Part I

26 CFR 1.48-9, 1.48-13, 1.48-14, and 1.6418-5

T.D. 10015

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Definition of Energy Property and Rules Applicable to the Energy Credit

AGENCY : Internal Revenue Service (IRS), Treasury.

ACTION : Final regulations.

SUMMARY : This document sets forth final rules relating to the energy credit, including rules for determining whether investments in energy property are eligi­ ble for the energy credit and for imple­ menting certain amendments made by the Inflation Reduction Act of 2022. The final regulations impact taxpayers who invest in energy property eligible for the energy credit.

DATES : Effective date : These regulations are effective on December 12, 2024.

Applicability dates : For dates of applica­ bility, see §§1.48-9(g), 1.48-13(f), 1.4814(j), and 1.6418-5(j).

FOR FURTHER INFORMATION CONTACT : Concerning the regulations, the IRS Office of the Associate Chief Counsel (Passthroughs and Special Indus­ tries) at (202) 317‑6853 (not a toll‑free number).

SUPPLEMENTARY INFORMATION:

Authority

This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 48 and 6418 of the Internal Revenue Code (Code) issued by

the Secretary of the Treasury or her dele­ gate (Secretary) pursuant to the authority granted under sections 45(b)(12), 48(a) (3)(D), and (a)(16), 6418(g) and (h), and 7805(a) of the Code (final regulations). Section 48(a)(3)(D) provides a specific delegation of authority for the Secretary to prescribe by regulations performance and quality standards for energy property after consulting with the Secretary of Energy.

Sections 45(b)(12) and 48(a)(16) pro­ vide specific delegations of authority with respect to the requirements of section 45(b), including the prevailing wage and apprenticeship (PWA) requirements of section 45(b)(7) and (8), as incorporated by section 48(a)(10) and (11), with each stating, “[t]he Secretary shall issue such regulations or other guidance as the Sec­ retary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which pro­ vides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.” Section 48(a)(10)(C) grants authority for the Secretary to provide, by regulations or other guidance, for recapturing the benefit of any increase in the credit allowed under section 48(a) allowed to an energy project that initially satisfies the PWA requirements if such energy project should later fail to satisfy such requirements during the recapture period by applying rules similar to the rules of section 50(a) of the Code. Sec­ tion 48(a)(16) provides a general grant of regulatory authority for section 48(a), by stating: “The Secretary shall issue such regulations or other guidance as the Sec­ retary determines necessary to carry out the purposes of this subsection, including regulations or other guidance which pro­ vides for requirements for recordkeeping or information reporting for purposes of administering the requirements of this subsection.”

Section 6418(g) provides several spe­ cific delegations of authority to the Sec­ retary with regard to enforcing require­ ments for valid transfers of certain Federal income tax credits under section 6418 and recapturing excessive credit transfers. Section 6418(h) provides a specific del­ egation of authority with respect to the

transfer of credits under section 6418, stating, in part, that “[t]he Secretary shall issue such regulations or other guidance as may be necessary to carry out the pur­ poses of this section.”

Finally, section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of

[the Code], including all rules and regu­ lations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

I. Overview

Section 38 of the Code allows cer­ tain business credits against the Federal income tax imposed by chapter 1 of the Code (chapter 1). Among the credits allowed by section 38 is the investment credit determined under section 46 of the Code, which includes the energy credit determined under section 48 (section 48 credit). See sections 38(b)(1) and 46(2). Section 48(a)(1) generally provides that the section 48 credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. For most types of energy property, eligibility for the section 48 credit and, in some cases, the amount of the section 48 credit depend upon meeting certain deadlines for begin­ ning construction of the energy property or for placing the energy property in ser­ vice.

Section 48 originally was enacted by section 2 of the Revenue Act of 1962, Pub­ lic Law 87-834, 76 Stat. 960, 963 (Octo­ ber 16, 1962), to spur economic growth by encouraging investments in various capital projects across many industries including energy, transportation, and communica­ tions. Section 48 has been amended many times since its enactment, most recently by section 13102 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). The IRA amended section 48 in several ways, including by making additional types of energy property eligi­ ble for the section 48 credit, providing a special rule to allow certain lower-output

Bulletin No. 2024–52 1355 December 23, 2024

energy properties to include amounts paid for qualified interconnection property in connection with the installation of energy property, and providing an increased credit amount for energy projects that sat­ isfy prevailing wage and apprenticeship requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities.

The Income Tax Regulations at §1.48-9 in effect prior to December 12, 2024 (for­ mer §1.48-9), which provide definitions and rules for determining whether prop­ erty is energy property eligible for the sec­ tion 48 credit, originally were published on January 23, 1981 (T.D. 7765, 46 FR 7287). Those regulations were amended on July 21, 1987 (T.D. 8147, 52 FR 27336) to provide rules for dual use property. Thus, former §1.48-9 has not been updated since 1987, which is before many of the current types of energy property became eligible for the section 48 credit.

II. Prior Guidance

Prior to proposing the amendments to the regulations under section 48 being finalized by this treasury decision, the Department of the Treasury (Trea­ sury Department) and the IRS twice requested comments on issues to be addressed in these regulations. On Octo­ ber 26, 2015, the Treasury Department and the IRS published Notice 2015-70, 2015-43 I.R.B. 604, requesting com­ ments regarding statutory updates to section 48 preceding those made by the IRA. On October 24, 2022, in response to the passage of the IRA, the Trea­ sury Department and the IRS published Notice 2022-49, 2022-43 I.R.B. 321, requesting general as well as specific comments on issues arising under sec­ tion 48, among other sections, that were amended or added by the IRA.

On August 30, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG100908-23) in the Federal Register (88 FR 60018), corrected in 88 FR 73807 (Oct. 27, 2023), corrected in 89 FR 25550 (April 11, 2024), proposing rules regard­ ing the increased credit amounts available for taxpayers satisfying PWA require­ ments established by the IRA (PWA Proposed Regulations). Comments were

requested and a public hearing was held November 21, 2023.

On November 22, 2023, after consid­ eration of all the comments submitted in response to Notice 2015-70 and Notice 2022-49, and after consultation with the Department of Energy (DOE), the Trea­ sury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-13256917) in the Federal Register (88 FR 82188), corrected in 89 FR 2182 (January 12, 2024), proposing rules that would pro­ vide guidance under section 48 (Proposed Regulations). On February 22, 2024, the Treasury Department and the IRS pub­ lished a second correction to the Proposed Regulations in the Federal Register (89 FR 13293) that re-opened the comment period through March 25, 2024 (Correc­ tion). The Proposed Regulations withdrew certain portions of the PWA Proposed Regulations and re-proposed regulations that would provide additional guidance on the PWA requirements under section 48, including the statutory exception for energy projects with a maximum output of less than one megawatt (MW) and the recapture rules under section 48(a)(10)(C) related to the PWA requirements.

Although the Proposed Regulations withdrew certain portions of the PWA Proposed Regulations, the Explanation of Provisions section in the preamble to the PWA Proposed Regulations gener­ ally remained relevant. Therefore, to the extent consistent with the preamble to the Proposed Regulations, the Explanation of Provisions section of the PWA Proposed Regulations was incorporated in the pre­ amble to the Proposed Regulations.

The preamble to the Proposed Regu­ lations did not address written comments that were submitted in response to the PWA Proposed Regulations. Any com­ ments received in response to the Pro­ posed Regulations, including comments on the re-proposed regulations addressing the PWA requirements specific to sec­ tion 48, are addressed in the Summary of Comments and Explanation of Revisions section of this preamble. The Proposed Regulations did not extend the comment period or affect the scheduled hearing for the PWA Proposed Regulations. The PWA Proposed Regulations, other than the por­ tions that were withdrawn, were adopted

as final regulations by Treasury Decision (T.D. 9998), which was published in the Federal Register (89 FR 53184) on June 25, 2024 (PWA Final Regulations). On June 21, 2023, the Treasury Depart­ ment and the IRS published a notice of proposed rulemaking (REG-101610-23) in the Federal Register (88 FR 40496) proposing rules concerning the election under section 6418 to transfer certain Federal income tax credits, including the section 48 credit (6418 Proposed Regu­ lations). Proposed §1.6418-5 of the 6418 Proposed Regulations included proposed rules addressing notification requirements and the impact of the credit recapture rules under sections 50(a), 49(b), and 45Q(f) (4) on the transfer of Federal income tax credits. Comments were requested and a public hearing on the 6418 Proposed Reg­ ulations was held on August 23, 2023.

The Proposed Regulations would supplement the 6418 Proposed Reg­ ulations by adding provisions to pro­ posed §1.6418-5 addressing notification requirements and the impact of the recap­ ture rules for failing to satisfy the PWA requirements under section 48(a)(10) if an election under §1.6418-2 or §1.6418-3 has been made. The preamble to the Pro­ posed Regulations did not address written comments that were submitted in response to the regulations proposed in the 6418 Proposed Regulations. Any comments received in response to the Proposed Regulations, including the additions to proposed §1.6418-5 described in the Pro­ posed Regulations, are addressed in the Summary of Comments and Explanation of Revisions section of this preamble. The Proposed Regulations did not otherwise extend the comment period for the 6418 Proposed Regulations. On April 30, 2024, a Treasury Decision (T.D. 9993) adopting the 6418 Proposed Regulations as final regulations (6418 Final Regulations) was published in the Federal Register (89 FR 34770). The 6418 Final Regulations did not finalize the portion of proposed §1.6418-5 that was included in the Pro­ posed Regulations.

Summary of Comments and Explanation of Revisions

The Treasury Department and the IRS received 350 written comments in

December 23, 2024 1356 Bulletin No. 2024–52

response to the Proposed Regulations. The comments are available for public inspection at https://www.regulations.gov or upon request. After full consideration of the comments received in response to the Proposed Regulations, these final reg­ ulations adopt the Proposed Regulations with modifications as described in this Summary of Comments and Explanation of Revisions.

Comments addressing the require­ ments for energy property are described in part I of this Summary of Comments and Explanation of Revisions. Comments addressing the PWA requirements are described in part II of this Summary of Comments and Explanation of Revisions. Comments addressing rules applicable to energy property are described in part III of this Summary of Comments and Explana­ tion of Revisions.

Comments summarizing the statute or the Proposed Regulations, recommending statutory revisions, or addressing issues that are outside the scope of this rulemak­ ing (such as revising other Federal regula­ tions and recommending changes to IRS forms) generally are not addressed in this Summary of Comments and Explanation of Revisions or adopted in these final regulations. In addition to modifications described in this Summary of Comments and Explanation of Revisions, the final regulations also include non-substantive grammatical or stylistic changes to the Proposed Regulations. Unless otherwise indicated in this Summary of Comments and Explanation of Revisions, provisions of the Proposed Regulations with respect to which no comments were received are adopted without substantive change.

I. Requirements for Energy Property

For purposes of the section 48 credit, energy property consists of all the compo­ nents of property that meet the statutory requirements for an energy property as defined by section 48(a)(3) and (c).

Section 48(a)(3)(B) through (D) pro­ vide general requirements for all types of energy property. Section 48(a)(3)(B) limits energy property to property that is constructed, reconstructed, or erected by the taxpayer or that the taxpayer acquires if the original use of such property com­ mences with the taxpayer. Section 48(a)(3)

(C) provides that to be eligible as energy property, depreciation (or amortization in lieu of depreciation) must be allowable for the property. Section 48(a)(3)(D) provides that to be eligible as energy property, the property must also meet any performance and quality standards that have been pre­ scribed by the Secretary, after consulta­ tion with the Secretary of Energy, and are in effect at the time of the taxpayer’s acquisition of the property. Under section 48(a)(3), energy property does not include property that is part of a qualified facility the production from which is allowed a renewable electricity production credit determined under section 45 (section 45 credit) for the taxable year or any prior taxable year. Lastly, if the statutory text of section 48 provides dates by which con­ struction of energy property must begin or when energy property must be placed in service, such energy property must meet those deadlines to be eligible for the sec­ tion 48 credit at specified energy percent­ ages.

A. Definitions related to requirements for energy property

Before 1990, section 48 defined the term “section 38 property” to include, among other types of property, energy property eligible for the section 48 credit. The Revenue Reconciliation Act of 1990, Public Law 101-508, 104 Stat. 1388 (November 5, 1990) removed the term “section 38 property” in amending section 48. However, section 48 is one of the cred­ its that comprise the investment credit for any taxable year determined under section 46, which is included in section 38(b)(1) and remains subject to the general busi­ ness credit rules under section 38. As a result, rules related to “section 38 prop­ erty” remain generally applicable to the section 48 credit.

Sections 1.48-1 and 1.48-2 provide guidance with respect to section 38 prop­ erty. Section 1.48-1 was last substan­ tially revised on October 11, 1988 (T.D. 8233, 53 FR 39592) and §1.48-2 was last revised on June 28, 1985 (T.D. 8031, 50 FR 26698). Although subsequent amend­ ments to section 48 have made some of the rules provided by these regulations inap­ plicable, those rules continue to provide useful definitions related to requirements

for energy property, some of which would be adopted under proposed §1.48-9.

1. Performance and Quality Standards for Energy Property

Section 48(a)(3)(D) provides that energy property is property that meets the performance and quality standards (if any) that have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy) and are in effect at the time of the acquisition of the prop­ erty. Former §1.48-9(m)(1) provided that “energy property must meet quality and performance standards, if any, that have been prescribed by the Secretary (after consultation with the Secretary of Energy) and are in effect at the time of acquisition.” Generally, proposed §1.48-9(c)(2)(i) would adopt this rule for performance and quality standards for energy property from former §1.48-9(m)(1) by providing that energy property must meet performance and quality standards, if any, which have been prescribed by the Secretary (after consultation with the Secretary of Energy) and are in effect at the time of acquisition of the energy property. The final regula­ tions adopt this rule as proposed.

2. Performance and Quality Standards for Electrochromic Glass Property

Proposed §1.48-9(c)(2)(ii)(B) would provide rules for performance and qual­ ity standards for electrochromic glass property by stating that to be eligible for the section 48 credit, electrochromic win­ dows must be rated in accordance with the National Fenestration Rating Coun­ cil (NFRC) and secondary glazing sys­ tems must be rated in accordance with the Attachments Energy Rating Council (AERC) Rating and Certification Process, or subsequent revisions.

A few commenters addressed the per­ formance and quality standards for elec­ trochromic glass provided in the Proposed Regulations. Generally, these commenters suggested methods to satisfy the NFRC rating requirement and were particularly interested in a simulation-based process. For example, a commenter advocated for a process that emphasizes simulation-based validation to expedite compliance and reduce barriers to implementation, partic­

Bulletin No. 2024–52 1357 December 23, 2024

ularly given the lengthy delays associated with physical testing. This commenter stated that simulations, supported by advanced and reliable modeling software, have become a standard practice within the industry. Another commenter also emphasized the need to use simulations to satisfy the NFRC rating requirement.

In response to these comments, the Treasury Department and the IRS con­ sulted with the DOE and learned that the existing NRFC and the AERC ratings sys­ tems incorporate simulation methodolo­ gies that should address the commenters’ concerns. Accordingly, the final regula­ tions adopt this rule as proposed.

3. Placed in Service

a. General rules

Section 48(a) provides that the sec­ tion 48 credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. As part of the regula­ tions under section 46 for the investment credit, §1.46-3(d)(1) provides general rules for determining when a taxpayer has placed a property in service for purposes of the section 48 credit. Under §1.463(d)(1), property is considered placed in service in the earlier of the taxable year in which, under the taxpayer’s deprecia­ tion practice, the period for depreciation with respect to such property begins; or the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.

Proposed §1.48-9(b)(5) largely pro­ posed to adopt the general rules of §1.463(d)(1) for determining when a taxpayer has placed an energy property in service. However, to be eligible for the section 48 credit, energy property must be property with respect to which depreciation (or amortization in lieu of depreciation) is allowable. Accordingly, proposed §1.489(b)(5)(i) would provide that the taxable year in which energy property is placed in service is the earlier of the taxable year in which, under the taxpayer’s depreciation practice, the period for depreciation of such property begins, or the taxable year

in which the energy property is placed in a condition or state of readiness and avail­ ability for a specifically assigned function in either a trade or business or in the pro­ duction of income.

A commenter requested that the final regulations provide a different placed in service rule for energy storage technology. Because energy storage technology may charge and discharge prior to commer­ cial readiness, the commenter suggested that energy storage technology should be treated as placed in service when: (i) such property has all licenses, permits, and approvals required to store and dis­ patch power; (ii) pre-operational testing is complete; (iii) the taxpayer has title to the property; and (iv) the property is available to store and discharge power on a regular, commercial basis.

Proposed §1.48-9(b)(5) would adopt the general placed in service rules of §1.46-3(d)(1), which have applied to the section 48 credit since its enactment, with a modification to reflect the require­ ment that the property be eligible for depreciation or amortization. Until the IRA amended section 48, energy storage property (referred to as “energy storage technology” after the IRA amendments) was considered a component of energy property. Without providing specific indicia that an energy property is placed in service, the rule provided at proposed §1.48-9(b)(5) would provide general prin­ ciples for a taxpayer to determine when an energy property has been placed in service that are broadly applicable to all types of energy property, well-understood, and widely relied upon by industry. The gen­ eral principles provided by the final rule are sufficiently broad to address the com­ menter’s concerns. Therefore, the final regulations do not adopt these comments and instead adopt the placed in service rules as proposed.

b. Lease-passthrough election

Section 1.46-3(d)(3) provides that, notwithstanding the provisions of §1.463(d)(1), property with respect to which an election is made under §1.48-4 to treat the lessee as having purchased such property is considered placed in service by the les­ sor in the taxable year in which possession is transferred to such lessee. Proposed

§1.48-9(b)(5)(ii) would adopt the special rule from §1.46-3(d)(3) for determining when a leased property has been placed in service. Several commenters provided comments relating to the rule for leased property in the context of qualified biogas property.

A commenter requested clarification on the application of the lease passthrough election under §1.48-4 to treat a lessee as having purchased such energy property from the lessor with respect to any prop­ erty comprising a qualified biogas prop­ erty, including both component properties considered functionally interdependent as a single unit of energy property and prop­ erty treated as an integral part of energy property. This commenter asked for illus­ trative examples of the application of the lease passthrough election in the context of a renewable natural gas (RNG) qual­ ified biogas property if the equipment comprising the qualifying biogas produc­ tion property, including equipment treated as an integral part of the qualifying biogas property, is owned by multiple taxpayers.

Another commenter suggested allow­ ing a single taxpayer to consolidate deemed ownership of an entire qualified biogas property to permit a more efficient use and/or transfer of the section 48 credit under the section 6418 credit transfer rules by relying on existing lease passthrough rules that apply to energy property. The commenter asserted that this would per­ mit greater qualified investment and use of the section 48 credit if, for regulatory or environmental permitting reasons, some portion of the section 48 credit-eligible qualified biogas property simply cannot be owned by a single or related taxpayers. The commenter acknowledged that under the 6418 Proposed Regulations, the trans­ fer of the tax credits to a lessee under a lease passthrough election will preclude further transfers under section 6418.

Guidance on eligibility for the lease passthrough election is beyond the scope of the Proposed Regulations because pro­ posed §1.48-9(b)(5)(ii) merely proposed a rule for determining when property with respect to which a lease passthrough elec­ tion is made under §1.48-4 is placed in service. Guidance on eligibility for the lease passthrough election is addressed elsewhere, such as in §1.48-4 and the 6418 Final Regulations. Accordingly,

December 23, 2024 1358 Bulletin No. 2024–52

these final regulations do not adopt these comments.

4. Acquisition of energy property

Proposed §1.48-9(b)(2) would provide that the term acquisition of energy prop­ erty means a transaction by which a tax­ payer obtains rights and obligations with respect to energy property, including 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 physical possession or con­ trol of the energy property. This definition was intended to require that the taxpayer establish tax ownership of the energy property for Federal income tax purposes. The final regulations modify the definition in proposed §1.48-9(b)(2) to make this requirement explicit.

B. Types of energy property

Proposed §1.48-9(e) would expand the definitions of energy property provided in former §1.48-9 to account for new technologies that were added by amend­ ments to section 48, including by the IRA. Generally, the definitions of the types of energy property provided in the Proposed Regulations incorporate the definitions provided in section 48(a)(3) and (c) but do not provide specific beginning of con­ struction or placed in service deadlines. Taxpayers should refer to the current defi­ nitions of energy property provided by section 48 for specific requirements appli­ cable to each type of energy property. The definitions of the types of energy property provided in proposed §1.48-9(e) were developed by the Treasury Department and the IRS in consultation with the DOE.

Some commenters requested clarifica­ tion concerning whether a particular type of technology would fall into one of the categories of energy property. For exam­ ple, a commenter requested guidance concerning what type of energy property would include sewage energy recovery property and provided three options: geo­ thermal heat pump (GHP) property by reference to “underground fluids,” energy storage technology, or waste energy recovery property (WERP). A defiinitive response to such comments would require

the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which may include information that was not provided by the commenters. Because more information is needed to make the determinations requested by the commenters, these final regulations do not address the requested clarifications concerning the categoriza­ tion of specific technologies.

1. Combined Heat and Power System Property

Section 48(a)(3)(A)(v) includes com­ bined heat and power system (CHP) prop­ erty as a type of energy property. Section 48(c)(3)(A) defines CHP property as property comprising a system that, among other requirements, 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). Section 48(c) (3)(A) further provides, in part, that a 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), and that the energy efficiency percentage of the system must exceed 60 percent.

Section 48(c)(3)(B) provides that the amount of the section 48 credit with respect to CHP property is reduced to the extent that a CHP property has an electri­ cal or mechanical capacity in excess of applicable limits. Subject to the exception for CHP property that uses closed or openloop biomass as feedstock, CHP property with capacity in excess of the applicable capacity limit (15 MW or a mechanical capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy capacities) is eli­ gible for only a fraction of the otherwise allowable section 48 credit. This frac­ tion is equal to the applicable capacity limit divided by the capacity of the CHP property. However, CHP property with a capacity in excess of 50 MW or a mechan­ ical energy capacity in excess of 67,000

horsepower or an equivalent combina­ tion of electrical and mechanical energy capacities does not qualify for the section 48 credit. Section 48(c)(3)(C) provides that the energy efficiency percentage of a CHP property is the fraction (i) the numera­ tor of which is the total useful electrical, thermal, and mechanical power produced by the system at normal operating rates, and expected to be consumed in its nor­ mal application, and (ii) the denomina­ tor of which is the lower heating value of the fuel sources for the system. The energy efficiency percentage and the per­ centages under section 48(c)(3)(A)(ii) are determined on a British thermal unit (Btu) basis. Section 48(c)(3)(C)(iii) spe­ cifically provides that the term “combined heat and power system property” does not include property used to transport an energy source to the facility or to distrib­ ute energy produced by the facility.

Additionally, section 48(c)(3)(D) pro­ vides that a CHP property with a fuel source that is at least 90 percent from closed or open-loop biomass that would otherwise qualify for the section 48 credit but for the failure to meet the efficiency standard is eligible for a credit reduced in proportion to the degree to which the sys­ tem fails to meet the efficiency standard. For example, a system that would other­ wise be required to meet the 60-percent efficiency standard, but that only achieves 30-percent efficiency, would be permitted to claim a credit equal to one-half of the otherwise allowable credit.

Proposed §1.48-9(e)(6)(i) would pro­ vide generally that CHP property is prop­ erty comprising a system that uses the same energy source for the simultane­ ous 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 applica­ tions). Proposed §1.48-9(e)(6)(i) would also provide that CHP property must pro­ duce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechani­ cal 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). Further, proposed §1.48-9(e)(6)(i) would provide

Bulletin No. 2024–52 1359 December 23, 2024

that 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 sec­ tion 45). Proposed §1.48-9(e)(6)(i) would also provide that 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 capac­ ity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities. Proposed §1.48-9(e)(6)(ii) would provide that CHP property does not include property used to transport the energy source to the gener­ ating facility or to distribute energy pro­ duced by the facility.

A commenter requested that the final regulations clarify whether a CHP prop­ erty would be eligible for the section 48 credit, assuming all other criteria are met, if the fuel source is exclusively non-re­ newable natural gas. There is no require­ ment that a CHP property use a specific fuel or feedstock. The Treasury Depart­ ment and the IRS emphasize that all CHP property must meet the requirements of section 48(c)(3) and those provided in proposed §1.48-9(e)(6)(i), which the final regulations adopt as proposed.

2. Geothermal Heat Pump Property

Section 48(a)(3)(A)(vii) provides, in part, that energy property includes equip­ ment that uses the ground or ground water as a thermal energy source to heat a struc­ ture or as a thermal energy sink to cool a structure (geothermal heat pump or GHP property). Proposed §1.48-9(e)(8) would adopt the statutory definition of GHP property while providing the modification that in addition to the ground and ground water, other underground working fluids may be used as a thermal energy source or as a thermal energy sink. Accordingly, proposed §1.48-9(e)(8) would provide that GHP property is equipment that uses the ground, ground water, or other under­ ground fluids as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

Several commenters requested revi­ sions to the definition of GHP property to include recovered heat as a thermal energy source. For example, representative of these comments, a commenter requested

clarification that equipment used to cir­ culate recovered heat qualifies as GHP property. This commenter asserted that the same GHP property that uses a ground heat exchanger as a source or sink can be designed to operate in a heat recov­ ery mode, simply recycling heat around a building if the potential exists. Another commenter noted that the use of GHP property in heat recovery mode should be considered a qualified energy source for purposes of the calculation to determine whether the GHP property qualifies as dual use property.

As defined in proposed §1.48-14(b)(1), the term “dual use property” would mean property that uses energy derived from both a qualifying source (that is, from an energy property including a qualified facility for which a section 48(a)(5) elec­ tion has been made) and from a non-qual­ ifying source (that is, sources other than an energy property including a qualified facility for which a section 48(a)(5) elec­ tion has been made). As proposed §1.4814(b)(2) would further provide, if dual use property uses energy derived from both a qualifying source and a non-qualifying source 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 during an annual mea­ suring period (Dual Use Rule). Further, if the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the 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.

The Treasury Department and the IRS decline to adopt these suggested revisions because they would conflict with the stat­ utory definition of GHP property. Section 48(a)(3)(A)(vii) specifically provides that GHP property includes equipment that uses the ground or ground water as a ther­ mal energy source. While the Proposed Regulations would provide that under­ ground fluids may be included, this is a clarification that underground fluids other than water may offer another medium that contains thermal energy from the ground

or ground water. The statute does not include any other thermal energy sources. For further discussion of the Dual Use Rule see part III.B. of this Summary of Comments and Explanation of Revisions.

Additionally, a few commenters sug­ gested expanding the definition to allow GHP property to be used to heat domestic hot water in addition to a structure. For example, a commenter requested that the final rule clarify that domestic hot water generation by GHP property is included in the definition of GHP property. Another commenter asserted that GHP property eligible for the section 48 credit should also be permitted to provide hot water generation because it would be counter­ intuitive if heating hot water for space conditioning is included in the definitions, but heating of domestic hot water is not. The statute requires GHP property heat a structure or cool a structure; therefore, the suggestion to expand the definition is not authorized by the statute. The Treasury Department and the IRS decline to adopt these suggested revisions. The final regu­ lations adopt this rule as proposed.

A commenter mentioned that the energy property definition in proposed §1.48-9(e)(3) concerning geothermal energy property includes clarifying lan­ guage on the scope of included property, specifically addressing production and distribution equipment. The commenter recommended including similar language for GHP property described in section 48(a)(3)(A)(vii). The Treasury Depart­ ment and the IRS declined to adopt this suggestion in the Proposed Regulations, and explained in the preamble to the Proposed Regulations that, while section 48(a)(3)(A)(vii) does not specify energy distribution equipment and components of a building’s heating and/or cooling sys­ tem as components of GHP property, such equipment may be integral to the func­ tion of the GHP property to heat or cool a structure. Thus, energy distribution equip­ ment may be considered GHP property for the reasons stated in the preamble to the Proposed Regulations.

3. Waste Energy Recovery Property

Section 48(a)(3)(A)(viii) provides that energy property includes waste energy recovery property (WERP). Section 48(c)

December 23, 2024 1360 Bulletin No. 2024–52

(5) defines WERP as property (with a capacity not in excess of 50 MW) that generates electricity solely from heat from buildings or equipment if the primary pur­ pose of such building or equipment is not the generation of electricity. Additionally, section 48(c)(5)(C) prevents taxpayers from claiming a double benefit by provid­ ing that any property that could be treated as WERP (determined without regard to section 48(c)(5)(C)) and is part of a CHP property is not treated as WERP for pur­ poses of section 48 unless the taxpayer elects not to treat such system as a CHP property for purposes of section 48.

Proposed §1.48-9(e)(9)(i) would pro­ vide that WERP is property that generates electricity solely from heat from build­ ings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Proposed §1.489(e)(9)(i) would also provide examples of buildings or equipment the primary purpose of which is not the generation of electricity including, but not limited to, manufacturing plants, medical care facil­ ities, facilities on college campuses, pipe­ line compressor stations, and associated equipment. Further, proposed §1.48-9(e) (9)(i) would provide that WERP does not include any property that has a capacity in excess of 50 MW. Proposed §1.48-9(e)(9) (ii) would provide that any WERP that is part of a system that is a CHP property is not treated as WERP for purposes of sec­ tion 48 unless the taxpayer elects to not treat such system as a CHP property for purposes of section 48.

Several commenters requested that specific technologies, including “pres­ sure reduction” equipment or “pressure letdown” equipment, sometimes referred to as “turboexpanders,” which generally allow high pressure gas to expand and produce heat, be added to the examples of WERP that would be provided in proposed §1.48-9(e)(9)(i). Another commenter requested that “pressure reduction” equip­ ment be included as an example of WERP because pipeline transmissions (regard­ less of geographic distance) require high pressure, but at pressure letdown stations and within industrial facilities where the pressure is reduced, pressure reduction affords an opportunity for energy collec­ tion. A commenter requested that district energy systems paired with WERP be

added to the examples of WERP, while another commenter suggested adding car­ bon dioxide power system technology to the examples of WERP.

In response to these requests, the Trea­ sury Department and the IRS highlight that proposed §1.48-9(e)(9) would provide non-exhaustive examples of buildings and facilities at which WERP may function rather than examples of technology that may qualify as WERP. This approach provides a function-oriented approach to determine whether a technology is WERP that is broad enough to encompass nascent technologies without rendering the regula­ tions quickly obsolete. Therefore, the final regulations do not adopt the requested revisions to the definition of WERP, and the final regulations adopt this rule as pro­ posed.

4. Energy Storage Technology

Section 48(a)(3)(A)(ix), which was added by the IRA, provides that energy property includes energy storage technol­ ogy. Section 48(c)(6)(A)(i) defines energy storage technology to mean 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 (or, in the case of hydrogen, that stores energy), and has a nameplate capacity of not less than 5 kilo­ watt-hours (kWh). Section 48(c)(6)(A)(ii) provides that thermal energy storage prop­ erty is also energy storage technology.

Section 48(c)(6)(B) provides a rule for modifications of energy storage technol­ ogy. In the case of any property that either was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property has a capacity of less than 5 kWh and is modified in a manner that such property (after such modification) has a nameplate capacity of not less than 5 kWh, or is energy storage technology (as described in section 48(c)(6)(A)(i)) and is modified in a manner that such property (after such modification) has an increase in name­ plate capacity of not less than 5 kWh, such property is treated as energy storage tech­ nology (as described in section 48(c)(6) (A)(i)) except that the basis of any exist­ ing property prior to such modification is

not taken into account for purposes of the section 48 credit.

Section 48(c)(6)(C) defines thermal energy storage property, for purposes of section 48(c)(6), as property comprising a system that: is directly connected to a heating, ventilation, or air conditioning 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. Section 48(c)(6)(C) (ii) provides that thermal energy storage property does not include a swimming pool, a CHP property, or a building or its structural components.

Commenters requested clarifications regarding the treatment of energy stor­ age technology co-located with, an inte­ gral part of, or shared with a facility that is otherwise eligible for certain Federal tax credits. For example, a commenter requested clarification concerning bound­ aries between energy storage technology eligible for the section 48 credit and qual­ ified clean hydrogen production facilities eligible for the credit under section 45V. Another commenter requested confir­ mation that energy storage technology, including a hydrogen energy storage prop­ erty, separately qualifies for the section 48 credit regardless of whether it is part of a facility for which a credit under section 45, 45V, or 48 is or has been allowed. A commenter also requested confirmation that energy storage technology will be treated as separate property for section 48 and other Code provisions. The Trea­ sury Department and the IRS confirm that energy storage technology is eligi­ ble for the section 48 credit if it satisfies the requirements of section 48 even if the energy storage technology is co-located with or shared by a facility that is other­ wise eligible for the section 45, 45V, or 48 credits.

a. Hydrogen energy storage property

Proposed §1.48-9(e)(10)(iv) would provide that hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the pro­ duction of electricity) that stores hydro­ gen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of

Bulletin No. 2024–52 1361 December 23, 2024

hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Proposed §1.48-9(e)(10) (iv) would also require hydrogen energy storage property to store hydrogen that is solely used for the production of energy and not for other purposes such as for the production of end products such as fertil­ izer. Proposed §1.48-9(e)(10)(iv) would also provide a non-exhaustive list of components of hydrogen energy storage property that would include, but would not be limited to, a hydrogen compressor and associated storage tank and an under­ ground storage facility and associated compressors.

In the preamble to the Proposed Regu­ lations, the Treasury Department and the IRS requested comments on alternative approaches to assessing limitations on the use of hydrogen energy storage property, including whether additional clarifica­ tion is needed regarding the production of energy from hydrogen, and what type of documentation would be needed to demonstrate that a hydrogen energy stor­ age property was used to store hydrogen that is solely used for the production of energy.

A commenter particularly endorsed the approach taken in the Proposed Reg­ ulations by providing that the nameplate capacity requirement for hydrogen is 0.127 kilograms for 5 kWh. The com­ menter suggested this rule be retained in the final regulations.

Generally, commenters disagreed with the requirement that hydrogen energy storage property must store hydrogen that is solely used for the production of energy and not for other purposes, which the commenters referred to as the “end use requirement.” For example, a commenter stated that the final regulations should be revised to align with the statutory language and asserted that the end use requirement is not in accord with legislative intent, would cause delays, is unworkable, and misaligns with the Biden Administration’s U.S. National Clean Hydrogen Strategy and Roadmap. Some commenters asserted that the end use requirement is simply unworkable due to lack of tracing mecha­ nisms once hydrogen enters the stream of commerce.

Multiple commenters also asserted that imposing an end use requirement on hydrogen energy storage property is

unsupported by the statute and would be impossible to administer. Comment­ ers expressed concerns that the end use requirement would render the credit use­ less, impact markets inappropriately, and lead to confusion. Commenters also asserted that section 48(c)(6)(A)(i) requires only that hydrogen energy stor­ age property “store energy” and does not require that it actually be used for the pro­ duction of energy. Another commenter noted that because hydrogen is a form of energy, that hydrogen storage is per se energy use.

With respect to administrability, com­ menters explained the difficulties of both requiring exclusive energy use and obtain­ ing the information to make this determi­ nation. For example, a commenter stated that it is too difficult for the storage owner to predict how hydrogen will be used and another asserted that requiring stored hydrogen to be used solely for the pro­ duction of energy would, in cases of bulk storage, be nearly impossible. Another commenter likewise stated that taxpay­ ers do not have full control of, or even information regarding, the use of hydro­ gen once it leaves their storage facilities and will be unable to have the certainty needed regarding end use to obtain proj­ ect financing. This commenter, along with others, also noted the significant burden of documenting the end use of the stored hydrogen. This commenter explained that currently there are no recordkeeping or documentation precedents available for a taxpayer to efficiently demonstrate the end-use of hydrogen, a fungible molecule, stored in a taxpayer’s hydrogen energy storage property. The commenter asserted that because there is no available docu­ mentation pathway for tracking hydro­ gen molecules through to their end use, it would be both impractical and prohibi­ tively costly for a taxpayer to develop and implement such recordkeeping practices. Another commenter requested that the end use requirement conclude with the recap­ ture period.

Lastly, commenters explained how the end use requirement would limit the use­ fulness of the credit. For example, a com­ menter asserted that the end use require­ ment would render the section 48 credit largely useless as a means of encouraging the development of the large-scale hydro­

gen storage capability that will be essential to the establishment of a robust hydrogen ecosystem in the United States. Addition­ ally, a commenter stated that an end use requirement would cause several prob­ lems, including deterring the provision of hydrogen storage services to a significant portion of the hydrogen market sector (for example, for ammonia production). This commenter also requested clarification regarding the appropriate treatment in a case in which hydrogen is another step removed from ammonia production with electricity production as an interim step. Generally, under the Proposed Regula­ tions, this scenario satisfies the end use requirement.

A commenter noted that the end use requirement would lead to a risk of cre­ ating two separate markets for hydrogen: those that are able to use the section 48 credit and those that are not. Emphasiz­ ing the same points, another commenter stated that restricting the end-use of the clean hydrogen to “energy” may mate­ rially impact the ability of producers to secure offtake agreements and/or restrict the usage of hydrogen storage and trans­ portation networks to only certain types of hydrogen end-uses.

Another commenter noted that energy storage technology neutrality is very important. This commenter stated that it believes that the “energy only” end use requirement would make hydrogen stor­ age a second (or even third) class tech­ nology if compared to battery energy stor­ age for purposes of the section 48 credit. The commenter added that one way of reading the positioning of hydrogen and battery storage within the same statutory provision is that this reflects the intent of Congress to not favor one form of energy storage over the other. This commenter further asserts that the absence of an end use requirement imposed on battery storage property indicates that no such requirement should be imposed on hydro­ gen energy storage property.

While the majority of commenters objected to including the end use require­ ment, several commenters provided sug­ gestions if the end use requirement is adopted. Several of these commenters suggested the use of an allocation rule sim­ ilar to the Dual Use Rule under proposed §1.48-14(b)(2) and discussed in part III.B.

December 23, 2024 1362 Bulletin No. 2024–52

of this Summary of Comments and Expla­ nation of Revisions. A commenter sug­ gested revising the Proposed Regulations to require a reasonable allocation between qualifying energy uses and nonqualifying non-energy uses of stored hydrogen simi­ lar to the requirements found in the Dual Use Rule. Another commenter stated that the final regulations should provide flexi­ bility and permit any reasonable method to establish the annual use of the stored hydrogen similar to proposed §1.48-14(b) (2)(ii). A commenter proposed that the final regulations provide a Dual Use safe harbor for a portion of a hydrogen energy storage property.

Alternatively, several commenters sug­ gested linking the end use requirement to the rules for the credit for production of clean hydrogen under section 45V of the Code. These commenters proposed that hydrogen energy storage be eligible for the section 48 credit regardless of end use, if the hydrogen stored is at least 50 per­ cent qualified clean hydrogen under sec­ tion 45V(c)(2).

Commenters also requested clarifica­ tions regarding what would be consid­ ered energy use for purposes of applying the end use requirement. For example, a commenter requested a clarification that the definition of energy use is inclusive of an application in which hydrogen is fully consumed in the manufacturing of a downstream molecule, which is in turn clearly used in an energy application for which hydrogen would be qualified if used directly. Another commenter noted that the examples provided in the preamble to the Proposed Regulations are too narrow and should be expanded to reflect vari­ ous uses of hydrogen as energy, including ammonia as a feedstock for fuel. A com­ menter asked for clarification that storage of hydrogen that is solely used as energy includes hydrogen used as energy for mobility purposes. Finally, a commenter requested that the final regulations allow for the storage of hydrogen whose end use is fertilizer for food production, because prohibiting hydrogen storage used in this way may encourage the parallel develop­ ment of hydrogen storage and transporta­ tion infrastructure that could otherwise be shared.

Several commenters also requested clarification regarding substantiation of

the end use requirement. A commenter suggested that taxpayers be permitted to rely on the use described in commercial sales contracts without the need to track the ultimate end use of hydrogen by thirdparty users. Another commenter asked that taxpayers be required only to main­ tain documentation, such as an agreement between the two parties or a certification, that the immediate purchaser of the stored hydrogen intends to use it for energy. This commenter stated that tracking use past the point of immediate purchaser to the end use of the molecule is impossible and as a result may make the credit unavail­ able to a variety of hydrogen storage projects. Another commenter noted that operators of clean hydrogen transport and storage systems will need to know what sort of assurances are needed from off-tak­ ers at the limits of their system to satisfy credit eligibility and ensure limited recap­ ture risk.

Several commenters suggested that the final regulations provide a method for a taxpayer to demonstrate that a hydrogen energy storage property was used to store hydrogen solely used for the production of energy. A commenter recommended that taxpayers be able to meet this require­ ment through (i) an affirmative attestation of intent by the taxpayer that owns the storage property and (ii) a five-year look­ back process, with reasonable threshold tests, to determine whether a recapture has occurred and what percentage of the credit should be recaptured. Another commenter recommended that the final regulations create a rebuttable presumption of energy use allowing taxpayers to demonstrate energy end use requirements under the relevant facts and circumstances.

The Proposed Regulations would require that the hydrogen energy storage property store hydrogen solely use for the production of energy and not for other purposes such as for the production of end products such as fertilizer. After consider­ ation of comments received, the Treasury Department and the IRS agree that section 48(c)(6)(A)(i) does not require that hydro­ gen energy storage property store hydro­ gen that will be used for the production of energy. The Treasury Department and the IRS also understand commenters’ con­ cerns regarding the administrative chal­ lenges the end use requirement presents

for taxpayers and agree that the final regu­ lations require modification. Accordingly, the final regulations do not adopt the requirement that hydrogen energy storage property store hydrogen that is solely used for the production of energy and not for other purposes such as for the production of end products such as fertilizer.

Some commenters asserted that the preamble to the Proposed Regulations indicated that hydrogen energy storage property is not limited to hydrogen. Since hydrogen may be stored within ammonia or methanol, commenters requested that the final regulations state that hydrogen storage property that stores hydrogen in the form of ammonia, methanol, or another stable medium qualifies as energy storage technology if such product is pro­ duced directly from hydrogen and subject to any use limitation provided in the regu­ lations. Another commenter requested that the final regulations clarify that equipment used to process hydrogen into ammonia, methanol, and other carriers, as well as storage for such hydrogen carriers, is hydrogen energy storage property.

The Treasury Department and the IRS decline to adopt the comments request­ ing that the final regulations provide that chemical storage, that is, equipment used to store hydrogen carriers (such as ammo­ nia and methanol), is hydrogen energy storage property. Section 48(c)(6)(A)(i) specifically references only hydrogen, not compounds containing hydrogen. While most vessels designed for hydrogen stor­ age (both above and below ground) may be capable of storing other gases, they are usually dedicated to a single gas (and not repurposed) to avoid contamination and mixing of gases.

Many commenters also provided feed­ back on the non-exhaustive list of compo­ nents of property that may be considered part of hydrogen energy storage property as would be provided in proposed §1.489(e)(10)(iv). A commenter endorsed the inclusion of “compressor and storage tank” as a component of hydrogen energy storage property. Several commenters requested that additional components of property be added to this list, some by asserting that the components should be eligible under rules for functionally inter­ dependent or integral property. Other commenters requested that the final reg­

Bulletin No. 2024–52 1363 December 23, 2024

ulations expand the examples of integral and functionally interdependent equip­ ment to be more inclusive of existing and future hydrogen energy storage property technologies.

Specifically, commenters requested that hydrogen energy storage property include hydrogen liquefaction and related equipment, equipment required to operate underground hydrogen storage property, as well as dedicated hydrogen distribution equipment such as pipelines located on the storage side of custody meters, hydro­ gen trailers (for example, cryogenic liquid tankers, or cylinders hauled by modules or chassis) and railcars. Another com­ menter proposed that the final regulations treat hydrogen liquefaction equipment and related equipment in the same man­ ner as power conditioning and transfer equipment may be treated with respect to certain energy property that generates electricity.

The Treasury Department and IRS agree that additional clarity on the defini­ tion of hydrogen energy storage property is warranted. The Treasury Department and IRS understand that hydrogen lique­ faction equipment may prepare hydrogen for storage in the hydrogen energy storage property, making such property an integral part of hydrogen energy storage property.

Section 48(c)(6)(A)(i) provides that energy storage technology does not include property primarily used in the transportation of goods or individuals and not for the production of electricity. Pipelines, trailers, and railcars are prop­ erty primarily used in the transportation of goods or individuals not for the pro­ duction of electricity. However, hydrogen energy storage property may have gath­ ering and distribution lines to transport hydrogen within the hydrogen energy storage property, making such property an integral part of the hydrogen energy stor­ age property. Therefore, the gathering and distribution lines used within a hydrogen energy storage property are not pipelines used to transport hydrogen outside of the hydrogen energy storage property. The final regulations provide that property that is an integral part of hydrogen energy stor­ age property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property.

Several commenters requested clari­ fication regarding the costs included in hydrogen energy storage property. In the context of salt caverns, a commenter asserted that the final regulations should confirm that eligible costs for a salt cavern include not only the costs to acquire and construct the eligible property but also all direct and indirect costs associated with the development and construction of the salt cavern and referenced rules under section 263A of the Code. Another com­ menter requested clarification regarding what equipment from an operational stor­ age facility would be includible in basis for purposes of the section 48 credit. A commenter requested that power-to-gas methanation facility qualify as hydrogen energy storage.

As stated for other energy properties, the Treasury Department and the IRS emphasize that the rule for determining what constitutes a unit of energy property is function-based. Because more informa­ tion is needed to make the determinations requested by the commenters, the final regulations do not adopt these comments.

b. Electrical energy storage property

Proposed §1.48-9(e)(10)(ii) would pro­ vide that electrical energy storage prop­ erty is property (other than property pri­ marily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electric­ ity, 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 individ­ uals, electrical energy storage property includes, but is not limited to, recharge­ able electrochemical batteries of all types (such as lithium ion, vanadium flow, sodium sulfur, and lead-acid); ultracapac­ itors; physical storage such as pumped storage hydropower, compressed air stor­ age, flywheels; and reversible fuel cells.

Multiple commenters requested clari­ fication concerning specific technologies that may be electrical energy storage prop­ erty. A commenter requested that the defi­ nition be expanded to include compressed fluid storage in addition to compressed air storage so as to include liquid and gas applications. Because these applications

generally are used by pipelines, which are property primarily used in the transporta­ tion of goods or individuals and not for the production of electricity, the Treasury Department and the IRS decline to adopt these revisions.

Multiple commenters requested that load controllers be described as an inte­ gral part of electrical energy storage tech­ nology while other commenters requested that bidirectional chargers be eligible as energy storage technology. Another com­ menter requested that the final regulations explicitly include thermal batteries capa­ ble of storing energy for conversion to electricity in its non-exhaustive list of eli­ gible “electrical energy storage property” due to confusion related to thermal energy storage (TES) being a separate category.

As has been noted previously, the Pro­ posed Regulations are intended to provide a function-oriented method to determine whether a technology is energy storage technology that is broad enough to encom­ pass nascent technologies without render­ ing the regulations quickly obsolete. It is impossible to enumerate every single technology that may be eligible for the section 48 credit given the ever-changing nature of the industry and technological development. Although these regulations do not list all technologies that may qual­ ify for the section 48 credit, the Proposed Regulations provide adequate guidance and examples to illustrate the application of the rules for taxpayers to analyze a par­ ticular technology. The Treasury Depart­ ment and the IRS, therefore, do not adopt commenters’ requests concerning specific technologies.

Multiple commenters questioned what primarily used in the transportation in section 48(c)(6)(A)(i) means in the case of electrical energy storage property. A commenter explained that pipeline sys­ tems can be multi-tasked with a section of the pipe to act as energy storage and requested that the phrase “primarily used in the transportation of goods” specifi­ cally exclude equipment that is mobile but include stationary property such as pipelines. Another commenter requested a bright line rule for technologies that are not primarily used in transportation of goods or individuals to qualify for the sec­ tion 48 credit. This commenter suggested that property, including school buses,

December 23, 2024 1364 Bulletin No. 2024–52

that receives, stores, and delivers energy for conversion to electricity and that is used less than 35 percent of the hours in a calendar year for transporting goods or individuals is not primarily used for trans­ portation. In response to these comments, the Treasury Department and the IRS note that pipelines and school buses are both primarily used in transportation. In addi­ tion, there are other IRA tax incentives intended to benefit some technologies for which commenters seek section 48 credit eligibility. For instance, section 45W provides a tax credit for electric school buses. Furthermore, a notice of proposed rulemaking (REG-118269-23) published in the Federal Register (89 FR 76759) on September 19, 2024, regarding the sec­ tion 30C alternative fuel vehicle refueling property credit (30C Proposed Regula­ tions) proposed a definition for property primarily used in the transportation of goods or individuals and not for the pro­ duction of electricity for purposes of sec­ tions 48 and 48E. In particular, proposed §1.48-9(e)(10)(vi) of the 30C Proposed Regulations would provide that energy storage property is primarily used in the transportation of goods or individuals and not for the production of electricity, and therefore is not energy storage tech­ nology eligible for the section 48 credit, if a credit is claimed under section 30C for such property. Accordingly, comments regarding this proposed definition will be addressed when the 30C Proposed Regu­ lations are finalized.

In the context of a pumped storage hydropower facility, a commenter sug­ gested that the scope of eligible electrical energy storage technology be defined to include all property necessary to receive, store, and deliver energy for conversion to electricity, consistent with the defini­ tion in section 48(c)(6)(A)(i), and include all tangible personal property and other tangible property up to and including the step-up transformer at the substation prior to transmission to the grid. This com­ menter also suggested that an example be included to illustrate these concepts. Another commenter stated that the final regulations should confirm that the term “energy storage technology” includes all the qualified property up to and including the step-up transformer at the substation prior to transmission to the grid, and that

this property would include the two reser­ voirs, the powerhouse (including the gen­ erators, turbines, and associated electrical equipment), the piping and pumps, the tunnel, substation equipment, and other integral property.

A definitive response to such comments would require the Treasury Department and the IRS to conduct a complete fac­ tual analysis of the property in question, which may include information beyond that which was provided by the comment­ ers. Because more information is needed to make the determinations requested by the commenters, the requested clarifica­ tions are not addressed in these final reg­ ulations.

c. Thermal energy storage property

Proposed §1.48-9(e)(10)(iii) would provide that thermal energy storage prop­ erty is property comprising a system that is directly connected to a heating, venti­ lation, or air conditioning (HVAC) sys­ tem; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cool­ ing of the interior of a residential or com­ mercial building. Thermal energy storage property includes equipment and materi­ als, 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 build­ ing or its structural components. The Pro­ posed Regulations included a non-exhaus­ tive list of examples of thermal energy storage property.

Commenters requested clarifications on what constitutes thermal energy stor­ age property. A commenter requested clar­ ification that thermal energy storage prop­ erty includes all air-source heat pumps, electric boilers, and hot water heat pumps, but does not include fossil-fuel-pow­ ered water boilers. The commenter also requested that the final regulations clar­ ify that ground and air source heat pumps qualify as energy storage technology and suggested that thermal energy stored in one medium may be transferred and stored in a second medium for subsequent use. The commenter also requested that the use of the term “subsequent” in the

definition of thermal energy storage prop­ erty under section 48(c)(6)(C)(i)(II) not require a specific interval of time between storage and use for a process to qualify. Another commenter stated that the point at which the scope of thermal energy storage property ends is unclear and requested clarification regarding whether “equipment” extends to the thermal energy source for thermal energy storage property. This commenter also requested clarity on whether the thermal energy source equipment (for example, chiller, heat pump, or furnace) may be used for multiple purposes or if the thermal energy source equipment must be dedicated to the thermal energy storage property. Another commenter asked whether equipment that uses thermal energy to heat or cool a structure is also thermal energy storage property. Some commenters endorsed the proposed examples of thermal energy storage property, while other comment­ ers requested additions, such as including “chilled water” to ice and electric boilers that use electricity to heat water and later use this stored energy to heat a building through the HVAC system.

The Treasury Department and IRS agree that the definition of thermal energy stor­ age property requires clarification. Ther­ mal energy storage property is defined, in part, as a system which “removes heat from, or adds heat to, a storage medium for subsequent use.” The Treasury Depart­ ment and IRS, in consultation with DOE, understand the phrase “adds heat to” as including equipment that is involved in adding, or transferring, already-exist­ ing heat from one medium to the storage medium, but not equipment involved in transforming other forms of energy into heat in the first instance. Equipment that just adds (or removes) heat includes technologies, like heat pumps, that draw heat from the ambient air or other stores of heat, and add that heat to a storage medium. By contrast, equipment that transforms other forms of energy into heat in the first instance, for example, through combustion or electric resistance, is not property that “removes heat from, or adds heat to” a storage medium and is therefore not an eligible component of a thermal energy storage property. For example, a conventional gas boiler with an integrated storage tank would not generally be ther­

Bulletin No. 2024–52 1365 December 23, 2024

mal energy storage property. While the gas boiler elements would not be part of such property, the integrated storage tank, however, may be thermal energy storage property if it otherwise meets the ther­ mal energy storage property definition. Further, an air-to-water heat pump with a thermal storage tank, for example, would generally be thermal energy storage prop­ erty provided that it otherwise meets the thermal energy storage definition. This could be the case even if the heat pump also serves a purpose in the connected HVAC system’s real-time heating or cool­ ing of a building. In that case, the thermal storage tank would be thermal energy stor­ age property and the heat pump may also qualify as part of that eligible property to the extent the taxpayer’s costs exceed the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cool­ ing.

The Proposed Regulations included an example of electric furnaces that use elec­ tricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system. The Treasury Department and IRS acknowl­ edge that this example needs to be refined to more precisely delineate the scope of eligible thermal energy storage property. Whereas the heated bricks and equipment that adds heat generated by the furnace to those bricks, or removes heat from the bricks, are eligible thermal energy storage property, the electric furnace equipment that transforms energy into the thermal energy in the first instance is not. The final regulations clarify that thermal energy storage property does not include property that transforms other forms of energy into heat in the first instance and this example has been revised accordingly in the final regulations.

With respect to the requirement for subsequent use, the Treasury Department and IRS also agree that additional clarity is warranted. The statute requires that ther­ mal energy storage property must be able to perform certain functions, not simply performing heat transfer. Any heat trans­ fer may take some amount of time and heat does not immediately dissipate even if no effort is made to store it. While some

may assert that such heat transfer is sub­ sequent use, the Treasury Department and IRS disagree. A plain reading of the stat­ ute indicates that thermal energy storage property does not include property that simply engages in heat transfer. The ther­ mal energy storage property must be able to store the heat. The Treasury Depart­ ment and IRS, in consultation with DOE, find that a minimum time interval for sub­ sequent use provides certainty for taxpay­ ers and sound tax administration. Accord­ ingly, the final regulations clarify that property that “removes heat from, or adds heat to, a storage medium for subsequent use” is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building. The final regulations also provide a safe harbor for thermal energy storage property. If the thermal energy storage property can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for the minimum of one hour, it is deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building.

The Treasury Department and IRS have revised the definition of thermal energy storage property and the exam­ ples in the final regulations to illustrate what constitutes thermal energy storage property. These final regulations also add that thermal energy storage property may store thermal energy in an artificial pit, an aqueous solution, or a solid-liquid phase change material, in addition to the under­ ground tank or a borehole field already included in the Proposed Regulations, in order to be extracted for later use for heat­ ing and/or cooling. The final regulations clarify that a heat pump system that trans­ fers heat into and out of a storage medium is thermal energy storage property. How­ ever, consistent with §1.48-14(d), if ther­ mal energy storage property, such as a heat pump system, includes equipment, such as a heat pump, that also serves a purpose in an HVAC system that is installed in connection with the thermal energy stor­ age property, the taxpayer’s basis in the

thermal energy storage property includes the total cost of the thermal energy stor­ age property and HVAC system less the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting heating or cool­ ing.

Commenters also requested clarifi­ cations regarding whether specific com­ ponents may be part of thermal energy storage. A commenter requested that pipes to distribute stored thermal energy to and within buildings (including for multiple residential or commercial buildings such as through a district heating system) and equipment in building heating and/or cooling systems — such as coils, radia­ tors, and other end-use equipment — nec­ essary to convey stored thermal energy to building space or domestic hot water sup­ ply be included in thermal energy storage property.

With respect to the request to include pipes and equipment in building heating and/or cooling systems, the statutory defi­ nition of thermal energy storage property provides, in part, that it is directly con­ nected to an HVAC system, not that it is an HVAC system. The Proposed Regulations would provide a function-oriented method to evaluate whether property is a func­ tionally interdependent or an integral part of thermal energy storage property. With respect to the request to include equipment necessary to convey domestic hot water supply, the statutory definition further pro­ vides, in part, that thermal energy storage property provides energy for the heating or cooling of the interior of a residential or commercial building. The statute does not provide for stored energy for domes­ tic hot water supply for consumptive use. Therefore, property that provides energy for domestic hot water supply exclusively for consumptive use and not for heating or cooling of the interior of such a building is not eligible under the statute. The final regulations do not adopt these comments.

Another commenter requested clari­ fication that if property that would oth­ erwise qualify as thermal energy storage property is connected to a district heating system that provides energy for the heat­ ing or cooling of multiple buildings, it would nonetheless be considered “directly

December 23, 2024 1366 Bulletin No. 2024–52

connected to a heating, ventilation, or air conditioning system”. Proposed §1.489(e)(10)(iii) would not preclude ther­ mal energy storage technology property that is directly connected to more than one HVAC system from being a thermal energy storage property. The final regula­ tions do not modify the example.

Commenters also requested modifica­ tion of the definition of thermal energy storage property in proposed §1.48-9(e) (10)(iii). A commenter suggested adding “refrigeration” to “is directly connected to a heating, ventilation, or air conditioning system” because industrial refrigeration systems are considered part of the HVAC system in construction. This commenter also joined another in recommending add­ ing “industrial” to “for use in heating a residential or commercial building” to pre­ vent restricting the use of thermal energy storage in industrial sites and to elimi­ nate confusion regarding commercial and industrial building types. To maintain con­ sistency with the statutory text, the final regulations maintain the wording set forth in section 48(c)(6)(C)(i)(I) and (III) as is.

Commenters also expressed concerns that the language “directly connected to…” in proposed §1.48-9(e)(10)(iii) might exclude thermal energy storage property that directly functions as a heat­ ing system itself without connecting to an HVAC system. A commenter suggested providing guidance to clarify that thermal energy storage property that functions as a self-contained heating or cooling system is eligible thermal energy storage property under proposed §1.48-9(e)(10)(iii). Sec­ tion 48(c)(6)(C)(i)(I) requires that ther­ mal energy storage property is directly connected to a heating, ventilation, or air conditioning system, but does not include the HVAC system itself as eligible ther­ mal energy storage property. Therefore, these comments are not adopted because they would be inconsistent with the stat­ ute. However, elements of such a system could constitute eligible thermal energy storage property.

Additionally, a commenter requested clarification that thermal energy storage property may be considered battery stor­ age technology for the purpose of claiming the credit available to residential custom­ ers under section 25D(d)(6) of the Code. The Treasury Department and the IRS

decline to address this request because it is outside of the scope of section 48 and, therefore, these final regulations.

d. Modifications of energy storage property

Proposed §1.48-9(e)(10)(v) would pro­ vide that with respect to electrical energy storage property and hydrogen energy storage property placed in service after December 31, 2022, energy storage tech­ nology that is modified as set forth in pro­ posed §1.48-9(e)(10)(v) is treated as elec­ trical energy storage property or hydrogen energy storage property, except that the basis of any existing property prior to such modification is not taken into account for purposes of the section 48 credit. Proposed §1.48-9(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), except that such property had a capacity of less than 5 kWh and is modified in a manner that such property (after such 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) and is modified in a manner that such property (after such modification) has an increase in name­ plate capacity of not less than 5 kWh.

A commenter asked if the section 48 credit is available for repurposed batter­ ies used to build energy storage systems. Whether a battery is repurposed and eli­ gible for the section 48 credit requires a factual determination that is beyond the scope of these regulations. The 80/20 Rule provides general rules for taxpayers that include some used components when placing in service an energy property.

Another commenter requested that the requirement that any modified energy stor­ age property must increase the nameplate capacity of the energy storage property by 5 kWh or more be removed. Section 48(c) (6)(B) sets forth the 5 kWh requirement for modifications to energy storage prop­ erty so it cannot be removed. The final regulations do not adopt this comment.

Multiple commenters requested clari­ fication that the minimum 5 kWh capac­ ity increase needed for modifications of energy storage under section 48(c)(6)

(B) be the nameplate capacity not actual capacity (which may have decreased due to degradation). The commenters explained that focusing on nameplate capacity will provide greater certainty than measuring actual capacity. Another commenter explained that nameplate capacity should be tested at the time of purchase, rather than on the date of mod­ ification, especially due to non-degrading systems and storage augmentation. The commenter noted that if augmentations are implemented, the installed energy storage capacity of the energy storage technology is increased (original instal­ lation nameplate capacity plus the aug­ mentation totaling the amount installed), but the nameplate capacity of the property and interconnection agreement remains unchanged.

Section 48(c)(6)(B) provides that, for purposes of the modification rule, name­ plate capacity is examined at the time of the modification and must result in a nameplate capacity increase from below 5 kWh to not less than 5 kWh (for energy storage property originally placed in ser­ vice before enactment of the IRA) or by at least 5 kWh (for energy storage tech­ nology placed in service after the enact­ ment of the IRA that is later modified). Consistent with the statute, the Proposed Regulations would not take into account actual capacity but instead use nameplate capacity. The only instance in which sec­ tion 48(c)(6)(B) uses the term “capacity” alone, rather than “nameplate capacity”, is nonetheless still a reference to name­ plate capacity. Specifically, section 48(c) (6)(B)(i) refers to property that “would be described in subparagraph (A)(i), except that such property has a capacity of less than 5 kilowatt hours”. The referenced section 48(c)(6)(A)(i) text makes clear that the 5 kWh capacity threshold is, in fact, a nameplate capacity threshold. Therefore, for the avoidance of doubt, the final regu­ lations at §1.48-9(e)(10)(v)(A) clarify that the relevant pre-modification capacity is the nameplate capacity. Therefore, other than the minor clarification noted above, these comments were not adopted in the final regulations.

Additionally, a commenter requested clarification whether capacity must be added within the bounds of an existing electrical storage property enclosure, or

Bulletin No. 2024–52 1367 December 23, 2024

whether the enclosure may be expanded or an additional enclosure added to accom­ modate the increased capacity. Another commenter requested clarification that adding new battery racks to an existing enclosure would be eligible for the section 48 credit if the nameplate capacity of the new battery rack is at least 5 kWh. The Proposed Regulations would provide no limitation on the physical space occupied by an energy storage technology and the final regulations retain this approach.

5. Qualified Biogas Property

Section 48(a)(3)(A)(x) was added by the IRA to provide that energy property includes qualified biogas property. Sec­ tion 48(c)(7)(A) defines qualified biogas property as property comprising a system that converts biomass (as defined in sec­ tion 45K(c)(3), as in effect on the date of enactment of section 48(a)(7) (August 16, 2022)) into a gas that consists of not less than 52 percent methane by volume, or is concentrated by such system into a gas that consists of not less than 52 percent methane, and captures such gas for sale or productive use, and not for disposal via combustion. Section 48(c)(7)(B) provides that qualified biogas property includes any property that is part of such system that cleans or conditions such gas.

Proposed §1.48-9(e)(11) would adopt the statutory definition of qualified bio­ gas property. Proposed §1.48-9(f)(2) (i) would provide that components of property are considered qualified biogas property if they are functionally inter­ dependent, that is, if the placing in ser­ vice 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 qualified bio­ gas property as described in proposed §1.48-9(e)(11)(i). The Proposed Regu­ lations adopted this approach because it provides a function-oriented method to determine what is considered included in a qualified biogas property and is broad enough to encompass technological changes. Additionally, proposed §1.489(e)(11)(i) would provide examples of functionally interdependent components of a qualified biogas property including, but not limited to, a waste feedstock col­ lection system, a landfill gas collection

system, mixing or pumping equipment, and an anaerobic digester.

Proposed §1.48-9(e)(11)(i) would clarify that upgrading equipment is not a functionally interdependent component of qualified biogas property. The pream­ ble to the Proposed Regulations stated that the upgrading equipment that is nec­ essary to condition biogas into the appro­ priate mixture for injection into the pipe­ line is not functionally interdependent with the qualified biogas property that converts biomass into a gas containing not less than 52 percent methane and cap­ tures such gas for sale or productive use as specified in the statute. The preamble to the Proposed Regulations also stated that while this upgrading equipment makes the injection of biogas into a pipe­ line possible, such upgrading equipment is not necessary to satisfy the statutory requirements that the biogas converted from biomass contain not less than 52 percent methane, and that it be captured for sale or productive use.

a. Correction and cleaning and conditioning property

The Correction published on Feb­ ruary 22, 2024, stated that a correction was needed to clarify that gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen, would be energy property if it is an integral part of an energy prop­ erty as defined in proposed §1.48-9(f)(3). Accordingly, the Proposed Regulations were corrected by revising the following sentence: “However, gas upgrading equip­ ment 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 bio­ gas property.” to read as follows: “How­ ever, gas upgrading equipment necessary to concentrate the gas into the appropri­ ate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not a functionally interdependent component (as defined in paragraph (f)(2)(ii) of this section) of qualified biogas property.”

The Proposed Regulations and Correc­ tion requested comments regarding what types of components may be included within the definition of cleaning and con­ ditioning property provided in the defini­ tion of qualified biogas property in section 48(c)(7)(B). The Treasury Department and the IRS received numerous comments regarding the components that should be included in qualified biogas property.

Commenters universally supported the inclusion of upgrading equipment in qual­ ified biogas property and some asserted that the Proposed Regulations’ exclusion of upgrading equipment conflicts with analogous provisions in the Proposed Reg­ ulations that allow the inclusion of power conditioning and transfer equipment such as that allowed in offshore wind projects. Most commenters asserted that upgrading equipment should be considered function­ ally interdependent to qualified biogas property and therefore, eligible for the section 48 credit. A commenter requested that biogas energy property include a defi­ nition of system for section 48(c)(7)(A) purposes that includes all integrated prop­ erty.

Commenters also expressed concern that the Proposed Regulations and the Correction unduly limit what would be included as qualified biogas property. For example, a commenter stated that prop­ erty used to capture, clean, condition, upgrade, and perform “chemical, mechan­ ical, or thermochemical conversion” are all necessary to convert biogas into usable products. Commenters explained that the Proposed Regulations would allow only biogas property with limited utility to qualify and would exclude a majority of costs related to biogas property. For example, a commenter stated that under the Proposed Regulations, property used to produce the raw biogas from the land­ fill, remove sulfur from the biogas, and remove the volatile organic compounds from the biogas would appear to qualify for the section 48 credit, whereas property used to remove carbon dioxide, nitrogen, and oxygen from biogas and to otherwise prepare the gas for injection into a natu­ ral gas pipeline would not qualify for the section 48 credit. The commenter asserted that the equipment used in these latter pro­ cesses are essential components of a RNG system and comprise approximately 85

December 23, 2024 1368 Bulletin No. 2024–52

percent of overall capital investment in an RNG project.

A commenter asserted that the Pro­ posed Regulations read the sale or pro­ ductive use language out of the statute. Another commenter stated that the Pro­ posed Regulations would limit eligibility for the section 48 credit to essentially raw biogas (if it can meet the 52 percent methane threshold). According to the commenter, raw biogas generally cannot be used without some treatment due to the contaminants present in the gas stream and even if the raw biogas can be used, such use is typically through combustion (that is, burned on-site for electricity or as process energy), which is excluded under the statute. The commenter explained that, at best, the Proposed Reg­ ulations may allow some medium-BTU gas, which is biogas that received only limited treatment to remove certain con­ taminants, to be eligible for the section 48 credit. However, medium-BTU gas is not as valuable as RNG and is typically used locally.

Generally, many commenters agreed that the utility of biogas is significantly limited without proper cleaning and con­ ditioning. These commenters stated that, without upgrading, the extracted biogas faces considerable challenges for market­ ability because its high moisture content and corrosive properties make it difficult to safely store, compress, mix with other gases, transport, inject into the natural gas system, or market. Consequently, the non-upgraded biogas is of limited util­ ity, such as on-site combustion to create process heat, generate electricity, or to be flared into the atmosphere. In contrast, a commenter described the marketable uses of upgraded RNG as including, but not limited to, advanced electricity genera­ tion in fuel cells, hydrogen production, advanced liquid fuels for aviation, and RNG for use in trucking, industrial pro­ cesses, and space heating.

Generally, commenters requested the final regulations correct the treatment of “gas upgrading equipment” in the Pro­ posed Regulations to instead treat it as property that “cleans and conditions” gas, asserting that such treatment is consistent with the plain text of the statute and the intention of Congress. To support this position, a commenter asserted that the

statute and legislative history do not con­ template any limitation on what property “cleans or conditions” gas. Several com­ menters cited certain congressional state­ ments regarding the Agriculture Environ­ mental Stewardship Act to support their reading of the definition of qualified bio­ gas property added to section 48 by the IRA.

Similarly, many commenters asserted there is a misunderstanding in the Pro­ posed Regulations that the term “upgrad­ ing” is interchangeable with the phrase “cleaning and conditioning.” For exam­ ple, a commenter stated that the exclusion of upgrading equipment appears contra­ dictory to the statute, which expressly includes cleaning and conditioning prop­ erty. This commenter noted that the Pro­ posed Regulations misunderstand the “upgrading” process, which is an indus­ try verbiage, but is essentially part of the “cleaning and conditioning process” nec­ essary to process biogas to standards that support its productive use or sale. Another commenter stated that the DOE uses these terms interchangeably.

Additionally, a few commenters stated that the Proposed Regulations incorrectly implemented the 52 percent measurement as a ceiling rather than a floor. For exam­ ple, a commenter pointed to the preamble to the Proposed Regulations as mistakenly interpreting that the statute was enacted to incentivize taxpayers to produce 52 per­ cent methane (and nothing greater). The commenter stated that this is contrary to the statute, to the relevant legislative his­ tory, and to an understanding of how the quantities of biogas that can be produced by RNG developers can be used.

Several commenters also pointed to the reference to “such gas” in the stat­ ute to evidence that “such gas” refers to biogas not less than 52 percent methane and captured for sale or productive use. A commenter asserted that the reference to “such gas” provides a two-prong test. According to the commenter, first the sys­ tem must convert the biomass into a gas that is between 52 percent and 100 per­ cent methane by volume and second the system must capture “such gas for sale or productive use, and not for disposal via combustion”; thus, in the commenter’s view, the reference to “such gas” is to gas described in the first prong.

Another commenter stated that the ref­ erence to “such gas” includes biogas that is at least 52 percent methane by volume. The commenter concluded therefore, that the statute does not exclude from qualified biogas property cleaning and conditioning equipment that is used to process biogas that is already 52 percent methane by vol­ ume.

Another commenter stated that the statute uniquely and broadly defines the term “cleaning and condition property” not as the Proposed Regulations suggest, which limits its applicability to instances in which an otherwise ineligible property needs cleaning and conditioning to be eli­ gible. Instead, the commenter noted that the Proposed Regulations’ interpretation of section 48(c)(7)(B) ignores the refer­ ence to “such gas,” referring to the defini­ tion in section 48(c)(7)(A), which clearly states “any property which is part of such system which cleans or conditions such gas.” The commenter asserted that the term “such gas” refers to biogas that is not less than 52 percent methane and captured for sale or productive use, as confirmation that cleaning and conditioning equipment for gas that has already met the conditions set forth in section 48(c)(7)(A), is quali­ fied biogas property.

Commenters also objected to the exclu­ sion of gas upgrading equipment provided in the Proposed Regulations because com­ menters assert that it could negatively impact investment and financing for bio­ gas projects, especially those on small farms, agricultural projects, and municipal projects. A commenter, who works with smaller scale farms including dairy farms, asserted that the upgrading equipment is integral to the cleaning and conditioning process, and crucial for achieving energy output suitable for productive use or sale, especially for projects in rural and remote communities. The commenter concluded that the limitation on upgrading equip­ ment provided in the Proposed Regula­ tions will prevent projects from moving forward and disproportionately impact small agricultural projects.

Several commenters asserted that the statute supports redefining the components of property that are considered function­ ally interdependent to a qualified biogas property. A commenter suggested redefin­ ing qualified biogas property as property

Bulletin No. 2024–52 1369 December 23, 2024

that is placed in service to upgrade biogas for sale or a productive use beyond the point that such gas is typically vented or flared. This commenter explained that this definition properly places the focus on property used to convert an unproductive substance (such as landfill gas) into a pro­ ductive substance (such as RNG).

Another commenter agreed with the inclusion of the gas upgrading equipment as integral property but stated that the Cor­ rection is limited to technology specific to upgrading for pipeline injection and therefore, is out of line with the technol­ ogy neutral definition in the statute. The commenter asserted that upgrading, pro­ cessing, or reforming should be viewed without limitation to specific technology and that many biomass resources may not be close to natural gas pipelines or have other limitations on pipeline injection. The commenter further stated that the focus should be on the components required for property that captures such gas for sale or productive use. Therefore, if additional onsite steps are required to process raw biogas that meets the minimum 52 percent methane content threshold into a usable product, whatever the product may be, then the property necessary to take those steps should be considered qualified bio­ gas property.

The Treasury Department and the IRS agree with the commenters that the proposed rule addressing gas upgrading equipment is too restrictive. As comment­ ers explained, upgrading equipment is used interchangeably with cleaning and conditioning equipment and such equip­ ment may be needed to make the biogas suitable for sale or productive use. The Treasury Department and IRS also agree that specific upgrading equipment should not be identified for injection into a pipe­ line. Therefore, the final regulations pro­ vide more generally that gas upgrading equipment is cleaning and conditioning property.

Commenters requested clarifications regarding what types of equipment are considered qualified biogas property, including as functionally interdependent components or as property integral to the qualified biogas property. For example, a commenter requested that a list of equip­ ment be included as qualifying biogas property in the final regulations includ­

ing gas removal equipment, pressure and temperature control equipment, moisture removal equipment, compression equip­ ment, thermal oxidizer equipment, gas recycling equipment, and synthetic meth­ ane production equipment. Another com­ menter proposed revisions to the example in proposed §1.48-9(e)(11)(i) to include as qualified biogas property cleaning and conditioning equipment used to remove toxins or any other impurities from raw biogas or concentrate the gas into the appropriate mixture for sale or produc­ tive use through removal of other gases such as carbon dioxide, nitrogen, or oxy­ gen. A commenter requested the inclu­ sion of landfill municipal solid waste as a renewable resource to produce renewable natural gas as energy property because such a system may implement thermal gasification and other relevant technolo­ gies. Another commenter suggested that qualified biogas property should include the pipeline and compression equipment necessary to transport the gas from the production plant to the common carrier pipeline.

Another commenter suggested that the Proposed Regulations be modified to specifically provide that the property com­ prising a biogas conversion/concentration and capture system, including any prop­ erty that is part of such system and that cleans and conditions, is a single unit of energy property (collectively referred to as a RNG Production System). This com­ menter also suggested that the gas upgrad­ ing equipment necessary to concentrate the gas into the appropriate mixture for injec­ tion into a pipeline through the removal of other gases and impurities is a func­ tionally interdependent component of the RNG Production System. This commenter also described a second type of property, a landfill gas collection system (LFG Col­ lection System), and noted that the LFG Collection System is property that is an integral part of, but not functionally inter­ dependent with, the RNG Production Sys­ tem because the placing in service of an LFG Collection System is not dependent upon placing in service the RNG Produc­ tion System, but the LFG Collection Sys­ tem is used directly in and essential to the completeness of the intended function of the RNG Production System. While this commenter’s focus was on landfills, the

commenter noted the same analysis would apply to other collection systems such as anaerobic digesters operating at farms. Some commenters asserted that anaerobic digesters were functionally interdepen­ dent property, while others asserted that anaerobic digesters were integral property.

After consultation with the DOE, the Treasury Department and IRS understand that the methane content of biogas in an anaerobic digester can vary between 44% and 68%. Thus, if biogas processed by an anaerobic digester consists of not less than 52% methane and all other statu­ tory requirements are met, an anaerobic digester would be a unit of energy prop­ erty. Commenters explained that although biogas exiting an anaerobic digester might not be put to productive use, the statute requires that qualified biogas property capture the gas “for sale or productive use.” To illustrate, if a taxpayer places in service an anaerobic digester, which gen­ erates biogas meeting the not less than 52% methane requirement, and sells the biogas to another taxpayer who in turn places in service cleaning and condition­ ing property to clean such biogas, each taxpayer has a qualified biogas property and may be eligible for the section 48 tax credit. On the other hand, if the biogas in the anaerobic digester does not meet the not less than 52% methane requirement, then such digester is not, by itself, a qual­ ified biogas property. Nevertheless, the anaerobic digester still may be an integral part of other qualified biogas property, such as a system that cleans and condi­ tions the biogas.

The Treasury Department and the IRS intend that the final regulations provide a function-oriented approach to determin­ ing what property is considered energy property, including qualified biogas prop­ erty. The Proposed Regulations provided examples of types of property that are included as qualified biogas property, which were intended to be illustrative but not exclusive. Therefore, the final regula­ tions do not include additional examples of property that is included as qualified biogas property but do clarify that prop­ erty that is an integral part of qualified biogas property includes, but is not lim­ ited to, a waste feedstock collection sys­ tem, landfill gas collection system, and mixing and pumping equipment.

December 23, 2024 1370 Bulletin No. 2024–52

b. Flaring allowance

The preamble to the Proposed Reg­ ulations explained that a commenter to Notice 2022-49 stated that some proper­ ties that produce electricity from gas using a combustion process may flare waste or tail gas, including during commissioning or maintenance periods. This commenter recommended a de minimis exception. In response to this concern, the Proposed Regulations requested comments regard­ ing whether such an exception is neces­ sary and what should be considered de minimis for this purpose.

All comments received in response to this request were in favor of an exception. Some comments pointed to the overarch­ ing purpose of the qualified biogas prop­ erty and noted that nominal leakage should not prevent property from qualifying. For example, a commenter asserted that if the overarching purpose of the biogas is for sale or productive use, then the combus­ tion of a de minimis portion should not prevent a property that produced such gas from being a qualified biogas property. Similarly, a commenter recommended allowing a de minimis exception for flare waste or tail gas so that otherwise eligible biomass systems will not be disqualified from the credit due to small amounts of leakage arising from normal business operations.

Another commenter pointed to the ben­ efit of hazard reduction associated with nominal flaring. This commenter stated that flaring in appropriate circumstances should not disqualify a facility, because “flares are often required as a safety and emissions hazard reducer to be used in case of emergency, accidental release, start-up and shut-down procedures, and other rare occurrences.”

The Treasury Department and the IRS understand commenters’ concerns regard­ ing whether flaring performed for com­ missioning, maintenance, safety, or other reasons may impact eligibility for the sec­ tion 48 tax credit. Qualified biogas prop­ erty is defined, in part, as capturing biogas “for sale or productive use, and not for disposal via combustion.” The Treasury Department and the IRS interpret this stat­ utory requirement to not impact a quali­ fied biogas property that combusts, or flares, some biogas under standard oper­

ating conditions, provided the primary purpose of the qualified biogas property is sale or productive use of biogas and any flaring complies with all relevant Federal, State, regional Tribal, and local laws and regulations. After consulting the DOE, the Treasury Department and the IRS under­ stand that flare permits are specific to a given biogas facility design. Determin­ ing the amount of flaring appropriate for safety purposes is specific to each quali­ fied biogas property and enforcing that limit is best left to relevant Federal, State, regional, local, and/or Tribal regulators. Flaring performed in accordance with applicable permits from relevant Federal, State, regional, local, and/or Tribal regula­ tors should not jeopardize a qualified bio­ gas property’s eligibility for the section 48 credit. Accordingly, the final regulations at §1.48-9(e)(11) provide that while a qualified biogas property generally may not capture biogas for disposal via com­ bustion, combustion in the form of flar­ ing will not disqualify a qualified biogas property, provided the primary purpose of the qualified biogas property is sale or productive use of biogas and any flaring complies with all relevant Federal, State, regional, Tribal, and local laws and reg­ ulations.

c. Point of measurement

Proposed §1.48-9(e)(11)(ii) would pro­ vide that the methane content requirement described in section 48(c)(7)(A)(i) and in the Proposed Regulations is measured at the point at which gas exits the biogas production system, which may include an anaerobic digester, landfill gas collection system, or thermal gasification equipment. This measurement point was described in the Proposed Regulations as the point at which a taxpayer generally must deter­ mine whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit.

Several commenters requested clarifi­ cation regarding the point of measurement for the methane content requirement. A commenter specifically requested clari­ fication regarding the point at which the gas exits the biogas production system. Several commenters noted that the point of measurement provided in the Proposed

Regulations was incorrect because it is too early in the process. These comments responded to the Proposed Regulations as well as the Correction. This sentiment generally is consistent with the comment­ ers’ view that biogas upgrading equipment should be considered eligible biogas prop­ erty.

One commenter stated that the Cor­ rection does not address the measurement point for the methane content requirement for purposes of determining whether the definition of “qualified biogas property” is met. The commenter asserted that the final rule must clarify that the 52 percent methane content requirement is measured at the point at which the biogas is going to be sold or put to productive use, which would be after the biogas has been passed through the cleaning and conditioning and/ or gas upgrading equipment. The com­ menter suggested that a change should be made regardless of whether gas upgrad­ ing equipment is considered “integral” or “functionally interdependent.” The com­ menter submitted another comment after the Correction was issued urging that the methane content of 52 percent should be measured at the point at which the gas is ready for sale or applicable productive use, that is, at the end of the cleaning and conditioning process. Several commenters supported these comments and incorpo­ rated them into their own comments.

Another commenter similarly stated that the methane content should be mea­ sured at the end of the cleaning and condi­ tioning process, which would be the point at which the biogas is going to be sold or put to a productive use, to ensure it con­ sists of at least 52 percent methane. Many commenters have asserted that the 52 per­ cent measurement is a floor (not a ceiling). Therefore, even if the measurement point were to occur earlier, taxpayers that later upgrade the biogas could still satisfy the 52 percent requirement. The Treasury Department and the IRS agree that the point of measurement in the Proposed Regulations was too early in the biogas production process, which could potentially frustrate compliance with the “sale or productive use” requirement. Therefore, the final regulations adopt at §1.48-9(e)(11)(ii) the rule that the meth­ ane content requirement described in sec­ tion 48(c)(7)(A)(i) and in the Proposed

Bulletin No. 2024–52 1371 December 23, 2024

Regulations is measured at the point at which the biogas exits the qualified biogas property.

6. Microgrid Controllers

Section 48(a)(3)(A)(xi) provides that energy property includes microgrid con­ trollers. Section 48(c)(8)(A) defines a microgrid controller as equipment that is part of a qualified microgrid and designed and used to monitor and control the energy resources and loads on such micro­ grid. Section 48(c)(8)(B) defines a quali­ fied microgrid as an electrical system that includes equipment that is capable of gen­ erating not less than 4 kW and not greater than 20 MW of electricity; is capable of operating in connection with the electri­ cal 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)). Proposed §1.48-9(e)(12)(i) would pro­ vide generally that 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 gen­ erating 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 inde­ pendently (and disconnected) from such electrical grid; and is not part of a bulkpower system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)). Proposed §1.48-9(e)(12)(ii) would pro­ vide that for purposes of proposed §1.489(e)(12), a qualified microgrid includes an electrical system that is capable of operat­ ing in connection with the larger electrical grid, regardless of whether a connection to the larger electrical grid exists.

The preamble to the Proposed Regu­ lations requested comments on whether the rules for functionally interdependent property as would be provided in pro­ posed §1.48-9(f)(2)(ii) would be sufficient to determine the components that should be included as part of a microgrid con­

troller, or whether another test is needed due to the specific role of microgrid con­ trollers and their components. A few com­ menters advocated for the application of the functional interdependence standard to microgrid controllers. For example, one commenter stated that the functional interdependence standard is thoughtful, provides direct language applicable to the definition of microgrid controllers, and creates an easy and thorough way to iden­ tify the multi-faceted infrastructure that goes into microgrid controllers to generate and store energy.

However, several commenters requested that particular components of property be listed specifically in the defi­ nition of microgrid controllers: optimiza­ tion software, communications software, communications equipment, incoming service, cables, wiring, ethernet switches, computer hardware, load controllers, programmable logic controllers, meters and relays, building management sys­ tems, local human management interface screens, protective relays, breakers, rout­ ers, and other hardware necessary to mon­ itor and control the energy resources and loads on a qualified microgrid.

Additionally, two commenters specif­ ically requested the inclusion of switch­ gear in the definition of microgrid con­ trollers. One of the commenters explained that switchgear is the true backbone of the microgrid controls system. However, the commenter also pointed out that switch­ gear is an essential part of any building’s electrical operations with or without a microgrid. This commenter also noted that because switchgear is a critical piece of a building’s infrastructure, it is usually also owned by the building owner. The commenters generally suggested that if switchgear is owned by the building owner but paid for by the taxpayer that owns the microgrid controller, then the cost of the switchgear should be included in the basis of the taxpayer’s section 48 credit for the microgrid controller similar to the inclu­ sion of interconnection property costs in the credit basis of certain lower-output energy properties.

The two commenters also suggested that if switchgear is part of an existing building, and a microgrid controller is added in a case in which a taxpayer is applying the 80/20 Rule, then the switch­

gear should not be taken into account for purposes of the 80/20 Rule. For example, one of the commenters explained that switchgear in an existing building may be sufficient for connecting microgrid controls with relevant distributed energy resources and load resources either as is or with some additional pieces of equipment and because all microgrid control compo­ nents will connect through the switchgear, it is critical that the integrated but stand­ alone microgrid control equipment is not considered as retrofitting of the switch­ gear in existing buildings under the 80/20 Rule. The other commenter likewise rec­ ommended that equipment integrated into switchgear to enable the installation of a microgrid controller should not be consid­ ered retrofitted equipment but a separate purchase of functionally interdependent energy property.

The Treasury Department and the IRS consulted with the DOE and confirmed that while switchgear may be a necessary part of a microgrid, switchgear is neither functionally interdependent nor integral to a microgrid controller. Switchgear plays a vital role in ensuring the reliabil­ ity and safety of microgrids by managing power distribution, providing protection, and maintaining system integrity. How­ ever, the microgrid controller is respon­ sible for the overall management and optimization of a microgrid’s energy resources and its interaction with the main grid. For example, in the build­ ing context, technically a fuse or circuit breaker could be considered a switchgear, in which case they would exist in build­ ings with or without microgrid control. As a result, switchgear is not part of the energy property defined as a “microgrid controller” and is not taken into account for purposes of the 80/20 Rule. For fur­ ther discussion of the 80/20 Rule see part III.A. of this Summary of Comments and Explanation of Revisions.

After considering comments request­ ing that the final regulations add more examples of specific components eligible as part of a microgrid controller, the Trea­ sury Department and the IRS decline to do so. The Treasury Department and the IRS have further considered the unit of energy property as applied to microgrid control­ lers and conclude that the proposed rule is clear.

December 23, 2024 1372 Bulletin No. 2024–52

Commenters also requested clarifi­ cation concerning what is included as a “microgrid” for purposes of section 48. Two commenters requested the adoption of language clarifying that an eligible microgrid includes an electrical system that is capable of operating in connection with the larger electrical grid regardless of whether the microgrid is physically connected to the electrical grid. Another commenter noted that until it is clarified that single-family homes with systems greater than 4 kW are eligible “microg­ rids,” tax equity investors likely will be reluctant to finance the installation of load controllers associated with rooftop solar, storage, and residential microgrid installations. Similarly, another com­ menter asserted that the term “qualified microgrid” applies both to microgrids as they are conventionally known, which could involve many households or busi­ nesses, and to “nanogrids,” which usually involve a single household. Regarding the request for clarification about a microg­ rid needing to be physically connected to the electrical grid, proposed §1.48-9(e) (12)(ii) already provides that 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. Regarding the other comments, proposed §1.48-9(e)(12)(i) adopts the statutory definition of a qual­ ified microgrid as an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity. This definition encompasses a wide range of technologies. To the extent that such “nanogrids” used in single family homes meet the definition under the statute and proposed §1.48-9(e)(12)(i), it is unneces­ sary to change the definition to identify this certain technology. The proposed rule is adopted without change.

C. Definition of energy property and scope of included components

Since shortly after the enactment of section 48, energy property eligible for the section 48 credit has been interpreted by the Treasury Department and the IRS to include, in addition to energy generation property, costs related to components such

as power conditioning equipment, transfer equipment, and parts related to the func­ tioning of that equipment.

On November 9, 1978, the Energy Tax Act of 1978, amended section 48 by adding a new subsection (then section 48(l)) to define “energy property.” Public Law 95-816, 92 Stat. 2174. On January 23, 1981, the Treasury Department and the IRS promulgated T.D. 7765, 46 FR 7287-01, to provide additional guidance regarding the definition of energy prop­ erty. The preamble to T.D. 7765 states that “[i]n response to comments, the definition of solar energy property was expanded to make it clear that it includes storage devices, power conditioning equipment, transfer equipment, and property solely related to the functioning of those items. However, such equipment does not include transmission equipment.”

The preamble to T.D. 7765 also states that “[a] number of comments cited spe­ cific legislative history to the effect that wind energy property includes ‘transfer equipment.’” T.D. 7765 defines “trans­ fer equipment” as including equipment that permits the aggregation of electricity generated by several windmills and equip­ ment that alters voltage in order to permit transfer to a transmission line. T.D. 7765 adds transfer equipment, but not transmis­ sion lines, to the definition of wind energy property.

Former §1.48-9(d)(3) defines “solar energy property” as equipment that uses solar energy to generate electricity, and includes storage devices, power condi­ tioning equipment, transfer equipment, and parts related to the functioning of those items. This provision also provides that solar energy property used to generate electricity includes only equipment up to (but not including) the stage that transmits or uses electricity.

Former §1.48-9(e) defines “wind energy property” as consisting of a wind­ mill, wind-driven generator, storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. Section 48(a)(3) no longer includes wind energy property as a type of energy property. However, qualified wind facilities (includ­ ing qualified offshore wind facilities) may be qualified investment credit facilities that a taxpayer may elect to treat as energy

property if they meet all the requirements provided in section 48(a)(5).

While not specifically addressed in sec­ tion 48, guidance published in the Internal Revenue Bulletin interpreting section 48 has provided that functionally interde­ pendent components are considered com­ ponents of energy property eligible for the section 48 credit. In Notice 2018-59, 2018-28 I.R.B. 196, the Treasury Depart­ ment and the IRS clarified components that are considered part of an energy prop­ erty. Section 7.01(1) of Notice 2018-59 states that an energy property generally includes all components of property that are functionally interdependent (unless such equipment is an addition or mod­ ification to an energy property). Notice 2018-59 also provides that components of property are functionally interdependent if the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate electricity. Further, Notice 201859 cites Revenue Ruling 94-31, 1994-1 C.B. 16, in stating that functionally inter­ dependent components of property that can be operated and metered together and can begin producing electricity separately from other components of property within a larger energy project will be considered an energy property.

In the context of defining “section 38 property,” §1.48-1(d)(4) provides that “section 38 property” is “used as an inte­ gral part of one of the specified activities

[for which section 38 property may func­ tion] if it is used directly in the activity and is essential to the completeness of the activity.” Section 1.48-1(d)(4) also provides that “[p]roperty shall be consid­ ered used as an integral part of one of the specified activities if so used either by the owner of the property or by the lessee of the property.” Notice 2018-59 incorpo­ rates the concept of integral property from §1.48-1(d) to provide that certain property that is an integral part of an energy prop­ erty is included in energy property for pur­ poses of the section 48 credit.