The U.S. Department of Treasury has released final rules for the Section 48 Energy Credit, commonly known as the Investment Tax Credit (ITC).
The ITC is a tax credit awarded to investments in qualifying clean energy installations. The credit is generally valued at 30% of the cost of the project.
Historically, the ITC has been expanded or extended in a piecemeal fashion, failing to provide long-term clarity and predictability for clean energy developers. Now, ITC and the related Production Tax Credit (PTC) are extended for projects beginning construction through 2033. The two credits are currently awarded to specific clean energy technologies and will switch to a broad technology-neutral credit in 2025.
“By ending short-term legislative extensions for the Investment Tax Credit, the Inflation Reduction Act has given clean energy project developers clarity and certainty to undertake major investments and produce new clean power to meet growing electricity demand,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo.
Treasury said the final rules “retain the core framework of the proposed rules and guidance” issued in November 2023. The final rules clarify general rules for ITC and its definitions of property eligible for the credit. It was informed by 350 written comments from stakeholders.
Some updates in the final guidance include:
- Definition of “energy project”: The final rules revise the definition of energy project to require ownership of the energy properties plus four or more factors from a list of seven factors and clarify that taxpayers can assess the factors at any point during construction or during the taxable year energy properties are placed in service.
- Co-located energy storage: The final rules clarify that a section 48 credit may be claimed for energy storage technology that is co-located with and shares power conditioning equipment with a qualified facility for which a section 45 credit is claimed.
- Hydrogen storage: The final rules clarify that a hydrogen energy storage property does not need to store hydrogen that is solely used as energy and not for other purposes.
The ITC sets aside a federal tax credit of 30% of installed system costs for clean energy technologies like solar, wind and energy storage. The credit is offered as a base 6%, and the 30% credit is only offered to projects that satisfy prevailing wage requirements.
A further 10% tax credit adder is offered to projects installed in eligible Energy Communities, which are defined by income status and the economic impact of legacy energy systems in their area.
Another 10% adder can be applied to projects that meet domestic content requirements. A large portion of the spending in the IRA is directed toward supporting the buildout of U.S.-based clean energy manufacturing, and the 10% domestic content adder is designed to stimulate demand for these products. The three credits can be combined to cover 50% of installed system costs.
An industry note from Phil Shen, managing director, Roth Capital Partners, said that there is expectation the Trump administration will require domestic content for the Investment Tax Credit.
“We expect activity to slow down as the industry waits and then adjusts to what could be more stringent ITC requirements,” said Roth.
Two other key facets of the ITC are direct pay and transferability. Direct pay is made available to tax-exempt entities investing in clean energy projects. Credits including the 30% Investment Tax Credit, plus any applicable adders, can be used by these entities as a payment against tax liability, and any remaining balance can be refunded as a direct payment to these entities. Tax years beginning January 1, 2023 are eligible for this transaction.
Find the final guidance for the Investment Tax Credit on the Federal Register here.
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