Proposed guidance for clean electricity production and investment tax credits just released

The GHG emissions rate measures the amount of greenhouse gases emitted by a facility during electricity production. The new regulations mandate that the GHG emissions rate must be determined using a lifecycle analysis (LCA), which accounts for all emissions from the production process. This includes direct emissions from electricity production, but excludes emissions from backup generators, routine maintenance and other specific activities. For C&G facilities, the emissions rate includes all emissions from the transformation of the input energy source into electricity, ensuring a comprehensive and accurate assessment of their environmental impact.

Provisional emission rates are temporary GHG emissions rates for facilities not listed in the annual emissions rate table (the Annual Table). Facility owners can submit petitions for these rates that include detailed emissions data and supporting documentation with their federal income tax returns for the first year they claim the section 45Y credit. The petition must include an emissions value obtained from the Department of Energy (DOE) or determined using a designated LCA model. Upon IRS’ acceptance of the return with the PER petition, the emissions values are deemed to be accepted.

Qualified facilities are those that meet specific criteria to be eligible for the section 45Y credit. The new regulations expand these definitions, detailing requirements based on energy source and technology. A qualified facility for the section 45Y credit is one owned by the taxpayer, used for electricity generation, placed in service after Dec. 31, 2024, and has a GHG emissions rate of zero or less. Additionally, a qualified facility excludes any facility that has received a credit under Sections 45, 45J, 45Q, 45U, 48, 48A, or 48E according to section 38 of the Code for the current or any prior taxable year.

CHP property refers to systems using the same energy source to simultaneously or sequentially generate electrical power, mechanical shaft power, or both, along with steam or other forms of useful thermal energy, including heating and cooling applications. However, CHP property does not include equipment for transporting the energy source to the generating facility or distributing the produced energy. To qualify for the section 45Y credit, a CHP property must produce at least 20% of its total useful energy as thermal energy and at least 20% as electrical or mechanical power, with an energy efficiency percentage exceeding 60%, measured on a British thermal unit (Btu) basis.

The energy efficiency percentage is calculated as the ratio of total useful electrical, thermal, and mechanical power produced by the system to the lower heating value of the fuel sources. Additionally, for calculating electricity produced, useful thermal energy from CHP property is converted to kilowatt hour (kWh) by dividing the total useful thermal energy by the facility’s heat rate, which is the energy used to generate 1 kWh of electricity, expressed in Btus per kWh.

Section 45Y tax credits are provided based on the kWh of electricity produced by the taxpayer at a qualified facility, and either sold to an unrelated person or sold, consumed, or stored by the taxpayer in a qualified facility equipped with a metering device. A metering device measures and registers the continuous amount of electricity over time for energy revenue metering.

Related and unrelated persons refer to the relationships between entities or individuals involved in the clean electricity project, which can affect eligibility for tax credits. A related person is defined as someone who would be considered a single employer with another person. This means they are treated as related if they have common ownership or control as defined by the tax regulations. An unrelated person, on the other hand, is someone who does not meet these criteria and is not considered related under section 45Y. Additionally, sales of electricity to individual consumers are treated as sales to an unrelated party for the purpose of claiming the section 45Y credit, ensuring that such transactions qualify for the credit.

The 80/20 rule for retrofitting an existing facility under section 45Y allows a facility to qualify as originally placed in service even if it contains some used components, provided the fair market value of the used components does not exceed 20% of the total value of the facility. The total value is calculated by adding the cost of new components to the fair market value of the used components. If a facility meets this requirement, it is considered originally placed in service on the date the new components are placed in service.

Facilities that meet prevailing wage and apprenticeship requirements can receive higher credit amounts. The new regulations specify that these facilities can qualify for an increased credit rate of 1.5 cents per kilowatt-hour, compared to the base rate of 0.3 cents per kilowatt-hour, promoting fair wages and training opportunities alongside environmental benefits.

A qualified facility for the section 48E credit is one used for electricity generation, placed in service by the taxpayer after Dec. 31, 2024, and with a GHG emissions rate equaling zero. A qualified facility includes components of property owned by the taxpayer that are integral parts of the facility. Integral parts include power conditioning and transfer equipment, roads, fences, buildings (under specific conditions), and shared integral property. The facility does not include electrical transmission equipment or equipment beyond the electrical transmission stage and generally excludes additions or modifications to an existing facility, unless specified under expansion or retrofit rules.

EST includes a unit of EST and property owned by the taxpayer that is an integral part of the EST. Types of EST include electrical energy storage property, thermal energy storage property, and hydrogen energy storage property. Each type of EST must meet specific requirements to qualify, including functional interdependence of components and proper integration into the overall energy storage system. EST does not include equipment that is merely an addition or modification to an existing EST, ensuring that only comprehensive, standalone systems qualify for the credit. By defining these types and criteria, the regulations aim to promote the development and deployment of advanced energy storage solutions critical for enhancing the reliability and efficiency of clean energy systems.

To qualify for the section 48E credit, a CHP property must meet similar criteria as section 45Y. These criteria include producing at least 20% of its total useful energy as thermal energy and at least 20% as electrical or mechanical power, with an energy efficiency percentage exceeding 60%, measured on a Btu basis. The energy efficiency percentage calculation process is the same as section 45Y.

For section 48E projects, the qualification process is typically more straightforward for new installations, such as when a wastewater treatment plant adds a CHP system that meets zero GHG emissions. In these cases, the focus is on entirely new systems being installed without needing to consider the existing assets at the facility. This is important because section 48E includes an "80/20 rule" which applies to projects involving existing assets. The 80/20 rule means that at least 80% of the facility must be new to qualify for the credit, and no more than 20% of the facility can consist of existing assets. Therefore, new installation projects can more easily meet the section 48E credit requirements, especially if they also comply with domestic content requirements (which mandate that a certain percentage of the materials used in the project are sourced from within the U.S.) and qualify for direct pay options (which allow the taxpayer to receive a direct payment from the Treasury instead of a tax credit).

In contrast, a comprehensive "trash facility" designed to produce biogas and generate electricity is a more complex project that involves integrating a variety of assets and infrastructure, both new and existing. Because such a project would need to account for existing assets and ensure that at least 80% of the facility is new under the 80/20 rule, it faces greater challenges in meeting the section 48E criteria.

When multiple taxpayers hold direct ownership through their qualified investments in a single qualified facility or EST, without the arrangement being treated as a partnership for Federal income tax purposes, each taxpayer determines their eligible investment based on their fractional ownership interest. A taxpayer must directly own at least a fractional interest in the entire unit of a qualified facility or EST to claim the section 48E credit. The credit cannot be claimed for ownership of separate components unless those components constitute a complete unit. However, the use of property owned by one taxpayer that is an integral part of a qualified facility or EST owned by another taxpayer does not prevent the second taxpayer from claiming the credit for their investment. This allows for shared integral property to be utilized effectively while maintaining eligibility for the credit.

The section 48E credit is subject to general recapture rules under and additional recapture if a qualified facility’s GHG emissions rate exceeds 10 grams of CO2e per kWh within five years of being placed in service. A recapture event occurs if the GHG emissions rate exceeds this threshold, but changes to the Annual Table after the facility is placed in service do not trigger recapture. Each taxable year within the five-year period must be assessed to determine compliance, and taxpayers must report the GHG emissions rate annually to the IRS. If a recapture event occurs, the tax for the year increases by the applicable recapture percentage of the claimed credit, starting at 100% in the first year and decreasing by 20% annually.

Similar to section 45Y, the methodology for calculating the GHG emissions rate involves using a LCA to measure the total emissions from the production process. This approach ensures that all emissions, from the initial production of energy to the final use, are accounted for.

A qualified facility eligible for the section 48E credit cannot have received credits under sections 45, 45J, 45Q, 45U, 45Y, 48, or 48A for the current or any prior taxable year. A taxpayer who owns a qualified facility that qualifies for both a section 48E credit and another Federal income tax credit can only claim the section 48E credit if the other tax credit has not been allowed for that facility. However, this rule does not prevent a taxpayer from claiming a section 48E credit for a facility that is co-located with another facility that has received credits under those sections.

Section 48E does not operate on an election basis, meaning that taxpayers cannot simply choose to apply these credits at their discretion. Instead, projects must meet specific criteria and requirements to qualify for the credit. Once these criteria are met, the provisions regarding direct pay and credit transfer come into play, offering flexibility to taxpayers.

Under the direct pay provision (section 6417 of the Internal Revenue Code), eligible taxpayers can receive a direct payment from the Treasury instead of a tax credit. This is particularly beneficial for entities such as tax-exempt organizations, governmental entities and rural electric cooperatives that typically do not have sufficient tax liability to benefit from the credit. By opting for direct pay, these entities can effectively monetize the credit, receiving a cash payment that can be used to fund their projects.

Section 6418 of the Internal Revenue Code allows for the transfer of tax credits to unrelated entities. This provision enables taxpayers who qualify for the section 48E credit but cannot fully utilize it due to limited tax liability to sell the credit to another taxpayer. The purchasing entity can then utilize the credit to reduce its own tax liability. This transferability is facilitated through a contractual agreement, and the credit must be transferred in whole; partial transfers are not allowed. The transfer must be completed in a single taxable year, and the selling taxpayer cannot repurchase the credit once transferred.