Regulations proposed on Section 45V verifications, ITC elections

In detail

Modified or retrofitted facility placed-in-service date

Modification to produce qualified clean hydrogen

In general, the Section 45V credit applies to qualified clean hydrogen produced after 2022 and is limited to 10 years from the date the facility is placed in service. A facility that is modified to produce qualified clean hydrogen is deemed originally placed in service as of the date the property required to complete the modification is placed in service if (1) the facility was placed in service before 2023, (2) it did not produce qualified clean hydrogen before the modification, and (3) the amounts paid or incurred are properly chargeable to capital account.

The proposed regulations clarify that the modification must be made to enable the facility to produce qualified clean hydrogen, i.e., the facility could not produce hydrogen with a lifecycle GHG emissions rate of four kilograms or less of CO2e per kilogram of hydrogen without the modification.

Retrofitting an existing facility

The proposed regulations provide that a new original placed-in-service date may be established for an existing facility (regardless of whether it previously produced qualified clean hydrogen or when it was first placed in service) that is retrofitted with new property but that, after completion, contains some used property. The fair market value of the used property must be no more than 20% of the facility’s total value, calculated by adding the cost of the new property to the value of the used property (80/20 rule). “Costs” of new property include all properly capitalized costs. A facility that satisfies this rule is considered originally placed in service on the date the new property added to the facility is placed in service.

Observation: The terminology of the 80/20 rule may be confusing in describing the percentage calculation as “adding the cost of the new property to the value of the used property.” An example clarifies that this rule is satisfied if 80% of the facility’s value after retrofitting is attributable to new property. 

Election to claim Section 48 credit

Statutory background

Section 48 allows a taxpayer to irrevocably elect to treat property that is part of a qualified clean hydrogen production facility placed in service after 2022 as Section 48 energy property and claim the Section 48 credit for investment in the property. A taxpayer that has been allowed the Section 45Q or 45V credit for any tax year for production at a facility may not make the Section 48 election for that facility.

The Section 48 credit under the election is a percentage of the property’s basis that varies depending on the facility’s anticipated GHG emissions rate. An unrelated party must verify the actual emissions rate after production begins. Only basis attributable to construction or reconstruction after 2022 qualifies for the credit.

As an investment tax credit, the Section 48 credit generally is subject to recapture if the property is disposed of or fails to be investment credit property during a five-year recapture period. Treasury is authorized to issue rules providing for additional recapture if actual verified production is inconsistent with the expected production on which the claimed credit was based.

Observation: The additional recapture may occur because the Section 48 credit is claimed in the year a facility is placed in service but the qualification for and amount of the credit when a qualified clean hydrogen production facility election is made depends on satisfying requirements during tax years after production begins.

Election procedures

The proposed regulations provide that a taxpayer makes the Section 48 election on Form 3468, Investment Credit, filed with the federal income tax or information return for the tax year the facility is placed in service, and must attach a statement providing certain information. The taxpayer makes a separate election for each eligible facility. An election for a facility owned by a partnership or S corporation is made by the entity. An election made by a taxpayer owning an interest in a facility, including a partnership or S corporation, is binding on all taxpayers owning interests.

Verification

An electing taxpayer must obtain a verification report from a qualified verifier for the tax year the facility is placed in service and each tax year during the five-year recapture period, and attach the report to Form 3468 for the election year. The qualified verifier must attest to information relating to the facility’s GHG emissions and establishing that the verifier is unrelated to the taxpayer (and to a transferee taxpayer if the credit has been transferred), and sign and date the report by the unextended due date of the return for the tax year the hydrogen is produced. The taxpayer must retain the report for six years.

Recapture

In addition to the recapture that applies to investment credit property generally, the proposed regulations provide that a taxpayer’s tax is increased by a recapture amount if an emissions tier recapture event occurs in any tax year of a five-year recapture period that begins in the first tax year following the placed-in-service tax year. An emissions tier recapture event occurs in a tax year if (1) a taxpayer fails to timely obtain an annual verification report, (2) the actual GHG emissions rate supports a lower basis percentage for calculating the credit than the percentage that was used to calculate the credit in the tax year the facility was placed in service and the credit was claimed, or (3) the actual GHG emissions rate exceeds the maximum rate for qualified clean hydrogen of four kilograms of CO2e per kilogram of hydrogen.

The recapture amount is 20% of the excess of the Section 48 credit that was allowed in the placed-in-service year over the credit amount supported by actual production in the recapture year. If the allowable credit in a recapture year would be zero, for example if the taxpayer fails to obtain a verification report or the emissions rate exceeds four kilograms of CO2e per kilogram of hydrogen, the recapture amount is 20% of the total credit that was allowed in the placed-in-service year.