Notice 2009-52 will be obsoleted upon
Internal Revenue Bulletin 2023-52 · 2026-10-03 edition · updated 2026-10-04 · United States
publication of the final regulations in the Federal Register . Notice 2009-52, in relevant part, provides procedures for taxpayers to make an irrevocable election under section 48(a)(5) to treat qualified property that is part of a qualified investment credit facility as energy property eligible for a section 48 credit in lieu of a section 45 credit.
Proposed Applicability Dates
Except for the provisions of proposed §§1.48-13 and 1.6418-5(f), these regulations generally are proposed to apply with respect to property that is placed in service after December 31, 2022, and during a taxable year beginning after the date final regulations are published in the Federal Register . Proposed §1.6418-5(f) is proposed to apply to taxable years ending on or after the date final regulations are published in the Federal Register. A taxpayer may rely on proposed §§ 1.48-9, 1.48-14, and 1.6418-5(f) with respect to property
that is placed in service after December 31, 2022, and during a taxable year beginning on or before the date final regulations are published in the Federal Register, provided the taxpayer and all related persons (within the meaning of sections 267(b) and 707(b) of the Code) apply proposed §§ 1.48-9 and 1.48-14 in their entirety and in a consistent manner.
Proposed §1.48-13 is proposed to apply to projects placed in service in taxable years ending after the date final regulations are published in the Federal Register, and the construction of which begins after the date final regulations are published in the Federal Register . However, proposed §1.48-13(d) is proposed to apply to energy projects the construction of which begins after November 22, 2023. Taxpayers may rely on §1.48-13 with respect to construction of a property or project beginning on or after January 29, 2023, and on or before the date these regulations are published as final regulations in the Federal Register, provided, that beginning after the date that is 60 days after August 29, 2023, taxpayers follow proposed §1.48-13 in its entirety and in a consistent manner.
Special Analyses
I. Regulatory Planning and Review— Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520) (PRA) requires that a Federal agency obtain the approval of Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. A Federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.
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The collections of information in these proposed regulations contain reporting and recordkeeping requirements that are required to verify the eligibility of the property for the credit. These collections of information would generally be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper reporting and compliance.
The reporting requirement mentioned within this proposed regulations with respect to section 48 are in proposed §1.48-14(f)(6), which provides the time and manner for a taxpayer to make a section 48(a)(5)(C) an election to have qualified investment credit facility property that was placed in service after December 31, 2008, treated as a qualified investment credit facility for purposes of claiming the section 48 credit. These requirements are considered general tax records under § 1.6001-1. A taxpayer must make a section 48(a) (5)(C) election on a completed Form 3468 (Investment Credit) (or successor forms, or pursuant to instructions and other guidance) with the taxpayer’s timely filed return (including extensions) for the taxable year in which the energy property is placed in service. The taxpayer must make a separate section 48(a)(5)(C) election for each qualified facility that is to be treated as a qualified investment credit facility. These collections are included in Notice 2009-52, 2009-1 C.B. 1094, which is already approved under OMB Control Number 1545-2145 for all filers. Also, the election selection is included on, Form 3468, which is already approved in OMB Control Numbers 1545-0155 for trust and estate filers, 1545-0074 for individual filers, and 1545-0123 for business filers. This proposed regulation is not changing the collection requirements already approved by OMB.
These proposed regulations would also include reporting requirements, in addition to the general reporting requirements set forth in in §1.45-12 of the August Proposed Regulations, for taxpayers that claim an increased credit amount under section 48(a)(9)(B)(iii). These proposed regulations would require taxpayers to verify compliance with the Prevailing Wage Requirements by providing information that includes the aggregate information detailed in §1.45-12 of the August
Proposed Regulations during the five-year recapture period after an energy project is placed in service. The Secretary may issue forms and instructions in future guidance for the purpose of meeting these reporting requirements. As set forth in the preamble to the August Proposed Regulations, these reporting requirements will be covered under OMB control numbers 15450074 for individuals/sole proprietors and 1545-0123 for business entities. The IRS has solicited public comments on these requirements and the associated burdens for trusts and estates and has sought OMB approval under a new OMB control number (1545-NEW) for trust and estate filers. This proposed regulation is not changing or creating new collection requirements not already approved by, or will be approved by, OMB for the §1.45-12.
These proposed regulations also describe recapture procedures as detailed in proposed § 1.6418–5. The reporting of a section 48(a)(10)(C) recapture event will still be required to be reported using Form 4255, Recapture of Investment Credit . This form is approved under OMB control numbers 1545–0074 for individuals, 1545–0123 for business entities, and 1545-0166 for trust and estate filers. The proposed regulation is not changing or creating new collection requirements not already approved by OMB.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule.
The Treasury Department and the IRS have not determined whether the proposed rule, when finalized, will likely have a significant economic impact on a substantial number of small entities. This
determination requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an IRFA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities.
Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on its impact on small business.
A. Need for and objectives of the rule
The proposed regulations will provide greater clarity to taxpayers for purposes of claiming the section 48 credit for energy property. The proposed rule is expected to encourage taxpayers to invest in developing new energy properties, including qualified facilities otherwise eligible for the section 45 credit for which a taxpayer makes a section 48(a)(5)(C) election. Thus, the Treasury Department and the IRS intend and expect that the proposed rule will deliver benefits across the economy that will beneficially impact various industries.
B. Affected small entities
The Small Business Administration estimated in its 2018 Small Business Profile that 99.9 percent of United States businesses meet its definition of a small business. The applicability of these proposed regulations does not depend on the size of the business, as defined by the Small Business Administration. As described more fully in the preamble to these proposed regulations and in this IRFA, these rules may affect a variety of different businesses across several different industries.
The section 48 credit incentivizes the development of energy property. Because the potential credit claimants can vary widely, it is difficult to estimate at this time the impact of these proposed regulations, if any, on small businesses.
The Treasury Department and the IRS expect to receive more information on the impact on small businesses through comments on this proposed rule and again
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when taxpayers start to claim the section 48 credit using the guidance and procedures provided in these proposed regulations.
C. Impact of the rule
The proposed regulations will allow taxpayers to plan investments and transactions based on the ability to claim the section 48 credit. The increased use of the section 48 credit will incentivize the development of technologies for energy generation and storage. The use of the section 48 credit may also lead to additional investment in electrical grid infrastructure to transport electricity.
Because the statutory changes that are reflected in the proposed rules have already been accounted for by Form 3468, the recordkeeping and reporting requirements should not increase for taxpayers that already claim the section 48 credit. The Form 3468 already provides the procedures for taxpayers to make a section 48(a)(5)(C) election. To make the election, a taxpayer must claim the energy credit with respect to a qualified investment credit facility property on a completed Form 3468 (Investment Credit) (or successor forms, or pursuant to instructions and other guidance) and file such form with the taxpayer’s timely filed return (including extensions) for the taxable year in which the property is placed in service. Although the Treasury Department and the IRS do not have sufficient data to precisely determine the likely extent of the increased costs of compliance, the estimated burden of complying with the recordkeeping and reporting requirements are described in the Paperwork Reduction Act section of the preamble.
D. Duplicative, overlapping, or conflicting Federal rules
The proposed rule would not duplicate, overlap, or conflict with any relevant Federal rules. As discussed above, the proposed rule would merely provide procedures and definitions to allow taxpayers to claim the section 48 credit.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and
benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million (updated annually for inflation). These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments or by the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications and do not impose substantial, direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.
VI. Executive Order 13175: Consultation and Coordination with Indian Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal implications if the rule either imposes substantial, direct compliance costs on Indian Tribal governments, and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. This proposed rule does not have substantial direct effects on one or more Federally recognized Indian Tribes and does not impose substantial direct compliance costs on Indian Tribal governments within the meaning of the Executive order.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published in the Internal
Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov .
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to any comments regarding the notice of proposed rulemaking and partial withdrawal of notice of proposed rulemaking that are submitted timely to the IRS in the preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments submitted will be made available at http://www.regu- lations.gov or upon request for public inspection and copying.
A public hearing has been scheduled for February 20, 2024, at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Ave, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the public hearing. Persons who wish to present oral comments at the public hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by January 22, 2024. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the public hearing. If no outline of the topics to be discussed at the public hearing is received by January 22, 2024, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register .
Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access
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property. Paragraph (f) of this section provides rules for components included in an energy property. Paragraph (g) of this section provides the applicability date for this section.
(b) Definitions related to requirements for energy property. For purposes of section 48 of the Code, this section, §§1.4813 and 1.48-14, and any provision of the Code or this chapter that expressly refers to any of the foregoing, the following definitions apply:
(1) Construction, reconstruction, or erection of energy property. The term con- struction, reconstruction, or erection of energy property means work performed to construct, reconstruct, or erect energy property either by the taxpayer or for the taxpayer in accordance with the taxpayer’s specifications.
(2) Acquisition of energy property . The term acquisition of energy property means a transaction by which a taxpayer obtains rights and obligations with respect to energy property, including—
(i) Title to the energy property under the law of the jurisdiction in which the energy property is placed in service, unless the property is possessed or controlled by the taxpayer as a lessee, and
(ii) Physical possession or control of the energy property.
(3) Original use of energy property (i) In general . The term original use of energy property means the first use to which a unit of energy property is put, whether or not such use is by the taxpayer.
(ii) Retrofitted units of energy prop- erty . A retrofitted unit of energy property acquired by the taxpayer will not be treated as being put to original use by the taxpayer unless the rules in §1.48-14(a) regarding retrofitted energy property (80/20 Rule) or paragraph (e)(10)(v) of this section regarding modifications of certain energy storage technology apply. The question of whether a unit of energy property meets the 80/20 Rule or is modified (as described in paragraph (e)(10) (v) of this section) is a facts and circumstances determination.
(4) Allowable —(i) In general. For purposes of applying paragraph (c)(1)(ii) of this section, depreciation (or amortization in lieu of depreciation) is allow- able with respect to energy property if such property is of a character subject
list. The subject line of the email must contain the regulation number REG132569-17 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY In Person at Hearing for regulation number REG-132569-17.
Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-132569-17 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-132569-17.
Individuals who want to attend the public hearing in person without testifying must also send an email to publichear- ings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG-132569-17 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing in Person for REG-132569-17. Requests to attend the public hearing must be received by 5:00 p.m. on February 15, 2024. Hearings will be made accessible to people with disabilities. To request special assistance during a hearing please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@ irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) by at least 5:00 p.m. on February 14, 2024.
Drafting Information
The principal authors of these proposed rules are Martha M. Garcia and Boris Kukso of the Office of Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Partial Withdrawal of Notice of Proposed Rulemaking
Under the authority of 26 U.S.C. 7805, proposed §1.48-13 contained in the notice of proposed rulemaking (REG-10090823) that was published in the Federal Register on August 30, 2023 (88 FR 60018), is withdrawn.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by:
a. Revising the entry for §1.48-9; and b. Adding entries in numerical order for §§ 1.48-13, 1.48-14, and 1.6418-5.
The revision and additions read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.48-9 also issued under 26 U.S.C. 48(a)(3)(D)(i) and (16). * * *
Section 1.48-13 also issued under 26 U.S.C. 48(a)(10)(C) and (16). * * *
Section 1.48-14 also issued under 26 U.S.C. 48(a)(16). * * *
Section 1.6418-5 also issued under 26 U.S.C. 48(a)(10)(C) and 6418(g) and (h).
Par. 2. Revise §1.48-9 to read as follows:
§1.48-9 Definition of energy property.
(a) In general . For purposes of the energy credit determined under section 48 of the Internal Revenue Code (Code), the term energy property means property that, taking into account the definition of the term unit of energy property (defined in paragraph (f)(2)(i) of this section) and of other terms defined in paragraph (b) and other provisions of this section, meets the requirements of paragraph (c) of this section and is of a type of energy property set forth in paragraph (e) of this section. Paragraph (d) of this section provides rules for property excluded from energy
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to the allowance for depreciation under section 167 of the Code and the basis or cost of such property is recovered using a method of depreciation (for example , the straight line method), which includes any additional first year depreciation deduction method of depreciation (for example, under section 168(k) of the Code). Further, if an Internal Revenue Service adjustment with respect to the Federal income tax or information return for such taxable year requires the basis or cost of such energy property to be recovered using a method of depreciation, depreciation is allowable to the taxpayer with respect to energy property.
(ii) Exclusions from allowable. For purposes of paragraph (b)(4)(i) of this section, depreciation is not allowable with respect to energy property if the basis or cost of such property is not recovered through a method of depreciation but, instead, such basis or cost is recovered through a deduction of the full basis or cost of the energy property in one taxable year (for example, under section 179 of the Code).
(5) Placed in service —(i) In general. Energy property is considered placed in service in the earlier of:
(A) The taxable year in which, under the taxpayer’s depreciation practice, the period for depreciation with respect to such energy property begins; or
(B) The taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income. Energy property in a condition or state of readiness and availability for a specifically assigned function includes, but is not limited to, components that are acquired and set aside during the taxable year for use as replacements for a particular energy property (or energy properties) in order to avoid operational time loss and equipment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. However, components acquired to be used in the construction of an energy property will not be considered in a condition or state of readiness and availability for a specifically assigned function.
(ii) Energy property subject to §1.48-4 election to treat lessee as purchaser . Notwithstanding paragraph (b)(5)(i) of
this section, energy property with respect to which an election is made under §1.48-4 to treat the lessee as having purchased such energy property is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.
(6) Unit of energy property . The term unit of energy property is defined in paragraph (f)(2)(i) of this section. No provision of this section or §1.48-13 or §1.48-14 uses the term unit in respect of energy property with any meaning other than that provided in paragraph (f)(2)(i) of this section.
(7) Claim . With respect to a section 48 credit determined with respect to energy property of a taxpayer, the term claim means filing a completing Form 3468, Investment Credit, or any successor form(s), with the taxpayer’s timely filed (including extensions) Federal income tax return for the taxable year in which the energy property is placed in service, and includes the making of an election under section 6417 or 6418 of the Code and corresponding regulations with respect to such section 48 credit and made on the taxpayer’s Federal income tax return or annual information return.
(c) Requirements for energy prop- erty —(1) In general . Energy property must satisfy each of the requirements of paragraphs (c)(1)(i) through (v) of this section:
(i) The taxpayer constructs, reconstructs, or erects the property, or, if the original use of the property commences with the taxpayer, acquires the property;
(ii) Depreciation (or amortization in lieu of depreciation) is allowable with respect to the property;
(iii) The property meets the performance and quality standards as provided in paragraph (c)(2) of this section;
(iv) The construction of the property begins before the date provided in section 48 of the Code (if any such date is provided); and
(v) The property is placed in service by the taxpayer by the date provided in section 48 (if any such date is provided).
(2) Performance and quality stan- dards —(i) In general . Energy property must meet performance and quality standards, if any, which have been prescribed by the Secretary of the Treasury
or her delegate (after consultation with the Secretary of Energy) and are in effect at the time of acquisition of the energy property.
(ii) Special rules for performance and quality standards —(A) Small wind energy property . Small wind energy property must meet the performance and quality standards in effect at the time of acquisition of the small wind turbine set forth in the American Wind Energy Association Small Wind Turbine Performance and Safety Standard 9.1-2009, or subsequent revisions (AWEA); International Electrotechnical Commission 61400-1, 61400-2, 61400-11, 61400-12, or subsequent revisions (IEC); or the ANSI/ACP 101-1-2021, the Small Wind Turbine Standard, or subsequent revisions (ACP). The certification requirements applicable to such performance and quality standards are provided in guidance published in the Internal Revenue Bulletin. See §601.601 of this chapter.
(B) Electrochromic glass property . To be eligible for the section 48 credit, electrochromic windows must be rated in accordance with the National Fenestration Rating Council (NFRC) and secondary glazing systems must be rated in accordance with the Attachments Energy Rating Council (AERC) Rating and Certification Process, or subsequent revisions. See paragraph (e)(2)(ii) of this section for the definition of electrochromic glass property.
(iii) Time of acquisition . For purposes of applying performance and quality standards, the time of acquisition is the date the taxpayer enters into a binding contract (as defined in paragraph (c)(2)(iv) of this section) to acquire the property, or, in the case of property constructed, reconstructed, or erected by the taxpayer, the earlier of the date that—
(A) The taxpayer begins construction, reconstruction, or erection of the property, or
(B) The taxpayer and another person enter into a binding contract (as defined in paragraph (c)(2)(iv) of this section) requiring the other person to construct, reconstruct, or erect property and to place the property in service for an agreed upon use.
(iv) Binding contract . For purposes of this paragraph (c)(2), a contract is binding only if it is enforceable under State
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law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example , by use of a liquidated damages provision). For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount. For additional guidance regarding the definition of a binding contract, see §1.168(k)-2(b)(5)(iii)(A).
(d) Property that is not energy prop- erty —(1) Interaction with section 45 . Energy property does not include any property that is part of a qualified facility the production from which is allowed as a credit determined under section 45 of the Code (section 45 credit) for the taxable year or any prior taxable year. However, see paragraph (f)(3) of this section for rules regarding property that is an integral part of an energy property that is also used by a qualified facility. See §1.48-14(f)(1) for rules regarding making an election under section 48(a)(5) of the Code to treat a qualified facility as an energy property.
(2) Other property . Energy property also does not include power purchase agreements, goodwill, going concern value, or renewable energy certificates.
(e) Types of energy property . The types of energy property eligible for a section 48 credit are:
(1) Solar energy property —(i) In gen- eral . Solar energy property is equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool. Solar energy property includes solar electric generation equipment (as defined in paragraph (e) (1)(ii) of this section), solar process heat equipment (as defined in paragraph (e)(1) (iii) of this section), and equipment that uses solar energy to heat or cool a structure or provide hot water for use in a structure, and parts related to the functioning of all such equipment.
(ii) Solar electric generation equip- ment. Solar electric generation equipment is equipment that converts sunlight into electricity through the use of devices such as solar cells or other collectors.
(iii) Solar process heat equipment . Solar process heat equipment is equipment
that uses solar energy to generate steam at high temperatures for use in industrial or commercial processes.
(2) Fiber-optic solar energy property and electrochromic glass property (i) Fiber-optic solar energy property . Fiber-optic solar energy property is equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
(ii) Electrochromic glass property . Electrochromic glass energy property uses electricity to change its light transmittance properties (both visible and near infrared light) in order to heat or cool a structure. For purposes of section 48, windows, including secondary windows (also referred to as secondary glazings), that incorporate electrochromic glass are treated as electrochromic glass property.
(3) Geothermal energy property —(i) In general . Geothermal energy property is equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e)(2) of the Code), but only, in the case of electricity generated by geothermal power, up to (but not including) the electrical transmission stage. Geothermal equipment includes production equipment (as defined in paragraph (e)(3)(ii) of this section) and distribution equipment (as defined in paragraph (e)(3)(iii) of this section).
(ii) Production equipment . For purposes of paragraph (e)(3)(i) of this section, production equipment is equipment necessary to bring geothermal energy from the subterranean deposit to the surface, including well-head and downhole equipment (such as screening or slotting liners, tubing, downhole pumps, and associated equipment). Production, injection, and monitoring wells required for production of the geothermal deposit qualify as production equipment. If geothermal energy is used to generate electricity, production equipment also includes the property necessary to produce electricity. Production equipment does not include equipment used for exploration and development of geothermal deposits.
(iii) Distribution equipment . For purposes of paragraph (e)(3)(i) of this section, distribution equipment is equipment that transports geothermal energy from a
geothermal deposit to the site of ultimate use. If geothermal energy is used to generate electricity, distribution equipment includes equipment that transports geothermal fluids between the geothermal deposit and the power plant. Distribution equipment also includes components of a building’s heating and/or cooling system, such as pipes and ductwork that distribute within a building the energy derived from the geothermal deposit.
(4) Qualified fuel cell property . Qualified fuel cell property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatts (kW) (1 kW in the case of a fuel cell power plant with a linear generator assembly) of electricity using an electrochemical or electromechanical process, and an electricity-only generation efficiency greater than 30 percent. For this purpose, electricity-only generation efficiency may be calculated by dividing the heat rate of the fuel cell (for example, kilowatt-hours (kWh) electricity produced per kilogram (kg) of fuel consumed) by the higher heating value of the fuel (for example, kWh per kg). A fuel cell power plant is an integrated system comprised of a fuel cell stack assembly, or linear generator assembly, and associated balance of plant components that converts a fuel into electricity using electrochemical or electromechanical means. A linear generator assembly does not include any assembly that contains rotating parts.
(5) Qualified microturbine property . Qualified microturbine property is a stationary microturbine power plant that has a nameplate capacity of less than 2,000 kW and an electricity-only generation efficiency of not less than 26 percent at International Standard Organization conditions. A stationary microturbine power plant is an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associated balance of plant components that converts a fuel into electricity and thermal energy. A stationary microturbine power plant also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors.
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(6) Combined heat and power system (CHP) property —(i) In general. CHP property is property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications). CHP property must produce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof). The energy efficiency percentage of CHP property must exceed 60 percent (except in the case of CHP systems that use biomass within the meaning of section 45 of the Code). CHP property does not include any property comprising a system if such system has a capacity in excess of 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities.
(ii) Components excluded. CHP property does not include property used to transport the energy source to the generating facility or to distribute energy produced by the facility.
(7) Qualified small wind energy prop- erty . Qualified small wind energy property is property that uses a qualifying small wind turbine to generate electricity. A qualifying small wind turbine means a wind turbine that has a nameplate capacity of not more than 100 kW.
(8) Geothermal heat pump equipment . Geothermal heat pump equipment is equipment that uses the ground, ground water, or other underground fluids as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.
(9) Waste energy recovery property (WERP) —(i) In general . WERP is property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Examples of buildings or equipment the primary purpose of which is not the generation of electricity include, but are not limited to, manufacturing plants, medical
care facilities, facilities on college campuses, pipeline compressor stations, and associated equipment. WERP does not include any property that has a capacity in excess of 50 MW.
(ii) Coordination with CHP property . Any WERP that is part of a system that is a CHP property is not treated as WERP for purposes of section 48 of the Code unless the taxpayer elects to not treat such system as a CHP property for purposes of section 48. (10) Energy storage technology —(i) In general . Energy storage technology includes electrical energy storage property described in paragraph (e)(10)(ii) of this section, thermal energy storage property described in paragraph (e)(10)(iii) of this section, and hydrogen energy storage property described in paragraph (e)(10) (iv) of this section.
(ii) Electrical energy storage property . Electrical energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transportation of goods or individuals, electrical energy storage property includes but is not limited to rechargeable electrochemical batteries of all types (such as lithium ion, vanadium flow, sodium sulfur, and lead-acid); ultracapacitors; physical storage such as pumped storage hydropower, compressed air storage, flywheels; and reversible fuel cells.
(iii) Thermal energy storage property . Thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Thermal energy storage property includes equipment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating a residential or commercial building. It does not include a swimming pool, CHP property,
or a building or its structural components. For example, thermal energy storage includes, but is not limited to, thermal ice storage systems that use electricity to run a refrigeration cycle to produce ice that is later connected to the HVAC system as an exchange medium for air conditioning the building, heat pump systems that store thermal energy in an underground tank or borehole field to be extracted for later use for heating and/or cooling, and electric furnaces that use electricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system.
(iv) Hydrogen energy storage property . Hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Hydrogen energy storage property must store hydrogen that is solely used as energy and not for other purposes such as for the production of end products such as fertilizer. For example, hydrogen energy storage property includes, but is not limited to, a hydrogen compressor and associated storage tank and an underground storage facility and associated compressors.
(v) Modifications of energy storage energy property . With respect to electrical energy storage property and hydrogen energy storage property placed in service after December 31, 2022, energy storage technology that is modified as set forth in this paragraph (e)(10)(v) is treated as electrical energy storage property described in paragraph (e)(10)(ii) of this section or hydrogen energy storage property described in paragraph (e)(10)(iv) of this section, except that the basis of any existing property prior to such modification is not taken into account for purposes of this section and section 48. This paragraph (e) (10)(v) applies to any electrical energy storage property and hydrogen energy storage property that either:
(A) Was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i) of the Code, except that such property had a capacity of less than 5 kWh and is modified in a manner that such property (after such
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modification) has a nameplate capacity (after such modification) of not less than 5 kWh; or (B) Is described in section 48(c)(6)(A) (i) of the Code and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh.
(11) Qualified biogas property —(i) In general . Qualified biogas property is property comprising a system that converts biomass (as defined in section 45K(c)(3) of the Code, as in effect on August 16, 2022) into a gas that consists of not less than 52 percent methane by volume (tested at the point described in paragraph (e)(11)(ii) of this section), or is concentrated by such system into a gas that consists of not less than 52 percent methane (tested at the point described in paragraph (e)(11)(ii) of this section), and captures such gas for sale or productive use and not for disposal via combustion. Qualified biogas property also includes any property that is part of such system that cleans or conditions such gas. For example, qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester. However, gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property.
(ii) Methane content requirement. The methane content requirement described in section 48(c)(7)(A)(i) of the Code and paragraph (e)(11)(i) of this section is measured at the point at which gas exits the biogas production system, which may include an anerobic digester, landfill gas collection system, or thermal gasification equipment. This is the point at which a taxpayer generally must determine whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit.
(12) Microgrid controllers— (i) In general . A microgrid controller is equipment that is part of a qualified microgrid and is designed and used to monitor and control the energy resources and loads on such microgrid. A qualified microgrid is
an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity; is capable of operating in connection with the electrical grid and as a single controllable entity with respect to such electrical grid, and independently (and disconnected) from such electrical grid; and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)). (ii) Capable of operating in connec- tion with the electrical grid. For purposes of this paragraph, a qualified microgrid includes an electrical system that is capable of operating in connection with the larger electrical grid, regardless of whether a connection to the larger electrical grid exists.
(13) Other property included in sec- tion 48 . Any other property specified by section 48 as energy property is energy property for purposes of this section and §§1.48-13 and §1.48-14.
(f) Property included in energy prop- erty —(1) In general. An energy property includes a unit of energy property (as defined in paragraph (f)(2)(i) of this section) that meets the requirements of paragraph (c) of this section, that is not excluded from energy property as provided in paragraph (d) of this section, and is of a type of energy property included in paragraph (e) of this section. Property owned by the taxpayer that is an integral part of an energy property (as defined in paragraph (f)(3) of this section) is treated as energy property. Energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage. Energy property also generally does not include equipment that is an addition or modification to an existing energy property. However, see §1.48-14(a) for rules regarding retrofitted energy property (80/20 Rule) and paragraph (e)(10)(v) of this section for rules regarding modifications of certain types of energy storage technology.
(2) Unit of energy property —(i) Definition. The term unit of energy prop- erty means all functionally interdependent components of property (as defined in paragraph (f)(2)(ii) of this section) owned by the taxpayer that are operated together
and that can operate apart from other energy properties within a larger energy project (as defined in §1.48-13(d)). For rooftop solar energy property, all components of property that are installed on a single rooftop are considered a single unit of energy property. See §1.48-13(d) for rules regarding when multiple energy properties will be treated as an energy project for certain purposes.
(ii) Functionally interdependent —(A) In general. Except as provided in paragraph (f)(2)(ii)(B) of this section, with respect to components of a unit of energy property, the term functionally interde- pendent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen as provided by section 48(c) of the Code and as described in paragraph (e) of this section.
(B) Components of certain energy property. In the case of solar process heat equipment, fiber-optic solar energy property, electrochromic glass property, geothermal heat pump equipment, qualified biogas property, and microgrid controllers, with respect to components of such property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the energy property as provided by section 48(c) of the Code and as described in paragraph (e) of this section.
(3) Integral part —(i) In general. For purposes of the section 48 credit, property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property as provided by section 48(c) of the Code and as described in paragraph (e) of this section and is essential to the completeness of the intended function. Property that is an integral part of an energy property is energy property. A taxpayer may not claim the section 48 credit for any property that is an integral part of the taxpayer’s energy property that is not owned by the taxpayer. Multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be considered an integral part of
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each energy property so long as the cost basis for the shared property is properly allocated to each energy property. The total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared property. In addition, property that is shared by a qualified facility (as defined in section 45(d) of the Code) and an energy property that is an integral part of the energy property will not be considered property that is not energy property under paragraph (d) of this section.
(ii) Power conditioning and transfer equipment . Property that is an integral part of energy property includes power conditioning equipment and transfer equipment used to perform the intended function of the energy property as provided by section 48(c) and as described in paragraph (e) of this section. Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters voltage in order to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware and software used to monitor, operate, and protect transfer equipment. Power conditioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or used by a qualified facility (as defined in
section 45(d) of the Code), so long as the total cost basis of the integral property is properly allocated across the energy property and qualified facility that share such property.
(iii) Roads . Roads that are an integral part of an energy property are integral to the activity performed by the energy property such as onsite roads that are used for equipment to operate and maintain the energy property. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property.
(iv) Fences. Fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property.
(v) Buildings . Generally, buildings are not integral parts of an energy property because they are not integral to the activity of the energy property. However, the following structures are not treated as buildings for this purpose:
(A) A structure that is essentially an item of machinery or equipment; and
(B) A structure that houses property that is integral to the activity of an energy property if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced when the energy property it initially houses is replaced.
(4) Location of energy property. Any property that meets the requirements of paragraphs (f)(2) and (3) of this section is part of an energy property regardless of where such property is located.
(5) Examples . This paragraph provides examples illustrating property included in energy property.
(i) Example 1 . Solar energy property . X constructs a solar energy property (Property) comprised of 500 separate solar panels. The solar panels are connected by wires, cables, and combiner boxes. Generated electricity is conditioned for subsequent use through an inverter and eventually carried to a substation that houses a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. All components of the Property, up to and including the transformer are either functionally interdependent components of the Property or are integral parts of the Property. Therefore, the Property is an energy property for purposes of the section 48 credit. When X places the Property in service, the cost of the components up to and including the
transformer is included in the basis of the Property for purposes of computing the section 48 credit.
(ii) Example 2. Co-located energy properties . Assume the same facts as in Example 1, except that Y constructs a wind energy property (Wind Property) near X’s solar energy property (Solar Property). X’s Solar Property and Y’s Wind Property each connect to a substation that houses a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through the intertie. X and Y each pay 50% of the cost of the transformer and related power conditioning equipment housed therein. X’s Solar Property and Y’s Wind Property are separate energy properties. When X and Y place their respective energy properties in service, the cost of the components up to and including 50% of the cost of the transformer and related power conditioning equipment is included in X’s and Y’s basis in their respective energy properties for purposes of computing the section 48 credit.
(iii) Example 3 . Qualified offshore wind facil- ity. Z constructs a qualified offshore wind facility (Offshore Wind Facility) comprised of 150 turbines for which Z makes a valid election under section 48(a)(5) of the Code to claim the section 48 credit in lieu of the section 45 credit. The alternating current electricity generated by the individual wind turbines will be carried by inter-array cables to an offshore substation where a transformer will step up the voltage of the electricity and a converter will convert it to direct current so it may be transported by subsea export cables to an onshore substation adjacent to the point of interconnection with the electrical grid. When the electricity reaches the onshore substation, it will flow into another converter where it will be converted back to alternating current, and then through a transformer and associated switchgear where it will be converted to electrical grid voltage and where the Offshore Wind Facility can be electrically isolated from the grid. The electricity will then pass through an intertie that will take the electricity from the substation to the point of interconnection with the electrical grid. All components of the Offshore Wind Facility, up to and including the transformer and switchgear housed in the onshore substation, are either functionally interdependent components of an energy property or integral parts of an energy property. Therefore, the Offshore Wind Facility is an energy property, and when Z places the Offshore Wind Facility in service, the cost of the components up to and including the transformer and switchgear housed in the onshore substation are included in the basis of the Offshore Wind Facility for purposes of computing the section 48 credit.
(iv) Example 4. Co-located energy property and qualified facility. X constructs a wind facility (Wind Facility) that is co-located with an energy storage technology (Energy Storage). The Wind Facility and Energy Storage share power conditioning and transfer equipment. X assigns 50% of the cost of the shared power conditioning and transfer equipment to the Wind Facility and 50% of the cost to the Energy Storage. The power conditioning and transfer equipment are integral parts of the Energy Storage, and are therefore, considered energy property. Therefore, X will include 50% of the cost of the power conditioning and transfer equipment when determining the section 48 credit for the Energy Storage. Because the
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(B) Yearly determination . A determination of whether a recapture event has occurred under paragraph (c)(3)(ii) of this section must be made for each taxable year (or portion thereof) occurring within the five-year recapture period, beginning with the taxable year ending after the date the energy project is placed in service. Thus, for each taxable year beginning or ending within the five-year recapture period, the taxpayer must determine whether the prevailing wage requirements of section 48(a)(10)(A) of the Code, §1.45-7(b)-(d), and paragraph (c)(1) of this section are satisfied for the recapture year(s) occurring during each taxable year.
(C) Carrybacks and carryforward adjusted . In the case of any recapture event described in paragraph (c)(3)(ii)(A) of this section, the carrybacks and carryforwards under section 39 must be adjusted by reason of such recapture event.
(iii) Correction and penalty pay- ments not required if taxpayer is subject to recapture under section 48(a)(10)(C) of the Code. If the IRS determines that a taxpayer that claimed the increased credit amount under section 48(a)(9)(B)(iii) of the Code or transferred a specified credit portion under section 6418 of the Code that includes the increased credit amount under section 48(a)(9)(B)(iii) failed to satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the five-year recapture period and the taxpayer does not make the correction and penalty payments provided in §1.45-7(c), then no penalty is assessed under §1.45-7, and the increased credit amount is subject to recapture. Taxpayers whose increased credit amount is subject to recapture under this section may still be entitled to the base amount of the energy credit under section 48(a) of the Code if such taxpayers meet the requirements to claim the credit.
(4) Recapture amount —(i) In gen- eral . If a recapture event has occurred as described in paragraph (c)(3)(ii) of this section and the taxpayer fails to make the correction and penalty payments described in §1.45-7(c)(1) within 180 days after the date of a final determination by the IRS, the tax under chapter 1 of the Code for the taxable year in which the recapture
shared power conditioning and transfer equipment are not considered part of the Wind Facility, if the Wind Facility otherwise satisfies the requirements of the section 45 credit, X can claim the section 45 credit for the Wind Facility.
(g) Applicability date . This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after
[DATE OF PUBLICATION OF FINAL RULE].
Par. 3. Section 1.48-13 is added to read as follows:
§1.48-13 Rules relating to the increased credit amount for prevailing wage and apprenticeship.
(a) In general . If a qualified energy project satisfies the requirements in paragraph (b) of this section, the amount of the energy credit determined under section 48(a) of the Internal Revenue Code (Code), after the application of sections 48(a)(1) through (8), and 48(a)(15), is equal to the credit determined under section 48(a) (section 48 credit) multiplied by five.
(b) Requirements . A qualified energy project satisfies the requirements of this paragraph (b) if it is one of the following—
(1) A project with a maximum net output of less than one megawatt (MW) of electrical (as measured in alternating current) or thermal energy determined based on the nameplate capacity as provided in paragraph (e) of this section (OneMegawatt Exception);
(2) A project the construction of which began prior to January 29, 2023; or
(3) A project that meets the prevailing wage requirements of section 48(a) (10)(A) of the Code, §1.45-7(b)-(d), and paragraph (c) of this section, the apprenticeship requirements of section 45(b)(8) of the Code and §1.45-8, and the recordkeeping and reporting requirements of §1.45-12.
(c) Special rule applicable to general prevailing wage requirements —(1) In general . In addition to satisfying the prevailing wage requirements under §1.457(b) through (d), a taxpayer must ensure that any laborers and mechanics employed (within the meaning of §1.45-7) by the taxpayer or any contractor or subcontractor in the construction of such energy project, and for the five-year period beginning
on the date such project is placed in service, the alteration or repair of such project, are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with 40 U.S.C. chapter 31, subchapter IV. Subject to section 48(a)(10)(C) of the Code and this paragraph (c), for purposes of determining the increased credit amount under section 48(a)(9)(B)(iii) of the Code, the taxpayer is deemed to satisfy the prevailing wage requirements of section 48(a)(10)(A)(ii) of the Code at the time such project is placed in service.
(2) Exception . For purposes of satisfying the prevailing wage requirements of paragraph (b)(3) of this section, §1.457(a) does not apply. (3) Recapture —(i) In general . The increased credit amount under paragraph (b)(3) of this section is subject to recapture for any project that does not satisfy the prevailing wage requirements in §1.457(b) through (d) and paragraph (c)(1) of this section for any period with respect to an alteration or repair of such project during the five-year period beginning on the date such project is originally placed in service (five-year recapture period) (but that does not cease to be investment credit property within the meaning of section 50(a) of the Code). (ii) Recapture event —(A) In general . Any failure to satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the fiveyear recapture period is a recapture event. Any failure to satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period remain subject to the correction and penalty provisions in §1.45-7(c), including the waiver provisions in §1.457(c)(6). Subject to § 1.45-7(c)(5) and (6), if the correction and penalty payments described in §1.45-7(c) are not made by the taxpayer on or before the date that is 180 days after the date of a final determination by the IRS (as defined in §1.45-7(c) (4)(ii)), the cure provision in §1.45-7(c) does not apply and the increased credit amount is subject to recapture.
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(iv) The energy properties share a common substation, or thermal energy offtake point;
(v) The energy properties are described in one or more common environmental or other regulatory permits;
(vi) The energy properties are constructed pursuant to a single master construction contract; or
(vii) The construction of the energy properties are financed pursuant to the same loan agreement.
(2) Related taxpayers —(i) Definition . For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in §1.52-1(b)).
(ii) Related taxpayer rule . For purposes of this section, related taxpayers are treated as one taxpayer in determining whether multiple energy properties are treated as an energy project with respect to which a section 48 credit may be determined.
(3) Consistent treatment as an energy project . If multiple energy properties are treated as a single energy project for beginning of construction purposes with respect to the section 48 credit, the multiple energy properties will also be treated as a single energy project for purposes of the prevailing wage and apprenticeship requirements, the domestic content bonus credit amount, and the increase in section 48 credit rate for energy communities. (e) Nameplate capacity for purposes of the One-Megawatt Exception. For purposes of paragraph (b)(1) of this section, the determination of whether an energy project has a maximum net output of less than 1 MW of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capacity. Where applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy project. Paragraphs (e)(1) through (5) of this section provide rules for applying the One-Megawatt Exception (as provided in paragraph (b)(1) of this section) to different types of energy properties. Because electrochromic glass property (as defined in §1.48-9(e)(2)(ii)), fiber-optic solar energy property (as defined in §1.489(e)(2)(i)), and microgrid controllers (as
event occurs is increased by the applicable recapture percentage multiplied by the increased credit amount that was claimed by the taxpayer under paragraph (b)(3) of this section.
(ii) Applicable recapture percentage . If the recapture event occurs:
(A) Within one full year after the property is placed in service, the recapture percentage is 100;
(B) Within one full year after the close of the period described in paragraph (c)(4) (ii)(A) of this section, the recapture percentage is 80;
(C) Within one full year after the close of the period described in paragraph (c)(4) (ii)(B) of this section, the recapture percentage is 60;
(D) Within one full year after the close of the period described in paragraph (c)(4) (ii)(C) of this section, the recapture percentage is 40;
(E) Within one full year after the close of the period described in paragraph (c)(4) (ii)(D) of this section, the recapture percentage is 20.
(5) Recapture period . The five-year recapture period begins on the date the project is placed in service and ends on the date that is five full years after the placed-in-service date. Each 365-day period (366-day period in case of a leap year) within the five-year recapture period is a separate recapture year for recapture purposes.
(6) Increase in tax for recapture . The increase in tax under chapter 1 of the Code for the recapture of an increased credit amount claimed under paragraph (b)(3) occurs in the year of the recapture event.
(7) Annual prevailing wage compliance report . In addition to the general reporting requirements in §1.45-12, a taxpayer that has claimed an increased credit amount under paragraph (b)(3) of this section or transferred a specified credit portion under section 6418 of the Code that includes an increased credit amount under paragraph (b)(3) of this section is required to provide to the IRS, information on the payment of prevailing wages with respect to any alteration or repair of the project during the recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See §601.601 of this chapter.
(8) Transferred specified credit por- tions . In the case of a transferred specified credit portion under section 6418, to which recapture of an increased credit amount under this paragraph (c) applies, the eligible taxpayer is required to notify the transferee taxpayer of the recapture event in accordance with the provisions of §1.6418-5(f)(2) and the transferee taxpayer is responsible for any amount of increase in tax under section 48(a) (10)(C) of the Code and this paragraph (c) in accordance with the provisions of §1.6418-5(f)(3).
(9) Coordination with recapture rules under section 50(a). If any increased credit amount was recaptured with respect to investment credit property in a prior year under section 48(a)(10)(C) of the Code and this paragraph (c), then, such increased credit amount is not included in determining the aggregate decrease in the credits allowed under section 38 of the Code for all prior taxable years which would have resulted solely from reducing to zero the credit determined under subparts D and E of part IV of subchapter A of chapter 1 of the Code (that is, sections 38 – 50 of the Code) with respect to the property.
(d) Energy project defined —(1) In gen- eral . For purposes of the increased credit amount provided by section 48(a)(9) of the Code and paragraphs (b) and (c) of this section, the domestic content bonus credit amount provided by section 48(a) (12) of the Code, and the increase in credit rate for energy communities provided in section 48(a)(14) of the Code, the term energy project means one or more energy properties (multiple energy properties) that are operated as part of a single energy project. Multiple energy properties will be treated as one energy project if, at any point during the construction of the multiple energy properties, they are owned by a single taxpayer (subject to the related taxpayer rule provided in paragraph (d)(2) of this section) and any two or more of the following factors are present:
(i) The energy properties are constructed on contiguous pieces of land;
(ii) The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
(iii) The energy properties have a common intertie;
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defined in §1.48-9(e)(12)) do not generate electricity or thermal energy, these energy properties are not eligible for the OneMegawatt Exception.
(1) Electrical generating energy prop- erty . In the case of an electrical generating energy property, use the maximum electrical generating output in MW that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202.
(2) Electrical energy storage property . In the case of electrical energy storage property (as defined in §1.48-9(e)(10)(ii)), use the storage device’s maximum net output.
(3) Thermal energy storage property and other property generating thermal energy . In the case of thermal energy storage property (as defined in §1.48-9(e) (10)(iii)) and other energy property that generates thermal energy for productive use (for example, direct geothermal use, geothermal heat pumps, solar process heating), a taxpayer must use the equivalent of 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling can be used to determine if the thermal storage property satisfies the One-Megawatt Exception (Btu per hour/3,412,140 = MW). For projects delivering thermal energy to a building or buildings, this can be assessed as either the aggregate maximum thermal output of all individual heating or cooling elements within the building or buildings, or as the maximum thermal output that the entire project is capable of delivering to a building or buildings at any given moment.
(4) Hydrogen energy storage property and specified clean hydrogen produc- tion facilities . A hydrogen energy storage property (as defined in §1.48-9(e)(10)(iv)) or a specified clean hydrogen production facility (as defined in section 48(a)(15) (C) of the Code) must have a maximum net output of less than 3.4 mmBtu/hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per hour of hydrogen to satisfy the One-Megawatt Exception.
(5) Qualified biogas property. In the case of qualified biogas property, 3.4 mmBtu/hour can be used as equivalent to the One-Megawatt Exception. Taxpayers
may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the EPA GHGRR at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known.
(f) Applicability date —(1) In general . Except as provided in paragraph (f)(2) of this section, this section applies to projects placed in service in taxable years ending on or after the date final regulations are published in the Federal Register, and the construction of which begins after the date final regulations are published in the Federal Register .
(2) Exception . Paragraph (d) of this section applies to energy projects the construction of which begins after November 22, 2023. Par. 4. Section 1.48-14 is added to read as follows:
§1.48-14 Rules applicable to energy property.
(a) Retrofitted energy property —(1) In general . For purposes of section 48(a) (3)(B)(ii), (a)(5)(D)(iv), and (a)(8)(B)(iii) of the Internal Revenue Code (Code), a retrofitted energy property may be originally placed in service even though it contains some used components of the unit of energy property only if the fair market value of the used components of the unit of energy property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of the unit of energy property (80/20 Rule). Only expenditures paid or incurred that relate to the new components of the unit of energy property are taken into account for purposes of computing the energy credit determined under section 48 (section 48 credit) with respect to the unit of energy property. The cost of new components of the unit of energy property includes all costs properly included in the depreciable basis of the new components. If the taxpayer satisfies the 80/20 Rule with regard to the unit of energy property and the taxpayer pays or incurs new costs for property that is an integral part of the
energy property (as defined in §1.48-9(f) (3)(i)), the taxpayer may include the new costs paid or incurred for property that is an integral part of the energy property (as defined in §1.48-9(f)(3)(i)) in the basis of the energy property for purpose of the section 48 energy credit. Further, in the case of an energy project (as defined in §1.4813(d)), the 80/20 Rule is applied to each unit of energy property comprising an energy project.
(2) Excluded costs. Costs incurred for new components of property added to used components of a unit of energy property may not be taken into account for purposes of the section 48 credit unless the taxpayer satisfies the 80/20 Rule (as provided in paragraph (a)(1) of this section) by placing into service a unit of energy property for which the fair market value of the used components of property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of property.
(3) Examples . This paragraph (a)(3) provides examples illustrating the provisions of this paragraph (a):
(i) Example 1. Retrofitted solar energy prop- erty that satisfies the 80/20 Rule. Z owns an existing solar energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. Z replaces used components of the solar energy property with new components of property at a cost of $1.4 million. The retrofitted solar energy property constitutes a unit of energy property. The fair market value of the remaining original components of the retrofitted solar energy property is $100,000, which is not more than 20% of the retrofitted solar energy property’s total value of $1.5 million (the cost of the new components ($1.4 million) + the value of the remaining original components ($100,000)). The value of the old components of the retrofitted solar energy property is $100,000/$1.5 million (7% of the value of total value of the retrofitted solar energy property), thus the retrofitted solar energy property will be considered newly placed in service for purposes of section 48, and Z will be able to claim a section 48 credit based on the cost of the new components ($1.4 million).
(ii) Example 2. Capital improvements to an exist- ing energy property that do not satisfy the 80/20 Rule. X owns an existing unit of energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. The fair market value of the unit of energy property is $1 million. During the tax year, X makes capital improvements to the unit of energy property. The expenditures for such capital improvements total $300,000. X may not claim a section 48 credit for the $300,000 spent on capital improvements during
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installed over a highly reflective surface that is affixed to a roof (reflective roof). The cost of the reflective roof is $15,000 whereas the cost of a standard roof for the building would be $10,000. The reflective roof does not include the portions of the existing roof that will be replaced, and any features of the roof not directly related to establishing, improving, and maintaining the efficiency of the reflective roof. Accordingly, the reflective roof, if installed in connection with the solar energy property, constitutes energy property under section 48. The incremental cost of the reflective roof is $5,000, and that amount is A’s eligible basis in the solar energy property for purposes of the section 48 credit.
(e) Special rules concerning owner- ship —(1) Eligible basis. For purposes of this section, a taxpayer that owns an energy property is eligible for the section 48 credit only to the extent of the taxpayer’s eligible basis in the energy property. In the case of multiple taxpayers holding direct ownership in an energy property, each taxpayer determines its eligible basis based on its fractional ownership interest in the energy property.
(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of energy property for a section 48 credit to be determined with respect to such taxpayer’s interest. No section 48 credit may be determined with respect to a taxpayer’s ownership of one or more separate components of an energy property if the components do not constitute a unit of energy property. However, the use of property owned by one taxpayer that is an integral part of an energy property owned by a second taxpayer will not prevent a section 48 credit from being determined with respect to the second taxpayer’s energy property.
(3) Related taxpayers —(i) Definition . For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in §1.52-1(b)).
(ii) Related taxpayer rule . For purposes of this section, related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an investment in an energy property with respect to which a section 48 credit may be determined.
the tax year because the capital improvements did not satisfy the 80/20 Rule.
(b) Dual use property —(1) Definition . For purposes of section 48, the term dual use property means property that uses energy derived from both a qualifying source (that is, from an energy property defined in §1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f) (1) of this section)) and from a non-qualifying source (that is, sources other than an energy property defined in §1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f)(1) of this section)).
(2) Qualification as energy property (i) In general . If dual use property meets each of the requirements of this paragraph (b), it will qualify as energy property if its use of energy from non-qualifying sources does not exceed 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(ii) of this section) during an annual measuring period (as defined in paragraph (b)(2)(iii) of this section). If the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the eligible basis of the energy property will be taken into account in computing the amount of the section 48 credit (for example, if 80 percent of the energy used by a dual use property is from qualifying sources, 80 percent of the basis of the dual use property will be taken into account in computing the amount of the section 48 credit).
(ii) Aggregation of energy inputs . The measurement of energy use required for purposes of paragraph (b)(2)(i) of this section may be made by comparing, on the basis of British thermal units (Btus), energy input to dual use property from all qualifying sources with energy input from all non-qualifying sources. The Commissioner may also accept any other method that accurately establishes the relative annual use of energy derived from all qualifying sources and of energy input from all non-qualifying sources by dual use property.
(iii) Annual measuring period . For purposes of paragraph (b)(2)(i) of this section, the term annual measuring period means with respect to an item of dual use property the 365-day period
(366-day period in case of a leap year) beginning with the day the dual use property is placed in service or a 365day period (366-day period in case of a leap year) beginning the day after the last day of the immediately preceding annual measuring period.
(iv) Recapture . If, for a taxable year (within the recapture period specified in section 50(a) of the Code) subsequent to the taxable year that a dual use property was placed in service, the equipment’s use of energy from all qualifying sources is reduced below 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(i) of this section), then recapture of the section 48 credit is required under section 50(a).
(c) Energy property eligible for mul- tiple Federal income tax credits —(1) In general . For purposes of this section, the basis of energy property may be eligible for calculating both the section 48 credit and another Federal income tax credit, subject to the limitation provided in paragraph (c)(2) of this section.
(2) Limitation. A taxpayer that owns energy property that is eligible for both the section 48 credit and another Federal income tax credit is eligible for the section 48 credit only to the extent the other Federal income tax credit was not claimed with respect to the taxpayer’s eligible basis in the energy property. Except as provided in paragraph (f)(8) of this section, in no event may a taxpayer claim both a section 48 credit and another Federal income tax credit with respect to the same eligible basis in an energy property. See paragraph (e) of this section for special rules regarding ownership of energy property.
(d) Incremental cost —(1) In general . For purposes of this section, only the incremental cost of energy property is included in the eligible basis of the energy property. The term incremental cost means the excess of the total cost of energy property over the amount that would have been expended for the energy property if the energy property were not used for a qualifying purpose.
(2) Example . A installs solar energy property above the surface of an existing roof of a building that A owns. The solar energy property uses bifacial panels that convert to energy the light that strikes both the front and back of the panels if
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improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) that is contained in or attached to a building. Further, all property that is in the nature of machinery (other than structural components of a building or other inherently permanent structure) is considered tangible personal property even though located outside a building. Local law is not controlling for purposes of determining whether property is or is not tangible property or tangible personal property. Thus, tangible property may be personal property for purposes of the energy credit even though under local law the property is considered to be a fixture and therefore real property.
(ii) Other tangible property . The term other tangible property means tangible property other than tangible personal property (not including a building and its structural components), that is used as an integral part of furnishing electrical energy by a person engaged in a trade or business of furnishing any such service.
(iii) Integral part —(A) In general . Property owned by a taxpayer is an integral part of a qualified investment credit facility owned by the same taxpayer if it is used directly in the intended function of the qualified investment credit facility and is essential to the completeness of the intended function of the qualified investment credit facility. A taxpayer may not claim the section 48 credit for any property that is an integral part of the taxpayer’s qualified investment credit facility that is not owned by the taxpayer.
(B) Power conditioning and trans- fer equipment . Property that is an integral part of a qualified investment credit facility includes power conditioning equipment and transfer equipment used to perform the intended function of the qualified investment credit facility. Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment
(4) Examples. The following examples illustrate the rules in this paragraph (e). In each example, X and Y are unrelated taxpayers.
(i) Example 1. Fractional ownership required to satisfy section 48 . X and Y own fractional ownership interests in a geothermal heat pump equipment that is a unit of energy property. Because X and Y each own a fractional ownership interest in a unit of energy property, a section 48 credit may be determined with respect to X’s and Y’s fractional ownership interests in the unit of energy property.
(ii) Example 2. Ownership of separate compo- nents . X and Y own separate components of a geothermal heat pump equipment, which taken together is a unit of energy property. X owns the coils in the ground and Y owns the heat pump. No section 48 credit may be determined with respect to either X or Y because each owns a separate component of energy property that does not constitute a unit of energy property as defined in §1.48-9(f)(2).
(iii) Example 3. Shared ownership of property that is an integral part of separate energy proper- ties. X owns a wind energy property that is a unit of energy property and Y owns a solar energy property that is a unit of energy property that are co-located. Both X’s wind energy property and Y’s solar energy property connect to a substation that houses a step-up transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. X and Y each own a 50% fractional ownership interest in the step-up transformer. The step-up transformer is an integral part of both the wind energy property and the solar energy property (as defined in §1.48-9(f)(3)(i). As a result, X and Y may both compute a section 48 credit for their respective energy properties by including 50% of the costs of the step-up transformer. (iv) Example 4. Separate ownership of property that is an integral part of separate energy property . X owns a wind energy property that is a unit of energy property and property that is an integral part of the wind energy property, specifically a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a solar energy property that is a unit of energy property that connects to X’s transformer. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48 credit for its solar energy property but it will not include any costs relating to the transformer.
(f) Coordination with other Code pro- visions . Paragraphs (f)(1) through (7) of this section provide rules applicable to the election under section 48(a)(5)(C) to treat certain facilities as energy property eligible for a section 48 credit in lieu of a renewable electricity production credit under section 45 of the Code (section 45 credit). Paragraph (f)(8) of this section provides a coordination rule for property with respect to which both a section 48 credit and a low-income housing credit under section 42 of the Code (section 42 credit) may be determined.
(1) Election to treat qualified facilities as energy property . If a taxpayer makes an election under section 48(a)(5)(C) of the Code (pursuant to the requirements in paragraph (f)(6) of this section) to treat qualified property (as defined in paragraph (f)(2) of this section) that is part of a qualified investment credit facility (as defined in paragraph (f)(4) of this section) as energy property with respect to which a section 48 credit may be determined, such property will be treated as energy property for purposes of section 48. No section 45 credit may be determined with respect to any such qualified investment credit facility and the requirements of section 45 are not imposed on a qualified investment credit facility. No credit under sections 45Q or 45V of the Code may be determined with respect to either any carbon capture equipment included in a qualified investment credit facility or any specified clean hydrogen production facility.
(2) Qualified property . For purposes of this paragraph (f), the term qualified property means property that meets each of the requirements of paragraphs (f)(2)(i) through (iii) of this section:
(i) The property is tangible personal property (as defined in paragraph (f)(3)(i) of this section) or other tangible property (not including a building or its structural components) (as defined in paragraph (f) (3)(ii) of this section), but only if such other tangible property is used as an integral part (as defined in paragraph (f)(3)(iii) of this section) of the qualified investment credit facility (as defined in paragraph (f) (4) of this section).
(ii) Depreciation (or amortization in lieu of depreciation) is allowable (as defined in §1.48-9(b)(4)) with respect to the property.
(iii) The taxpayer constructs, reconstructs, or erects the property (as defined in §1.48-9(b)(1)) or acquires the property (as defined in §1.48-9(b)(2)) if the original use of the property (as defined in §1.489(b)(3)) commences with the taxpayer. (3) Definitions related to requirements for qualified property. For purposes of section 48 of the Code and this paragraph (f), the definitions of this paragraph (f)(3) apply:
(i) Tangible personal property . The term tangible personal property means any tangible property except land and
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are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters voltage in order to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware and software used to monitor, operate, and protect transfer equipment.
(C) Roads . Roads that are an integral part of a qualified investment credit facility are integral to the activity performed by the qualified investment credit facility; these include onsite roads that are used for equipment to operate and maintain the qualified investment credit facility. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by a qualified investment credit facility.
(D) Fences. Fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property.
(E) Buildings . Generally, buildings are not integral parts of a qualified investment credit facility because they are not integral to the activity of the qualified investment credit facility. However, the following structures are not treated as buildings for this purpose:
( 1 ) A structure that is essentially an item of machinery or equipment.
( 2 ) A structure that houses property that is integral to the activity of a qualified investment credit facility if the use of the structure is so closely related to the use of the housed qualified investment credit facility that the structure clearly can be expected to be replaced when the
qualified investment credit facility it initially houses is replaced.
(4) Qualified investment credit facility . The term qualified investment credit facil- ity means any facility—
(i) That is a qualified facility (within the meaning of section 45) described in section 45(d)(1) through (4), (6), (7), (9) or (11) of the Code;
(ii) That meets the placed in service and beginning of construction requirements (if any) provided in section 48 of the Code;
(iii) With respect to which no credit has been allowed under section 45 of the Code; and
(iv) For which the taxpayer makes an irrevocable election under section 48(a) (5) of the Code and paragraph (f)(1) of this section.
(5) Intangibles excluded . Intangible property is not qualified property for purposes of section 48(a)(5)(D) of the Code and paragraph (f) of this section.
(6) Time and manner of making elec- tion —(i) In general . To make an election under section 48(a)(5) of the Code and paragraph (f)(1) of this section to treat a qualified facility as a qualified investment credit facility, a taxpayer must claim the section 48 credit with respect to such qualified investment credit facility on a completed Form 3468, Investment Credit, or any successor form(s), and file such form with the taxpayer’s timely filed (including extensions) Federal income tax return for the taxable year in which the qualified investment credit facility is placed in service. The taxpayer must also attach a statement to its Form 3468, or any successor form(s), filed with its timely filed Federal income tax return (including extensions) that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified investment credit facility subject to an election under section 48(a) (5) and paragraph (f)(1) of this section. A separate election must be made for each qualified facility that meets the requirements provided in paragraph (f)(4) of this section to be treated as a qualified investment credit facility. If any taxpayer owning an interest in a qualified facility makes an election with respect to such qualified facility, that election is binding on all taxpayers that directly or indirectly own an interest in the qualified facility.
(ii) Special rule for partnerships and S corporations . In the case of a qualified facility owned by a partnership or an S corporation, the election under paragraph (f)(1) of this section is made by the partnership or S corporation and is binding on all ultimate section 48 credit claimants (as defined in §1.50-1(b)(3) (ii)). The partnership or S corporation must file a Form 3468, or any successor form(s), with its timely filed partnership or S corporation return (including extensions) with respect to Federal income tax for the taxable year in which the qualified investment credit facility is placed in service to indicate that it is making the election and attach a statement that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified facility subject to the election. The ultimate credit claimants must claim the section 48 credit on a completed Form 3468, or any successor form(s), and file such form with a timely filed (including extensions) Federal income tax return for the taxable year that ends with or within the taxable year in which the partnership or S corporation made the election. The partnership or S corporation making the election must provide the ultimate credit claimants with the necessary information to complete Form 3468, or any successor form(s), to claim the energy credit.
(7) Election irrevocable . The election under section 48(a)(5) of the Code and paragraph (f)(1) of this section to treat a qualified facility as an energy property is irrevocable.
(8) Coordination rule for sections 42 and 48 credits. As provided under section 50(c)(3)(C) of the Code, in the case of a taxpayer determining eligible basis for purposes of calculating a section 42 credit, a taxpayer is not required to reduce its basis in an energy property by the amount of the section 48 credit determined with respect to the property. The basis of an energy property may be used to determine a section 48 credit and may also be included in eligible basis when determining a section 42 credit. See paragraph (e) of this section for special rules regarding ownership of energy property.
(g) Rules for certain lower-output energy properties to include qualified interconnection costs in the basis of
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associated energy property —(1) In gen- eral . For purposes of determining the section 48 credit, energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (g)(2) of this section), in connection with the installation of energy property (as defined in §1.489(a)) that has a maximum net output of not greater than 5 MW (as measured in alternating current) (as described in paragraph (g)(3) of this section). The qualified interconnection property must provide for the transmission or distribution of the electricity produced or stored by such energy property and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (g)(6) of this section.
(2) Qualified interconnection prop- erty. The term qualified interconnection property means, with respect to an energy project that is not a microgrid controller, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnection; is either constructed, reconstructed, or erected by the taxpayer, (as defined in §1.48-9(b)(1)), or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer; and the original use (as defined in §1.48-9(b)(3)), of which, pursuant to an interconnection agreement (as defined in paragraph (g) (4) of this section), commences with a utility (as defined in paragraph (g)(5) of this section). Qualified interconnection property is not part of an energy property. As a result, qualified interconnection property is not taken into account in determining whether an energy property satisfies the requirements for the domestic content bonus credit amount referenced in section 48(a)(12) of the Code and the increase in credit rate for energy communities provided in section 48(a) (14) of the Code.
(3) Five-Megawatt Limitation —(i) In general . The Five-Megawatt Limitation is measured at the level of the energy property in accordance with section 48(a)(8) (A) of the Code. The maximum net output
of an energy property is measured only by nameplate generating capacity of the unit of energy property at the time the energy property is placed in service.
(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. The determination of whether an energy property has a maximum net output of not greater than 5 MW (as measured in alternating current) is based on the nameplate capacity for purposes of paragraph (g)(1) of this section. Where applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy property. Paragraphs (g)(3)(ii)(A) and (B) of this section, provide rules for applying the Five-Megawatt Limitation (as provided in paragraph (g)(1) of this section) to electrical generating energy property and electrical energy storage property, respectively.
(A) Electrical generating energy prop- erty . In the case of an electrical generating energy property, use the maximum electrical generating output in MW that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202.
(B) Electrical energy storage property . In the case of electrical energy storage property (as defined in §1.48-9(e)(10)(ii)), the storage device’s maximum net output is its nameplate capacity.
(4) Interconnection agreement . The term interconnection agreement means an agreement with a utility for the purposes of interconnecting the energy property owned by such taxpayer to the transmission or distribution system of the utility.
(5) Utility . For purposes of section 48(a)(8) of the Code and this paragraph (g), the term utility means the owner or operator of an electrical transmission or distribution system that is subject to the regulatory authority of a State or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative.
(6) Reduction to amounts chargeable to capital account . In the case of expenses paid or incurred for qualified interconnection property as defined in paragraph (g)(2) of this section, amounts otherwise chargeable to capital account with respect to such expenses must be reduced under rules similar to the rules of section 50(c) of the Code. In addition, the taxpayer must pay or incur the interconnection property costs; therefore, any reimbursement, including by a utility, must be accounted for by reducing taxpayers’ expenditure when determining eligible costs.
(7) Examples . This subparagraph provides examples illustrating the application of the Five-Megawatt Limitation provided in this paragraph (g).
(i) Example 1 . Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by separate taxpayers. X places in service a solar energy property (Solar Property) with a maximum net output of 5 MW (as measured in alternating current). Y places in service a qualified wind facility (Wind Facility), for which Y has made a valid election under section 48(a)(5) of the Code to elect the section 48 credit in lieu of the section 45 credit, with a maximum net output of 5 MW (as measured in alternating current). The Solar Property and the Wind Facility are separate units of energy property installed on contiguous pieces of land and connect to the grid through a common intertie. As part of the development of the Solar Property and Wind Facility, interconnection costs are required by the utility to modify and upgrade the transmission system at or beyond the common intertie to the utility’s transmission system to accommodate such interconnection. X and Y are party to the same interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost of the qualified interconnection property. X and Y may include the costs paid or incurred by X and Y, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, when calculating their respective section 48 credits for the Solar Property and the Wind Facility because each has a maximum net output of not greater than 5 MW.
(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for a single energy property. X develops three solar energy properties located in close proximity. The three solar energy properties are not considered an energy project pursuant to the definition in § 1.48-13(d). Each of the solar energy properties is a unit of energy property and has a maximum net output of 4 MW (as measured in alternating current). Electricity that is suitable for use or transmission (and is not further conditioned) from the three solar energy properties feeds into a single gen-tie line and a common intertie. X is party to a separate interconnection agreement with the utility for each solar energy property and each interconnection
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portion described in §1.6418-1(c)(2) (iii), if, during any taxable year, there is recapture under section 48(a)(10)(C) of the Code and §1.48-13(c)(3) of any increased credit amount under section 48(a)(9)(B)(iii) before the close of the recapture period (as described in §1.4813(c)(5)), such eligible taxpayer and the transferee taxpayer must follow the notification process in paragraph (f)(2) of this section with recapture impacting the transferee taxpayer as described in paragraph (f)(3) of this section.
(2) Notification requirements . The notification requirements for the eligible taxpayer are the same as for an eligible taxpayer that must report a recapture event as described in paragraph (d)(2)(i) of this section, except that the recapture amount that must be computed is defined in §1.48-13(c)(4).
(3) Impact of recapture . The transferee taxpayer is responsible for any amount of tax increase under section 48(a)(10) (C) of the Code and §1.48-13(c)(3) upon the occurrence of a recapture event under §1.48-13(c)(3)(ii).
(4) Applicability date. This section applies to taxable years ending on or after
[DATE OF PUBLICATION OF FINAL RULE].
agreement allows for a maximum output of 4 MW (as measured in alternating current). X may include the costs it paid or incurred for qualified interconnection property for each solar energy property when calculating its section 48 credit for each of the three solar energy properties, subject to the terms of each interconnection agreement, because each of the solar energy properties has a maximum net output of not greater than 5 MW.
(iii) Example 3. Application of Five-Megawatt Limitation to a single interconnection agreement for multiple energy properties. The facts are the same as Example 2, except that X is party to one interconnection agreement with the utility with respect to the three solar energy properties and the interconnection agreement allows for a maximum output of 12 MW (as measured in alternating current). With respect to each of the three solar energy properties, X may include the costs it paid or incurred for qualified interconnection property for each solar energy property when calculating its section 48 credit for each of the three solar energy properties, subject to the terms of the interconnection agreement, because each of the solar energy properties has a maximum net output of not greater than 5 MW.
(iv) Example 4. Application of Five-Megawatt Limitation to an Energy Project. The facts are the same as Example 3, except that the three solar energy properties are also subject to a common power purchase agreement and as a result, are considered an energy project (as defined in § 1.48-13(d)). With respect to each of the three solar energy properties, X may include the costs it paid or incurred for qualified interconnection property when calculating its section 48 credit for each of the three solar energy properties, subject to the terms of the interconnection agreement, because each of the solar energy properties has a maximum net output of no greater than 5 MW. (h) Cross references . (1) For rules regarding the coordination of the section 42 credit and section 48 credit, see section 50(c)(3) of the Code. (2) For rules regarding the denial of double benefit for qualified biogas property, see section 45(e) of the Code.
(3) To determine applicable recapture rules, see section 50(a) of the Code.
(4) For rules regarding the credit eligibility of property used outside the United States, see section 50(b)(1) of the Code.
(5) For rules regarding the credit eligibility of property used by certain tax-exempt organizations, see section 50(b)(3) of the Code. See section 6417(d)(2) of the Code for an exception to this rule in the case of an applicable entity making an elective payment election.
(6) For application of the normalization rules to the section 48 credit when taken by certain regulated companies, including rules regarding the election not to apply the normalization rules to energy storage technology (as defined in section 48(c)(6) of the Code), see section 50(d)(2) of the Code.
(i) Applicability date . This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after
[DATE OF PUBLICATION OF FINAL RULE].
Par. 5. Section 1.6418-5, as proposed to be added at 88 FR 40496, June 21, 2023, is amended by:
Redesignating paragraphs (f) through (h) as paragraphs (g) through (i).
Adding new paragraph (f). The addition reads as follows:
§1.6418-5 Special rules.
(f) Notification and impact of recap- ture under section 48(a)(10)(C) of the Code— (1) In general. In the case of any election under §1.6418-2 or §1.6418-3 with respect to any specified credit
Douglas W. O’Donnell, Deputy Commissioner for Services and
Enforcement.
(Filed by the Office of the Federal Register November 17, 2023, 8:45 a.m., and published in the issue of the Federal Register for November 22, 2023, 88 FR 82188)
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