US state income tax digest April 2025
The US state income tax digest highlights significant income and business tax legislation, regulatory adoptions, judicial decisions, and administrative guidance.
Final regulations general rules on clean electricity tax credits
February 2025
In brief
What happened?
The IRS and Treasury on January 15 published final regulations on the Section 45Y clean electricity production tax credit and the Section 48E clean electricity investment tax credit. The regulations generally apply to qualified facilities and energy storage technology placed in service after 2024 in tax years ending on or after January 15, 2025.
This Insight discusses the general rules for the credits. A later Insight will address the rules for determining greenhouse gas (GHG) emissions, which are the same for both credits.
Why is it relevant?
The final regulations implement Sections 45Y and 48E, which replace Sections 45 and 48, respectively, as the primary tax incentives for clean electricity production or investment for facilities placed in service after 2024.
Action to consider
Taxpayers should consider the application of the final regulations to their new and expanded qualified facilities that are expected to be placed in service after 2024.
In detail
Statutory background
Section 45Y
Section 45Y provides a tax credit of an applicable amount times the kilowatt/hours 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. 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, adjusted for inflation. 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.
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 the British thermal units (BTU) into the equivalent kilowatt/hours.
Section 48E
The Section 48E credit generally is 6% of qualified investment in a qualified facility or energy storage technology (defined in Section 48(c)(6)), increased to 30% if a taxpayer meets prevailing wage and apprenticeship requirements or exceptions.
Qualified investment is the sum of (1) the basis of qualified property placed in service during the tax year that is part of a qualified facility, (2) the basis of energy storage technology placed in service during the tax year, and (3) expenditures paid or incurred for qualified interconnection property placed in service during the tax year.
A qualified facility (1) is used to generate electricity, (2) is subject to depreciation or amortization, (3) has a GHG emissions rate of not more than zero, (4) is placed in service after 2024 (or a new unit is placed in service or capacity expanded after 2024 to the extent of increased production), and (5) has not been allowed a credit for any tax year under Section 45, 45J, 45Q, 45U, 45Y, 45Z, 48, or 48A.
Qualified property must be (1) depreciable or amortizable, (2) tangible personal property or other tangible property (except buildings and structural components) used as an integral part of a qualified facility, and (3) constructed, reconstructed, or erected by the taxpayer, or acquired by a taxpayer that has original use.
Qualified facilities under Sections 45Y and 48E
In general
The proposed and final regulations define a qualified facility to include (1) a unit of qualified facility and (2) components of property owned by the taxpayer that are an integral part of a qualified facility. 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 is an integral part of a qualified facility if it is used directly in, and is essential to the completeness of, the facility’s intended function. Integral parts of a qualified facility are part of the qualified facility. The final regulations clarify that a qualified facility must generate electricity over and above the electricity the facility consumes.
New units or capacity (incremental production)
The proposed and final regulations treat a new unit or an expansion of capacity placed in service after 2024 at a facility placed in service before 2025, which qualifies for the credits to the extent of increased production (the incremental production rule), as a separate qualified facility. The proposed regulations required a taxpayer to use a modified or amended facility operating license or the International Standard Organization (ISO) conditions to measure the facility’s maximum electrical generating output and determine its nameplate capacity. The final regulations provide that the incremental production rule applies only if an addition of capacity or new unit would not otherwise qualify as a qualified facility placed in service after 2024, and require taxpayers to use a modified or amended facility license as the measurement standard if possible. Otherwise, a taxpayer may use an industry standard such as the ISO conditions or a standard provided in the Internal Revenue Bulletin.
Section 48E qualified investment in a new unit or addition of capacity is the total qualified investment during the tax year associated with the components of property that result in the new unit or addition of capacity. For purposes of Section 45Y, increased electricity production is determined by multiplying the amount of electricity that the facility produces during that tax year by a fraction, the numerator being the added capacity that results from the new unit or addition of capacity and the denominator the total capacity of the facility with the new unit or addition of capacity added.
Restarted facilities
The proposed regulations provided that a facility that is 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. The final regulations provide that increased capacity is determined from a base of zero and modify these rules to specify that the facility must be not authorized to operate by its federal regulatory authority during the one-year period, must be eligible to restart based on an operating license issued by its regulator, and must not have ceased operations to qualify for the restarted facilities rule.
Incremental cost
The Section 48E final regulations adopt a rule from recently published final regulations under Section 48 that provides that, if a component of qualified property or energy storage technology is used for a purpose other than the property’s intended function, only the excess of the total cost of a component over the amount that would have been expended for the component if that component were used for a non-qualifying purpose (the incremental cost) is included in the basis of the qualified facility.
Retrofitted facilities
The proposed and final regulations adopt the “80/20” rule, which treats a qualified facility that contains some used components in a unit of qualified facility as originally placed in service when the new components are placed in service. The final regulations clarify that a retrofitted facility is not required to have an increased capacity for the rule to apply.
Other Section 48E property
Energy storage technology
Qualified investment under Section 48E includes the basis of energy storage technology. The proposed and final regulations identify the types of energy storage technology as electrical, thermal, and hydrogen energy storage property.
The final regulations expand the description of thermal energy storage property and clarify that it does not include property that transforms energy into heat in the first instance. The property must be specifically designed to substantially alter the time profile of when heat added to or removed from the thermal storage medium can be used for heating or cooling. A safe harbor provides that the time profile rule is met if the thermal energy storage property can store sufficient energy to heat or cool a building interior for at least one hour.
The final regulations delete an “end use” requirement that hydrogen energy storage property must store hydrogen to be used only as energy and not for other purposes such as producing fertilizer.
Qualified interconnection property
Qualified investment includes amounts a taxpayer pays or incurs (that are chargeable to capital account) for qualified interconnection property in connection with a qualified facility. The facility must have a maximum net output of no more than five megawatts and be placed in service in the tax year.
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 a qualified facility for purposes of applying the five-megawatt limitation is based on nameplate capacity in alternating current. The final regulations add a rule that provides that, to determine the maximum net output in alternating current for qualified facilities that generate electricity in direct current, a taxpayer may use either (1) the sum of the nameplate generating capacities within the unit of qualified facility in direct current or (2) the nameplate capacity of the first component of the qualified facility that inverts the direct current electricity into alternating current.
The proposed regulations provided that qualified interconnection property is not part of a qualified facility and is not taken into account in determining whether the facility 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: Qualified interconnection property is not subject to the requirements of the credit bonuses because it is not a qualified facility. However, the cost is included in the basis of a qualified facility with a maximum net output of five megawatts or less, and thus is taken into account in calculating the bonus credit amounts.
Prevailing wage and apprenticeship bonus
The proposed regulations reserved rules on the prevailing wage and apprenticeship (PWA) credit bonus. Final regulations on the Section 45Y bonus were adopted in PWA final regulations. These final regulations revise the Section 45Y rules, add rules on the Section 48E PWA bonus, and include transition rules for determining the beginning of construction. See the PwC Insight Regulations on wage and apprenticeship credit bonus finalized.
For both Section 45Y and Section 48E, the final regulations provide that one megawatt for purposes of the one-megawatt exception to the PWA requirements is measured by the combined nameplate capacity of a facility with integrated operations. A qualified facility has integrated operations with a qualified facility of the same technology type if the facilities (1) are owned by the same or related taxpayers, (2) are placed in service in the same tax year, and (3) transmit electricity through the same point of interconnection or are able to support the same end user. The nameplate capacities of different types of energy storage properties that have integrated operations also are aggregated.
The final regulations provide that qualified facilities that generate electricity in direct current can determine net maximum output in alternating current by using either (1) the sum of the nameplate generating capacities within the unit of qualified facility in direct current or (2) the nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
Under Section 48E, the final regulations add rules for applying the one-megawatt exception to qualified facilities that produce heat but do not generate electricity (such as thermal and hydrogen energy storage property).
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