In detail

Statutory background

For property placed in service after 2022, Section 48 provides an investment tax credit for a percentage (generally 6%, increased to 30% if prevailing wage and apprenticeship requirements are met) of the basis of energy property a taxpayer places in service during a tax year. The 6% or 30% rate may be increased by bonuses related to domestic content, location in an energy community, and location in a low-income community.

Property qualifies as energy property if it is of a certain type; the taxpayer completes the property’s construction, reconstruction, or erection or acquires it as the original user; depreciation or amortization is allowable; and it complies with performance and quality standards in effect at the time of acquisition.

Types of property qualifying as energy property include (1) certain solar energy equipment, (2) geothermal energy equipment, (3) qualified fuel cells, (4) microturbine property, (5) combined heat and power system property, (6) qualified small wind energy property, (7) equipment using the ground or ground water as a thermal energy source, (8) waste energy recovery property, (9) energy storage technology, (10) qualified biogas property, and (11) microgrid controllers.

Energy property also includes amounts a taxpayer pays or incurs for qualified interconnection property that provides for the transmission or distribution of the electricity produced or stored by an energy property (other than a microgrid controller) with a maximum net output of five megawatts or less. Qualified interconnection property is tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system required at or beyond an energy project’s interconnection to the system.

For property that begins construction before 2025, a taxpayer may elect to treat qualified property that is part of a qualified investment credit facility as energy property. A taxpayer may elect to treat qualified property that is part of a specified clean hydrogen facility placed in service after 2022 as energy property. A taxpayer generally may not claim both the Section 48 credit and a production credit relating to the same facility.

Section 48 is scheduled to sunset for most energy property that begins construction after 2024, and for equipment that uses ground or ground water as a thermal energy source or thermal energy sink that begins construction after 2034.

Acquisition of energy property

The proposed and final regulations define “time of acquisition” for purposes of determining if property meets applicable performance and quality standards as the date a taxpayer enters into a binding contract to acquire the property or the earlier of the time the taxpayer begins construction or enters into a binding contract for construction. The proposed regulations defined “acquisition” of energy property as a transaction by which a taxpayer obtains rights and obligations relating to the property, including title (unless the taxpayer is a lessee) and physical possession or control. The final regulations rephrase this definition to provide that acquisition is a transaction by which a taxpayer acquires the rights and obligations to establish tax ownership of an energy property for federal income tax purposes. 

Qualified interconnection property

The proposed and final regulations provide that qualified interconnection property is not taken into account in determining whether an energy property satisfies the requirements for the domestic content or energy community credit bonuses. The final regulations add that qualified interconnection property also is not taken into account for purposes of the prevailing wage and apprenticeship bonus.

Observation: The preamble to the final regulations explains that the credit bonuses apply to energy projects and qualified interconnection property is not in itself an energy project. Thus, qualified interconnection property does not have to meet the requirements for the credit bonuses. However, the cost of qualified interconnection property in an energy project is included in the basis of the project (if installed in connection with energy property with a maximum net output of five megawatts or less) and thus taken into account in calculating the bonus credit amounts.

The proposed regulations provided that a taxpayer must reduce expenditures for qualified interconnection property by reimbursements when determining eligible costs. The final regulations modify this rule to provide that federal income tax principles determine if a taxpayer must reduce costs for amounts paid by another party.

The proposed and final regulations specify that the maximum net output of an energy property for purposes of applying the five-megawatt limitation is measured solely by the nameplate generating capacity of the unit of energy property when placed in service. The final regulations clarify that this measurement is in alternating current and add a rule that provides that, to determine the maximum net output in alternating current for energy property that generates electricity in direct current, a taxpayer may use either (1) the sum of the nameplate generating capacities within the unit of energy property in direct current or (2) the nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.

Dual-use property

The proposed and final regulations provide that property that uses energy derived from both a qualifying source such as an energy property and a nonqualifying source (dual-use property) qualifies as energy property if its use of energy from nonqualifying sources does not exceed 50% of its total energy input during an annual measuring period. Energy use may be measured by comparing energy input measured in BTUs to dual use property from all qualifying sources with energy input to the property from all non-qualifying sources. The final regulations add that, to convert the energy inputs for combined heat and power property into BTUs, the lower heating value of the fuel is used for combined heat and power property and the higher heating value of the hydrogen is used for fuel cells.

Prevailing wage and apprenticeship bonus

The final regulations adopt the proposed rules on the prevailing wage and apprenticeship bonus under Section 48 with modifications consistent with final regulations under other provisions on that credit bonus published on June 25, 2024. See the PwC Insight Regulations on wage and apprenticeship credit bonus finalized.

The final regulations expand on the proposed rules for applying the one-megawatt exception to the prevailing wage and apprenticeship requirements to energy property that does not generate electricity (such as thermal, hydrogen, and biogas property). The final regulations also add a rule for determining whether a direct current-generating energy project meets the one-megawatt exception that allows a taxpayer to determine net maximum output in alternating current by using either (1) the sum of the nameplate generating capacities within the unit of energy property in direct current or (2) the nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.

Observation: The preamble to the final regulations adheres to the position that the one-megawatt exception does not apply to energy property that does not generate electrical or thermal energy (such as electrochromic glass property, fiber-optic solar energy property, and microgrid controllers).

Recapture of transferred credit

The final regulations generally adopt the proposed regulations under Section 6418 on the notification requirements relating to, and impact of, recapture of transferred Section 48 credits. The final regulations add rules clarifying that a taxpayer that transferred only part of the total credit and retained a credit amount is responsible for only a proportional amount of recapture, and that the basis of the energy property is increased by recaptured amounts. For additional information on credit transfers, see the PwC Insight Regulations on transfers of energy tax credits are finalized.