Notice 2022-49 requested comments

on several aspects of the treatment of qualified interconnection property, specifically the types of eligible costs, the required documentation, and the Five-Megawatt Limitation.

Qualified interconnection property costs arise from installation of tangible

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property that is part of an addition, modification, or upgrade to a transmission or distribution system at or beyond the point of interconnection. Energy property includes all functionally interdependent property owned by the taxpayer. Additionally, property owned by the taxpayer that is an integral part of such energy property is energy property. This may include power conditioning equipment owned by the taxpayer and used to condition electricity into a form suitable for use or transmission. However, qualified interconnection property, which is most similar in function to transmission and distribution property, is neither property that is a functionally interdependent component of an energy property nor an integral part of an energy property. Therefore, qualified interconnection property is not energy property. Accordingly, proposed §1.48-14(g)(2) would clarify that 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)(B) and the increase in credit rate for energy communities provided in section 48(a)(14).

Consistent with section 48(a)(8)(A), however, proposed §1.48-14(g) would clarify that, in connection with the installation by a taxpayer of energy property (as defined in section 48(a)(3)) that has a maximum net output of not greater than 5 MW (as measured in alternating current), amounts paid or incurred by the taxpayer for qualified interconnection property that is required to accommodate the interconnection are included in the basis of a related energy property. Additionally, proposed §1.48-14(g)(3) would provide that the maximum net output of an energy property is measured only by nameplate generating capacity of the unit of energy property (or, in the case of energy storage technology, the nameplate capacity of such energy storage technology) at the time the energy property is placed in service.

2. Costs Included in Basis of Related Energy Property

Proposed §1.48-14(g)(1) would provide that only amounts paid or incurred by a taxpayer for property that is constructed,

reconstructed, or erected by the taxpayer, or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer, will be included in the basis of a related energy property. A taxpayer that is reimbursed for these costs may not include such reimbursed costs in the amount paid or incurred by the taxpayer for qualified interconnection property. Proposed §1.4814(g)(6) would adopt this rule. In the case of a utility reimbursing a taxpayer for costs the taxpayer pays or incurs for qualified interconnection property, the utility should provide the taxpayer with information regarding such costs by the date on which the project is placed in service.

The Treasury Department and the IRS are aware of common situations where a taxpayer could ultimately receive a payment, credit, or service from another entity, including a utility, related to the costs the taxpayer pays or incurs for qualified interconnection property. For example, one taxpayer may place in service energy property and make payments to a utility with respect to qualified interconnection property involving the addition, modification, or upgrade to the utility’s transmission system related to such energy property. Subsequently, a different taxpayer may, at a later date, place in service energy property and make payments to the same utility related to the same additions, modifications, or upgrades to the utility’s transmission system that were made in response to the first taxpayer’s interconnection. The utility may pay, credit, or provide services to the first taxpayer in an amount related to the costs paid by the second taxpayer. The likely amount or timing of any such payment, credit, or service would not be known at the time the first taxpayer interconnects to the utility’s transmission system.

The Treasury and the IRS request comment on whether such payment, credit, or service received by the first taxpayer, as the result of subsequent payments made to a utility by other parties, should be treated as a reimbursement to the first taxpayer and impact the amount of the costs of qualified interconnection property that the first taxpayer may include in its basis for purposes of the section 48 credit. The Treasury and the IRS also request comment on whether the costs paid by the second taxpayer

should be treated as amounts paid or incurred for qualified interconnection property in connection with the installation of the second taxpayer’s energy property. The Treasury and IRS request comment on industry practices relevant to the determination of costs paid or incurred for qualified interconnection property, including the accounting treatment of costs paid or incurred for qualified interconnection property. The Treasury and the IRS also request comment on whether any clarifications are needed regarding the tax treatment of amounts paid or incurred for qualified interconnection property, including reimbursement of costs paid or incurred by a taxpayer for qualified interconnection costs.

In section 3.02(1)(b)(ii) of Notice 2022-49, the Treasury Department and the IRS requested comments concerning what type of documentation, in addition to interconnection agreements and cost certification reports, is readily available for a taxpayer to demonstrate that they have paid or incurred interconnection costs. Taxpayers must retain documentation in compliance with section 6001 of the Code. The proposed regulations do not provide any specific type of required documentation, and any documentation that satisfies section 6001 will suffice to substantiate that a taxpayer has paid or incurred qualified interconnection costs. Commenters to Notice 2022-49 provided feedback on the documentation that taxpayers may use to substantiate costs paid or incurred for qualified interconnection property.

Qualified interconnection property is either constructed, reconstructed, or erected by the taxpayer, or the taxpayer pays or incurs the cost with respect to the construction, reconstruction, or erection of such property; and the original use of which, pursuant to an interconnection agreement, commences with a utility. Therefore, in some cases, taxpayers will have the necessary information and documentation on these costs. In other cases, the taxpayers will need to receive this information from the utility, which, the Treasury Department and the IRS understand, will be a common scenario. For situations in which property is constructed, reconstructed, or erected by a party other than the taxpayer, final information with conclusive details such as a true-up report

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with the actual costs, final invoices, proof of payment or reimbursement, and permission to operate documentation or any other final project accounting documentation should be maintained. Other examples of cost documentation records include, but are not limited to, the interconnection agreement, interconnection study, signed customer contracts, and cost certification reports.

3. Five-Megawatt Limitation

Under section 48(a)(8)(A), energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of energy property only if it has a maximum net output of not greater than 5 MW (as measured in alternating current). The addition of amounts paid or incurred by the taxpayer for qualified interconnection property in section 48(a)(8)(A) is tied to the installation of “energy property.” The statute clearly ties the 5 MW limitation to the energy property; therefore, as long as an energy property is 5 MW or less, the statute is satisfied. Additionally, measurement at the level of the energy property provides certainty for taxpayers and the IRS because it is measured by the energy property’s maximum net output when it is placed in service. Therefore, proposed §1.48-14(g)(3) would provide that the Five-Megawatt Limitation must be measured at the level of the energy property. Proposed §1.48-14(g)(7) also would provide examples illustrating the application of this rule.

In accordance with proposed §1.4814(g)(3), if an energy project comprised of multiple energy properties has a combined nameplate capacity in excess of 5 MW, each of the energy properties would nonetheless be eligible to include amounts paid or incurred by the taxpayer for qualified interconnection property if each energy property satisfies the Five-Megawatt Limitation. The Treasury Department and the IRS request comments regarding the application of the Five-Megawatt Limitation to a single energy property, including whether the definition of an energy property is sufficiently clear for this purpose. In addition, the Treasury Department and the IRS request comments regarding the circumstances under

which multiple energy properties each with a nameplate capacity of less than 5 MW would utilize common power conditioning equipment for economic or regulatory reasons and/or common interconnection agreements, or would instead utilize separate power conditioning equipment and/or interconnection agreements.

4. Non-application to Certain Types of Energy Properties

The definition of qualified interconnection property specifically excludes interconnection property installed with respect to an energy project that is a microgrid controller. Additionally, taxpayers may not include the costs of qualified interconnection property in the basis of electrochromic glass property and fiber optic solar energy property because these types of energy property do not require additions, modifications, or upgrades to a transmission or distribution system. Similarly, in the case of energy properties that generate thermal energy, such as certain geothermal property and qualified biogas property, this provision is inapplicable.

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