The Internal Revenue Service (IRS) has released initial guidance on the low-income adder to the investment tax credit (ITC) under Section 48(e) (Low-Income Bonus). The guidance, released in IRS Notice 2023-17 (Notice), provides limited clarification regarding the Low-Income Bonus and leaves significant questions unanswered. Accordingly, most taxpayers will likely require further guidance on the application and approval process before transacting around the Low-Income Bonus.
The most noteworthy takeaways from the guidance include the following:
- How the 1.8-gigawatt (GW) capacity limitation will be allocated among four subcategories
- The IRS has not yet determined how it will allocate any one category in the event applicants exceed the allocated capacity limitation
- Confirmation that further substantive guidance is forthcoming
- Projects placed in service before approval by the IRS are not eligible for the Low-Income Bonus
- Confirmation that the IRS will administer applications through a phased timeline in Q3 2023 and thereafter.
DETAILS OF THE NOTICE
The Low-Income Bonus was added to Section 48 last year pursuant to the enactment of the Inflation Reduction Act of 2022 (IRA), and it makes certain solar and wind projects eligible for an additional 10% to 20% ITC (total of 40% to 50% ITC). To be eligible for the Low-Income Bonus, ITC projects must be located in a low-income community, on Indian land or part of a qualified low-income residential building project or economic benefit project. The statute provides that the total projects eligible for the Low-Income Bonus in any year will be limited to 1.8 GW of direct current (DC) capacity, with the excess carried over to the following year. Accepted applicants will have four years from acceptance to place the property in service. The statute further provides that, within 180 days of the date of the enactment of the IRA (i.e., by February 12, 2023), the IRS must establish a program to allocate the annual 1.8 GW limitation to qualified facilities.
As required by the timeline set forth in the statute, the IRS issued the Notice this week with additional guidance regarding allocation of the annual capacity limitation. The Notice expressly confirms that the IRS will issue further guidance outlining specific application procedures, additional criteria, applicable definitions and other information necessary to submit an application for the Low-Income Bonus for the 2023 calendar year and that the procedure may be modified for the 2024 calendar year.
Acknowledging the goals of the Low-Income Bonus (including to increase adoption of and access to renewable energy facilities in low-income and other communities with environmental justice concerns, to encourage new market participants and to provide social and economic benefits to individuals and communities that have been historically overburdened with pollution, adverse human health or environmental effects and marginalized from economic opportunities), the Notice first confirms the allocation of the 1.8 GW capacity as follows:
- 700 megawatts (MW) for projects located in a low-income community
- 200 MW for projects located on Indian land
- 200 MW for projects that are part of a qualified low-income residential building project
- 700 MW for projects that are part of a qualified low-income economic benefit project.
The Notice also clarifies that subsequent guidance will incorporate additional criteria in determining how to allocate the foregoing four categories among eligible applicants. Those criteria may include a focus on facilities that (1) are owned or developed by community-based organizations and mission-driven entities, (2) have an impact on encouraging new market participants, (3) provide substantial benefits to low-income communities and individuals marginalized from economic opportunities and (4) have a higher degree of commercial readiness.
If the total applications for one of the four categories exceed the capacity for such category, then the IRS may use a lottery system or other process. Conversely, if the capacity in any category is not fully used in 2023, the excess may be reallocated by the IRS to another category to maximize the 2023 allocations. The Notice mentions that the awarded amount will neither exceed the DC capacity of the facility nor be prorated, suggesting that applicants will either be approved in full or rejected.
Importantly, the Notice clarifies that projects placed in service prior to being awarded an allocation by the IRS are not eligible to receive an allocation. This noteworthy restriction is not expressly stated in the statute and will be of interest to taxpayers considering the Low-Income Bonus for 2023 projects.
The application will be made by the owner of the project and can only be made with respect to one allocation category. The Notice provides that applicants that do not receive an allocation will be permitted to apply for future applications after calendar year 2023, however, it’s not clear if that means projects placed in service in 2023 could potentially claim allocations in 2024. Taxpayers losing out on capacity allocations in 2023 will not be placed on a waitlist, so they would have to reapply next year.
The Notice confirms that applications will be accepted in a phased approach during 2023, in 60-day application windows. The IRS anticipates that applications will be accepted for qualified low-income residential buildings and economic benefit projects in Q3 2023, and applications for low-income communities and Indian land will be accepted thereafter. Application guidance is forthcoming. The Notice also confirms that the US Department of Energy will provide administration services for the Low-Income Bonus, including reviewing applications, providing recommendations regarding the selection of applicants and performing the lottery or other applications process in the event there are more applicants than capacity. The Notice suggests that ultimate selection process will reside with the IRS, and accepted taxpayers will receive IRS notification of their acceptance. Finally, the Notice clarifies that an award of Low-Income Bonus capacity is not a determination that a project will qualify for the Low-Income Bonus or the ITC generally.
The Notice provides interesting insights into the IRS’s thinking on the Low-Income Bonus but leaves many questions unanswered, likely leaving the bonus largely outside the realm of transactions for the immediate future. For instance, while it clarifies four high-level allocation categories, the Notice also indicates that further considerations are forthcoming. Importantly, there is no certainty regarding how applicants will be chosen in the event any category is overcapacity. Accordingly, taxpayers meeting the technical requirements of the statute have no certainty regarding acceptance until further guidance is issued (or they receive notification from the IRS). Also of significance, the Notice fails to define what it means to be part of a qualified low-income residential building project or economic benefit project. While the other categories of eligible projects are well-understood under precedent law, qualified low-income residential building project and economic benefit project are new terms requiring IRS input. These projects could make up half of the Low-Income Bonus allocations in 2023, so it is imperative that the IRS provide further clarification as to their meaning.
Ultimately, it is not surprising that the Notice left so many questions unanswered as the IRA created a tremendous workload for the IRS. The statute expressly required the IRS to issue guidance on the Low-Income Bonus this week, but presumably the IRS is grappling with myriad other equally important regulatory questions stemming from the new law. Some of those questions arguably have much farther economic and statutory reach than the Low-Income Bonus (e.g., the prevailing wage and apprentice rules). Accordingly, it’s unsurprising that the IRS wouldn’t have time to do a sufficiently deep dive into the Low-Income Bonus on this short timeline and would effectively punt its regulatory obligation into Q3 2023.
We will be following the Low-Income Bonus in the coming months, including the release of any subsequent guidance. We will provide updates as they are made available.