption of access to renewable energy facilities in low-income and other communities with environmental justice concerns. 

For calendar year 2023, the total annual capacity limitation of 1.8 gigawatts to be allocated will be divided into four categories:

Applications will be accepted in a phased approach during a 60-day application window for calendar year 2023. It is anticipated that applications will first be accepted for Category 3 and 4 facilities in the third quarter of 2023. Category 1 and 2 facilities are anticipated to have a corresponding application window shortly thereafter. 

The guidance recognizes that a facility may meet multiple category criteria. In response, a Category 1 or 2 facility that is also considered a Category 3 or 4 facility will be considered a Category 3 or 4 facility in determining the incentive value. 

To further the overall program goals, additional criteria will be considered in determining how to allocate the annual capacity limitation. More specifically, the additional criteria to be described in forthcoming guidance may include a focus on facilities that:

• Are owned or developed by community-based organizations and mission-driven entities
• Have an impact on encouraging new market participants
• Provide substantial benefits to low-income communities and individuals marginalized from economic opportunities
• Have a higher degree of commercial readiness

If the selected applications exceed the annual capacity limitation reserved for each category, a lottery or other process may be used to allocate the capacity limitation. In the scenario where a category has excess capacity, the excess may be reallocated to other categories as needed. Any excess from calendar year 2023 will be carried forward to calendar year 2024. 

Applicants that do not receive an allocation and have not placed their project into service will be permitted to apply for future allocations after calendar year 2023. 

Placed in Service

To be eligible for the §48(e) low-income credit increase, facilities must be placed in service within four years after the date the applicant was notified of the allocation of the capacity limitation. Only one allocation category may be applied for. Facilities placed in service prior to receiving an allocation are not eligible for the Low-Income Community Bonus Program. 

 Key Takeaways

• Tax credit Incentive value of 10% or 20%
• Applicants must qualify under category criteria and receive an allocation by the IRS
• Available to qualified solar and wind facilities under five megawatts of maximum net output
• A lottery-like allocation process will be used in the event of excess applications
• Credit is not available to facilities placed in service prior to being awarded an allocation
• Any unused allocations from 2023 carry forward to be allocated in 2024