The IRS on May 31 provided much-anticipated final guidance for taxpayers applying for a 30% credit under Section 48C for a portion of the IRS’s $10 billion allocation for energy projects. The guidance package (Notice 2023-44 and Appendix C) provides both details on the application process itself and extensive new information on the criteria for evaluating submissions.
The IRS did not open the application process for concept papers on May 31 as expected, but pledged to begin accepting submissions by June 30 at the latest. Concept papers for the first round of allocations remain due no later than by July 31.
The Section 48C credit is potentially available to a broad range of activities that might not fit under specific definitions for other energy credits. Manufacturers of renewable energy property, fuel cells, grid modernization equipment, carbon capture equipment, energy conservation technology, hybrid and electric vehicles and infrastructure, and equipment to produce, refine or blend any low-carbon or renewable fuel may qualify. The credit is also for equipment to process critical minerals available and for any manufacturer that re-equips a facility to reduce carbon emissions by 20%.
Grant Thornton Insight
Competition for funding is likely to be intense and the timeline for the first round of allocations is tight. The IRS is requesting extensive documentation describing and supporting a project’s benefits yet is strictly limiting the length of concept papers and applications. It will be critical to offer relevant data and to organize applications in a clear and concise manner so they will be persuasive based on how the Department of Energy (DOE) and IRS will conduct reviews. There will be another round of allocations in 2024, but there are advantages for applying in the first round of funding. Taxpayers will receive feedback on their concept papers and taxpayers whose applications are not accepted can request a debrief in certain circumstances, which would allow them to strengthen future applications.
Section 48C program details
The Section 48C program was originally created and funded in 2009 with a $2.3 billion one-time allocation. It was resurrected with a new $10 billion allocation by the Inflation Reduction Act. At least $4 billion must be allocated to projects located in a census tract (or adjoining tract) that had either a coal mine close after 1999 or a coal-fired electric generating unit retired after 2009 and did not have a project that received any 2009 allocation.
The first round of allocations will consist of $4 billion in funding, with approximately $1.6 billion—or 40%—of that amount allocated to projects located in the census tracts described above. The IRS provided initial guidance on the first round of allocations in Notice 2023-18. That guidance is expanded in Notice 2023-44, which also updates Appendices A and B with details on the application process, requirements, and criteria for judging. Appendix C includes a full list of qualifying census tracts, and a mapping tool was also made available. A facility is treated as located in a qualified census tract if 50% or more of its square footage is within a qualified tract.
The IRS is expected to conduct a second round of allocations in 2024. A third round may only be available to the extent projects approved in the first two rounds are unable to use their allocation.
Grant Thornton Insight
The last time this program was offered, the IRS said it received more than $7.5 billion in qualified applications for its $2.3 billion allocation and could ultimately fund less than one-third of otherwise eligible projects. Although the current $10 billion allocation is much larger, the scope of the credit and the cost of projects have both increased. While there is a cap on the overall allocation, there is no cap on the amount of credits available for an individual project, which is based on cost.
Application timeline and process
The application process will involve two steps, a concept paper and a full application. Taxpayers must register through a “DOE eXCHANGE portal” to obtain application material and to submit their concept papers and applications. The portal will begin accepting concept papers for the first round of funding no later than June 30, 2023, with a July 31 deadline.
The concept paper must be submitted if a taxpayer intends to apply. The DOE will review the papers and provide taxpayers a letter encouraging or discouraging them to apply. Taxpayers who receive a letter of discouragement may still submit a full application, but the letter represents the DOE’s feedback that the project is unlikely to receive a recommendation based on the information provided.
Grant Thornton Insight
The concept paper was designed to save applicants the time and expense of preparing a full application for a project that is unlikely to be awarded. It may not require quite as much effort as a full application, but it is a critical part of the process and will still involve significant work. In some ways, presenting a compelling case in such a brief format could present its own challenges.
The IRS intends to transmit letters of encouragement or discouragement in the fall of 2023. The letters will provide feedback to all applicants on areas needing improvement. The application process will open for an applicant seven days after the date of the letter, and taxpayers will have 45 days from that date to submit the full application.
Grant Thornton Insight
The actual application deadline is not yet published and may depend on when concept paper letter responses are issued. The notice itself provides the 45-day timeline described above, but it is unclear whether all letters will be issued at the same time. The appendix to the notice separately states that the date the DOE will begin accepting applications and the deadline for submitting will be conveyed to applicants through the eXCHANGE portal. Earlier guidance provided that applications received before the deadline will be deemed submitted on the deadline. This is presumably meant to avoid a race to submit by precluding any advantage based on the order applications are received.
Applicants will be awarded allocations based on a DOE ranking of all the applications. The IRS will assign allocations starting at the top of the list and move down until all the funds available for allocation in that round are exhausted. The IRS said it will notify all applicants of final decision by March 31, 2024.
Taxpayers whose projects are not funded can request a debriefing from the DOE, but only if they did not receive a letter of discouragement based on their concept paper. DOE will provide an impression of the strengths and weaknesses of these rejected applications, which may help taxpayers who will apply again in future allocation rounds.
Taxpayers who are awarded an allocation will have two years from notification to certify their project. A project is eligible for certification only if the taxpayer has received all permits from federal, state, tribal, and local governmental bodies for construction, including any necessary environmental authorization or reviews. Taxpayers will be required to submit specific information requesting certification. If approved, the IRS will send a certification letter, and taxpayers will have two more years to place the project in service. The project will be considered placed in service in the taxable year that the period of depreciation begins “under the taxpayer’s depreciation practice,” or if earlier, the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically designed function.
Taxpayers who do not meet these deadlines can forfeit their allocation. Taxpayers with a significant change in plans or change in ownership must notify the IRS, and the IRS can void or recapture the credit or allocation.
Qualifying projects
There are three separate categories of qualifying projects, and there are multiple types of projects under each one. The credit is generally available for:
Grant Thornton Insight
Processing raw ore, brines, mine tailings, end-of-life products, waste streams and other source material into critical minerals will generally qualify. Projects that process critical minerals into derivative products, such as metals manufacturing, generally will not.
- Projects that re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20% through the installation of the following:
- Low-or-zero-carbon process heat systems
- Carbon capture, transport, utilization and storage systems
- Energy efficiency and reduction in waste from industrial processes
- Other industrial technology designed to reduce greenhouse gas emissions, as determined by Treasury
Grant Thornton Insight
Appendix A to Notice 2023-44 makes clear that this category is targeting energy-intensive manufacturing sectors, such as cement, iron, steel, aluminum and chemicals. Applicants must estimate total emissions for a facility using direct and indirect emissions under the EPA’s reporting protocol and simplified emissions calculator. Taxpayers can apply based on a 20% reduction to a sub-unit of a facility, but applicants will be evaluated based on facility-wide emissions.
- Projects to re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of the following:
- Property designed to produce energy from the sun, water, wind, geothermal deposits or other renewable resources
- Fuel cells, microturbines or energy storage systems and components
- Grid modernization equipment or components
- Property designed to capture, remove, use or sequester carbon dioxide emissions
- Equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable or low-carbon and low-emission
- Fuel cell or electric vehicles, and their components, materials and charging infrastructure
- Hybrid vehicles weighing less than 14,000 pounds and their components and materials
- Property designed to produce energy conservation technologies
- Other property designed to reduce greenhouse gas emissions, as determined by Treasury
Grant Thornton Insight
Appendix A provides extensive examples of the types of property that will qualify under each of these categories. Although the examples are not meant to be exclusive, it is a fairly exhaustive list that should provide enough information to determine if a project reasonably fits in a qualifying category. More importantly, the appendix also provides the following list of areas that the DOE will prioritize in the first round of funding (priority components are also listed within these priority areas):
- Clean hydrogen
- Electric grid
- Electric vehicles
- Nuclear energy
- Solar energy
- Wind energy
- Sustainable aviation fuels
Eligible property must be depreciable tangible property used as an integral part of the qualifying advanced energy project. It does not include any buildings or structural components. No credit is allowed under Section 48C for any investment for which a credit is claimed under Sections 48 (energy credit), 48A (advanced coal), 48B (gasification), 48E (clean electricity), 45Q (carbon oxide sequestration) or 45V (clean hydrogen production). Taxpayers will also not be allowed to claim a credit under Section 45X for components manufactured at a facility for which the Section 48C credit was claimed.
Grant Thornton Insight
The various credits in the IRA are complex and overlapping. Section 48C targets different activities than many of the other credits because it generally rewards investing in equipment to manufacture energy property, rather than rewarding the placement of energy property itself in service. In some cases, Section 48C won’t preclude the use of other credits farther down the supply chain. For instance, taxpayers could potentially receive a Section 48C allocation for investing in equipment to manufacture property such as solar panels, electric vehicles, carbon capture equipment and charging stations, while taxpayers placing the manufactured property in service could themselves claim a separate credit. In other cases, taxpayers will have to choose between credits. Manufacturers of battery, wind and solar components will have to choose between a Section 48C credit based on investing in manufacturing capacity or a Section 45X credit based on actual components manufactured.
Evaluating concept papers and applications
The statute under Section 48C requires qualifying projects to have a reasonable expectation of commercial viability, and requires Treasury and the DOE to take into consideration the following criteria:
- Domestic job creation
- Net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases
- Potential for technological innovation and commercial deployment
- Levelized cost of energy or reduction in consumption
- Project timeline from certification to completion
Treasury and DOE have refined these factors into broad categories and will evaluate all applications based on four technical review criteria:
- Commercial viability
- Greenhouse gas emissions impact
- Strengthening U.S. supply chains and domestic manufacturing for a net-zero economy
- Workforce and community engagement
Grant Thornton Insight
The project timeline will be an important aspect to the commercial viability category, as described below. It is also clear the IRS wants to reward projects that need funding and are not necessarily nearing completion. The guidance specifically provides that no allocation will be available for any property placed in service prior to the award of an allocation.
The IRS guidance provides detailed requirements for including and presenting information addressing these criteria in the concept paper and application. The required information is robust even for the concept paper. The actual application requires similar but more in-depth data and information. The different types of qualifying projects also have slightly different but similar requirements. Both the concept paper and application at a high level generally require the following types of information:
- Project overview: This section must describe the company and its relevant experience, provide details on the size and location of the facility and include summaries of equipment processes and how they will change under the project
- Commercial viability: The applicant must lay out a project plan, business plan, and management plan. The project plan must at a minimum address the project timeline, siting and permitting, and risk management. The business plan must describe in detail the financing sources, market information, and estimated costs compared to competitors. The management plan must include key team members, relevant industry experience, and potential risks from debt, legal issues, or liabilities.
- Greenhouse gas emissions: Applicants must quantify and describe in detail the impact to emissions in comparison to competitors and incumbents and include product specifications to verify claims. The data sheet must include a lifecycle analysis that addresses direct and indirect emissions and mitigation efforts and provide information on the levelized cost of abatement efforts.
- Strengthening supply chains: Applicants must lay out and justify current capacity and the impact of the project, how the products will affect domestic supply chain resilience, with detailed information on key suppliers, and product use.
- Workforce and community engagement: This section must estimate and characterize the number of jobs created, including information on wages and benefits. It also must address plans to attract, train, and retain a skilled and well-qualified workforce with information on partnerships with apprenticeship readiness programs and community-based workforce training and support. This section must include a description of planned efforts to engage with community and labor stakeholders. Applicants must also address impact to local air, water and land quality.
The concept paper must present all this information in a maximum of four pages for a general report, a one-page workforce and community engagement plan, and a spreadsheet for data. The application itself is in a similar format, but allows for 30 pages for the application, five pages for the workforce and community engagement plan, and adds a business entity certification and appendix files.
Grant Thornton Insight
The page limits and formatting requirements will be strictly enforced. The guidance specifically lays out requirements for page layout and size, font type and size, and even footnote formatting. The full application requires more detail, but the concept paper itself still requests a large amount of information across a wide range of issues with only six total pages and a spreadsheet to work with. Applicants should carefully consider how to structure their paper in as clear and concise a manner as possible while still addressing the issues the guidance emphasizes will be most important for evaluators.
Prevailing wage and apprenticeship rules
The taxpayer must meet prevailing wage and apprenticeship requirements to qualify for the full 30% credit rate. These rules generally impose a minimum wage for laborers and mechanics on a project and require a minimum percentage of hours to be performed by qualified apprentices, both by the taxpayer and any contractors and subcontractors. Taxpayers must satisfy the apprenticeship requirements during construction while the prevailing wage requirements must be met while re-equipping, expanding, or establishing an approved facility. Taxpayers failing to fulfill the requirements will generally only be eligible for one-fifth of the full credit amount, although it is possible to retain the 30% rate by paying a penalty described below.
The full rate is available after a prevailing wage failure by paying the difference in wages (multiplied by three for intentional disregard), plus the underpayment rate under Section 6621 (using 6% instead of 3%), and an additional $5,000 ($10,000 for intentional disregard) for each worker who was underpaid. Taxpayers can regain compliance with the apprenticeship requirements by paying $50 per labor hour ($500 for intentional disregard) for the number of hours the taxpayer fell below the required threshold.
The Section 48C guidance provides little new information on how to comply with the wage and apprenticeship rules. It instead relies on the guidance previously laid out in Notice 2022-61.
Grant Thornton Insight
The IRS will require taxpayers claiming the 30% Section 48C credit to both confirm that they intend to satisfy the prevailing wage and apprenticeship requirements, and then later confirm actual compliance. The guidance, however, does not appear to require any specific documentation for this certification besides the general rules outlined in Notice 2022-61. Notice 2022-61 itself offered very little guidance or recordkeeping or documentation. It said simply that taxpayers must maintain and preserve sufficient records in accordance with the rules under Section 6001, which provide the general requirements for any item on a return. Except for a single example, there is no explicit guidance on the types of records or payroll information that would meet the documentation requirements for this specific credit. For more information, see our prior story, “IRS starts clock on wage and apprenticeship rules.”
Next steps
The Section 48C program will provide a major source of funding to a broader range of activities than many other credits. The limited allocation, however, will make the application process competitive. The interplay with other credit opportunities can also be complex. Taxpayers should model the potential benefits and costs of various credit options and projects. For taxpayers who plan to apply, it will be crucial to align projects with how the DOE says it will judge applicants against the four-part criteria discussed above. Preparation could involve internal information gathering and identifying outside data on energy supply chains and energy markets.
For more information, contact:
Michael Eickhoff
Managing Principal, Credits & Incentives Services
Michael Eickhoff has 10 years of experience assisting clients in identifying, negotiating and implementing business incentives. He has held senior positions in government, industry, public accounting and financial advisory firms.
Chicago, Illinois
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Energy
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