In brief
The IRS and Treasury on June 3 published proposed regulations on the Section 45Y clean electricity production tax credit and the Section 48E clean electricity investment tax credit. The regulations generally are proposed to apply to qualified facilities and energy storage technology placed in service after 2024 during a tax year ending on or after final regulations are published in the Federal Register.
Comments on the proposed regulations are due by August 2, 2024. Public hearings are scheduled for August 12 (in person) and August 13 (by telephone).
The PwC Insight Proposed regulations on clean electricity tax credits provide rules on greenhouse gas emissions discussed the proposed rules addressing greenhouse gas (GHG) emissions, which apply to both credits. This insight discusses the proposed general rules relating to Section 45Y. A later insight will discuss the proposed general rules under Section 48E.
The proposed regulations are the first IRS and Treasury guidance implementing Section 45Y, which replaces Section 45 as the primary tax incentive for clean electricity production for facilities placed in service after 2024. Section 45 generally will sunset for facilities that begin construction after 2024. Taxpayers may claim a credit under either Section 45 or Section 45Y for facilities that begin construction before 2025 and are placed in service after 2024.
The preamble to the proposed regulations requests specific comments on many issues to be addressed in future guidance, including what datasets might appropriately be considered in determining the credit phaseout applicable year. Taxpayers might consider submitting comments on these or other issues. Taxpayers with facilities qualifying for either the Section 45 or Section 45Y credit should consider conducting modeling to evaluate which credit produces the more beneficial result.
In detail
Statutory background
Section 45Y provides a tax credit of an “applicable amount” times the kilowatt/hours (KW/hr) of clean electricity a taxpayer produces at a qualified facility in the United States and sells to an unrelated person or uses, consumes, or stores during the tax year. An unrelated person is an entity that is not treated as a single employer with the taxpayer under Section 52(b). Electricity that a taxpayer uses, consumes, or stores qualifies for the credit only if the qualified facility has a metering device owned and operated by an unrelated person.
The applicable amount is 0.3 cents generally or 1.5 cents if a taxpayer meets prevailing wage and apprenticeship requirements or exceptions in constructing, repairing, or altering the qualified facility. These amounts are adjusted for inflation.
The credit is phased out for facilities that begin construction after the later of 2032 or the calendar year that Treasury determines that the annual greenhouse gas (GHG) emissions from US electricity production are 25% or less of the emissions from US electricity production in 2022 (the applicable year). The credit is reduced to 75% of the otherwise applicable credit if production begins in the second calendar year after the applicable year, 50% if construction begins in the third calendar year after the applicable year, and zero thereafter.
A qualified facility must (1) be owned by the taxpayer, (2) generate electricity, (3) be placed in service after 2024, and (4) have a GHG emissions rate not greater than zero. New units and expansions of capacity after 2024 at a facility placed in service before 2025 may qualify to the extent of the resulting increased production. Thermal energy produced by a combined heat and power system (defined in Section 48(c)(3)) is treated as electricity, converting British thermal units into the equivalent KW/hrs.
The credit applies for 10 years after a qualified facility is placed in service and is not allowable if a credit was allowed for any tax year under Section 45, 45J, 45Q, 45U, 48, 48A, or 48E for investment in or production at the facility.
Proposed regulations
Sold, used, consumed, or stored
The proposed regulations provide that a sale of electricity to an individual consumer is treated as a sale to an unrelated person. Standards are provided for the metering device that must be owned and operated by an unrelated person if the taxpayer uses, consumes, or stores the electricity. The unrelated person may share network equipment owned by the taxpayer and co-locate network equipment at the taxpayer’s facility.
Qualified facilities
The proposed regulations provide that a qualified facility includes (1) a unit of qualified facility and (2) qualified property owned by the taxpayer that is an integral part of the qualified facility. A component of property may be part of a qualified facility although not co-located.
A unit of qualified facility includes all functionally interdependent components of property owned by the taxpayer that are operated together and can operate apart from other property to produce electricity. A component is functionally interdependent if placing the component in service is dependent on placing in service other components to produce electricity.
A component of property owned by a taxpayer is an integral part of a qualified facility if it is used directly in, and is essential to the completeness of, the intended function of the qualified facility. Integral parts of a qualified facility are parts of the qualified facility.
The proposed regulations identify power conditioning equipment that modify the characteristics of electricity and related parts (such as transformers, inverters, converters, switches, circuit breakers, and arrestors) as integral parts of a qualified facility. Transfer equipment, including components that allow for the aggregation of electricity generated by a qualified facility and components that alter voltage to permit electricity to be transferred to a transmission or distribution line (such as wires, cables, and combiner boxes), and related parts (such as current transformers, circuit breakers, and fuses), are integral parts.
Onsite roads used for equipment to operate and maintain a qualified facility are integral parts, however, roads used primarily for access to the site or for employee or visitor vehicles and fences do not qualify. Generally, buildings are not integral parts of a qualified facility. However, structures that are essentially items of machinery or equipment, or that house components that are integral parts and clearly can be expected to be replaced when the housed property is replaced, are not treated as buildings.
Property shared by more than one qualified facility (whether owned by the same or different taxpayers) may be an integral part of each facility. A taxpayer or taxpayers may claim a Section 45Y credit for production at one qualified facility and a Section 48E credit for investment in another qualified facility that share a component of property that is an integral part of each facility.
Observation: The Section 45Y rules for qualified facilities are essentially the same as the rules defining “energy property” for purposes of Section 48. The “unit of qualified facility” rule is adopted from the “unit of energy property” rule in the Section 48 proposed regulations. See the PwC Insight Proposed regulations define energy property for Section 48 investment tax credit.
New units or capacity
The proposed regulations treat a new unit or an expansion of production capacity placed in service after 2024 at a qualified facility placed in service before 2025 as a separate qualified facility. A new unit or capacity expansion requires that components are added or replaced. A taxpayer must use a modified or amended facility operating license or the International Standard Organization conditions to measure the facility’s maximum electrical generating output and determine its nameplate capacity.
The proposed regulations provide that, for purposes of applying the exception to the prevailing wage and apprenticeship requirements for a facility with a maximum net output of less than one megawatt, the capacity of a new unit or capacity addition is the sum of the nameplate capacity of the added unit or capacity and the nameplate capacity of the facility to which the unit or capacity was added.
A facility that was decommissioned and restarts has increased capacity if (1) the existing facility ceased operations, (2) the existing facility was shut down and without a valid operating license for at least one calendar year, and (3) the increased capacity of the restarted facility has a new, reinstated, or renewed operating license.
A taxpayer computes the increased amount of electricity produced and eligible for the Section 45Y credit after a new unit or capacity addition is placed in service by multiplying the amount of electricity produced during the tax year by the fraction of the additional nameplate capacity resulting from the new unit or capacity over the total nameplate capacity of the facility including the new unit or capacity.
Retrofitted facilities
The proposed regulations adopt the “80/20” rule, which treats a facility that contains some used components in a unit of qualified facility as placed in service when the new components are placed in service. The rule applies if the fair market value of the used components is not more than 20% of the total value of the unit of qualified facility. The cost of the new components includes all costs properly included in their depreciable basis.
Applicable year for credit phaseout
In identifying the applicable year for purposes of the credit phaseout, the proposed regulations require that both the Energy Information Administration’s Electric Power Annual and the EPA’s Inventory of US Greenhouse Gas Emissions and Sinks (or a substitute data source if one of these becomes unavailable) must be used to assess the level of GHG emissions from the production of electricity in the United States for a calendar year. Both data sources must support a conclusion that the GHG emissions from the production of electricity in the United States in a calendar year are 25% or less of the emissions for 2022.
Multiple owners
Section 45Y requires the credit amount for a facility with multiple owners to be allocated to the owners in proportion to their gross sales ownership. The proposed regulations provide that, if a qualified facility owned through an unincorporated organization elects out of subchapter K under Section 761(a), each member’s undivided ownership share in the qualified facility is treated as a separate qualified facility owned by the member.
Exception to the prevailing wage and apprenticeship requirements
The preamble to the proposed regulations states that the IRS and Treasury intend to provide, in regulations finalizing August 2023 proposed regulations on the prevailing wage and apprenticeship requirements, that whether a facility meets the one-megawatt exception for purposes of Section 45Y is based on a qualified facility’s nameplate capacity, measured using the International Standard Organization conditions, if applicable. The final regulations would define “nameplate capacity” for this purpose as the maximum electrical generating output in megawatts that a qualified facility can produce on a steady state basis and during continuous operation under standard conditions.
The IRS and Treasury on June 18 issued final regulations on the prevailing wage and apprenticeship requirements that do not include these rules. The preamble to those regulations advises that comments regarding the one-megawatt exception for purposes of Section 45Y will be addressed in the final Section 45Y regulations.
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