Notice 2018-59 also explains that prop­

erty that is “functionally interdependent” to the generation of electricity is treated as a unit of energy property. Further, Notice 2018-59 provides that certain other prop­ erty integral to the production of electric­ ity is included in determining what costs

Bulletin No. 2024–52 1373 December 23, 2024

to include in the basis of energy property and the date on which construction of the energy property began. Section 7.02(1) of Notice 2018-59 includes an example illus­ trating that, while a transmission tower located at a site where energy property is located is not energy property because transmission is not an integral part of the activity performed by the energy property, a custom-designed transformer that steps up the voltage of electricity produced at an energy property to the voltage needed for transmission is power conditioning equipment, which is an integral part of the activity performed. In addition, section 7.02(2) of Notice 2018-59 explains that onsite roads used to operate and maintain the energy property are integral to the pro­ duction of electricity, but not roads used primarily to access the site or primarily for employee or visitor vehicles. Similarly, section 7.02(3) and (4) of Notice 2018-59 explain that fences are not integral to the production of electricity nor are buildings, unless the building is essentially an item of machinery or equipment, or a structure that houses property that is integral to the activity of an energy property if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced if the energy property it initially houses is replaced.

One challenge in defining components that are included in energy property is determining the components that are com­ mon to all energy property, without lim­ iting or constraining future technological advances. To avoid limiting future energy technologies, the Treasury Department and the IRS consulted with the DOE and determined that the best option is to adopt a function-oriented approach to describe the types of components that are con­ sidered energy property. Accordingly, proposed §1.48-9(f) would adopt the concepts of functional interdependence and property that is an integral part of an energy property as provided in guidance published in the Internal Revenue Bulletin issued previously by the Treasury Depart­ ment and the IRS.

Further, consistent with prior guidance, proposed §1.48-9(f)(1) would provide the general rule that an energy property includes a unit of energy property that meets the requirements for energy prop­

erty, is not excluded from energy property, and is of a type of energy property included in section 48(a)(3). Property owned by the taxpayer that is an integral part of an energy property is treated as energy prop­ erty. Energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical trans­ mission stage. With the exception of the modification of energy storage technology (as provided in proposed §1.48-9(e)(10) (iii)) and the application of the 80/20 Rule (as provided in proposed §1.48-14(a)(1)), energy property does not include equip­ ment that is an addition or modification to an existing energy property.

1. Unit of Energy Property

Proposed §1.48-9(f)(2)(i) would pro­ vide, in part, that the term unit of energy property means all functionally inter­ dependent components of property (as defined in proposed §1.48-9(f)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project (as defined in proposed §1.48-13(d)). For rooftop solar energy property, all components of property that are installed on a single rooftop would also be considered a single unit of energy property under the Proposed Regulations.

A commenter requested additional examples regarding the “unit of energy property” with respect to electrical energy storage and other energy property. For example, the commenter requested an example illustrating that an individual battery capable of operating on its own or with other batteries is a “unit of energy property.” The commenter asserted that this should be the clear result if such a bat­ tery can “operate apart from other energy properties,” including, for example, a sin­ gle storage container with multiple battery packs. The commenter noted that this is also consistent with prior guidance pub­ lished in the Internal Revenue Bulletin regarding wind farms. The commenter asserted that if under this prior guid­ ance, the addition of a new wind turbine is treated as the addition of a new unit of energy property, then the same rule should apply to batteries. A definitive response to such comments would require the Trea­

sury Department and the IRS to conduct a complete factual analysis of the property in question, which may include informa­ tion beyond that which was provided by the commenters. Because more informa­ tion is needed to make the determina­ tions requested by the commenters, the requested clarifications are not addressed in these final regulations.

With respect to solar energy property, some commenters suggested that the Pro­ posed Regulations did not clearly draw the line between the unit of energy property and property integral to the unit of energy property. For example, a commenter stated that the final regulations need to clarify that a unit of solar energy prop­ erty includes all solar panels, racks, wires, cables, and equipment connected through a single inverter (rather than all prop­ erty through the transformer). This com­ menter referred to Example 1 in proposed §1.48-9(f)(5)(i) and recommended adding an example (or modifying the existing example) to clarify the components in the unit of solar energy property. This com­ menter explained that this is necessary to comport with the definition of a unit of energy property as all functionally inter­ dependent components, since each group of components connected through an inverter may be operated independently. Similarly, a commenter requested that the final regulations clarify that a solar project may have multiple units of energy prop­ erty connected through a single inverter. Another commenter also requested a new or revised example to illustrate that for a larger-scale ground-mounted solar array, a “unit of energy property” is a single string or block of panels connected to each other and through a common inverter.

As highlighted by commenters, solar energy property may be configured in different ways. The Treasury Department and IRS agree with commenters that clarity on how the definition of a unit of energy property is applied to solar energy property is warranted. Under the Pro­ posed Regulations, a unit of energy prop­ erty means all functionally interdependent components of property (as defined in proposed §1.48-9(f)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project (as defined in proposed §1.48-13(d)). In

December 23, 2024 1374 Bulletin No. 2024–52

applying this definition to a solar energy property, the Treasury Department and IRS view the unit of energy property as all the solar panels that are connected to a common inverter, which would be consid­ ered an integral part of the energy prop­ erty, or connected to a common electrical load, if a common inverter does not exist. Accordingly, a large, ground-mounted solar energy property may be comprised of one or more units of energy property depending upon the number of inverters. The example in the final regulations is updated to reflect this. The final regula­ tions adopt the definition of unit of energy property as proposed.

For rooftop solar energy property, all components of property that are installed on a single rooftop would also be consid­ ered a single unit of energy property under the Proposed Regulations. The final regu­ lations adopt this rule as proposed.

2. Functional Interdependence

Proposed §1.48-9(f)(2)(ii)(A) would provide that except as provided in pro­ posed §1.48-9(f)(2)(ii)(B), with respect to components of a unit of energy prop­ erty, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen as provided by section 48(c) and as described in pro­ posed §1.48-9(e).

Proposed §1.48-9(f)(2)(ii)(B) would provide that in the case of solar process heat equipment, fiber-optic solar energy property, electrochromic glass property, GHP property, qualified biogas property, and microgrid controllers, with respect to components of such property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the energy property as provided by section 48(c) and as described in proposed §1.489(e). Many commenters requested that tax­ payers be permitted to claim a credit for a functionally interdependent piece of property without owning the entire unit of energy property. These comments

addressing ownership are discussed in part III.D. of this Summary of Comments and Explanation of Revisions.

Other commenters asserted that the statute does not require ownership of a unit of energy property; instead, the tax­ payer must only own something that fits the relevant definition of “energy prop­ erty.” These commenters stated that the proposed definitions of the unit of energy property based on “functional interde­ pendence” and integral property have no basis in section 48. A commenter stated that section 48 does not require or per­ mit the Treasury Department or the IRS to discriminate between types of energy property, whether based on functionality, ownership, or otherwise. This commenter referred to the flush language at section 48(a)(3)(D): “[energy property] shall not include any property which is part of a facility the production from which is allowed as a credit under section 45 for the taxable year or any prior taxable year.” The commenter said this language clearly signals that Congress recognizes that property may be part of a facility, but that the term “property” represents some­ thing less than a facility. The commenter also referred to Technical Advice Mem­ orandum 8528001 (January 8, 1985) for the principle that components of property that may function together can also retain their separate identity for tax purposes. Lastly, the commenter stated that section 48 is focused on capitalized expenditures on items of property that are tangible personal property for Federal income tax purposes that are used in a trade or busi­ ness. As a result, the commenter asserted that to define the types of property that qualify for the section 48 credit, taxpay­ ers should focus on items of property that are integral to a process that Congress has chosen to incentivize, for example, the production of energy using certain inputs. This commenter requested the removal of the functional interdependence standard at proposed §1.48-9(f) and asserted that while this standard is needed for section 45 to determine a qualified facility and for beginning of construction purposes, this standard is not needed for purposes of section 48.

Another commenter stated that the Pro­ posed Regulations contradict the language and intent of the IRA by distinguishing

between “functionally interdependent” components and “integral parts” of energy property to determine the owner or own­ ers of energy property who may claim the section 48 credit. The commenter noted that this distinction contravenes the plain text of section 48, which permits the sec­ tion 48 credit to be claimed by the owner of energy property if the original use of that energy property began with such owner.

The concept of a unit of energy prop­ erty also is intertwined with the discus­ sion of the 80/20 Rule in part III.A. of this Summary of Comments and Explanation of Revisions. In the context of the 80/20 Rule, a few commenters also did not agree with this concept. For example, a commenter highlighted the statutory lan­ guage and pointed out that certain defi­ nitions of energy property use the word “equipment” as opposed to “system.” A commenter explained that some energy properties are defined as equipment that serves a function, such as solar energy property defined in section 48(a)(3)(A)(i) and GHP property defined in section 48(a) (3)(A)(vii). This commenter contrasted those definitions with statutory definitions of other types of energy property as com­ prising a system, such as the definition of CHP property in section 48(c)(3), thermal energy storage property as defined in sec­ tion 48(c)(6)(C)(i), and qualified biogas property as defined in section 48(c)(7). The commenter concluded that the “unit of energy property” concept as provided in proposed §1.48-9(f)(2)(i) is appropriate for energy properties defined as systems, but it should not be applied to energy properties defined as equipment.

Another commenter made a similar point about misalignment of the “unit of energy property” concept by focusing specifically on its application to geother­ mal energy property. The commenter stated that despite the statute defining “energy property” at the equipment level, “equipment used to produce, distribute, or use energy derived from a geother­ mal deposit,” the Proposed Regulations use the term “unit of energy property,” a term defined more expansively, such that it could be interpreted to be equivalent to an entire facility in the case of geothermal energy property. By using the term “unit of energy property,” the commenter asserted

Bulletin No. 2024–52 1375 December 23, 2024

that the Proposed Regulations give a mis­ leading appearance that the rules comport with the statutory text of section 48 but define that term so that it is functionally equivalent to the term “facility” as applied in section 45.

In the context of microgrid control­ lers, some commenters agreed with the application of the functional interdepen­ dence standard. A commenter stated that microgrids are highly customizable, and the functional interdependence standard as proposed would allow accommodation of the different engineering requirements of qualified microgrids to future-proof the definition and allow for technological advances. This commenter agreed that the functional interdependence standard is sufficiently flexible for microgrid control­ lers.

The statute supports the Proposed Reg­ ulations’ definition and use of the terms “functionally interdependent” and “unit of energy property.” Additionally, these concepts have been adopted in previous guidance published in the Internal Reve­ nue Bulletin under section 48, particularly Notice 2018-59, which provides guidance regarding the beginning of construction rules for the section 48 credit.

There are three key reasons for requir­ ing an energy property to include all functionally interdependent components that are part of a unit of energy property. First, the statutory definition of each type of energy property as provided in section 48(a)(3) and (c) is included at proposed §1.48-9(e). The unit of energy property definition at §1.48-9(e)(2) aligns with these statutory definitions by encompass­ ing the property required to generate elec­ tricity or perform the required function as described in the statute. If a taxpayer owns merely a component of property within a larger unit of energy property and is not required to place in service the entire unit of energy property, then in some cases there would be no certainty that the gen­ eration of electricity or other statutorily required function would be satisfied when the taxpayer claims the credit.

Some commenters suggested that this uncertainty could be eliminated or reduced by a coordinated operating plan among separate taxpayers. However, section 48 provides a credit only if a taxpayer places in service “energy property” as defined

by statute. It does not provide a credit for placing in service a mere component of energy property, regardless of whether it is subject to an operating plan. In addition, taxpayers claim the section 48 credit by filing Form 3468, Investment Credit, with their Federal income tax return. The IRS has no authority to compel taxpayers to coordinate tax credit claims or share tax return information with other taxpayers. Any taxpayer claiming a section 48 credit must satisfy the statutory requirements, as described by Congress, for each type of energy property, and the functional inter­ dependence standard provided in the Pro­ posed Regulations would ensure that the statutory requirements are met.

Second, focusing on the statutory lan­ guage in section 48(a)(1), which provides that “the energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year,” the defini­ tion of the unit of energy property using a functional interdependence standard is consistent with how the term “placed in service” has been interpreted by the courts and developed in various forms of guidance. Proposed §1.48-9(b)(5) largely incorporates the general rules provided by §1.46-3(d)(1) for determining when a tax­ payer has placed a property in service for the section 48 credit. An energy property is considered “placed in service” in the earlier of the taxable year in which, under the taxpayer’s depreciation practice, the depreciation of such energy property begins or the taxable year in which the property is “placed in a condition or state of readiness and availability for a specifi­ cally assigned function.” See §§1.46-3(d) (1) and 1.167(a)-11(e)(1)(i).

To determine the taxable year in which depreciation begins, it is the energy prop­ erty described in section 48(a)(3)(A) that must be depreciable. See section 48(a)(3) (C). As stated earlier, this energy property cannot be a mere component that would be depreciated in isolation from the rest of the components that would make up a unit of energy property. Treating individual components within a unit of energy prop­ erty as an energy property would make it practically impossible to determine the taxable year in which the depreciation of components that comprise an energy property begins.

The Tax Court has said that “when an individual component that is designed to operate as a part of a larger system is inca­ pable of contributing to the system in isola­ tion, it is not regarded as placed in service until the entire system reaches a condition of readiness and availability for its specif­ ically assigned function.” Green Gas Del. Statutory Tr. v. Commissioner, 147 T.C. 1, 52 (2016), aff’d, 903 F.3d 138 (D.C. Cir. 2018). The Tax Court further explained that components “are not to be considered placed in service separately from the sys­ tem of which they are an essential part.” Olsen v. Commissioner, T.C. Memo 202141, aff’d 52 F.4th 889 (10th Cir. 2022). See als - Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 390 (5th Cir. 1995), aff’g in part, rev’g in part on other grounds T.C. Memo. 1992-168; see Pub. Serv. Co. v. United States, 431 F.2d 980, 984 (10th Cir. 1970) (holding that individual com­ ponents of a power plant could not be con­ sidered separately because no component “would serve any useful purpose” on its own). As demonstrated by these rulings, courts have long interpreted the placed in service requirement to apply to all of the functionally interdependent components of a unit of property that must be placed in service collectively.

Lastly, in amending section 48 for taxable years after the enactment of the IRA, Congress did not contradict or dis­ place these concepts, which had already been established in guidance published in the Internal Revenue Bulletin. In Notice 2018-59, the Treasury Department and the IRS clarified what components are con­ sidered part of an energy property. Sec­ tion 7.01(1) of Notice 2018-59 states that an energy property generally includes all components of property that are function­ ally interdependent (unless such equip­ ment is an addition or modification to an energy property). Further, Notice 2018-59 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 to generate electricity. Notice 2018-59 relies upon the ratio­ nale provided in Revenue Ruling 94-31, 1994-1 C.B. 16, that functionally inter­ dependent components of property that can be operated and metered together and can begin producing electricity separately

December 23, 2024 1376 Bulletin No. 2024–52

from other components of property within a larger energy project will be considered an energy property.

3. Integral Part of an Energy Property

Proposed §1.48-9(f)(3)(i) would pro­ vide that for purposes of the section 48 credit, property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property as provided by section 48(c) and as described in proposed §1.489(e) and is essential to the completeness of the intended function. Property that is an integral part of an energy property is energy property. A taxpayer may not claim the section 48 credit for any property not owned by the taxpayer that is an inte­ gral part of the taxpayer’s energy prop­ erty. Multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be con­ sidered an integral part of each energy property so long as the cost basis for the shared property is properly allocated to each energy property. The total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared prop­ erty. In addition, property that is an inte­ gral part of an energy property that is also shared by a qualified facility (as defined in section 45(d)) will not be considered property that is not energy property under proposed §1.48-9(d). This means that property that is also used by a qualified facility (as defined in section 45(d)) may still be energy property.

Proposed §1.48-9(f)(3)(ii) would pro­ vide that property that is an integral part of energy property includes power condi­ tioning equipment and transfer equipment used to perform the intended function of the energy property as provided by sec­ tion 48(c) and as described in proposed §1.48-9(e). Power conditioning equip­ ment includes, but is not limited to, trans­ formers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equip­ ment and include, but are not limited to,

switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment.

Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy prop­ erties and equipment that alters voltage to permit transfer to a transmission or distri­ bution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or pro­ tection of transfer equipment are also treated as transfer equipment and may include items such as current transform­ ers used for metering, electrical interrupt­ ers (such as circuit breakers, fuses, and other switches), and hardware and soft­ ware used to monitor, operate, and protect transfer equipment.

Power conditioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or used by a qualified facility (as defined in section 45(d)), so long as the total cost basis of the integral property is not exceeded for purposes of the section 48 credit claimed with respect to any energy property or qualified facility that share such property.

Proposed §1.48-9(f)(3)(iii) would pro­ vide that roads that are an integral part of an energy property are integral to the activity performed by the energy prop­ erty such as onsite roads that are used for equipment to operate and maintain the energy property. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property .

Proposed §1.48-9(f)(3)(iv) would pro­ vide that fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property. A commenter disagreed that fencing is not integral and asserted that concerns of national security dictate the fences, along with security systems and monitoring devices, be treated as integral to electricity generation. Fencing is not considered property integral to an energy property because it is not essential to the completeness of the intended function of

an energy property, whether electricity generation or another specific function of energy property. This rule originally was provided in Notice 2018-59 and was included in the Proposed Regulations. The proposed rule is adopted without change.

For the various section 48 energy prop­ erties, commenters requested confirma­ tion that certain property is an integral part of an energy property. A commenter requested clarification that an HVDC (high-voltage direct current) power sys­ tem is either a “unit of energy property” or a “functionally interdependent compo­ nent” of an offshore wind facility. If the HVDC power system is used directly in the intended function of the energy prop­ erty and is essential to the completeness of the intended function, then the HVDC power system would be an integral part to an energy property, and thus, treated as part of that energy property. However, because the generation or storage of electricity or thermal energy is not dependent upon the placing in service of an HVDC power sys­ tem, it is not a functionally interdependent component of an energy property and not a separate “unit of energy property.” Fur­ ther, the Proposed Regulations included an offshore wind example, retained in these final regulations, that illustrates the application of the energy property rules and addresses this commenter’s concern.

Another commenter requested that the final regulations clarify that software that operates, monitors, or protects the project applies more broadly than power conditioning and transfer equipment and may be considered property integral to an energy property. The commenter asserted that certain types of software used as a part of energy management systems, bat­ tery management systems, and microgrid controllers should be considered property integral to an energy property. This com­ menter also requested that software that optimizes and automates integral parts also be eligible. Finally, this commenter believed that the final regulations should clarify that a taxpayer who owns an energy property can include software costs in the basis of the energy property to compute the section 48 credit. Another commenter stated that the definition of power condi­ tioning equipment expressly includes soft­ ware used to “monitor, operate, and pro­ tect” such equipment and requested this

Bulletin No. 2024–52 1377 December 23, 2024

definition be modestly expanded. As dis­ cussed in part I.B.6. of this Summary of Comments and Explanation of Revisions, software may be integral to different types of energy property, including microgrid controllers. Therefore, software that opti­ mizes and automates may be integral if it meets the integral property rule in §1.489(f)(3). To the extent the commenter is asking whether software costs may be capitalized, that issue is beyond the scope of these regulations. The proposed rules are adopted without change.

In the context of qualified biogas prop­ erty, commenters requested additional examples of what components may be integral property. Specifically, a com­ menter asked for clarification that mobile trailers or containers used to transfer bio­ gas are integral to biogas energy property. The final regulations do not adopt these comments, as these regulations are meant to apply to all energy properties and do not provide an exclusive list of compo­ nents of property that may be included in energy property. The final regulations do provide certain examples of property that is an integral part of qualified biogas prop­ erty including, but not limited to, a waste feedstock collection system, a landfill gas collection system, and mixing or pumping equipment.

Additionally, a few commenters requested clarification regarding the deter­ mination of when construction begins in cases in which two or more energy prop­ erties share integral property. The com­ menters proposed that the beginning of construction on one energy property does not determine when construction begins on another energy property, even if they share property integral to both energy properties. The Treasury Department and the IRS have addressed the beginning of construction rules in several pieces of Internal Revenue Bulletin guidance. The Proposed Regulations do not address these rules and they are beyond the scope of the final regulations.

In the context of solar energy property, a commenter requested that the Treasury Department and the IRS confirm that power conditioning equipment, including transformers, is not considered a compo­ nent of a unit of energy property; rather, power conditioning equipment is an “inte­ gral part” of energy property. This com­

menter noted that the example included in proposed §1.48-9(f)(5)(i) says this, but requested that the Treasury Department and the IRS clarify that the language in this example, “[a]ll components of the Property, up to and including the trans­ former are either functionally interdepen­ dent components of the Property or are integral parts of the Property,” means it is the transformer that is the “integral part” and the other solar components that are the functionally interdependent components of the property. This same commenter also requested that gen-tie lines be clarified as integral property. The final regulations, at §1.48-9(f)(3)(ii), provide that power conditioning and transfer equipment is considered an integral part of an energy property and provide a nonexclusive list of types of property that are considered power conditioning equipment, including transformers and transfer equipment.

Another commenter requested con­ firmation that offshore generating assets and components of island-based hydro­ power facilities qualify for the section 48 credit. This commenter also requested that similar rules and examples as those provided in the Proposed Regulations for offshore wind facilities apply to marine and hydrokinetic energy property. As dis­ cussed in more detail in part III.F. of this Summary of Comments and Explanation of Revisions, offshore wind facilities and qualified hydropower facilities are both qualified facilities under section 45(d) for which a taxpayer may make an election to claim the section 48 credit in lieu of the section 45 credit. Whether certain assets are included in an offshore wind facility or qualified hydropower facility as defined in section 45(d) is beyond the scope of these final regulations.

4. Property Excluded from Energy Property

Proposed §1.48-9(d)(2) would pro­ vide that energy property does not include power purchase agreements, goodwill, going concern value, or renewable energy certificates. A commenter requested addi­ tional clarification and examples of the potential bifurcation of tax basis between renewable energy certificates and an associated energy property. A definitive response to this comment would require

the Treasury Department and the IRS to conduct a complete factual analysis of the renewable energy certificates and associ­ ated energy property, which may include information beyond that which was pro­ vided by the commenters. Because more information is needed to provide the clari­ fication requested by the commenters, the requested clarification is not addressed in these final regulations. The final regula­ tions adopt the rule as proposed.

II. Rules Relating to the Increased Credit Amount for Satisfying Certain Prevailing Wage and Apprenticeship Requirements and the Energy Project Rule

Section 48(a)(9) provides for an increased credit amount for energy proj­ ects for taxpayers who satisfy certain requirements. Section 48(a)(9)(A)(i) pro­ vides a general rule that in the case of any energy project that satisfies the require­ ments of section 48(a)(9)(B), the amount of the credit determined under section 48(a) (determined after the application of section 48(a)(1) through (8) and (15), and without regard to section 48(a)(9)(A)(i)) is equal to such amount multiplied by 5.

Section 48(a)(9)(A)(ii) provides that for purposes of section 48(a), the term “energy project” means a project consist­ ing of one or more energy properties that are part of a single project.

Section 48(a)(9)(B) provides that a project meets the requirements of section 48(a)(9)(B) if it is one of the following: (i) a project with a maximum net output of less than 1 megawatt of electrical (as mea­ sured in alternating current) or thermal energy (One Megawatt Exception); (ii) a project the construction of which begins before the date that is 60 days after the Secretary publishes guidance with respect to the requirements of section 48(a)(10) (A) and (11) (BOC Exception); and (iii) a project that satisfies the requirements of section 48(a)(10)(A) and (11) (PWA requirements).

Section 48(a)(10) provides rules with respect to the prevailing wage require­ ments (Prevailing Wage Requirements) under section 48, including the special recapture provision under section 48(a) (10)(C). Section 48(a)(10)(B) provides that rules similar to the correction and penalty procedures for a failure to satisfy

December 23, 2024 1378 Bulletin No. 2024–52

the Prevailing Wage Requirements under section 45(b)(7)(B) apply, and those rules generally apply prior to a recapture event under section 48(a)(10)(C). Section 48(a) (11) provides that rules similar to the rules of section 45(b)(8) apply with respect to the apprenticeship requirements (Appren­ ticeship Requirements).

Under the BOC Exception in section 48(a)(9)(B)(ii), taxpayers may claim the amount of the increased credit without satisfying the PWA requirements if con­ struction “begins before the date that is 60 days after the Secretary publishes guid­ ance with respect to the [PWA require­ ments].” The Treasury Department and the IRS published Notice 2022-61, 202252 I.R.B. 560, on November 30, 2022, providing initial guidance with respect to the PWA requirements and starting the 60-day period described in those sec­ tions. To qualify for the BOC Exception, a taxpayer must begin construction of a section 48 energy project before Janu­ ary 29, 2023. Unless the One Megawatt Exception applies, taxpayers who do not meet the BOC Exception under section 48 would need to satisfy the applicable PWA requirements to claim the increased amount of credit.

A. PWA requirements

Comments on the general PWA requirements (including comments that referenced section 48 but addressed the PWA requirements more generally) were addressed in the PWA Final Regulations. Comments received regarding the specific PWA requirements under section 48, the One Megawatt Exception under section 48, and the recapture rules contained in section 48(a)(10)(C) were not addressed in the PWA Final Regulations and are addressed in this Summary of Comments and Explanation of Revisions.

To the extent consistent with this Sum­ mary of Comments and Explanation of Revisions section of these final regula­ tions, the Summary of Comments and Explanation of Revisions section of the PWA Final Regulations is incorporated in these final regulations. Therefore, general comments addressed in the preamble to the PWA Final Regulations are not addressed again in this Summary of Comments and Explanation of Revisions.

The PWA Final Regulations provide generally applicable rules on the PWA requirements. These final regulations generally adopt by cross-reference those rules in the PWA Final Regulations pro­ mulgated under section 45(b)(7) and (8); specifically, in §1.45-7 (Prevailing Wage Requirements), §1.45-8 (Apprenticeship Requirements), and §1.45-12 (recordkeep­ ing and reporting). Consistent with the PWA Final Regulations, the PWA require­ ments under section 48 apply with respect to the creditable portion of an energy proj­ ect within the meaning of section 48(a)(9) (A) and these final regulations.

As stated in the preamble to the PWA Final Regulations, the Treasury Depart­ ment and the IRS have determined that given the complexity of the PWA require­ ments, the uncertainty regarding the potential retroactive effects of the PWA requirements, and the benefits to tax administration gained with consistency across the various Code sections con­ taining PWA requirements, a transition rule is appropriate. The PWA Final Reg­ ulations provide that any work performed before January 29, 2023 (that is, the date that is 60 days after the publication of Notice 2022-61) is not subject to the PWA requirements, regardless of whether there is an applicable BOC Exception. This tran­ sition rule also applies for taxpayers that may initially satisfy the BOC Exception, but later fail to meet the BOC Exception (for example, by failing to meet certain continuity requirements). These taxpay­ ers must satisfy the PWA requirements for construction, alteration, or repair (as applicable) that occurs on or after January 29, 2023, but do not need to meet the PWA requirements for work that occurred prior to that date. For those reasons described in the preamble to the PWA Final Regu­ lations, this transition rule also applies to the PWA requirements under section 48 and is adopted by reference into §§1.45-7 and 1.45-8 in these final regulations.

The PWA Final Regulations also pro­ vide a limited transition waiver for the penalty payment with respect to the cor­ rection and penalty procedures described in section 45(b)(7)(B) for a failure to satisfy the Prevailing Wage Require­ ments. The PWA Final Regulations pro­ vide that the penalty payment is waived with respect to a laborer or mechanic

who performed work in the construction, alteration, or repair of a qualified facility on or after January 29, 2023, and prior to June 25, 2024, if the taxpayer relied upon Notice 2022-61 or the PWA Pro­ posed Regulations for determining when the obligation to pay prevailing wages began, provided the taxpayer makes the appropriate correction payments to the impacted workers within 180 days of June 25, 2024. These final regulations clarify that this limited transition waiver applies to section 48 provided the taxpayer makes the appropriate correction payments to the impacted workers within 180 days of the publication of these final regulations.

Similarly, these final regulations also allow taxpayers to use Notice 2022-61 for determining when construction begins for purposes of the applicable percentage of labor hours performed by qualified apprentices required under section 48(a) (11) (by reference to section 45(b)(8)) in satisfying the Labor Hours Requirement described in §1.45-8. These transition rules are explained further in the preamble to the PWA Final Regulations.

The PWA Final Regulations provide special rules applicable to Indian Tribal governments. These final regulations also adopt by cross-reference the special rules with respect to Indian Tribal governments under §1.45-7 for purposes of the Prevail­ ing Wage Requirements.

B. Section 48(a)(10)(C) recapture rules

Section 48(a)(10)(C) authorizes the Secretary, by regulations or other guid­ ance, to provide for recapturing the benefit of any increase in the credit allowed under section 48(a) by reason of section 48(a) (10) with respect to any project that does not satisfy the requirements under section 48(a)(10)(A) (after application of section 48(a)(10)(B)) for the period described in section 48(a)(10)(A)(ii) but that does not cease to be investment credit property within the meaning of section 50(a). The period and percentage of such recapture is to be determined under rules similar to the rules of section 50(a).

Proposed §1.48-13(c)(9) provides a rule to coordinate the recapture of an increase credit amount in a prior taxable year with recapture under section 50(a) in a current taxable year. These final regula­

Bulletin No. 2024–52 1379 December 23, 2024

tions do not adopt proposed §1.48-13(c) (9) because the proposed rule may have resulted in an inaccurate calculation of the amount of the “aggregate decrease in credit allowed” calculated under section 50(a). Section 50(a) and §§1.47-1, 1.47-2, and 1.50-1 provide rules governing recap­ ture of the investment credit, including the section 48 credit.

Proposed §1.48-13(c)(3)(i) would pro­ vide generally that the increased credit amount under proposed §1.48-13(b)(3) is subject to recapture for any project that does not satisfy the Prevailing Wage Requirements in §1.45-7(b) through (d) and proposed §1.48-13(c)(1) for any period with respect to an alteration or repair of such project during the five-year period beginning on the date such project is originally placed in service (five-year recapture period) (but that does not cease to be investment credit property within the meaning of section 50(a)). Further, proposed §1.48-13(c)(7) would provide that, in addition to the general reporting requirements described in §1.45-12, a taxpayer that has claimed an increased credit amount under proposed §1.48-13(b) (3) or transferred a specified credit por­ tion under section 6418 that includes an increased credit amount under proposed §1.48-13(b)(3) is required to provide to the IRS, information on the payment of prevailing wages with respect to any alter­ ation or repair of the project during the five-year recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Reve­ nue Bulletin.

Commenters requested more detail on the “annual prevailing wage compliance report” because the Proposed Regula­ tions do not specify what information is required to be reported to the IRS. A com­ menter noted that the Proposed Regula­ tions do not provide any applicable pro­ cedures if the IRS should disagree with the completeness of the information or provide detail on the scope of prevailing wages for an alteration or repair. The com­ menter further asserted that the guidance should avoid imposing any additional bur­ dens on the taxpayer and creating any fur­ ther uncertainty with respect to the already substantial compliance obligations created by the PWA Proposed Regulations.

The details requested by these com­ menters were addressed in the PWA Final Regulations. The PWA Final Regulations provided definitions of terms, including what constitutes an alteration or repair, and detail on the required recordkeeping and reporting for the purposes of the PWA requirements. Further, as provided in the Proposed Regulations, information on the payment of prevailing wages with respect to any alteration or repair of the project during the five-year recapture period is to be provided in the form and manner as described in IRS instructions or in publi­ cations or guidance published in the Inter­ nal Revenue Bulletin. Accordingly, these comments are not addressed again in this Summary of Comments and Explana­ tion of Revisions. These final regulations do clarify that if there is no alteration or repair that occurs during the relevant year during the five-year recapture period, then the taxpayer is deemed to satisfy the Pre­ vailing Wage Requirements for that year.

Proposed §1.6418-5(f) would provide rules addressing the notification require­ ments and the impact of recapture under section 48(a)(10)(C). The final regulations update the rules in proposed §1.64185(f) because the 6418 Final Regulations, which included updated recapture rules in §1.6418-5, were published after publica­ tion of proposed §1.6418-5(f). Thus, it is necessary to update §1.6418-5(f), which was reserved in the 6418 Final Regula­ tions, in these final regulations to ensure consistency with the updated recapture rules in the 6418 Final Regulations.

C. Definition of energy project

Section 48(a)(9)(A)(ii) defines the term “energy project” as a project consisting of one or more energy properties that are part of a single project. Proposed §1.48-13(d) (1) would provide that, for purposes of the increased credit amount under sec­ tion 48(a)(9) and proposed §1.48-13(b) and (c), the domestic content bonus credit amount under section 48(a)(12), and the increase in credit rate for energy commu­ nities provided in section 48(a)(14), the term “energy project” means one or more energy properties (multiple energy prop­ erties) that are operated as part of a single energy project. Proposed §1.48-13(d)(1) would provide that multiple energy prop­

erties will be treated as one energy project if, at any point during the construction of the multiple energy properties, they are owned by a single taxpayer (subject to the related taxpayer rule provided in proposed §1.48-13(d)(2)) and any two or more of the following factors are present:

(i) The energy properties are con­ structed on contiguous pieces of land;

(ii) The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;

(iii) The energy properties have a com­ mon intertie;

(iv) The energy properties share a com­ mon substation, or thermal energy off-take point;

(v) The energy properties are described in one or more common environmental or other regulatory permits;

(vi) The energy properties are con­ structed pursuant to a single master con­ struction contract; or

(vii) The construction of the energy properties is financed pursuant to the same loan agreement.

Proposed §1.48-13(d)(2) would define the term “related taxpayers” and provide a related taxpayer rule. Proposed §1.4813(d)(3) would require consistent treat­ ment as an energy project.

1. Challenges for Project Structures

The Treasury Department and the IRS received several comments regarding the energy project definition, and comment­ ers raised concerns regarding the single project rule. Emblematic of comment­ ers’ views, a commenter summarized its concerns that the Proposed Regulations would expand the definition of a “project” by potentially grouping energy properties that would not commonly be considered as a single energy project if those energy properties were paid for under the same construction contract or financing agree­ ment, even if the properties were operated separately. The commenter explained that the problems caused by the grouping of multiple energy properties as a single proj­ ect are particularly acute for behind the meter solar facilities in different locations that are typically sized to provide power for their respective dedicated sites. This commenter described several concerns

December 23, 2024 1380 Bulletin No. 2024–52

including geographic and time disparity, the impact on small bidders, the ability to plan around the proposed definition’s factors, and the impact on domestic con­ tent bonus credit amount requirements. Another commenter stated that the single project rule in the Proposed Regulations would capture energy properties located on contiguous parcels that are owned by the same tax equity partnership (which is overinclusive and does not take into account projects for which the owner of each project is a disregarded special pur­ pose entity), yet the energy properties are subject to separate permits, separate power purchase agreements, separate substations and gen-tie lines, separate construction contracts, and separate construction loans and permanent debt, and ownership of the underlying real estate is separate.

A commenter explained that typically, each project partnership will have a sep­ arate engineering, procurement, and con­ struction (EPC) agreement. If, for exam­ ple, project partnerships A, B, C, and D hold four separate energy properties and four separate EPC agreements are entered into on four separate dates, that would create four distinct prevailing wage rates that need to be tracked for prevailing wage purposes. If all four energy properties owned by the four project partnerships are deemed to be a single energy project, then each project partnership would still have to determine separately whether it met the PWA requirements due to the dif­ fering prevailing wage rates from the var­ ious dates the EPC contracts were signed. The commenter suggested that if any one of the four energy properties comprising the single energy project does not meet the PWA requirements, then none would be treated as meeting the requirements.

Another commenter explained that the single project rule would make thou­ sands of separate residential rooftop sys­ tems one “energy project,” because two of the factors (common construction and loan agreements) always will be met. This commenter explained that these sys­ tems generally are constructed under the same EPC contract and financed via the same debt facility purely as a matter of convenience and not because the systems are intended to be operated together as a single project. Therefore, the commenter explained that all rooftop photovoltaic

(PV) solar systems installed by any indi­ vidual EPC contractor (even if installed years apart and in separate States) poten­ tially could be treated as one energy proj­ ect under the Proposed Regulations. This commenter also raised concerns that this approach creates uncertainty and is thus administratively unworkable with regard to the timing of credit claims.

Several commenters had concerns and requested clarification regarding the appli­ cation of the single project rule to co-lo­ cated energy property and energy storage technology (such as solar energy prop­ erty and battery storage). A commenter explained that battery storage co-located within the solar array would meet the cri­ teria that the projects be contiguous to one another (indeed integrated), and other criteria could apply as well, for example, that both types of energy property are part of the same construction contract and sub­ ject to the same permits. This commenter explained that the listed criteria in the Pro­ posed Regulations appear to be focused on traditional energy generating projects, which makes sense if there are multiple energy properties that should be treated as a single energy project but could inad­ vertently bring energy storage technology under the umbrella of a section 45 credit solar project. Additionally, several com­ menters requested that if the single project rule is adopted in final regulations, such regulations should confirm that “[s]ection 45 qualified facilities that are co-located with section 48 energy property will not be considered part of an energy project (unless they elect under section 48(a) (5) to be treated as energy property),” as stated in the preamble to the Proposed Regulations.

Another commenter provided an example of a project in a school district (District) for which potentially varying PWA requirements must be met. The District installs solar energy properties on a school, district offices, and a sup­ ply warehouse located across separate non-contiguous locations within the Dis­ trict boundaries. The District issues a sin­ gle series of tax-exempt bonds to finance construction costs at all properties. After a single request for proposal, the District selects a single contractor to construct the energy properties at each location. Even if the District were to send out requests

for proposals for each separate property, the same contractor may be selected for all sites. In addition, although the District could issue separate series of bonds for each site, those bonds may be considered a single issue under §1.150-1. Under the Proposed Regulations, the various solar energy properties would be considered a single energy project even though the energy properties are distinct and located miles apart.

Many commenters proposed alterna­ tives to the Proposed Regulations’ defi­ nition of energy project. Several com­ menters recommended re-instituting the facts and circumstances single project test from Notice 2018-59. A commenter also suggested allowing taxpayers an option, but not a requirement, to elect to have multiple energy properties be “treated as one energy project” if they meet the sin­ gle project rule with two factors and com­ mon ownership found in the Proposed Regulations. This commenter stated that if the Proposed Regulations’ definition of energy project is retained, the rule should change the timing for analyzing common ownership from “at any point during the construction” to “when the energy prop­ erty is placed in service.” This commenter also suggested removing the related tax­ payer rule and instead providing an option to elect to be treated as one taxpayer. Another commenter proposed that the final regulations could instead create a rebuttable presumption under which tax­ payers can avoid having multiple energy properties treated as a single energy proj­ ect by demonstrating that the project cov­ ers multiple technologies, taxpayers, tax­ able years, or interconnection agreements.

A commenter proposed that to the extent that the Treasury Department and the IRS are concerned with the potential for abuse, the final regulations could require meeting three or four factors before mandating sin­ gle project treatment. Alternatively, con­ sistent with the approach taken in regula­ tions under section 48(e) (T.D. 9979, 88 FR 55506 (Aug. 15, 2023), corrected in 88 FR 59446 (Aug. 29, 2023), corrected in 88 FR 87903 (Dec. 20, 2023)), these final regulations could limit the applica­ tion of the facts and circumstances deter­ mination to smaller projects (that is, under five megawatts). Another commenter offered as an alternative that the final reg­

Bulletin No. 2024–52 1381 December 23, 2024

ulations add a requirement for satisfaction of an additional factor or factors (that is, more than two) and provide that aggre­ gation will only occur if the projects are clearly operated together. Another com­ menter similarly suggested that three fac­ tors should be met.

Additionally, one commenter sug­ gested that, if the rule were retained, fur­ ther clarification is needed regarding what qualifies as a loan agreement and whether the definition of “energy project” applies to projects of any size. This commenter requested that the final regulations clar­ ify that the definition does not include tax equity positions. This commenter also recommended that the final regulations align the effective date of the new energy project definition with the construction of an energy property or an energy project beginning on or after January 29, 2023, to eliminate any confusion regarding the new definition and to mitigate additional risk to taxpayers.

A commenter supported the Proposed Regulations’ definition of energy proj­ ect in a comment submitted in response to the PWA Proposed Regulations stated that the Treasury Department and the IRS should make clear that a taxpayer seeking the increased credit rate for satisfying the PWA requirements cannot subdivide proj­ ects and construction contracts to evade the PWA requirements. The commenter stated that certain factors, including ownership and proximity, should deter­ mine whether multiple qualified facili­ ties or units of equipment constitute one single qualified facility for purposes of determining whether the One Megawatt Exception applies. For example, with respect to solar projects, the commenter suggested that multiple energy properties should be treated as one single project if they are owned by a single legal entity, or the energy properties are constructed and/or installed in the same general geo­ graphic location or on adjacent or con­ tiguous pieces of land. The same general geographic location may include more than one State, provided that the multiple energy properties are on adjacent or con­ tiguous pieces of land.

Overall, commenters expressed a view that the single project rule as drafted in the Proposed Regulations would apply to an overly broad range of energy properties

and lead to illogical groupings and practi­ cal difficulties in complying with various bonus credit amounts and increased credit rates under section 48. Based on the con­ cerns raised in these comments, the Trea­ sury Department and the IRS acknowledge that additional flexibility is warranted. See part II.C. 4 of this Summary of Comments and Explanation of Revisions.

2. Facts and Circumstances Approach

Commenters asserted that a facts and circumstances approach should be applied to the definition of energy project. Several commenters raised concerns about incon­ sistency with prior guidance published in the Internal Revenue Bulletin with regard to the beginning of construction rules applicable to section 48. Comment­ ers also stated that the Proposed Regula­ tions would implement the energy project definition differently than a similar rule provided in the beginning of construc­ tion guidance and Notice 2022-61 (which addresses the application of PWA require­ ments), by mandating single-project treat­ ment if common ownership and any two factors are met, rather than applying a facts and circumstances test. Similarly, commenters stated that regulations under section 48(e) for the Low-Income Com­ munities Bonus Credit Program provide a single project definition that uses a facts and circumstances test.

The Treasury Department and the IRS confirm that the definition of energy proj­ ect in the Proposed Regulations adopts a different approach than the facts and cir­ cumstances test used in other tax guidance. These comments requesting alternatives to the Proposed Regulations’ definition of energy project are not adopted because the increased credit rate for satisfying the PWA requirements, the domestic content bonus credit amount, and the increase in the credit rate for energy communities under section 48 require a greater degree of certainty for taxpayers and the IRS. Further, the Low-Income Communities Credit Program is a competitive, allocated credit program which requires an applica­ tion; the section 48 credit does not. This difference in the process for claiming the section 48 tax credit supports the need for a more specific approach for the credit. Accordingly, the definition of energy

project in these final regulations provides particular and specific requirements rather than a facts and circumstances approach.

3. Interaction with Domestic Content Bonus Credit Amounts

Several commenters asserted that the definition of “energy project” in proposed §1.48-13(d) is inconsistent with the ini­ tial domestic content guidance set forth in Notice 2023-38, 2023-22 I.R.B. 872. A few commenters stated that the appli­ cation of the single project rule in the Pro­ posed Regulations may cause any co-lo­ cated energy properties to be aggregated for domestic content bonus credit amount purposes. The commenters suggested that this aggregation of different classes or cat­ egories of energy property as a single proj­ ect is inappropriate and may create signifi­ cant issues in qualifying for the domestic content bonus credit amount, including potentially distorting the domestic content calculation by overinclusion of costs for energy storage technology.

Commenters provided specific exam­ ples with domestic content bonus credit amount implications. In one such example, a taxpayer places a solar array in service in 2023 and then places a battery energy storage system (BESS) associated with the array in service in 2026. Construction of the BESS began, for example, by clear­ ing and grading at the site of the BESS in 2023. The solar array and the BESS are on contiguous parcels and share a common substation. Under the proposed rule, the array and the BESS would be treated as a single energy project. The array would qualify for the domestic content bonus credit amount, but the addition of the BESS would put the energy project below the applicable percentage calculation for domestic content purposes, despite the “project” involving different technologies and different tax years. The taxpayer may be unable to avoid this result for proj­ ects with limited access to substations or if required upgrades would exceed the value of the domestic content bonus credit amounts, and thus may choose not to add new BESS to the grid, in clear contraven­ tion of Congressional intent. However, assuming no other factors under the single project rule are present, the taxpayer could avoid this result simply by placing the

December 23, 2024 1382 Bulletin No. 2024–52

BESS on a non-contiguous parcel, a result that is likely to be technically inefficient, and more importantly, is inconsistent with the intent of the domestic content bonus credit as set forth by Congress in the IRA.

Another commenter provided addi­ tional feedback on domestic content issues arising from placing different types of energy property in service in different taxable years. This commenter explained that if multiple energy properties were treated as a single project for purposes of the domestic content bonus credit amount, then the energy properties would be tested on a combined basis for the steel, iron, and manufactured components require­ ments. This could affect situations in which different types of energy properties are co-located, and the domestic content bonus credit amount could be pursued for one type of energy property but not for the other type of energy property. Accord­ ing to the commenter, the result likely would be that foreign products would be sourced for both types of energy prop­ erty. Further, the commenter noted that combined testing would raise questions regarding the impact to energy properties that are placed in service years apart. For example, the commenter noted that if an earlier phase of an energy project did not qualify for the domestic content bonus credit amount, then it would likely be impossible for a later phase of the project to qualify if tested on a combined basis. Alternatively, the commenter noted that if an earlier phase of an energy project qual­ ified for the domestic content bonus credit amount, then it could later become ineligi­ ble for the domestic content bonus credit amount if a later phase of that energy proj­ ect caused the project to fail to meet the domestic content requirements.

Another commenter stated that the Pro­ posed Regulations’ definition of energy project would deter many taxpayers from attempting to satisfy the domestic content bonus credit amount requirements and disqualify otherwise qualifying energy properties. This commenter explained that, increasingly, procurement decisions are made earlier in the project life cycle due to long lead times. Therefore, the commenter noted that a developer might be able to secure enough domestic equipment or steel to allow one energy property to satisfy the domestic content bonus credit amount

requirements but not enough for additional energy properties. However, the com­ menter stated that if these multiple energy properties were aggregated and treated as a single energy project, that energy project likely would not qualify for the domestic content bonus credit amount since the com­ bined domestic cost percentage would be unlikely to satisfy the adjusted percentage rule as defined in Notice 2023-38.

Some commenters asserted that the Proposed Regulations’ definition of energy project should apply only to energy prop­ erties that are within the same category for purposes of section 48. These com­ menters also requested clarification that energy storage technology such as a BESS is treated as an “energy project” separate from solar energy property and other cat­ egories of energy property for purposes of the domestic content bonus credit amount. For example, a commenter highlighted the concern that “energy project” may be read broadly to apply to all energy properties that are owned by the same taxpayer and co-located, even if the energy properties are of different classes or categories and have separate pathways to eligibility. This commenter requested that the final regu­ lations clarify the “energy project” defi­ nition by providing that the reference to “one or more energy properties” in sec­ tion 48(a)(9)(A)(ii) should be properly interpreted to refer only to the same class or category of energy property. The com­ menter concluded that a better approach to the definition of “energy project” would be to treat specific types of energy property, such as solar, wind, and other categories, as separate from energy storage technol­ ogy property even if co-located, owned by the same taxpayer, and sharing common facilities and infrastructure.

Section 48 applies the domestic content bonus credit amounts to an entire energy project defined as one or more energy prop­ erties that are part of a single project. As a result, all types of energy property, includ­ ing energy storage technologies that meet the criteria as would be provided in pro­ posed §1.48-13(d) are included within an energy project for purposes of the domes­ tic content bonus credit amount. As noted earlier, the Treasury Department and the IRS recognize that additional flexibility is warranted with respect to the definition of energy project. The final regulations revise

the definition of energy project to allow the taxpayer to choose when to assess the factors of an energy project, either at any point during construction or during the tax­ able year energy properties are placed in service. However, multiple types of energy property may be appropriately treated as a single energy project in certain situations. Accordingly, the final regulations do not adopt comments requesting that an energy project must be limited to energy properties of the same type.

4. Revisions to Definition of Energy Project

The Treasury Department and the IRS agree with commenters that the Proposed Regulations’ definition of energy project, described as ownership plus two factors, is too rigid and could have unintended impacts, such as preventing small rooftop solar installations from being eligible for the One Megawatt Exception and treating multiple energy properties that are located in different States as a single energy proj­ ect. Further, the Treasury Department and the IRS understand that the “at any point during construction” language in the Pro­ posed Regulations may be problematic for taxpayers, potentially grouping energy properties that will be placed in service in different taxable years.

In response to the concerns raised by commenters, the definition of energy proj­ ect is modified in the final regulations. The Proposed Regulations would have required two or more factors to be present. In the case of multiple energy properties owned by a taxpayer, the final regulations require that four or more factors be pres­ ent and that the factors may be assessed, at the taxpayer’s choice, either at any point during construction or during the taxable year the energy properties are placed in service. The Treasury Department and the IRS understand that taxpayers require flexibility given the varied landscape of energy property development and financ­ ing structures. However, the Treasury Department and the IRS disagree that a facts and circumstances analysis should be applied to the definition of energy proj­ ect. Energy project is the statutory term for the unit of property to which the PWA requirements, the domestic content bonus credit amount, and the increase in credit

Bulletin No. 2024–52 1383 December 23, 2024

rate for energy communities are applied. In addition, in promulgating these final regulations pursuant to the express delega­ tion of authority in section 48(a)(16), the Treasury Department and the IRS deter­ mined that using particular and specific factors in the definition of energy project will increase certainty for taxpayers and the IRS. That increased certainty will pro­ mote sound tax administration and help to carry out the purposes of section 48(a).

Separately, a commenter requested confirmation that an energy project will be deemed placed in service when the final energy property within the energy project is placed in service. Section 48(a) (9)(A)(ii) defines an “energy project” as a project consisting of one or more energy properties that are part of a single proj­ ect. Because the PWA requirements, the domestic content bonus credit amount, and the increase in credit rate for energy communities are each applied at the energy project level, the determination of whether an energy project meets any of these requirements cannot be made before the last of the multiple energy properties within such energy project are placed in service. Accordingly, the final regulations clarify the definition of energy project consistent with this comment.

Further, the final regulations do not adopt proposed §1.48-13(d)(3). The Pro­ posed Regulations would have provided that, if multiple energy properties are treated as a single energy project for beginning of construction purposes with respect to the section 48 credit, then the multiple energy properties also will be treated as a single energy project for purposes of the PWA requirements, the domestic content bonus credit amount, and the increase in credit rate for energy communities. The Treasury Department and the IRS recognize that this proposed rule may conflict with existing BOC guidance and the definition of “energy project” that is being adopted in these final regulations. Accordingly, the final regula­ tions do not adopt this proposed rule.

D. One Megawatt exception

1. Nonapplication to Certain Energy Properties

Proposed §1.48-13(e) would provide rules for nameplate capacity for pur­

poses of the One Megawatt Exception. Proposed §1.48-13(e) would provide that for purposes of proposed §1.48-13(b)(1), the determination of whether an energy project has a maximum net output of less than one MW of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capac­ ity. Proposed §1.48-13(e) would provide that if applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum elec­ trical generating output or usable energy capacity of an energy project. Lastly, proposed §1.48-13(e) would provide that because electrochromic glass prop­ erty (as defined in proposed §1.48-9(e) (2)(ii)), fiber-optic solar energy property (as defined in proposed §1.48-9(e)(2)(i)), and microgrid controllers (as defined in proposed §1.48-9(e)(12)) do not generate electricity or thermal energy, these energy properties are not eligible for the One Megawatt Exception.

Two commenters supported the rule as proposed, including disallowing the exception for certain properties. One of the commenters stated that the proposed rules for the One Megawatt Exception will provide certainty with respect to the appli­ cability of labor standards and prevent fraud. Both commenters requested the Treasury Department and the IRS to retain the nameplate capacity rule for maximum net output in the final regulations.

One commenter asserted that the One Megawatt Exception, as proposed, is too broad, undermining the PWA require­ ments, and should not apply to any energy properties that do not generate or produce electrical or thermal energy. This com­ menter disagreed with the alternatives provided for some types of energy prop­ erty and requested clarity that others also should not be eligible, including GHP property, energy storage technology, clean hydrogen production facilities, and quali­ fied biogas property.

Conversely, most commenters asserted that the One Megawatt Exception should be available for non-energy generating property. Some commenters suggested that the final regulations provide a de minimis threshold to the One Megawatt Exception. A commenter suggested con­ sideration of a basis dollar threshold with respect to prevailing wage exemptions for

types of energy property that do not gen­ erate electricity, namely electrochromic glass, fiber-optic solar energy property, and microgrid controllers.

Another commenter stated that these excluded types of energy property should be included if part of an “energy proj­ ect.” Commenters explained that the One Megawatt Exception in section 48(a)(9) (B)(i) applies to “energy projects” and therefore, can apply to microgrid control­ lers, fiber-optic solar energy property, or electrochromic glass that are combined with other types of energy property (for example, solar energy property) as part of an “energy project.”

Several commenters made the same point specifically regarding microgrid controllers. For example, a commenter stated that the final regulations should include microgrid controllers within the One Megawatt Exception. This com­ menter said that a strict statutory interpre­ tation would mean that if the sum capacity of all energy properties within an energy project is below one MW, then the One Megawatt Exception is satisfied. The com­ menter asserted that this statutory inter­ pretation is simple, straightforward, and accurately reflects the IRA. Similarly, a commenter suggested that to ensure small microgrid projects can take advantage of the One Megawatt Exception, the rule should allow microgrid controllers used in a microgrid for which the cumulative nameplate capacity value of the electrical generating distributed energy resources is less than one MW to be eligible for the One Megawatt Exception.

Another commenter noted that the inel­ igibility of microgrid controllers for the One Megawatt Exception contradicts the definition of a qualified microgrid, which requires that a qualified microgrid includes equipment capable of generating not less than 4 kW and not greater than 20 MW of electricity. This commenter asserted that if the aggregate of the nameplate capacity of the assets managed by a qualified microg­ rid is under one MW, or if there are other physical limitations built into the microg­ rid that limit generation to one MW, then the microgrid controller should qualify for the One Megawatt Exception.

Another commenter stated that because microgrid controllers do not generate energy, they should be considered to gen­

December 23, 2024 1384 Bulletin No. 2024–52

erate under one MW and thus should qual­ ify for the One Megawatt Exception. This commenter asserted that because Con­ gress did not specifically exclude energy properties with a maximum net output of less than one MW of electrical energy (and could have) —even if that output is zero — microgrid controllers should qual­ ify under the plain language of the statute. A similar suggestion was raised by sev­ eral commenters in the context of elec­ trochromic glass. One commenter stated that nothing in section 48(a)(9)(B)(i) sug­ gests that the One Megawatt Exception is limited to generating property; the statute simply looks to the output of the project, if any. This commenter concluded that the simplest and clearest reading of section 48(a)(9)(B)(i) is that an energy property that does not generate electricity is eligi­ ble for the One Megawatt Exception.

Similarly, another commenter stated that section 48(a)(9)(B)(i)’s focus on an energy project’s energy output capabil­ ity indicates that properties not produc­ ing any output could be considered for the One Megawatt Exception. This com­ menter asserted that the essence of the law was not to create a hierarchy favoring energy producers over non-producers but to encourage a broad spectrum of energy efficiency and conservation measures.

Another commenter stated that the Pro­ posed Regulations’ interpretation of the One Megawatt Exception is highly coun­ terintuitive as it runs contrary to obvi­ ous mathematical logic. This commenter stated that the One Megawatt Exception should be considered in light of the clear legislative intent behind it, which is that PWA requirements are disproportionately burdensome for smaller projects. This commenter alleged that, most troublingly, the interpretation is not merely prospec­ tive, from the date of publication of either the Proposed Regulations or the final regulations, but also retroactive, and that applying this interpretation retroactively will harm market actors who made good faith, logical decisions in the absence of any IRS guidance. This commenter requested that, at a minimum, the Trea­ sury Department and the IRS apply rules regarding the One Megawatt Exception on a prospective basis.

In addition to these comments, com­ menters also provided feedback on meth­

ods to measure the maximum net output of microgrid controllers to allow them to qualify for the One Megawatt Exception. One commenter proposed that a mea­ surement of the maximum net generation that a microgrid controller can provide via interconnection to the grid be used to determine whether a microgrid controller is eligible for the One Megawatt Excep­ tion, and that the maximum net output be calculated as the nameplate capacity of the microgrid generation less the mini­ mum historical microgrid load.

Commenters also provided methods for electrochromic glass to qualify for the One Megawatt Exception. Two comment­ ers suggested using anticipated energy savings for a building on which electro­ chromic windows are installed. For exam­ ple, a commenter suggested that a taxpayer should be able to measure the amount of energy expected to be saved by use of the electrochromic glass property and com­ pare that amount to one MW. The com­ menter noted that this approach is similar to the approach used to determine whether energy efficient investments in a commer­ cial building qualify for a deduction under section 179D of the Code; this commenter recommended that final regulations pro­ vide that the DOE program “Energy Plus” model be used to determine the amount of anticipated energy savings. Two com­ menters also proposed a safe harbor that would deem any electrochromic glass property installed in any building to meet the One Megawatt Exception if no more than 60,000 square feet of electrochromic glass is installed in the building. Another commenter highlighted administrative concerns with the non-application of the One Megawatt Exception to electrochro­ mic glass. The commenter explained that electrochromic glass is one of many struc­ tural components installed in a building, and laborers who are involved in the con­ struction, alteration or repair of electro­ chromic glass may also be involved in the construction, alteration or repair of other building components that are not qualified energy property, creating an additional recordkeeping burden for taxpayers.

The Treasury Department and the IRS have considered these comments on the One Megawatt Exception. The Trea­ sury Department and the IRS appreciate the suggestions made by commenters

in response to the request for comments in the Proposed Regulations regarding whether other methods of measurement may allow electrochromic glass prop­ erty, fiber-optic solar energy property, and microgrid controllers to be eligible for the One Megawatt Exception. However, after considering the statute further as well as the intent of the rules in the context of the PWA requirements, the Treasury Depart­ ment and the IRS have determined that the One Megawatt Exception applies only to the generation of electricity or thermal energy. The statutory language in section 48(a)(9)(B)(i) providing the increased credit amount for a project with a maxi­ mum net output of less than one MW of electrical (as measured in alternating cur­ rent) or thermal energy, means that there must be output, and that output must be under one MW. The proposed conversion formulas for certain types of energy prop­ erty, such as GHP property and energy storage property, do not undermine the PWA requirements. Rather, the proposed formulas provide clarity across various energy properties that generate output. Because electrochromic glass property, fiber-optic solar energy property, and microgrid controllers do not generate electrical or thermal energy, these types of energy property are not eligible for the One Megawatt Exception. These final reg­ ulations adopt this proposed rule without change.

2. Determination of Nameplate Capacity

As explained in the preamble to the Proposed Regulations, the DOE has advised the Treasury Department and the IRS that for energy projects that generate electrical or thermal energy, the determi­ nation of an energy project’s nameplate capacity will provide the necessary guid­ ance to determine the maximum electrical generating output in megawatts of elec­ trical (as measured in alternating current) or thermal energy that the unit is capable of producing on a steady state basis and during continuous operation under stan­ dard conditions. Accordingly, proposed §1.48-13(e) would provide that the deter­ mination of whether an energy project has a maximum net output of less than 1 MW of electrical (as measured in alternating current) or thermal energy is based on

Bulletin No. 2024–52 1385 December 23, 2024

nameplate capacity. Proposed §1.48-13(e) (1) would provide that in the case of an electrical generating energy property, the nameplate capacity is the maximum elec­ trical generating output in MW that the unit of energy property is capable of pro­ ducing on a steady state basis and during continuous operation under standard con­ ditions, as measured by the manufacturer and consistent with the definition of name­ plate capacity provided in 40 CFR 96.202.

Proposed §1.48-13(e)(2) would pro­ vide that in the case of electrical energy storage property (as defined in proposed §1.48–9(e)(10)(ii)), the nameplate capac­ ity is the storage device’s maximum net output.

Proposed §1.48-13(e)(3) would provide that in the case of thermal energy storage property (as defined in proposed §1.48– 9(e)(10)(iii)) and other energy property that generates thermal energy for produc­ tive use (for example, direct geothermal use, GHP property, solar process heat­ ing), a taxpayer must use the equivalent of 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu per hour/3,412,140 = MW) to determine if the thermal energy storage property satisfies the One Mega­ watt Exception. For projects delivering thermal energy to a building or build­ ings, this determination can be made with respect to either the aggregate maximum thermal output of all individual heating or cooling elements within the building or buildings, or as the maximum thermal output that the entire project is capable of delivering to a building or buildings at any given moment.

Proposed §1.48-13(e)(4) would pro­ vide that a hydrogen energy storage prop­ erty (as defined in proposed §1.48-9(e) (10)(iv)) or a specified clean hydrogen production facility (as defined in section 48(a)(15)(C)) must have a maximum net output of less than 3.4 mmBtu/hour of hydrogen or equivalently 10,500 scf per hour of hydrogen to satisfy the One Mega­ watt Exception.

Proposed §1.48-13(e)(5) would pro­ vide that in the case of qualified biogas property, 3.4 mmBtu/hour can be used as equivalent to the One Megawatt Excep­ tion. Taxpayers may convert the maxi­ mum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow

in scf per hour using the appropriate high heat value conversion factors found in the Environmental Protection Agency (EPA) Greenhouse Gas Reporting Rule (GHGRR) at table C–1 to subpart C of part 98 (40 CFR part 98). Otherwise, tax­ payers may calculate their own equivalent volumetric flow if the heat content of the gas is known.

Commenters provided feedback on the proposed conversion factors specific to certain types of property. For example, a commenter recommended that for thermal energy storage property and other prop­ erty generating thermal energy, the con­ version from mmBtu/hr to tons for cooling should be 3-5 times higher than proposed §1.48-13(e)(3), which refers to 284 tons for cooling to determine if thermal energy property meets the One Megawatt Excep­ tion. This commenter said that the con­ version factor provided by the Proposed Regulations is too low at a quarter of the conversion factor for electrical generat­ ing property, and instead the final regula­ tions should use an electrical equivalent. This commenter stated that for buildings cooled by chilled-water systems, it is widely accepted that the electrical power (in kW) required to generate cooling (in ton) by chillers is approximately 0.6-0.7 kW/ton for water-cooled chillers, and 1.1-1.2 kW/ton for air-cooled chillers, and cited a few sources. This commenter proposed replacing the conversion factor with 1,550 tons for water-cooled systems or 870 tons for air-cooled systems.

Similarly, for qualified biogas prop­ erty, a commenter stated that the proposed conversion factor of 3.4 mmBtu/hr in pro­ posed §1.48-13(e)(5) for the One Mega­ watt Exception should be increased. The commenter stated that this conversion factor for qualified biogas property is the­ oretical and not based in practical appli­ cations. The commenter also noted that any biogas plant producing onsite power typically does not produce more than 10 mmBtu/hr, and that a plant of this size would be very small and likely face eco­ nomic constraints even with the section 48 credit.

In consultation with the DOE, the Trea­ sury Department and the IRS have deter­ mined that the conversion formulas in the Proposed Regulations provide a direct and accurate conversion and that no changes

are needed to the conversion factors for thermal energy property, thermal energy storage property, and other energy prop­ erty that generates thermal energy for productive use, or for qualified biogas property. By providing a broadly-applica­ ble rule, these conversion formulas should provide accurate results for a broad set of applications and technologies. The com­ menters’ requests for specific formulas applicable to specific technologies conflict with the approach of these regulations to provide general rather than narrow rules. Therefore, the final regulations adopt these rules as proposed.

Other commenters stated general con­ cerns regarding lack of clarity with the measurement methods included in the Proposed Regulations. These commenters focused their concerns on thermal energy storage property and property generat­ ing thermal energy. For example, a com­ menter stated that it is unclear whether the One Megawatt Exception applies with respect to the thermal energy gen­ erated from the thermal energy source for the thermal energy storage (TES) (for example, a chiller or heat pump), or to the nameplate capacity of the TES property itself (for example, peak discharge rate from TES). The commenter then asked what conditions govern the discharge rate of TES if the One Megawatt Exception refers to the nameplate capacity of the TES property itself. This commenter sug­ gested that, alternatively, perhaps either could be used.

The Treasury Department and the IRS recognize that demonstrating the name­ plate capacity of thermal energy storage property may be technically impractical for some types of thermal energy storage property such as commercial heat pump storage systems. The Treasury Depart­ ment and the IRS, following consultation with the DOE, revise the rule in the final regulations to provide an option when nameplate capacity for the thermal energy storage property is not available, to use the nameplate capacity of the equipment that delivers thermal energy. For example, the nameplate capacity of the heat pump to a thermal energy storage property would be converted to megawatts based on the con­ version factors set forth in §1.48-13(e). For thermal energy storage property, as well as for other energy property that gen­

December 23, 2024 1386 Bulletin No. 2024–52

erates or distributes thermal energy for productive use, the final regulations clar­ ify that the maximum thermal output that the entire system is capable of delivering is calculated as the greater of the maxi­ mum instantaneous rate of cooling or the rate of heating of the aggregate of all the equipment distributing energy for produc­ tive use, which for thermal energy storage is distributing the thermal energy from the thermal energy storage to the building or buildings. Alternatively, for purposes of thermal energy storage property only, when the nameplate capacity for the ther­ mal energy storage property is unavail­ able, the maximum thermal output may be considered to be the greater of the rate of cooling or the rate of heating of the aggre­ gate of the nameplate capacity of all the equipment delivering energy to the ther­ mal energy storage property. Based on the comments, the Treasury Department and the IRS conclude that the revised rule will provide a clear, administrable standard of measurement.

Several commenters had similar con­ cerns regarding the measurement standard for geothermal energy property. A com­ menter explained that by design, a distrib­ uted GHP property’s maximum net output is always less than the total nameplate capacity. These commenters asserted that, for equipment generating thermal energy, it is not clear how nameplate capacity is defined. Commenters recommended that nameplate capacity be defined as either the published rating data on the Air Condition­ ing, Heating, and Refrigeration Institute (AHRI) Certification Directory or proj­ ect specific selections at design tempera­ tures. Commenters also stated that many buildings require redundant equipment to ensure consistent operating conditions within the building if a piece of equip­ ment fails, but that because the redundant equipment is not used during normal oper­ ation it should be excluded from the cal­ culation of the one-MW threshold. These commenters also suggested the final regu­ lations provide an example illustrating the method of assessment based on the use of thermal output from a full year.

As previously explained, the final reg­ ulations provide that the discharge rate of a thermal energy source is based on the nameplate capacity of the equipment, which would be converted to megawatts

based on the conversion factors set forth in §1.48-13(e). Therefore, taxpayers must use the nameplate capacity of the equip­ ment. Commenters’ concerns for geother­ mal energy property appear to be more focused on how to determine that name­ plate capacity if not all equipment will be used or will only be used to a specific temperature. Proposed §1.48-13(e)(3) would provide that, for projects delivering thermal energy to a building or buildings, the measurement can be assessed as either the aggregate maximum thermal output of all individual heating or cooling ele­ ments within the building or buildings, or as the maximum thermal output that the entire project is capable of delivering to a building or buildings at any given moment. The Treasury Department and the IRS consulted with the DOE, and the final regulations clarify that the maximum thermal output an entire project is capa­ ble of delivering at any given moment does not take into account the capacity of redundant equipment if such equipment is not operated when the system is at maxi­ mum output during normal operation. The determination of maximum thermal out­ put is intended to reflect normal operating conditions for the energy project.

Another commenter requested clarifi­ cation regarding the measurement method for electrical energy storage property. The commenter asserted that it is unclear at what stage to determine maximum electri­ cal generating output for the One Mega­ watt Exception, and that the definition of “nameplate capacity” is ambiguous because it turns on the phrase “maximum electrical generating output” but does not provide a method for determining such output. The commenter stated that for inverter-based resources, like solar and energy storage technologies, “maximum electrical generating output” could be determined at different stages. It could be measured as the initial output from PV modules (as measured in direct current), the subsequent output from associated storage (usually measured in direct cur­ rent), or the final output after the inverter (measured in alternating current).

In response to these comments, the Treasury Department and the IRS con­ sulted with the DOE to provide a method of measuring nameplate capacity for an energy property that generates electric­

ity in direct current. The final regulations provide a rule limited to energy properties that generate electricity in direct current. Under this rule, a taxpayer may choose to determine the maximum net output of each energy property that is part of the energy project (in alternating current) by using the lesser of (i) the sum of the nameplate generating capacities within the unit of energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternat­ ing current; or (ii) the nameplate capacity of the first component of property that inverts the direct current electricity gen­ erated into alternating current. This rule provides flexibility for taxpayers while ensuring that the maximum net output (in alternating current) can be determined in an administrable and reasonably accurate manner for energy properties that generate electricity in direct current.

III. Rules Applicable to Energy Property

A. Retrofitted energy property (80/20 Rule)

Proposed §1.48-14(a)(1) would pro­ vide generally that for purposes of section 48(a)(3)(B)(ii), (5)(D)(iv), and (8)(B)(iii), a retrofitted energy property may be origi­ nally placed in service even though it con­ tains some used components of the unit of energy property only if the fair market value of the used components of the unit of energy property is not more than 20 per­ cent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of the unit of energy property (80/20 Rule). Only expenditures paid or incurred that relate to the new components of the unit of energy property are taken into account for pur­ poses of computing the section 48 credit with respect to the unit of energy property. The cost of new components of the unit of energy property includes all costs prop­ erly included in the depreciable basis of the new components. If the taxpayer satis­ fies the 80/20 Rule with regard to the unit of energy property and the taxpayer pays or incurs new costs for property that is an integral part of the energy property, then the taxpayer may include the new costs paid or incurred for property that is an

Bulletin No. 2024–52 1387 December 23, 2024

integral part of the energy property in the basis of the energy property for purpose of the section 48 credit. Further, in the case of an energy project, the 80/20 Rule is applied to each unit of energy property comprising an energy project.

Proposed §1.48-14(a)(2) would pro­ vide that costs incurred for new compo­ nents of property added to used compo­ nents of a unit of energy property may not be taken into account for purposes of the section 48 credit unless the taxpayer satisfies the 80/20 Rule by placing in ser­ vice a unit of energy property for which the fair market value of the used compo­ nents of property is not more than 20 per­ cent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of property. Proposed §1.48-14(a)(3) would provide examples illustrating the 80/20 Rule.

1. General Comments regarding the 80/20 Rule

Several commenters provided com­ ments regarding the 80/20 Rule. Some commenters favored retaining the 80/20 Rule for application in limited cir­ cumstances. Generally, commenters that opposed the use of the 80/20 Rule expressed similar concerns regarding the ownership rules in the context of certain types of energy property.

Commenters that opposed the 80/20 Rule asserted that it is inconsistent with previous Internal Revenue Bulletin guid­ ance. Multiple commenters asserted that under current law, capital improvements to energy property are eligible for the section 48 credit without regard to the 80/20 Rule. These commenters pointed to existing §1.48-2(b)(7) and the exam­ ples in existing §1.48-2(c) to support this assertion. Existing §1.48-2(b)(7) pro­ vides, in relevant part: “The term ‘origi­ nal use’ means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.” A commenter noted that the examples in existing §1.48-2(c) illustrate the difference between a reconditioned or rebuilt unit of energy property previously in service and the addition of “some used parts,” on the one hand, and the addition of new property or capital improvements,

on the other. Additionally, the commenter asserted that Example 5 in existing §1.482(c) establishes that capitalized costs are included in computing the section 48 credit. Importantly, existing regulations under §1.48-2 do not reflect the current version of section 48 and are not informa­ tive to the extent those regulations do not take into account subsequent amendments to section 48, such as amendments made by the IRA.

Commenters also asserted that the pur­ pose of the 80/20 Rule was to address the “original use requirement” or to achieve a new “original placed in service date” in the context of the production tax credit under section 45. These commenters explained that the 80/20 Rule was con­ cerned with ensuring that taxpayers do not qualify for the entirety of the section 45 credit over a new ten-year credit period by making modest investments in an existing facility. Commenters explained this issue does not exist in the section 48 credit context, because the section 48 credit is available only for new property and not for any used components of property. A commenter noted that the 80/20 Rule only really matters if one is focused on the totality of the property that is used to pro­ duce energy in a manner incentivized by the Code. This is different for section 48, for which the proper focus is on specific items of energy property, not assemblages of energy property under common owner­ ship. Commenters asserted that, by apply­ ing the 80/20 Rule to energy property under section 48 and excluding the cost of otherwise eligible new equipment or prop­ erty that does not satisfy the 80/20 Rule, the Proposed Regulations fundamentally misconstrue the 80/20 Rule’s purpose and are inconsistent with current law.

While commenters correctly noted that the purpose of the 80/20 Rule was to address the “original use requirement” or achieve a new “originally placed in ser­ vice” date, the 80/20 Rule remains rele­ vant in the context of the section 48 credit. Section 48 requires the credit to be deter­ mined on the basis of energy property placed in service during the taxable year. In situations in which energy property has already been placed in service, exist­ ing units of energy property cannot qual­ ify for the credit without the 80/20 Rule (with the exception of the modification of

energy storage technology as provided in proposed §1.48-9(e)(10)(iii)).

Supporters of retaining the 80/20 Rule noted that it should apply for purposes of the section 48 credit only in limited cir­ cumstances. First, the 80/20 Rule should apply to the acquisition of retrofitted energy property by a taxpayer for purposes of obtaining an original placed in service date for such retrofitted property (which commenters noted is the traditional appli­ cation of the 80/20 Rule). Second, the 80/20 Rule should apply if it is necessary for a qualified facility (otherwise eligible for the section 45 credit) to obtain a new original placed in service date, such as a retrofitted qualified facility for which the taxpayer elects to claim the section 48 credit in lieu of the section 45 credit.

While many commenters suggested dropping the 80/20 Rule altogether, other commenters suggested a range of possible alternatives. For example, a commenter suggested excepting from the 80/20 Rule property that is no longer functional for its intended energy purpose such as a prop­ erty that has fallen into disuse and has been sitting idle for years and that would require extensive renovations to return to use for its intended purpose; property that is no longer in a “condition or state of readiness and availability for a specifi­ cally assigned function”; and property that has been idle for a certain period of time prior to rehabilitation and reuse such as property located in opportunity zones and property for which no tax credit has previ­ ously been claimed. This commenter also proposed requiring a reduced percentage threshold to meet the policy objectives of the 80/20 Rule and referred to the Dual Use percentage rules as more favorable than the 80/20 Rule.

Multiple commenters suggested that, if the 80/20 Rule is retained, then the section 48 credit should apply to capi­ tal improvements without regard to the 80/20 Rule. However, these commenters noted that the 80/20 Rule could continue to apply to individual components placed in service by the taxpayer. Commenters asserted that the application of the 80/20 Rule to capital improvements would lead to uneconomic decisions or waste, such as favoring demolition and rebuild­ ing instead of investments to modify an existing energy property or encouraging

December 23, 2024 1388 Bulletin No. 2024–52

many existing waste processing sites to continue to vent or flare methane. Commenters also expressed concerns regarding the prohibition on claiming the section 48 credit in respect of new property that is installed after other items of energy property have been placed in service in cases in which the 80/20 Rule is not met. A commenter explained that such interpretation would disincentiv­ ize asset owners from upgrading their existing solar plants to maximize energy generation. This concern was shared by other commenters in the context of maintenance and upgrades performed on certain types of energy property such as GHP property.

Commenters also stated that net­ works of GHP properties grow over time by design, adding additional customer buildings and ground loop capacity as needed. Therefore, commenters asserted that application of the 80/20 Rule would hinder the adoption of networked GHP property as additional users may be reluctant to link into an existing shared ground loop due to the unavailability of the section 48 credit. Another commenter requested reconsideration of the 80/20 Rule, comparing the rule for modification of an energy storage technology (which is allowed) with “equipment that may make trash or biomass energy properties more efficient” (which is not allowed). This commenter also requested consider­ ation of the 80/20 Rule in light of various factors such as planned versus unplanned improvements.

In the context of a qualified biogas property, a commenter stated that the final regulations should clarify and explicitly state that any new cost paid or incurred by the taxpayer for property that is an integral part of the energy property may be included in the basis of the energy property for purposes of the section 48 credit, without regard to the application of the 80/20 Rule at the integral prop­ erty level and regardless of whether the new costs paid or incurred would gener­ ally be eligible for the section 48 credit. As an example, the commenter noted that this approach would allow the section 48 credit for a landfill gas collection system that primarily serves a purpose unrelated to the qualified biogas property (that is, storage of municipal solid waste).

Commenters also raised concerns regarding the use of the 80/20 Rule in the context of an energy project. Comment­ ers generally asserted that the application of the 80/20 Rule disincentivizes new projects. A commenter requested that the final regulations clarify and explicitly state that the 80/20 Rule is applied sepa­ rately with respect to each unit of energy property within an energy project and does not take into account any of the used property retained and used as an integral part of an energy project irrespective of whether these energy properties together are determined to satisfy any two or more of the factors described in proposed §1.48-13(d)(1)(i) through (vii). Another commenter explained the commenter’s understanding that if a section 48 credit is claimed on an energy project, then the 80/20 Rule would be applied to the entire project rather than to each compo­ nent separately. The commenter asserted that this interpretation conflicts with the historical understanding of the 80/20 Rule as it applies to the section 48 credit, which is based on each component of the unit of energy property. Another com­ menter noted that the final rule should make clear that any application of the 80/20 Rule does not apply to the entire energy project. If deemed applicable, it should be limited to the individual energy properties being put into operation by the claiming taxpayer and should not include new or expanded energy projects that are added to existing operations. The Pro­ posed Regulations already would pro­ vide that in the case of an energy project, the 80/20 Rule is applied to each unit of energy property comprising an energy project and a taxpayer that satisfies the 80/20 Rule with respect to an individual unit of energy property that is part of a larger energy project may be eligible for the section 48 credit. Additional clarifi­ cation to ensure that the 80/20 Rule is not applied at the energy project level is unnecessary.

The Treasury Department and the IRS have considered the comments sum­ marized earlier but decline to modify or abandon the 80/20 Rule as requested. The section 48 credit is available for “each energy property placed in service” during a taxable year. See section 48(a)(1). The 80/20 Rule is designed to broaden the

availability of the section 48 credit to pro­ vide a new original placed in service date for an energy property that includes some components of property that have already been placed in service, rather than requir­ ing the entire unit of energy property to be composed of only new property. The 80/20 Rule also encourages retrofitting of existing energy property provided there is sufficient new investment.

As discussed, in part III.D. of this Sum­ mary of Comments and Explanation of Revisions, the ownership rules would pro­ vide that the section 48 credit is available for an entire unit of energy property and not for individual components of prop­ erty. The 80/20 Rule is consistent with the ownership rules because it ensures that an energy property that is retrofitted to a suf­ ficient extent is considered a new energy property, whereas the addition of mere components is not eligible for the section 48 credit. The lone express rule for modification of existing energy property in section 48 is found in section 48(c)(6)(B). This special rule is limited to modifications of existing energy storage technology. In the Pro­ posed Regulations, the Treasury Depart­ ment and the IRS noted the significance of Congress providing specifically for modifications to energy storage technol­ ogy because the inclusion of this specific provision suggests that, otherwise, modi­ fications of existing energy properties are ineligible for the section 48 credit. In light of this modification rule for energy stor­ age technology, the structure of section 48 indicates that other modifications to exist­ ing energy property do not qualify for the credit.

However, providing the 80/20 Rule is appropriate and consistent with its pre­ vious adoption for the section 48 credit in Internal Revenue Bulletin guidance. As explained in the preamble to the Proposed Regulations, Notice 2018-59 addresses the application of the 80/20 Rule to retrofitted energy property for purposes of applying the beginning of construction rules for the section 48 credit. Section 7.05(1) of Notice 2018-59 provides that retrofitted energy property may qualify as originally placed in ser­ vice even though it contains some used components of property, provided it sat­ isfies the 80/20 Rule. Consistent with the

Bulletin No. 2024–52 1389 December 23, 2024

80/20 Rule provided in Notice 2018-59, the 80/20 Rule provided in these final regulations requires a taxpayer to own a unit of energy property to claim the sec­ tion 48 credit. Additionally, §1.48-14(a) specifically provides that if a taxpayer satisfies the 80/20 Rule, then the tax­ payer may include the new costs paid or incurred for property that is an integral part of the energy property in the basis of the energy property for purposes of the section 48 credit. By allowing an exist­ ing energy property to be retrofitted and afterwards to be treated as a new energy property, the 80/20 Rule is consistent with the ownership rules and is supported by the same rationale. Moreover, because modifications other than those described in section 48(c)(6)(B) (for existing energy storage technology) generally do not qualify for the section 48 credit, the provision of the 80/20 Rule is favorable to taxpayers and encourages substantial additional investment in existing energy property.

2. Application to Specific Technologies

Commenters raised concerns regarding the application of the 80/20 Rule to certain types of energy property. Several com­ menters had concerns about the applica­ tion of the 80/20 Rule to qualified biogas property, battery energy storage, and qual­ ified hydropower facilities. These issues were largely intertwined with concerns raised regarding the ownership require­ ment as it applies to these types of energy property.

a. Qualified biogas property

Many commenters shared concerns about the application of the 80/20 Rule stating that the rule would prevent the development of most qualified biogas property and other RNG projects. As described in the discussion of qualified biogas property in part I.B.5. of this Sum­ mary of Comments and Explanation of Revisions, commenters explained that unlike many other types of energy prop­ erty incentivized under section 48, com­ ponents of qualified biogas property (as described in the Proposed Regulations) are likely to have been placed in service prior to the enactment of the IRA. Comment­

ers also expressed concerns regarding the definition of “qualified biogas property,” the ownership provisions, and the 80/20 Rule, asserting that the combined impact of these rules provided in the Proposed Regulations would limit eligibility for qualified biogas property.

According to a commenter, the 80/20 Rule should be aligned with the “original use” requirement. To illustrate this point, the commenter provided an example, asserting that if a taxpayer is building a new unit of energy property that is func­ tionally interdependent with a pre-existing and previously placed in service unit of energy property (qualified or otherwise) that is owned by a separate taxpayer, the application of the 80/20 Rule is unneces­ sary. The commenter stated that for quali­ fied biogas property, it is common for the entire system to be comprised of compo­ nents of property owned by two different taxpayers and for the original use of these various components of property (that is, landfill gas collection components and cleaning and conditioning components, both compromising a qualified biogas property or “system”) to be with different taxpayers at potentially different points in time.

Several commenters expressed con­ cerns that the 80/20 Rule would not work for the qualified biogas projects that Con­ gress intended to incentivize. Representa­ tive of that view, a commenter stated that the 80/20 Rule is potentially problematic for RNG projects located at pre-existing landfills. The commenter proposed that the application of the 80/20 Rule be lim­ ited to the individual units put into opera­ tion by the claiming taxpayer and should not exclude new or expanded projects that are added to existing operations.

Commenters’ concerns stem from the ownership issues described in part III.D. of this Summary of Comments and Expla­ nation of Revisions. As described in part III.D., the final regulations clarify the definition of what is included in qualified biogas property in a manner that is respon­ sive to the ownership structures used by the biogas industry and allow for new property to be added to pre-existing land­ fills. Therefore, these final regulations do not adopt commenters’ specific comments concerning the application of the 80/20 Rule to qualified biogas property.

b. Second life batteries

The preamble to the Proposed Reg­ ulations explained that “a commenter requested that re-used or ‘second life’ batteries should be considered ‘new energy property.’” Generally, used prop­ erty cannot be considered “new property” for purposes of the 80/20 Rule, which is described earlier in part III.A. of this Sum­ mary of Comments and Explanation of Revisions. The preamble to the Proposed Regulations requested comments on whether “second life” batteries should be considered new components for purposes of the 80/20 Rule.

Commenters proposed considering second-life batteries that are disassembled substantially to the electric vehicle mod­ ule level to be new energy property for purposes of the 80/20 Rule. These com­ menters reasoned that such batteries go through a substantial transformation pro­ cess including dissembling and restructur­ ing, which is a manufacturing process that meets the modification rule. A commenter suggested that, for purposes of the 80/20 Rule, second life batteries be considered new energy property if documentation is provided supporting the fact that the batteries were remanufactured. Another commenter asserted that “second life” batteries may be considered within the 80 percent portion (as new property) of the 80/20 Rule if applied to energy storage technology and believed this is especially applicable in contexts in which the batter­ ies were originally used for a fundamen­ tally different purpose, or if in their previ­ ous iteration the batteries were ineligible for the section 48 credit.

The 80/20 Rule recognizes that a retro­ fitted energy property that contains only a relatively minimal amount of used com­ ponents is essentially a new energy prop­ erty. While “second-life” battery compo­ nents may be used to modify an energy storage technology as provided in section 48(c)(6)(B) and addressed in part I.B.4.d. of this Summary of Comments and Expla­ nation of Revisions, allowing primarily used components to be considered new property for purposes of applying the 80/20 Rule would be contrary to the basis of the 80/20 Rule. Accordingly, the Trea­ sury Department and the IRS do not adopt these comments.

December 23, 2024 1390 Bulletin No. 2024–52

c. Hydropower facilities

Section 48(a)(3) provides and pro­ posed §1.48-9(d)(1) would provide that for purposes of the section 48 credit, an energy property does not include any property that is part of a qualified facil­ ity the production from which is allowed a section 45 credit for the taxable year or any prior taxable year. Some commenters requested that the final regulations clar­ ify the interplay of the 80/20 Rule under section 48 in the case of a property that was previously part of a qualified facil­ ity under section 45. These commenters requested specific confirmation that the 80/20 Rule may be applied to a retrofitted pumped storage hydropower property for which the section 45 credit had previously been claimed to allow a section 48 credit to be claimed. Although the 80/20 Rule permits a retrofitted energy property to be treated as originally placed in service and qualify for the section 48 credit even though it contains some used components, the 80/20 Rule must be applied by giving effect to the statutory language in section 48(a)(3) that prohibits a section 48 credit on any property that is part of a facility the production from which is allowed as a section 45 credit for the taxable year or any prior taxable year. However, in the case of a retrofitted qualified facility for which a section 45 credit was not allowed, the 80/20 Rule could be used to obtain a new original use and placed in service date in order to claim a section 48 credit if an election under section 48(a)(5) is made. After consideration of the comments, an example of the application of the 80/20 Rule to a qualified hydropower production facility has been added to the final regu­ lations.

B. Dual use rule

Former §1.48-9 includes a Dual Use Rule, which provides that a solar energy property, wind energy property, or geother­ mal equipment is eligible for the section 48 credit to the extent of the energy prop­ erty’s basis or cost allocable to its annual use of energy from a qualified source if the use of energy from “non-qualifying” sources does not exceed 25 percent of the total energy input of the energy property during an annual measuring period. This

version of the Dual Use Rule is referred to as the “75-percent Cliff.”

Proposed §1.48-14(b)(1) would pro­ vide that for purposes of section 48, the term dual use property means property that uses energy derived from both a qualifying source (that is, from an energy property including a qualified facility for which an election has been made) and from a non-qualifying source (that is, sources other than an energy property including a qualified facility for which an election has been made).

Proposed §1.48-14(b)(2)(i) would pro­ vide that, in general, dual use property 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 measuring period. 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 per­ cent of the energy used by a dual use prop­ erty 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).

1. Dual Use Rule and Energy Storage Technology

The preamble to the Proposed Regula­ tions explained that the Treasury Depart­ ment and the IRS recognize that the Dual Use Rule is no longer relevant to determin­ ing the eligibility of energy storage tech­ nology placed in service after December 31, 2022, because the IRA added energy storage technology as an energy property effective for property placed in service after December 31, 2022. However, the Dual Use Rule may still have other appli­ cations under section 48. The Proposed Regulations requested comments on the application of the Dual Use Rule to sec­ tion 48 after its amendment by the IRA.

A commenter suggested that the final regulations should eliminate the applica­ tion of the Dual Use Rule for all energy storage, including energy storage property placed in service before January 1, 2023. In the alternative, the commenter sug­ gested reducing the requirement for energy storage property placed in service prior to

2023 to 50 percent charging from qualify­ ing energy sources. This commenter also requested that final regulations eliminate any penalties or recapture for energy stor­ age systems that charge less from quali­ fying energy sources than they did during a previous annual measuring period. Finally, the commenter recommended that the final regulations allow for exceptions to charging restrictions during actual or anticipated emergency days, particularly when there are severe weather conditions, which are periods during which storage resources are badly needed. The com­ menter explained that the charging limita­ tions disqualify energy storage property placed in service before January 1, 2023, that is charged by grid rather than by solar, wind, or other qualifying property from the section 48 credit eligibility. The com­ menter noted that it would be difficult to ensure that the charge comes from quali­ fying sources during severe weather con­ ditions. Because these final regulations apply only to property placed in service after December 31, 2022, these comments are outside the scope of the regulations.

Section 13102(q)(2) of the IRA pro­ vides that amendments to section 48 regarding energy storage technology apply to properties placed in service after December 31, 2022. Accordingly, pro­ posed §1.48-14(i) would limit application of proposed §1.48-14 “to property placed in service after December 31, 2022, and during a taxable year beginning after the date of publication of the final rule.” Therefore, the prior version of the Dual Use Rule referred to as the 75-percent Cliff continues to apply to energy proper­ ties placed in service prior to January 1, 2023. These final regulations do not adopt the requested change to the applicability date provided in the Proposed Regulations for these provisions.

2. Aggregation of Energy Inputs

Proposed §1.48-14(b)(2)(ii) would provide that the measurement of energy use required for purposes of proposed §1.48-14(b)(2)(i) is made by comparing, on the basis of Btus, energy input to dual use property from all qualifying sources with energy input from all non-qualifying sources. The Proposed Regulations fur­ ther would provide that the Commissioner

Bulletin No. 2024–52 1391 December 23, 2024

may also accept any other method that accurately establishes the relative annual use of energy derived from all qualify­ ing sources and of energy input from all non-qualifying sources by dual use prop­ erty.

A commenter requested clarifica­ tion regarding the appropriate means of demonstrating annual energy consump­ tion for an energy property, especially for solar water heating systems. The com­ menter noted that solar thermal systems have accepted Federal sizing guidelines for accurately estimating energy con­ sumption by source, whether from solar, electric, gas, or other applicable technol­ ogies, and because of this, not all solar thermal systems may include heat meters or other specialized monitoring equip­ ment that may be needed to determine the annual energy consumption by source requirements and, thus, requiring such measurement could add undue and unnec­ essary costs to comply with this rule. This commenter recommended that the final regulations specify types of monitoring in general, or in lieu of or in addition to monitoring, provide guidance on appro­ priate or acceptable energy consumption modeling that might otherwise meet this requirement. For example, the commenter noted system performance modeling that may be used to determine annual energy production for a given system that is situ­ ated in a specific climate and used in the ENERGY STAR Residential Water Heater Certification Program. This commenter also noted that clarification regarding the costs that can be included in the basis of an energy property would also be useful in other Dual Use contexts, such as for solar carports.

The Treasury Department and the IRS decline to adopt additional measurements to determine energy input from qualify­ ing and nonqualifying sources. The Pro­ posed Regulations state that the Commis­ sioner may accept any other method that accurately establishes the relative annual use of energy derived from all qualify­ ing sources and of energy input from all non-qualifying sources by dual use prop­ erty. The final regulations will continue to allow the Commissioner to accept any other method that accurately establishes the qualifying sources and energy inputs to an energy property during the annual

measuring period. Additionally, the final regulations do not provide clarification regarding what costs may be included in the basis of energy property. See part I.B of this Summary of Comments and Expla­ nation of Revisions for a discussion of the definitions of types of energy property.

3. Dual Use Property and Microgrid Controllers

The preamble to the Proposed Reg­ ulations states that certain equipment is necessary for a microgrid controller to perform its functions. However, such equipment may also have been required to be installed without the presence of a microgrid. An example is a communica­ tions system (for example, a local eth­ ernet network or a commercial wireless network). Because a microgrid controller must be connected to a communications system to operate properly, such a com­ munications system could be considered part of the microgrid controller itself. The communications system could also be used for other purposes and may not be dedicated to the microgrid system. The Treasury Department and the IRS con­ sider the Dual Use Rule inapplicable to this scenario because it does not involve the use of energy derived from both quali­ fying and non-qualifying sources.

A commenter asserted that it is neces­ sary to create a Dual Use Rule for micro­ grid controllers because requiring specific equipment to be dedicated to the microgrid controller that could otherwise be used for multiple purposes is an inefficient use of resources. The commenter also noted that given the complexity and unique nature of microgrids, it is impossible to specify all conditions under which a Dual Use might arise. This commenter suggested that any component of property that is tied into the microgrid system (whether hard­ ware-based or software-based) becomes a necessary component of either the operation of the microgrid or the mon­ itoring/maintenance of the operation of the microgrid. The commenter noted that existing equipment would not be included in the basis of the microgrid controller for purposes of the credit, but if new equip­ ment is needed or if existing equipment needs to be replaced to accommodate the operations of the microgrid, such equip­

ment should be included in the basis of the microgrid controller for purposes of the section 48 credit even if such equipment is partially used for other purposes that are not eligible for the section 48 credit. This comment poses the issue of whether the cost of components of property is included in an energy property’s basis even though such components can be used for purposes not intended for energy property. That issue is addressed in the discussion of the functional interdependence and inte­ gral property rules described in part I.C.2 and 3 of this Summary of Comments and Explanation of Revisions.

C. Incremental cost

Former §1.48-9(k) defines incremen­ tal cost as the excess of the total cost of equipment over the amount that would have been expended for the equipment if the equipment were not used for a qual­ ifying purpose related to the section 48 credit. Proposed §1.48-14(d)(1) would adopt a similar definition and allow only the incremental cost of energy property to be included in basis for purposes of deter­ mining the section 48 credit.

Proposed §1.48-14(d)(2) would pro­ vide as an example, a scenario in which the incremental cost of a reflective roof for the purpose of installing a solar energy property is $5,000, the difference between the costs of a reflective roof and a standard roof. A commenter suggested expanding this example to include other roof upgrades that enable the operation of energy property.

The amount of incremental cost is determined on a case-by-case basis and the example is only intended to illustrate the general application of the incremental cost rule. Accordingly, this comment is not adopted.

D. Ownership rules

Proposed §1.48-14(e)(1) would pro­ vide that for purposes of section 48, a taxpayer that owns an energy property is eligible for the section 48 credit only to the extent of the taxpayer’s basis in the energy property. Further, proposed §1.4814(e)(1) would provide that in the case of multiple taxpayers holding direct owner­ ship in an energy property, each taxpayer

December 23, 2024 1392 Bulletin No. 2024–52

determines its basis based on its fractional ownership interest in the energy property.

Proposed §1.48-14(e)(2) would pro­ vide that a taxpayer must directly own at least a fractional interest in the entire unit of energy property for a section 48 credit to be determined with respect to such tax­ payer’s interest. Further, proposed §1.4814(e)(2) would provide that no section 48 credit may be determined with respect to a taxpayer’s ownership of one or more separate components of an energy prop­ erty if the components do not constitute a unit of energy property. However, pro­ posed §1.48-14(e)(2) would also provide that the use of property owned by one tax­ payer that is an integral part of an energy property owned by a second taxpayer will not prevent a section 48 credit from being determined with respect to the second tax­ payer’s energy property.

Proposed §1.48-14(e)(3)(i) would provide that the term “related taxpayers” means members of a group of trades or businesses that are under common control (as defined in Treasury Regulations §1.521(b)). Proposed §1.48-14(e)(3)(ii) would provide that related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an investment in an energy property with respect to which a section 48 credit may be determined.

Many commenters disagreed with the application of the ownership rules. Sev­ eral commenters raised general arguments focused on prior interpretations of sec­ tion 48, while others voiced disagreement regarding the application of the ownership rules to qualified biogas property, GHP property, and offshore wind facilities (eli­ gible for the section 48 credit through an election under section 48(a)(5)).

1. Prior Interpretations of the Ownership Rules

Some commenters raised interpreta­ tions of the ownership rules and the defi­ nition of an “energy property” in caselaw and guidance. These commenters assert that these sources demonstrate that own­ ership of individual components of energy property, and not of an entire unit of energy property, is sufficient to claim the section 48 credit.

Several commenters pointed to Coo- per v. Commissioner, 88 T.C. 84 (1987),

which was decided under prior versions of sections 46 and 48 and the regula­ tions thereunder. In Cooper, the taxpayer asserted that owning specific compo­ nents of solar water heating system was sufficient to claim the section 48 credit for solar energy property. While the Tax Court agreed that the taxpayer did not own the entire working solar water heating sys­ tem, the Court held that the definition of a solar energy property provided in former section 48(l)(4) was sufficiently broad to provide a credit for component parts of a solar water heating system. Id . at 116-117.

The Tax Court subsequently clarified the holding in Cooper, explaining that “the property in Cooper consisted of integrated water-heating systems that were ready for installation to discharge their desig­ nated function”; they just had not been installed yet. Olsen, T.C. Memo 2021-41 at *14. Conversely, in the Olsen case, the Tax Court found that “[p]etitioners’ lenses were mere components of a system….” and not a complete system and therefore unable to be placed in service as a system. Id. Stated otherwise, while commenters cite to Cooper to support the assertion that the section 48 credit is available for separate components of property within an energy property, the Tax Court clarified in Olsen that components that “operate as part of a complicated…system and were incapable of performing any useful func­ tion in isolation” were not placed in ser­ vice. Id . at 13. Additionally, Cooper was decided under former section 48(l)(4) and not under the current version of section 48, which is substantially different. Commenters also cited Samis v. Com- missioner, 76 T.C. 609 (1981), for the proposition that ownership of an entire energy property is not required to claim the section 48 credit. However, Samis stands only for the proposition that prop­ erty connected to a building is a part of the building regardless of ownership. In Samis, although the taxpayers owned a “total energy plant” that provided hot water and heating/cooling for a residen­ tial apartment complex not owned by the taxpayers, the total energy plant was held to be a structural component of the apart­ ment complex and therefore not “tangi­ ble personal property” or “other tangible property” qualifying for the investment credit. The Tax Court explained in a foot­

note that the ownership of the plant was irrelevant because the total energy plant is not eligible for the section 48 credit. Therefore, in Samis it was clear only that the taxpayer could not separate ownership of the heating and cooling system from the apartment complex to sidestep rules that the property must not be part of a building.

Commenters also pointed to Revenue Ruling 78-268, 1978-2 C.B. 10, to support the premise that components of an energy property may be owned by different tax­ payers. However, in Revenue Ruling 78-268, the taxpayers did not own just a component of one energy property—they owned a fractional interest in the entire facility. In Revenue Ruling 78-268, four parties, two of which were tax-exempt, owned an electric generating facility through a tenancy in common. Revenue Ruling 78-268 held that the presence of the tax-exempt owners did not disqualify the other owners from claiming a credit because the fractional interests in the tenancy in common were treated as sepa­ rate assets. The Treasury Department and the IRS disagree with commenters that the holding of Revenue Ruling 78-268 conflicts with the ownership rules in the Proposed Regulations. Instead, Revenue Ruling 78-268 illustrates that a fractional interest in the entire energy property is sufficient for a taxpayer to claim a section 48 credit, which is the very rule in pro­ posed §1.48-14(e)(2).

Commenters also cited PLR 201536017 (PLR) to support the premise that ownership of an entire energy prop­ erty is not required to claim the section 48 credit. However, private letter rulings are not precedential and cannot be relied upon by a taxpayer other than the tax­ payer addressed in the PLR (see section 6110(k)(3) of the Code). Furthermore, the PLR does not involve the section 48 credit but instead section 25D of the Code. Regardless, similar to Revenue Ruling 78-268, the PLR involves credit eligibility through fractional ownership of an entire energy property, not owner­ ship of just certain components. The PLR addresses a factual scenario in which a taxpayer purchased solar PV panels in an offsite array (that also contains other solar PV panels owned by other individu­ als) as well as a partial ownership in rack­ ing equipment, inverter equipment, and

Bulletin No. 2024–52 1393 December 23, 2024

wiring and other equipment and installa­ tion services required for the integration of the panels in the array and the inter­ connection of the array to a local utility’s electric distribution system. The PLR concludes that as a result, the taxpayer has made a “qualified solar electric prop­ erty expenditure” under section 25D(d) (2) and the taxpayer is eligible to claim a section 25D credit. To the extent this PLR provides any helpful analysis regarding the section 48 credit, it involves partial ownership in all the other equipment necessary to integrate the panels into the array and interconnect the array to a local utility’s electric distribution system, and not just certain components.

Finally, commenters pointed to FAQs 34 and 35 of guidance from the Treasury Department regarding payments under section 1603 of the American Recovery and Reinvestment Act of 2009 ¹ (Section 1603 Grant Program) to support the prem­ ise that ownership of an entire energy property is not required to claim the sec­ tion 48 credit. FAQ 34 addressed grant eligibility for a factual scenario involving an open-loop biomass facility owned by one taxpayer that uses off-site feedstock conversion equipment owned by another taxpayer. The FAQ provided that the con­ version equipment may be considered part of the open-loop biomass facility eligible for the grant if the conversion equipment is integrated into the open-loop biomass facility. Evidence that the conversion facility is integrated into the open-loop biomass facility includes factors such as whether they are placed in service simul­ taneously, the extent to which the conver­ sion facility’s output is dedicated to the facility (for example, under an exclusive long-term supply contract), and the depen­ dence of the open-loop biomass facility on the output of the conversion equipment (at least 75 percent).

Additionally, FAQ 35 addressed the procedural requirements of the 1603 Grant Program as applied to the facts pre­ sented in FAQ 34, by providing that the taxpayer that owns the conversion equip­ ment and taxpayer that owns the openloop biomass facility must each submit an application filed jointly in order to receive

Section 1603 grant payments. While the 1603 Grant Program did adopt concepts from sections 45 and 48, the Section 1603 Grant Program is not based on any income tax provisions and thus is not a relevant precedent for purposes of the section 48 credit.

The Proposed Regulations’ approach to ownership eligibility is further supported by the IRA’s amendments to section 48 and administrability considerations. The IRA amended section 48 to provide for an increased credit amount for energy projects satisfying the PWA requirements (section 48(a)(9) through (11)), a bonus credit amount for energy projects satisfy­ ing domestic content requirements (sec­ tion 48(a)(12)), and an increase in credit rate for energy projects in energy com­ munities (section 48(a)(14)). Addition­ ally, the IRA amended section 48(a)(8) to allow the cost of qualified interconnection property to be included in the basis of cer­ tain lower-output energy properties. This statutory framework indicates that special rules enacted by the IRA amendments apply to either an energy property or an energy project, which is further defined as a project consisting of one or more energy properties that are part of a single project. This statutory scheme requires that the section 48 credit is available only if an entire energy property (or energy project) is placed in service. Under the alternative ownership rules requested by comment­ ers, a taxpayer’s eligibility for the IRA’s bonuses could depend, in many cases, on whether unrelated parties met the require­ ments for the various bonus credits pro­ vided by the IRA. This uncertainty would create severe challenges for tax adminis­ tration.

While the Treasury Department and the IRS understand the concerns raised by commenters, the statutory language and administrability concerns arising from the overall statutory scheme effected by the IRA’s recent amendments both support a requirement that the taxpayer own all or a fraction of an entire energy property or energy project. Therefore, the final regula­ tions do not adopt the changes to the own­ ership rules requested by the commenters. The rule is adopted as proposed.

2. Application to Qualified Biogas Property

Commenters presented practical rea­ sons for disagreeing with the ownership rules, particularly in the context of the section 48 credit for qualified biogas property placed in service at dairy farms and landfills. Commenters provided rea­ sons that the owner of biogas upgrading equipment cannot be the same owner of the functionally interdependent qualified biogas property, which is described in pro­ posed §1.48-9(e)(11)(i) as including, but not limited to, a waste feedstock collec­ tion system, a landfill gas collection sys­ tem, mixing or pumping equipment, and an anaerobic digester. Commenters also explained that biogas upgrading equip­ ment is often added to dairy farms and landfills, and those that engage in biogas upgrading are not the same owners of the underlying farms and landfills.

A commenter explained that different types of qualified biogas property located at a site are almost always owned by differ­ ent taxpayers as a result of regulatory con­ straints, financial capability, or other busi­ ness considerations. Another commenter explained that because qualified biogas property is prohibitively expensive, farm­ ers and ranchers often work with cooper­ atives or other organizations to facilitate shared ownership of such equipment, and the ownership rules, as proposed, would have an exclusionary effect on Ameri­ can agriculture and specifically on farm­ er-owned cooperatives. Emphasizing these same concerns, another commenter stated that often farmers and ranchers are not interested in an outside entity owning the anaerobic digester that, in addition to biogas, produces nutrients and water used within the farming operation and are therefore crucial for the farmers and ranchers to own and control.

Commenters note that similar issues arise in the context of landfills. For exam­ ple, a commenter (whose comments were endorsed by many others) explained that landfill owners often use collection equipment for compliance with regula­ tory requirements and view methane gas capture as a core operation. As a result,

1 Payments for Specified Energy Property in Lieu of Tax Credits Under the American Recovery and Reinvestment Act of 2009, Frequently Asked Questions and Answers.

December 23, 2024 1394 Bulletin No. 2024–52

landfill gas collection systems are almost always owned and operated by the land­ fill operator, which may be a municipality, while the biogas upgrading equipment is owned by another taxpayer. This makes common ownership of both the func­ tionally interdependent qualified biogas property as described in the proposed §1.48-9(e)(11) and the biogas upgrading equipment difficult to achieve.

Moreover, those engaged in biogas upgrading at a landfill may not legally be allowed to own the landfill biogas equipment. For example, a commenter stated that the proposed treatment of a landfill gas collection system property as a functionally interdependent part of the qualified biogas property is problem­ atic because it is very common for RNG production systems to be developed by a taxpayer at a landfill owned by a differ­ ent taxpayer. In this type of arrangement, it is important for the owner of the land­ fill to retain ownership and control of the landfill gas collection property to comply with existing regulatory and permitting requirements for operation of the landfill. Additionally, this commenter noted that it is common for such landfill gas collec­ tion system property to have already been placed in service before biogas collected from the system is captured and integrated into a new RNG production system.

Another commenter emphasized both timing issues and legal restrictions cre­ ated by the ownership rules, stating that the ownership rules fail to recognize that most landfills have already installed gas capture and control systems (GCCS System). These systems are generally required under existing regulations, and the landfills typically insist on maintaining total control and ownership of the GCCS System to ensure they remain within reg­ ulatory requirements. This commenter explained that RNG developers provide additional equipment to further refine cap­ tured landfill gases into beneficial end use products, but that additional equipment may not benefit from section 48 credits under proposed §1.48-9(e)(11), which requires the split ownership of the GCCS System and gas upgrading equipment.

The final regulations address the com­ menters’ concerns through other revisions to the final regulations. The Treasury Department and the IRS expect that these

revisions will alleviate the concerns raised by the biogas industry without requiring changes to the ownership rules. For dis­ cussion of these revisions to the definition of qualified biogas property see part I.B.5. of this Summary of Comments and Expla­ nation of Revisions.

3. Application to GHP Property and Geothermal Energy Property

Commenters also provided feedback on the effect of the ownership rules in the context of GHP property and geother­ mal energy property. Many commenters asserted that the Proposed Regulations could cause significant potential harm to development of geothermal projects. These commenters stated that it is import­ ant that the Treasury Department and the IRS provide a method for split own­ ership of GHP property and geothermal energy property to qualify for the section 48 credit. In support of these requests, commenters pointed to congressional cor­ respondence urging support for the geo­ thermal industry and requesting guidance to allow for viable third-party ownership business models, including clarifying that GHP property and geothermal energy property are exempt from the “limited use property” doctrine.

Commenters also explained that there are dozens of networked geothermal proj­ ects currently planned or deployed across the country. Commenters stated that net­ worked GHP property and geothermal energy systems almost always involve multiple owners by design, and that GHP property networks can serve a diverse array of customer buildings while those customers own and maintain their own GHP property. Commenters stated that the ground loop and the heating and cooling units are functionally interdependent yet distinct components of the GHP property that are often owned by utilities. The com­ menters also noted that in many instances, utilities are prohibited by regulators from owning their customers’ heating and cool­ ing equipment. These commenters sug­ gested that the delineation between out­ door and indoor equipment is sufficient to allow for clear allocation of the credit between taxpayers.

Several other commenters made sim­ ilar points about GHP property and the

ownership rules. Some commenters emphasized the need for an exception for geothermal property and others focused on the reasoning for separate ownership. For example, a commenter highlighted the commonality of separate ownership arrangements because utilities are often prohibited from owning a customer’s heating and cooling equipment. Another commenter provided a detailed discus­ sion on separate ownership of geothermal property and highlighted the business necessity for this structure. This com­ menter explained that the barrier to geo­ thermal energy use is the high cost and expertise required for the overall under­ ground system. This commenter said it makes perfect sense for the underground system to be owned by a specialized company with both the technical skills and a long-range investment strategy. This commenter explained that in other cases, it will be independent companies that contract to supply geothermal energy to the edge of a facility. The commenter noted that in both cases, the facility or building owner would then connect to the system to make use of the geother­ mal energy, and that the energy user is required neither to make the investment in the geothermal system, nor to have expertise in developing the system.

This same commenter also explained that the Proposed Regulations ignore his­ torical precedent that virtually all geo­ thermal energy development was split ownership. This commenter asserted that since the 1980s and into the future, split ownership remains an important model for geothermal energy development and use. The commenter gave several exam­ ples illustrating the split ownership model across the United States.

Commenters generally recommended that split ownership be allowed for geo­ thermal property, including GHP prop­ erty. One commenter (whose comments were endorsed by many others) suggested drawing the line at indoor/outdoor own­ ership. Another commenter asserted that property within a home or building should be considered an entire unit of energy property while another taxpayer owns the equipment underground as a separate unit of energy property. This commenter noted that the final regulations should define the scope of energy property to allow the tax­

Bulletin No. 2024–52 1395 December 23, 2024

payer a section 48 credit based on the tax­ payer’s basis in energy property it owns.

Commenters also noted the use of “equipment” in section 48(a)(3)(A)(iii) and (vii) (for example) to refer to geother­ mal energy property is different from the use of “system” used in other places to refer to energy property (for example, sec­ tion 48(c)(1)(C), which defines a fuel cell power plant). These commenters noted that if the equipment is viewed individu­ ally as is suggested by the differing defini­ tions in section 48, then individual owners should be allowed to qualify in contra­ vention of the coils/heat pump example included in the proposed rules. Comment­ ers also made this point regarding use of the term “equipment” with reference to solar energy property.

The statutory language does not sup­ port providing a special ownership rule for GHP property (or geothermal energy property) as requested by the commenters. In the case of GHP property, both the coils in the ground and the heat pump equip­ ment are necessary for GHP property to satisfy the definition in section 48(a)(3) (A)(vii). Because both the coils and heat pump are necessary to perform the func­ tion of the GHP property, ownership of only the coils or only the heat pump is not ownership of the entire unit of energy property and therefore, is not ownership of GHP property, as statutorily defined.

This analysis is consistent with the definition of “geothermal energy prop­ erty” under section 48(a)(3)(A)(iii), which includes as energy property equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e)(2)), but only, in the case of electricity generated by geothermal power, up to (but not includ­ ing) the electrical transmission stage. That is, this definition encompasses produc­ tion and disposition or use up to but not including electrical transmission. Because both the equipment that produces electric­ ity from a geothermal deposit and equip­ ment needed to either distribute or use such energy are necessary to perform the energy function of the geothermal energy property, ownership of only components of that equipment is not ownership of the entire unit of energy property and there­ fore, is not ownership of geothermal energy property, as statutorily defined.

In response to these comments, the Treasury Department and the IRS have provided an example of GHP property in the final regulations to clarify that owner­ ship of every heat pump that is connected to coils in the ground owned by the same taxpayer is not required to qualify, but that ownership of both coils and at least one heat pump is required. Additionally, other taxpayers may purchase heat pumps that attach to existing coil systems. While ownership of those heat pumps alone will not satisfy section 48, it is possible that the taxpayer may be eligible for a credit under section 25D.

Commenters also requested an exemp­ tion for GHP property from the “limited use property” doctrine. Property that is not commercially usable by anyone other than the lessee at the end of the lease term is considered “limited use.” Section 5.02 of Revenue Procedure 2001-28, 2001-1 C.B. 1156, provides an example of a leased smokestack attached to a warehouse owned by the lessee and concludes that the smokestack is limited-use property because it would not be commercially feasible to disassemble the smokestack at the end of the lease term and reconstruct it at a new location. Commenters expressed concern because, in one typical thirdparty ownership arrangement, a thirdparty owned ground loop is installed for the benefit of a building and leased to the building owner, with the building owner owning the heat pump.

Under a longstanding body of case law and IRS guidance, if property is leased for substantially its entire useful life, then the transaction is treated more properly as a sale of the property for Federal income tax purposes than a lease, because the party designated as the lessee obtains the bene­ fits and burdens of ownership of the prop­ erty under the purported lease agreement. Grodt & McKay Realty, Inc. v. Commis- sioner, 77 T.C. 1221 (1981) (listing fac­ tors for determining whether the benefits and burdens of ownership of property have passed and a sale occurred); Revenue Ruling 55-541, 1955-2 C.B. 19 (property determined to be leased for substantially its entire useful life and therefore results in a transfer of equitable ownership). A purported lease of limited-use property, therefore, may be treated as a sale for Federal income tax purposes because the

lessee is considered to have acquired the benefits and burdens of ownership of the property for substantially its entire useful life. See Estate of Starr v. Commissioner, 274 F.2d 294 (9th Cir. 1959) (purported lease of a fire sprinkler system); Mt. Man- sfield Television v. United States, 239 F.Supp. 539 (D. Vermont 1964) aff’d 342 F.2d 994 (2d Cir. 1965) (purported lease of microwave equipment installed in a television station).

Under this analysis, a third-party own­ ership arrangement involving a lease of a ground loop that cannot be removed at the end of the lease and used somewhere else may be characterized more properly for Federal income tax purposes as a sale (rather than a lease) of the ground loop to the building owner at the inception of the lease because the lessor must re-lease or sell the property to the lessee at the end of the lease term.

To claim the section 48 credit, the tax­ payer must own the energy property when it is placed in service. Consequently, the lessor of the ground loop in the lease financing transaction above may not be eligible for the section 48 credit for the cost of the ground loop insofar as it is treated as having transferred ownership of the ground loop to the purported lessee for Federal income tax purposes at the incep­ tion of the lease. This would be the case even if the Proposed Regulations were modified to permit separate ownership of components of an energy property, or in the absence of such a modification, even if the nominal owner of the ground loop owned a fractional ownership interest in the other components of the GHP prop­ erty, which taken together constitutes an energy property. Because of the “limited use property” doctrine, the lessor of the ground loop may not be regarded as the tax owner of the ground loop when it is placed in service and, therefore, would not be eligible for the section 48 credit for its basis in the ground loop.

Commenters presumed that it is within the Treasury Department and the IRS’s regulatory authority to revise the “lim­ ited use property” doctrine provided in Revenue Procedure 2001-28, 2001-1 C.B. 1156, to provide an exception for GHP property. However, Revenue Procedure 2001-28 (and its predecessors, which date back to Revenue Procedure 75-21, 1975-1

December 23, 2024 1396 Bulletin No. 2024–52

C.B. 715) merely provides guidelines for advance rulings on leveraged lease trans­ actions, and notes that these guidelines “do not define, as a matter of law, whether a transaction is or is not a lease for Federal income tax purposes and are not intended to be used for audit purposes.” Rather, the “limited use property” doctrine reflects the broader Federal income tax principle that the characterization of a leasing trans­ action for Federal income tax purposes is determined by its substance and not its form. Helvering v. F. & R. Lazarus & Co., 308 U.S. 252 (1939); Frank Lyon Co. v. United States, 435 U.S. 561 (1978). Con­ sequently, explicit statutory authorization would be needed to exempt leases of GHP property from the “limited use property” doctrine. The final regulations, therefore, do not exempt GHP property from the “limited use property” doctrine.

4. Application to Solar Energy Property and Offshore Wind Facilities

Commenters also provided feedback on the effect of the ownership rules in the context of solar energy properties and offshore wind facilities. A commenter asserted that requiring a taxpayer to own a direct interest in each component of a unit of solar energy property is unreasonable. This commenter provided an example of a taxpayer that constructs and places in service a solar facility that has 1,000 com­ ponents and qualifies for the section 48 credit. If the taxpayer owns 999 compo­ nents of the solar facility and another tax­ payer owns the remaining one component, then the same solar facility that qualified for the section 48 credit because the tax­ payer owned all components will no lon­ ger be energy property under the Proposed Regulations. This commenter said there does not seem to be any justification for this rule. This commenter highlighted that the facility is serving the same purpose and would be eligible for the same amount of section 48 credit. The commenter also asserted that introducing and defining the term “unit of energy property” in a way that does not allow its components to be owned by more than a single taxpayer leads to an unreasonable result.

This commenter requested that the Treasury Department and the IRS issue a rule enabling taxpayers to claim the sec­

tion 48 credit for separate components of energy property. Alternatively, the commenter requested that the Treasury Department and the IRS issue a rule to limit the definition of unit of energy prop­ erty with respect to a particular taxpayer to those components owned by that tax­ payer. As has been discussed previously in part III.D.1 of this Summary of Com­ ments and Explanation of Revisions, the statute requires the taxpayer to own an interest in an energy property to claim a section 48 credit.

Some commenters were particularly concerned about the rule in the Proposed Regulations that a taxpayer is eligible to claim the credit for integral property only if that same taxpayer owns the unit of energy property. These commenters were specifically concerned about the ability of owners of power conditioning and trans­ fer equipment to claim the section 48 in both the solar and offshore wind context. In general, the commenters disagreed that an integral property that would otherwise qualify if owned by the same taxpayer that owns the unit of energy property would not qualify if owned by another taxpayer. For example, a commenter asserted in the case of a single energy property in which energy property and integral parts are con­ structed together but owned by separate taxpayers, both taxpayers should be able to claim separate credits on the bases of their respectively owned portions. Simi­ larly, the commenter noted that if a unit of energy property is constructed and placed in service by a taxpayer, and later another taxpayer constructs and places in service integral property, both taxpayers should be able to claim credits.

A commenter made a similar point specifically about offshore wind facil­ ities. This commenter noted that if the power conditioning equipment is owned by a taxpayer that has no ownership in the offshore wind facility, the power condi­ tioning equipment would not qualify for the section 48 credit without changing its operation, character, or function but would have qualified had that taxpayer had an ownership interest in the offshore wind facility. The commenter stated that the power conditioning equipment continues to serve the same purpose, is used directly in the intended function of the offshore wind facility, and is essential to the com­

pleteness of its intended function. This commenter pointed out that offshore wind facilities (such as those along the Atlan­ tic coast) will involve multiple States, and it is unlikely that the same entity will own both the offshore wind facility and the integral supporting infrastructure, but both should be eligible for the credit.

Another commenter made a similar point stating that power conditioning and transfer equipment has been established by the Proposed Regulations as an inte­ gral part of the production of electricity from an offshore wind facility, and that in accordance with precedent, the Trea­ sury Department and the IRS should establish in the final regulations that the separate owner of this integral equip­ ment may qualify for the section 48 credit. This commenter stated that this is essential to enabling the necessary flex­ ibility for offshore wind developers to structure financially viable projects, and ultimately achieve the Administration’s goal of deploying 30 gigawatts (GW) of offshore wind capacity by 2030. Another commenter noted that the distinction in the Proposed Regulations between func­ tionally interdependent property (needed for generation of electricity) and other “integral” property for purposes of section 48 is arbitrary, illogical, and unnecessary for offshore wind properties involving multiple owners, and there is no need for an owner of an offshore wind delivery system to have an artificial requirement to own some portion of the turbines. This commenter noted that permitting multi­ ple owners to share the section 48 credit would not lead to overuse or “double counting” of the section 48 credit.

Other commenters noted that allow­ ing third party ownership of power con­ ditioning and transfer equipment would significantly decrease the financial burden on developers and ratepayers, as well as diversify investment in the industry. Com­ menters also stressed the benefits of sep­ arate ownership as a more cost effective model of ownership, including efficiencies that provide lower overall costs to con­ sumers; reduced environmental impacts (for example, fewer cables traversing sen­ sitive marine ecosystems); efficient use of constrained cable corridors; fewer disrup­ tions to communities than if each offshore wind facility, develops its own offshore

Bulletin No. 2024–52 1397 December 23, 2024

wind power conditioning and transfer equipment; and incentivizing competitive solicitation of such equipment.

Generally, these commenters requested that integral property, specifically power conditioning equipment, be treated as a separate unit of energy property that may claim the section 48 credit. However, sec­ tion 48 provides a credit only for property that satisfies the definitions of “energy property” provided at section 48(a)(3) and (c), and owners of only integral property do not own “energy property” as defined in section 48(a)(3) or (c). For example, power conditioning and transfer equip­ ment does not alone generate electricity or satisfy an intended function provided by the statute. As a result, costs associated with integral property owned by a taxpayer that owns the related energy property may be included in basis of the energy property owned by the same taxpayer as provided in these final regulations because integral property is necessary for the intended use for an energy property, but integral prop­ erty alone cannot qualify for the section 48 credit.

E. Calculation of basis

Proposed §1.48-14(e)(1) would provide that for purposes of the section 48 credit, a taxpayer that owns an energy property is eligible for the credit only to the extent of the taxpayer’s basis in the energy property. Proposed 1.48-14(e)(1) also would provide in the case of multiple taxpayers holding direct ownership in an energy property, each taxpayer determines its basis based on its fractional ownership interest in the energy property. A commenter supported the fractional ownership rule for determin­ ing a taxpayer’s basis and requested the extension of those rules to the credits under sections 30C and 45W of the Code.

Other commenters, while opposing the ownership rules, also requested clar­ ification of how to determine basis if the fractional ownership rule is retained. A commenter requested examples of the application of these ownership rules in the context of an animal waste-to-RNG quali­ fied biogas property in which the property comprising the qualified biogas property is owned by multiple taxpayers.

Another commenter requested clarifi­ cation regarding the allocation of a section

48 credit if taxpayers own different frac­ tional ownership interests in the unit of energy property and related integral prop­ erty. A commenter requested that the final regulations apply similar allocation rules provided in proposed §1.48-9(f)(3)(i) and (ii) to shared integral property in the con­ text of a qualified investment credit facil­ ity under section 48(a)(5).

Other commenters, while opposed to the ownership rules, suggested alternative ways to determine basis if there are multiple owners. Two commenters suggested that energy property that is integral to multiple energy projects (for example, as part of a “shared collector system” configuration) should be eligible for the section 48 credit based on the energy property’s capacity allocable to each taxpayer’s energy project. Another commenter supported the creation of a rule that can be used to determine if the primary use of a transmission line is for renewable energy generation and, if so, to allow it to qualify as a split ownership component of the qualifying renewable energy development (whether wind, solar, or geothermal). This commenter pointed to the use of the Open Access Transmission Tariff as a model for such test. This com­ menter also noted that the initial dedicated renewable connection capacity is likely to be oversized and so the Treasury Depart­ ment and the IRS should be able to develop partial section 48 credit qualification over time if deemed necessary.

Proposed §1.48-14(e)(1) would provide that a taxpayer determines its basis based on the taxpayer’s fractional ownership in the energy property. Proposed §1.4814(e)(4)(iii), Example 3, would provide an example in which integral property has two owners that each own one-half of the integral property with each owner includ­ ing one-half of the basis of that property to determine their basis for section 48 credit purposes. The example does not look to whether the use of the integral property for qualifying uses corresponded to the one-half split in ownership.

Proposed §1.48-9(f)(3) would provide that multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be con­ sidered an integral part of each energy property so long as the cost basis for the shared property is properly allocated to each energy property. In that scenario, the

total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared property, but there is no require­ ment that the proportion of a taxpayer’s ownership of the integral property must correspond with the proportion of the tax­ payer’s fractional ownership of the energy property.

Because the fractional ownership rules applicable to multiple owners of integral property must comport with the general ownership rules, the Treasury Department and the IRS decline to adopt commenters’ alternative suggestions on calculating the credit for integral property. Section 48 requires that the taxpayer own property that satisfies the statutory definition of an energy property, and therefore the deter­ mination cannot be tied to an alternative measure such as capacity. In response to the comment on transmission lines, pro­ posed §1.48-9(f)(3)(ii), which is adopted in these final regulations, makes clear that energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage. Finally, in response to comments requesting clarifications with respect to the application of section 30C or 45W, such clarifications are more appropriately addressed in guidance under those provisions.

Commenters also submitted questions concerning the specific costs that are capi­ talized and included in basis (for example, consultant labor and expenses associated with project/construction management, planning, design, engineering, and envi­ ronmental services, contractor costs, legal services, and permitting services). Issues concerning what costs may be capitalized and included in the basis of an energy property are similarly beyond the scope of these final regulations.

F. Election to treat qualified facilities as energy property

Section 48(a)(5) generally provides an election to treat a “qualified investment credit facility” as energy property for purposes of the section 48 credit. Section 48(a)(5)(B) provides that no section 45 credit is allowed for any taxable year with respect to any qualified investment credit

December 23, 2024 1398 Bulletin No. 2024–52

facility. Section 48(a)(5)(C) provides, in part, that the term “qualified investment credit facility” means any qualified facil­ ity (within the meaning of section 45(d) (1) through (4), (6), (7), (9), or (11)) with respect to which no section 45 credit has been allowed and for which the taxpayer makes an irrevocable election under sec­ tion 48(a)(5). Accordingly, proposed §1.48-9(d) would exclude from energy property any property that is part of a qualified facility with respect to which a section 45 credit is allowed for any tax­ able year, including any prior taxable year.

Proposed §1.48-14(f) would provide rules applicable to the election under sec­ tion 48(a)(5)(C) to treat certain facilities as energy property eligible for a section 48 credit in lieu of a renewable electricity production credit under section 45. Pro­ posed §1.48-14(f)(1) would provide that if a taxpayer makes an election under sec­ tion 48(a)(5)(C) to treat qualified property that is part of a qualified investment credit facility as energy property with respect to which a section 48 credit may be deter­ mined, such property will be treated as energy property for purposes of section 48. Proposed §1.48-14(f)(1) would also provide that no section 45 credit may be determined with respect to any such qual­ ified investment credit facility and that the requirements of section 45 are not imposed on a qualified investment credit facility. Additionally, proposed §1.4814(f)(1) would provide that no credit under section 45Q or 45V may be deter­ mined with respect to either any carbon capture equipment included in a qualified investment credit facility or any specified clean hydrogen production facility.

Proposed §1.48-14(f)(2) would define the term “qualified property” for purposes of proposed §1.48-14(f). Proposed §1.4814(f)(3) would provide definitions related to requirements for qualified property. Proposed §1.48-14(f)(4) would define the term “qualified investment credit facil­ ity.” Proposed §1.48-14(f)(5) would pro­ vide that intangible property is excluded from the definition of qualified property for purposes of the election under section 48(a)(5). Several commenters asked whether a taxpayer may claim a section 48 credit for energy storage technology co-located with a qualified facility for which a taxpayer

claims the section 45 credit if the energy storage technology is an integral part of the qualified facility. As described in the preamble to the Proposed Regulations, the Treasury Department and the IRS under­ stand that energy storage technologies eligible for the section 48 credit are often co-located with qualified facilities eligible for the section 45 credit and may share power conditioning and transfer equip­ ment.

In consideration of this practice, pro­ posed §1.48-9(f)(3)(ii) would provide that power conditioning and transfer equip­ ment that is shared by a qualified facility (as defined in section 45(d)) and an energy property may be treated as an integral part of the section 48 energy property. Pro­ posed §1.48-9(d) would also clarify that such shared property is not considered part of a qualified facility and, therefore, the sharing of such property will not impact the ability of a taxpayer to claim the sec­ tion 48 credit for an energy property or the section 45 credit for a qualified facility.

In the preamble to the Proposed Reg­ ulations, the Treasury Department and the IRS requested comments regarding whether additional guidance is needed on this issue. After considering the com­ ments received, the Treasury Department and the IRS confirm that even though shared power conditioning and transfer equipment is integral to a qualified facility for which the section 45 credit is claimed, co-located energy storage technology remains a separate energy property under section 48. Therefore, a section 48 credit may be claimed for energy storage tech­ nology that is co-located with a qualified facility and shares power conditioning and transfer equipment with the qualified facility for which a section 45 credit is claimed.

In the context of the section 48(a)(5) election, commenters requested that the final regulations confirm that components of property within a qualified hydropower facility (for which a section 48(a)(5) elec­ tion is made) are eligible for the section 48 credit. A commenter asked that regulations provide guidance regarding the scope of a “qualified investment credit facility” and “qualified property,” including examples specific to a qualified hydropower facility.

Another commenter requested that the final regulations confirm that the section

48 credit for energy storage technology is available regardless of whether the energy storage technology is part of a qualified hydropower facility for which a section 45 credit is allowed. This com­ menter requested that final regulations confirm that any new investment in property with respect to pumped stor­ age hydropower qualifies for the section 48 credit (as an energy storage technol­ ogy) regardless of whether the property is shared with a qualified hydropower facility that claims or has claimed the section 45 credit. A section 48 credit may be claimed for energy storage technology that is co-located with a qualified facility and shares power conditioning and trans­ fer equipment with the qualified facility for which a section 45 credit is claimed. These final regulations provide rules of general applicability that taxpayers can use to determine whether they are eli­ gible for a section 48 credit. The Trea­ sury Department and the IRS are not in a position to determine credit eligibility in specific fact scenarios in these final regu­ lations. Thus, the final regulations do not provide the requested clarifications.

Commenters also requested clarifica­ tion concerning property that is included in offshore wind facilities. A commenter requested clarification that qualified prop­ erty in a marshaling or operation and maintenance port that is an integral part of an offshore wind energy facility should qualify as energy property for the purposes of the section 48 credit. The Proposed Regulations would provide a rule for loca­ tion of energy property that addresses this comment. Under proposed §1.48-9(f)(4), any property that meets the requirements of proposed §1.48-9(f)(2) (unit of energy property rules) and proposed §1.48-9(f)(3) (integral part rules) is a part of an energy property regardless of where such prop­ erty is located. The final regulations adopt this rule as proposed. However, these final regulations have revised proposed §1.4814(f) to address only the election to treat qualified facilities as energy property, and several of the provisions in §1.48-14(f) have been rearranged under that subsec­ tion in the final regulations. Additionally, the coordination rule for the sections 42 and 48 credits has been moved from pro­ posed §1.48-14(f)(5) to §1.48-14(g) in the final regulations.

Bulletin No. 2024–52 1399 December 23, 2024

Additionally, the final regulations remove the references to “software” from proposed §1.48-14(f)(3)(iii)(B) because section 48(a)(5) limits “qualified prop­ erty” to tangible property. Software gen­ erally is not tangible property.

G. Lower-output energy properties and qualified interconnection costs

1. Qualified Interconnection Property

Section 48(a)(8)(A) provides gener­ ally that for purposes of determining the credit under section 48(a), energy prop­ erty includes amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installa­ tion of energy property that has a maxi­ mum net output of not greater than five MW (as measured in alternating current), to provide for the transmission or distribu­ tion of the electricity produced or stored by such property, and that are properly chargeable to the capital account of the taxpayer (qualified interconnection costs).

Section 48(a)(8)(B) provides that the term “qualified interconnection prop­ erty” means, with respect to an energy project that is not a microgrid control­ ler, any tangible property (1) that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such intercon­ nection, (2) that is either (i) constructed, reconstructed, or erected by the taxpayer, or (ii) for which the cost with respect to the construction, reconstruction, or erec­ tion of such property is paid or incurred by such taxpayer, and (3) the original use of which, pursuant to an interconnection agreement, commences with a utility.

Section 48(a)(8)(C) and (D) provide additional definitions for purpose of this rule. Section 48(a)(8)(C) provides that the term “interconnection agreement” means an agreement with a utility for the pur­ poses of interconnecting the energy prop­ erty owned by such taxpayer to the trans­ mission or distribution system of such utility. Section 48(a)(8)(D) provides that for purposes of section 48(a)(8), the term “utility” means the owner or operator of an electrical transmission or distribution

system that is subject to the regulatory authority of a State or political subdivi­ sion thereof, any agency or instrumental­ ity of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative. Section 48(a)(8)(E) provides that in the case of costs paid or incurred for interconnection property, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules similar to the rules of section 50(c).

Proposed §1.48-14(g)(1) would gen­ erally provide that for purposes of deter­ mining the section 48 credit, energy prop­ erty includes amounts paid or incurred by the taxpayer for qualified intercon­ nection property, in connection with the installation of energy property that has a maximum net output of not greater than five MW (as measured in alternating cur­ rent). The qualified interconnection prop­ erty must provide for the transmission or distribution of the electricity produced or stored by such energy property and must be properly chargeable to the capi­ tal account of the taxpayer as reduced by §1.48-14(g)(6).

Proposed §1.48-14(g)(2) would define the term “qualified interconnection prop­ erty” to mean, with respect to an energy project that is not a microgrid controller, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnec­ tion; is either constructed, reconstructed, or erected by the taxpayer, or for which the cost with respect to the construction, reconstruction, or erection of such prop­ erty is paid or incurred by such taxpayer; and the original use of which, pursuant to an interconnection agreement, com­ mences with a utility.

Proposed §1.48-14(g)(2) also would provide that qualified interconnection property is not part of an energy property and that as a result, qualified interconnec­ tion property is not taken into account in determining whether an energy property satisfies the requirements for the domestic content bonus credit amount referenced in

section 48(a)(12) and the increase in credit rate for energy communities provided in section 48(a)(14).

Some commenters requested that the final regulations confirm that equipment required to modify and upgrade transmis­ sion or distribution systems beyond the point of interconnection would be con­ sidered qualified interconnection prop­ erty and eligible for inclusion in basis. As already noted, proposed §1.48-14(g)(2) would define the term “qualified intercon­ nection property” to mean, with respect to an energy project that is not a micro­ grid controller, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project inter­ connects to such transmission or distri­ bution system in order to accommodate such interconnection. These final regula­ tions adopt this definition in renumbered §1.48-14(h)(2). Therefore, the Treasury Department and the IRS confirm that tangible property required to modify and upgrade transmission or distribution sys­ tems beyond the point of interconnection would (provided the property satisfies the other requirements of section 48(a)(8)(B)) be considered qualified interconnection property and eligible for inclusion in basis for purposes of the section 48 credit.

Some commenters requested that cer­ tain components or technologies be spe­ cifically listed as qualified interconnec­ tion property. For example, a commenter asked for clarification that existing tech­ nologies that can be used to upgrade grid infrastructure to allow for interconnection of energy projects would be considered qualified interconnection property. Two commenters recommended including equipment between “a customer’s distri­ bution system and the utility’s distribution point of common coupling (POC).” These commenters listed relays, switchgears (including low-voltage assemblies, medi­ um-voltage assemblies, and circuit break­ ers), transformers, and voltage regulators.

The Proposed Regulations would adopt the statutory requirements for qual­ ified interconnection property provided in section 48(a)(8)(B). The final regulations adopt these rules as proposed. Because a definitive response to comments request­ ing greater specificity regarding equip­

December 23, 2024 1400 Bulletin No. 2024–52

ment that is considered qualified inter­ connection property would require the Treasury Department and the IRS to con­ duct a complete factual analysis of the property in question, the requested clari­ fications are not addressed in these final regulations.

One commenter requested that the final regulations include a detailed definition of “point of interconnection” to distinguish between energy property and qualified interconnection property for purposes of calculating the basis of the energy prop­ erty eligible for a section 48 credit. After consultation with the DOE, the Treasury Department and the IRS understand that the “point of interconnection” is a term of art well understood by the industry and taxpayers seeking an interconnec­ tion agreement. At the transmission level, interconnection procedures are, in most of the United States, governed by the Federal Energy Regulatory Commission (FERC). Providing a further definition of “point of interconnection” outside of the FERC context risks creating confusion for gen­ erators and taxpayers. Therefore, no addi­ tional clarifications to define the “point of interconnection” are included in the final regulations.

a. Interaction with PWA requirements

Section 48(a)(9)(A)(i) (general rules for the increased credit amount for energy projects) provides that in the case of any energy project that satisfies the require­ ments of section 48(a)(9)(B), the amount of the credit determined under section 48(a) (determined after the application of section 48(a)(1) through (8) and (15), and without regard to this clause) is equal to such amount multiplied by 5.

The Proposed Regulations did not address the interaction between the rules for qualified interconnection costs and the PWA requirements. A commenter requested that the final regulations con­ firm that the PWA requirements do not apply to the construction, alteration, or repair of interconnection property.

Section 48(a)(9) provides that the increased credit amount (for satisfying the PWA requirements) is determined after the application of section 48(a)(8) (rules for interconnection property) and therefore, amounts paid or incurred by

the taxpayer for qualified interconnection property in connection with the instal­ lation of energy property are eligible for the increased credit amount. However, the PWA requirements apply only to “energy projects,” which is defined in a way that excludes interconnection property. See section 48(a)(9)(A)(ii) (defining “energy project” as “a project consisting of one or more energy properties that are part of a single project”); section 48(a)(8)(B) (i) (defining “interconnection property” as required “at or beyond the point at which the energy project interconnects to” a transmission or distribution system, implying that interconnection property is distinct from the energy project). Thus, interconnection property is not subject to the PWA requirements.

In addition to not being part of an energy project, interconnection property generally is not within the control of the taxpayer that owns the energy project because it need not be owned by the same taxpayer. Instead, qualified interconnec­ tion property may be owned by a utility and is part of an addition, modification, or upgrade to a transmission or distribu­ tion system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system. It would be difficult or impossible in such a case for the tax­ payer to control or monitor whether the construction of the interconnection prop­ erty complies with PWA requirements. This may explain why the statute permits the increased credit amount for amounts paid or incurred for qualified intercon­ nection property, without subjecting the construction of such property to the PWA requirements.

2. Interaction with Other Bonus Credit Amounts

Section 48(a)(12)(A) provides gener­ ally that in the case of any energy proj­ ect that satisfies the domestic content requirements, for purposes of computing the section 48 credit with respect to such property, the energy percentage is to be increased by the applicable credit rate increase, which is 2 percentage points in the case of an energy project that does not satisfy the requirements of section 48(a) (9)(B), and 10 percentage points in the

case of any energy project that satisfies those requirements.

Section 48(a)(14)(A) provides that in the case of any energy project that is placed in service within an energy com­ munity (as defined in section 45(b)(11) (B), as applied by substituting “energy project” for “qualified facility” each place it appears), for purposes of computing the section 48 credit with respect to energy property that is part of such project, the energy percentage is to be increased by the applicable credit rate increase that is 2 percentage points in the case of any energy project that does not satisfy the requirements of section 48(a)(9)(B), and 10 percentage points in the case of any energy project that satisfies those require­ ments.

A commenter requested clarification regarding the interaction between the rules for qualified interconnection costs and the computation of the domestic con­ tent bonus credit amount and the increased credit amount for energy projects located in an energy community. This commenter stated that if a community solar project seeks interconnection to the distribution grid, usually there will be upgrades or other investments necessary to support the connection to the distribution system. The commenter explained that the gener­ ator generally has little control or ability to determine the components or design of a distribution utility’s interconnection requirements, and as a result, it is entirely appropriate to exclude these investments for the eligibility determination for the domestic content bonus credit amount and the increased credit amount for energy projects located in an energy community. According to the commenter, however, because these qualified interconnection costs are paid by the developer, they would still be part of the basis not only for the section 48 credit, but also for the domestic content bonus credit amount and the increased credit amount for energy projects located in an energy community. This commenter requested that the Trea­ sury Department and the IRS confirm that this is the correct interpretation of the rule.

As highlighted by commenter and as provided in proposed §1.48-14(g)(2), qualified interconnection property is not part of an energy property and as a result, qualified interconnection property is not

Bulletin No. 2024–52 1401 December 23, 2024

taken into account in determining whether an energy property satisfies the require­ ments for the domestic content bonus credit amount and the increased credit amount for energy projects located in an energy community. However, the com­ menter requested clarification regarding whether qualified interconnection costs are eligible for these provisions.

Section 48(a)(8)(A) provides that for purposes of determining the credit under section 48(a), energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of certain energy property (subject to certain addi­ tional requirements). Because the credit under section 48(a) is calculated by mul­ tiplying the energy percentage – which includes any domestic content bonus credit amount and any increased credit amount for energy projects located in an energy community – by the basis of the energy project – which includes amounts paid or incurred by the taxpayer for qualified interconnection property, qualified inter­ connection costs are taken into account in calculating the domestic content bonus credit amount and the increased credit amount for energy projects located in an energy community to the extent included in the basis of the energy property.

3. Basis Reduction

Section 48(a)(8)(E) provides that in the case of costs paid or incurred for inter­ connection property, amounts otherwise chargeable to capital account with respect to such costs are to be reduced under rules similar to the rules of section 50(c). Sim­ ilarly, proposed §1.48-14(g)(6) would provide that in the case of costs paid or incurred for qualified interconnection property as defined in proposed §1.4814(g)(2), amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules simi­ lar to the rules of section 50(c). Neither the statute nor the Proposed Regulations specify whether the provisions of section 50(c)(1) or (3) apply. Section 48(a)(8)(A) provides that energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of energy property. Therefore, the special rule in

section 50(c)(3)(A), which provides for a basis reduction of 50 percent in the case of any energy credit, applies to qualified interconnection property the costs of which are included for purposes of the section 48 credit.

Proposed §1.48-14(g)(6) would also provide that the taxpayer must pay or incur qualified interconnection property costs; therefore, any reimbursement, including by a utility, must be accounted for by reducing taxpayers’ expenditure to deter­ mine eligible costs. As acknowledged in the preamble to the Proposed Regula­ tions, and as raised by some commenters, uncertainty exists regarding the inclusion of qualified interconnection costs in situa­ tions in which the taxpayer that owns the energy property does not fully bear the qualified interconnection costs (for exam­ ple, cases in which the taxpayer is reim­ bursed). In the preamble to the Proposed Regulations, the Treasury Department and the IRS requested comments on whether a payment, credit, or service received by the owner of the energy property (first taxpayer), as the result of subsequent pay­ ments made to a utility by other parties, should be treated as a reimbursement to the first taxpayer and impact the amount of the qualified interconnection costs that the first taxpayer may include in its basis for purposes of the section 48 credit.

The Treasury Department and the IRS also requested comments on whether the costs paid by a second taxpayer should be treated as amounts paid or incurred for qualified interconnection property in connection with the installation of the second taxpayer’s energy property. Fur­ ther, the Treasury Department and the IRS requested comments on industry practices relevant to the determination of costs paid or incurred for qualified interconnection property, including the accounting treat­ ment of costs paid or incurred for qualified interconnection property. Lastly, the Trea­ sury Department and the IRS requested comments on whether any clarifications are needed regarding the tax treatment of amounts paid or incurred for qualified interconnection property, including reim­ bursement of costs paid or incurred by a taxpayer for qualified interconnection property.

In response to these requests, com­ menters confirmed that future unforesee­

able reimbursements of qualified inter­ connection costs may occur. Commenters also requested further guidance on these issues and provided recommendations for addressing these situations.

A commenter recommended that the section 48 credit avoid accounting for any reimbursements paid to the taxpayer for qualified interconnection costs in a later taxable year. This commenter also sug­ gested that the Treasury Department and the IRS incorporate a mechanism, simi­ lar to a recapture mechanism, in the final regulations to avoid a taxpayer receiving a greater amount in reimbursements than it paid for the qualified interconnection costs net of the section 48 credit. This commenter raised concerns with situa­ tions in which the owner of an energy property receives reimbursement or reve­ nue for qualified interconnection property, despite the energy project being situated in a region of the country with a “participant funding” mechanism (for example, gen­ erators must fully fund network upgrades without reimbursement). Additionally, this commenter cited the possibility that a utility may reimburse the taxpayer for all or a portion of the qualified interconnec­ tion costs, usually over a 20-year period. Additionally, this commenter noted that there are circumstances in which a future interconnection customer pays for the use of interconnection property by reimburs­ ing the taxpayer, who is the initial inter­ connecting customer. This commenter noted that the first taxpayer would have no ability to foresee future payments from the second taxpayer at the time the first taxpayer interconnects to the utility’s transmission system.

Another commenter recommended that the final regulations disregard utility reimbursements, to the extent includible in taxpayers’ gross income, to determine taxpayers’ eligible qualified interconnec­ tion costs. This commenter also stated that the final regulations should clarify that unforeseeable payments for the use of interconnection property that a taxpayer has funded with no expectation of future compensation should not be treated as a reimbursement or as amounts paid toward qualified interconnection costs but should instead be treated as revenue.

The Treasury Department and the IRS recognize that situations may arise in

December 23, 2024 1402 Bulletin No. 2024–52

which the cost of qualified interconnec­ tion property is reduced after the taxable year in which the taxpayer claims the section 48 credit. The Treasury Depart­ ment and the IRS also recognize that other complicated situations may arise in determining whether a taxpayer has paid or incurred qualified interconnection costs. The comments received confirmed that these questions are not unique to the reimbursement of qualified intercon­ nection costs and may also arise in the context of other tax credits. Therefore, the determination of whether qualified interconnection costs have been paid or incurred by the taxpayer and whether cost is reduced by virtue of transactions with the utility or with a third party should be based on generally applicable Federal tax principles.

In consideration of the comments, the final regulations revise the rule regarding reduction to amounts chargeable to capital account to reflect the application of Fed­ eral tax principles to such transactions in determining the amount a taxpayer paid or incurred for qualified interconnection costs. The final regulations, which are now at §1.48-14(h)(1) (previously pro­ posed §1.48-14(g)(6)), explain that if the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal tax principles may require the taxpayer to reduce the amount treated as paid or incurred for qualified interconnection property to determine a section 48 credit. The final regulations also include two examples.

4. Leases

A commenter requested clarification regarding the treatment of qualified inter­ connection costs if an energy property is subject to a lease. This commenter ques­ tioned the availability of the section 48 credit for qualified interconnection costs incurred by small projects in a sale-lease­ back or any transaction in which the tax­ payer that initially incurred the qualified interconnection costs is different than the taxpayer that claims the section 48 credit. The commenter noted that the Proposed Regulations do not address this question and made the issue worse in cases in which the “three-month sale-leaseback” rule or the “lease-passthrough” rule is

combined with the section 48 credit rules regarding qualified interconnection costs.

The commenter also requested that the final regulations address how the rule that the “energy property shall include amounts paid or incurred by the taxpayer for qual­ ified interconnection property” operates if one taxpayer pays the interconnection costs, then sells the project to another tax­ payer, and the second taxpayer claims the section 48 credit. The commenter stated that the language in the Proposed Regula­ tions seems to effectively deny companies using the three-month sale-leaseback and the lease-passthrough rules from claiming a section 48 credit for qualified intercon­ nection costs. The commenter suggested that the final regulations should add lan­ guage that expands the original use rule to take into account the principles of section 50(d)(4), with original use determined on the date of the sale-leaseback or lease. The commenter also recommended that the definition of “interconnection agree­ ment” in the final regulations be revised to include an acknowledgement that energy property can be leased if there is an elec­ tion under section 50(d)(5). Finally, the commenter proposed designating and identifying specifically a portion of the purchase price for the sale of an energy project as a reimbursement for qualified interconnection costs.

The Treasury Department and the IRS acknowledge that developers and operators of energy properties may uti­ lize the existing sale-leaseback or leasepassthrough structures in cases in which they are seeking the section 48 credit. Nothing in these final regulations prohib­ its the application of general principles, including those in section 50(d). The spe­ cific applications of the sale-leaseback or lease-passthrough rules, however, are beyond the scope of these regulations.

The Treasury Department and the IRS recognize that the section 48 credit attrib­ utable to interconnection costs for quali­ fied interconnection property is allowed to a purchaser of energy property that bears those costs in connection with the purchase (for example, by adjusting the purchase price or making a separate pay­ ment to account for them). Thus, in the case of a purchase of energy property (or a deemed purchase of energy property in the case of a lease-passthrough transaction),

any amount paid or incurred by the buyer attributable to the value of interconnection costs associated with that energy property is an amount paid or incurred with respect to the construction, reconstruction, or erection of that qualified interconnection property.

Further, in the case of a sale-leaseback transaction subject to the “three-month rule” provided in section 50(d)(4), the original use of the energy property is deemed to commence with the buyer-les­ sor not earlier than the date on which the property is used under the sale-leaseback transaction, and in the case of a passthrough lease transaction, with the lessee as if the lessee actually purchased the property in accordance with §1.48-4.

Accordingly, these final regulations revise §1.48-14(h)(2) (previously pro­ posed §1.48-14(g)(2)) to provide “[f]or purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) must be taken into account, as applicable, with such original use determined on the date of the sale-leaseback or lease.” Likewise, these final regulations revise §1.48-14(h) (4) (previously proposed §1.48-14(g)(4)) to provide “[i]n the case of the election provided under section 50(d)(5) (relat­ ing to certain leased property), the term includes an agreement regarding energy property leased by such taxpayer.”

5. Five-Megawatt Limitation

Proposed §1.48-14(g)(3)(i) would pro­ vide that the Five-Megawatt Limitation is measured at the level of the energy prop­ erty in accordance with section 48(a)(8) (A). Further, proposed §1.48-14(g)(3) (i) would provide that the maximum net output of an energy property is measured by the nameplate generating capacity of the unit of energy property at the time the energy property is placed in service.

Proposed §1.48-14(g)(3)(ii) would describe nameplate capacity for purposes of the Five-Megawatt Limitation. The Proposed Regulations would provide that the determination of whether an energy property has a maximum net output of not greater than five MW (as measured in alternating current) is based on the name­ plate capacity for purposes of proposed

Bulletin No. 2024–52 1403 December 23, 2024

§1.48-14(g)(1). If applicable, taxpayers should use the ISO conditions to measure the maximum electrical generating output or usable energy capacity of an energy property. Proposed §1.48-14(g)(3)(ii)(A) and (B) would provide rules for apply­ ing the Five-Megawatt Limitation (as provided in proposed §1.48-14(g)(1)) to electrical generating energy property and electrical energy storage property, respec­ tively.

Proposed §1.48-14(g)(3)(ii)(A) would provide that in the case of an electri­ cal generating energy property, the Five-Megawatt Limitation is based on the maximum electrical generating output in MW that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202.

Proposed §1.48-14(g)(3)(ii)(B) would provide that in the case of electrical energy storage property, the Five-Mega­ watt Limitation is determined by the stor­ age device’s maximum net output, which is its nameplate capacity.

Generally, commenters agreed that the Five-Megawatt Limitation measurement should be done at the level of underlying energy property, not the energy project. The final regulations (now found in §1.4814(h)(3)) retain the proposed rule that the Five-Megawatt Limitation is measured at the level of the energy property in accor­ dance with section 48(a)(8)(A).

Other commenters expressed concerns with applying the Five-Megawatt Limita­ tion based on nameplate capacity and by the reference to alternating current output. A commenter stated that the interchange­ able use of two distinct electrical concepts, maximum net output in alternating current and nameplate generating capacity, in the Proposed Regulations could lead to mis­ interpretation and unintentionally exclude otherwise qualifying interconnection property. A commenter stated that pro­ posed §1.48-14(g)(3) must be modified to clarify that interconnection property eligi­ ble for the credit is measured at the point of output, that is, five MW (measured in alternating current) at the inverter, and not determined by the nameplate generation capacity. This commenter stated that sec­

tion 48(a)(8) does not contain the words “nameplate” or “capacity” and instead, it refers to “output … measured in alternat­ ing current,” which, for solar systems, can only be measured after the inverter. This commenter also stated that the definition of “qualified interconnection property” at proposed §1.48-14(g)(3)(ii)(A), as applied to property that generates electricity in direct current, such as solar panels, would result in a nullity, with only energy prop­ erty that generates electricity in alternat­ ing current able to qualify for the credit.

Similarly, a commenter stated that for purposes of claiming the section 48 credit for qualified interconnection prop­ erty, the final regulations should refer only to energy property output in alter­ nating current, without presuming that nameplate capacity perfectly corresponds to alternating current output. This com­ menter asserted that the final regulations should clarify that energy property is defined at the inverter level (that is, the source of alternating current output) for the purposes of determining eligibility of upstream network upgrades as qualified interconnection property.

The Treasury Department and the IRS understand commenters’ concerns and agree that the rule provided in the Pro­ posed Regulations should be revised. Section 48(a)(8) refers to a maximum net output of not greater than five MW (as measured in alternating current). The Pro­ posed Regulations provide for nameplate capacity in alternating current, without addressing types of energy property, such as solar energy property, that generate electricity in direct current. Nameplate capacity for these types of energy prop­ erty is measured before the property’s output is converted to alternating current by an inverter. Because an inverter would be considered property that is an integral part of the energy property and not part of the unit of property itself, measuring the nameplate capacity of an energy property that generates electricity in direct current would be difficult under the Proposed Regulations.

In consultation with the DOE, the Trea­ sury Department and the IRS conclude that nameplate generating capacity is the best and most practical measure of the maximum net output of an energy prop­ erty. Therefore, the Treasury Department

and the IRS do not adopt comments sug­ gesting changes to the use of nameplate capacity. The final regulations at §1.4814(h)(3)(ii) (previously proposed §1.4814(g)(3)(ii)) retain the rule that the deter­ mination of whether an energy property has a maximum net output of not greater than five MW (as measured in alternating current) is based on the nameplate capac­ ity of the energy property.

However, in response to comments, the Treasury Department and the IRS coordi­ nated with the DOE to provide a method of measuring nameplate capacity for an energy property that generates electricity in direct current. The final regulations at §1.48-14(h)(3)(iii) (previously proposed §1.48-14(g)(3)(iii)) provide that, for energy properties that generate electric­ ity in direct current, the taxpayer may choose to determine whether an energy property has a maximum net output of not greater than five MW (in alternating current) by using the lesser of: (i) the sum of the nameplate generating capacities within the unit of energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating current; or (ii) the nameplate capacity of the first component of property that inverts the direct current electricity generated into alternating cur­ rent. This rule provides flexibility for tax­ payers while ensuring that the maximum net output (in alternating current) of an energy property can be determined in an administrable and reasonably accurate manner for energy properties that generate electricity in direct current.

A commenter recommended that the Treasury Department and the IRS clarify the size limitation for eligible properties with a nameplate capacity exceeding five MW. This commenter asserted that further clarification is needed to ensure that there is no gaming by projects that attempt to get around the Five-Megawatt Limitation, and to safeguard against the possibility of multiple energy proper­ ties being improperly treated as a single energy property. The commenter noted that this has been done effectively in many States by limiting the amount of capacity that can be installed on a parcel of land and precluding subdivisions that are per­ formed for the purpose of circumventing a rule. The commenter also referenced

December 23, 2024 1404 Bulletin No. 2024–52

guidelines developed by the Massachu­ setts Department of Energy Resources, which outline particular scenarios that would qualify for an exception allow­ ing flexibility in the event that (i) there are multiple energy properties that are owned by separately regarded taxpayers; (ii) the energy properties are placed in service in a different tax year from other portions of the project; or (iii) there is a gap in time (for example, 6 to 12 months) between different properties being placed in service. As described in the preamble to the Proposed Regulations, the addition of amounts paid or incurred by the tax­ payer for qualified interconnection prop­ erty in section 48(a)(8)(A) is tied to the installation of “energy property.’’ Since the statute clearly ties the Five-Megawatt Limitation to the energy property, as long as an energy property is five MW or less, the statute is satisfied.

A few commenters requested greater clarity or examples regarding the appli­ cation of the Five-Megawatt Limitation. For example, a commenter requested that the final regulations confirm that multiple energy properties each with a nameplate capacity of less than five MW could uti­ lize common interconnection agreements (versus separate agreements). Other com­ menters requested clarification for cases in which multiple properties share inter­ connection property. Another commenter requested clarification or an example of multiple energy properties sharing inter­ connection property and the application of the Five-Megawatt Limitation with respect to various technologies and specif­ ically solar energy property.

In response to commenters that requested additional clarification of the Five-Megawatt Limitation, the final regu­ lations add an additional example as well as provide clarifications to the existing examples. These clarifications illustrate the revised method of measuring name­ plate capacity for an energy property that generates electricity in direct current. The clarifications also demonstrate the appli­ cation of the Five-Megawatt Limitation in cases in which the nameplate capacity dif­ fers from the maximum output provided in the interconnection agreement. Specif­ ically, the newly added example describes the application of the Five-Megawatt Lim­ itation to an interconnection agreement

for multiple energy properties owned by a single taxpayer. In that example, although the taxpayer has an interconnection agree­ ment with the utility that allows for a maximum output of 10 MW (as measured in alternating current), the taxpayer may include the costs taxpayer paid or incurred for qualified interconnection property, subject to the terms of the interconnec­ tion agreement, to calculate the taxpayer’s section 48 credits for each of the energy properties because each has a maximum net output of not greater than five MW (alternating current).

A commenter proposed that the final regulations treat interconnection prop­ erty as integral property by stating that in circumstances in which multiple energy properties (each with alternating cur­ rent output at or below five MW) utilize higher-capacity interconnection property, such interconnection property should be deemed integral to multiple energy prop­ erties. Section 48(a)(8)(A) provides that energy property includes amounts paid for qualified interconnection property; it does not provide that energy property includes qualified interconnection prop­ erty. Because the statute makes clear that interconnection property is distinct from energy property, it also cannot be prop­ erty that is integral to an energy property. The preamble to the Proposed Regulations explains that qualified interconnection property, which is most similar in function to transmission and distribution property, is neither property that is a functionally interdependent component of an energy property nor an integral part of an energy property.

6. Non-Application to Certain Types of Energy Properties

The preamble to the Proposed Regula­ tions clarified that the definition of quali­ fied interconnection property specifically would exclude interconnection property installed with respect to an energy project that is a microgrid controller. Addition­ ally, taxpayers may not include the costs of qualified interconnection property in the basis of electrochromic glass prop­ erty and fiber optic solar energy property because these types of energy property do not require additions, modifications, or upgrades to a transmission or distribution

system. Similarly, in the case of energy properties that generate thermal energy, such as certain geothermal property and qualified biogas property, this provision is inapplicable. Excluding certain proper­ ties from including interconnection costs is required by the statute and the fact that interconnection property is irrelevant to these technologies. The rule, therefore, is adopted as proposed.

However, the Treasury Department and the IRS did receive a comment regarding qualified interconnection property and the application of the proposed rules to microgrid controllers. Section 48(a)(8) (B)(i) defines “qualified interconnection property”, with respect to an energy proj­ ect that is not a microgrid controller. The commenter noted that section 48(a)(8)(B) (i) is not intended to disqualify an energy project from including interconnection property costs solely because such project includes a microgrid controller. The Trea­ sury Department and the IRS agree with this commenter’s view that if an energy project includes both a microgrid control­ ler and another type of energy property, then interconnection property costs for the energy project may be included in calcu­ lating the section 48 credit for the other energy property.

I V. Severability

If any provision in this rulemaking is held to be invalid or unenforceable facially, or as applied to any person or circumstance, it shall be severable from the remainder of this rulemaking, and shall not affect the remainder thereof, or the application of the provision to other persons not similarly situated or to other dissimilar circumstances.

Effect on Other Documents

Notice 2009-52, 2009-25 I.R.B. 1094, will be obsoleted for tax years begin­ ning after the date of publication of the final regulations in the Federal Register . Notice 2009-52, in relevant part, provides procedures for taxpayers to make an irre­ vocable election under section 48(a)(5) to treat qualified property that is part of a qualified investment credit facility as energy property eligible for a section 48 credit in lieu of a section 45 credit.

Bulletin No. 2024–52 1405 December 23, 2024

Applicability Dates

The provisions of §§1.48-9 and 1.4814 apply with respect to property that is placed in service during a taxable year beginning after December 12, 2024. Sec­ tion 1.6418-5(f) applies to taxable years ending on or after December 12, 2024. Taxpayers may choose to apply §§1.489, 1.48-14, and 1.6418-5(f) with respect to property that is placed in service after December 31, 2022, and during a taxable year beginning on or before December 12, 2024, provided taxpayers follow §§1.48-9, 1.48-14, and 1.6418-5(f) in their entirety and in a consistent manner.

Section 1.48-13 applies to energy proj­ ects placed in service in taxable years end­ ing after December 12, 2024, and the con­ struction of which begins after December 12, 2024. Taxpayers may choose to apply §1.48-13 to energy projects placed in ser­ vice in taxable years ending on or before December 12, 2024, and energy projects placed in service in taxable years ending after December 12, 2024, the construc­ tion of which begins before December 12, 2024, provided that taxpayers apply §1.48-13 in its entirety and in a consistent manner.

Special Analyses

I. Regulatory Planning and Review— Economic Analysis

Pursuant to the Memorandum of Agreement, Review of Treasury Regula­ tions under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520) (PRA) requires that a Federal agency obtain the approval of Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. A Federal agency may not conduct or spon­ sor, and a person is not required to respond

to, a collection of information unless the collection of information displays a valid control number.

The collections of information in these final regulations contain reporting and recordkeeping requirements that are required to verify the eligibility of the property for the credit. These collections of information generally are used by the IRS for tax compliance purposes and by taxpayers to facilitate proper reporting and compliance.

The reporting requirement mentioned within these final regulations with respect to section 48 are in §1.48-14(f)(5), which provides the time and manner for a tax­ payer to make a section 48(a)(5)(C) elec­ tion to have qualified investment credit facility property that was placed in ser­ vice after December 31, 2008, treated as a qualified investment credit facility for purposes of claiming the section 48 credit. These requirements are considered gen­ eral tax records under §1.6001-1.

A taxpayer must make a section 48(a) (5)(C) election on a completed Form 3468, Investment Credit, (or successor forms, or pursuant to instructions and other guid­ ance) with the taxpayer’s timely filed return (including extensions) for the tax­ able year in which the energy property is placed in service. The taxpayer must make a separate section 48(a)(5)(C) election for each qualified facility that is to be treated as a qualified investment credit facility. These collections are included on Form 3468, which is already approved in OMB Control Numbers 1545-0155 for trust and estate filers, 1545-0074 for individual filers, and 1545-0123 for business filers. These final regulations do not change the collection requirements already approved by OMB.

These final regulations also include reporting requirements, in addition to the general reporting requirements set forth in §1.45-12, for taxpayers that claim an increased credit amount under section 48(a)(9)(B)(iii). These final regulations require taxpayers to verify compliance with the Prevailing Wage Requirements by providing information that includes the aggregate information detailed in §1.45-12 during the five-year recapture period after an energy project is placed in service. The Secretary may issue forms and instructions in future guidance for

the purpose of meeting these reporting requirements. As set forth in the preamble to §1.45-12, these reporting requirements are covered under OMB control numbers 1545-0074 for individuals/sole propri­ etors, 1545-0123 for business entities, and 1545-2315 for trust and estate filers. These final regulations are not changing or creating new collection requirements not already approved by OMB for §1.4512. These final regulations also describe recapture procedures as detailed in §1.6418–5. The reporting of a section 48(a)(10)(C) recapture event will still be required to be reported using Form 4255, Recapture of Investment Credit . This form is approved under OMB control numbers 1545–0074 for individuals, 1545–0123 for business entities, and 1545-0166 for trust and estate filers. These final regula­ tions are not changing or creating new col­ lection requirements not already approved by OMB.

III. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq .) and that are likely to have a significant economic impact on a sub­ stantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 604 of the RFA requires the agency to present a final regulatory flexibility analysis (FRFA) of the final regulations.

These final regulations affect taxpayers, including small entities, that claim section 48 credits. Although data is not readily available about the number of small enti­ ties that are potentially affected by these rules, it is possible that a substantial num­ ber of small entities may be affected.

In connection with the Proposed Reg­ ulations, the Treasury Department and the IRS presented an IRFA to invite comments on both the number of entities affected and the economic impact on small entities. No comments were received specific to these areas of inquiry. In the absence of com­

December 23, 2024 1406 Bulletin No. 2024–52

ments in response to the Proposed Regula­ tions, this FRFA is presented with the final regulations.

In addition, pursuant to section 7805(f), the Proposed Regulations pre­ ceding these final regulations were submitted to the Chief Counsel for the Office of Advocacy of the Small Busi­ ness Administration for comment on its impact on small business, and no com­ ments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration.

A. Need for and objectives of the rule

The final regulations will provide greater clarity to taxpayers for purposes of claiming the section 48 credit for energy property. These final regulations are expected to encourage taxpayers to invest in developing new energy proper­ ties, including qualified facilities other­ wise eligible for the section 45 credit for which a taxpayer makes a section 48(a)(5) (C) election. Thus, the Treasury Depart­ ment and the IRS intend and expect that the final regulations will deliver benefits across the economy that will beneficially impact various industries.

B. Affected small entities

The Small Business Administration estimated in its 2018 Small Business Profile that 99.9 percent of United States businesses meet its definition of a small business. The applicability of these final regulations does not depend on the size of the business, as defined by the Small Business Administration. As described more fully in the preamble to the Proposed Regulations and in this FRFA, these rules may affect a variety of different businesses across several different industries.

The section 48 credit incentivizes the development of energy property. Because the potential credit claimants can vary widely, it is difficult to estimate at this time the impact of these final regulations, if any, on small businesses.

The Treasury Department and the IRS expect to receive more information on the impact on small businesses once taxpayers start to claim the section 48 credit using the guidance and procedures provided in these final regulations.

1. Impact of the rules

The final regulations will allow taxpay­ ers to plan investments and transactions based on the ability to claim the section 48 credit. The increased use of the section 48 credit will incentivize the development of technologies for energy generation and storage. The use of the section 48 credit may also lead to additional investment in electrical grid infrastructure to transport electricity.

Because the statutory changes that are reflected in the final regulations have already been accounted for by Form 3468, the recordkeeping and reporting require­ ments should not increase for taxpayers that already claim the section 48 credit. The Form 3468 already provides the pro­ cedures for taxpayers to make a section 48(a)(5)(C) election. To make the election, a taxpayer must claim the section 48 credit with respect to a qualified investment credit facility property on a completed Form 3468, Investment Credit (or succes­ sor forms, or pursuant to instructions and other guidance) and file such form with the taxpayer’s timely filed return (including extensions) for the taxable year in which the property is placed in service. Although the Treasury Department and the IRS do not have sufficient data to precisely deter­ mine the likely extent of the increased costs of compliance, the estimated burden of complying with the recordkeeping and reporting requirements are described in the Paperwork Reduction Act section of this Special Analyses.

2. Alternatives Considered

The Treasury Department and the IRS considered alternatives to these final regu­ lations. Significant alternatives considered include the definition of energy project in §1.48-13(d). As described in more detail in part II.C of the Summary of Comments and Explanation of Revisions section of this preamble, the Treasury Depart­ ment and the IRS considered comments explaining that the energy project defini­ tion was too broad with only two factors required to cause energy properties to be considered an energy project. Comment­ ers suggested instead providing that three or four factors should be met. Revising the definition of energy project to require three

factors would resolve challenges for most commenters on this issue, which were rep­ resented by solar developers. However, section 48 encompasses many different technologies in addition to solar photovol­ taic energy property. Accordingly, to pro­ vide taxpayers flexibility across the vari­ ous technologies eligible for the tax credit, §1.48-13(d) requires that four factors be met for energy properties to be considered an energy project.

3. Duplicative, overlapping, or conflicting Federal rules

The final regulations would not dupli­ cate, overlap, or conflict with any relevant Federal rules. As discussed above, these final regulations would merely provide procedures and definitions to allow tax­ payers to claim the section 48 credit.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggre­ gate, or by the private sector, of $100 million (updated annually for inflation). These final regulations do not include any Federal mandate that may result in expen­ ditures by State, local, or Tribal govern­ ments or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local gov­ ernments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These final regulations do not have federalism implications and do not impose substantial, direct compliance costs on State and local governments or preempt State law within the meaning of the Exec­ utive order.

Bulletin No. 2024–52 1407 December 23, 2024

Amendments to the Regulations

Accordingly, the Treasury Department and the IRS amend 26 CFR part 1 as fol­ lows:

PART 1—INCOME TAXES

VI. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments

Executive Order 13175 (Consulta­ tion and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal impli­ cations if the rule either imposes substan­ tial, direct compliance costs on Indian Tribal governments, and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. These final regulations do not have substantial direct effects on one or more Federally recognized Indian Tribes and does not impose substantial direct compliance costs on Indian Tribal governments within the meaning of the Executive order.

VII. Congressional Review Act

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq. ), the Office of Information and Regulatory Affairs desig­ nated this rule as a major rule as defined by 5 U.S.C. 804(2). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Fed- eral Register .

Notwithstanding this requirement, sec­ tion 808(2) of the CRA allows agencies to specify a different effective date when the agency for good cause finds that such pro­ cedure would be impracticable, unneces­ sary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest.

The IRA amended section 48 in sev­ eral ways, including by making additional types of energy property eligible for the section 48 credit and provided, for many such technologies, that construction must begin before January 1, 2025. Further, the IRA amendments included a special rule to allow certain lower-output energy prop­ erties to include amounts paid for qualified interconnection property in connection with the installation of energy property, and provided an increased credit amount

for energy projects that satisfy prevailing wage and apprenticeship requirements, a domestic content bonus credit amount, and an increase in credit rate for energy communities.

Following the IRA’s amendments to section 48, the Treasury Department and the IRS published the Proposed Regula­ tions. In response to the Proposed Regu­ lations, commenters continued to express uncertainty regarding the proper applica­ tion of the statutory rules under section 48 and the need for timely final regula­ tions because in many cases taxpayers must begin construction before January 1, 2025, in order to be eligible to claim the section 48 credit.

Consistent with Executive Order 14008 (January 27, 2021), letters from Members of Congress urging expeditious publication of final regulations, and com­ menters’ request for finalized rules, the Treasury Department and the IRS have determined that an expedited effective date of the final regulations is appropri­ ate here to provide certainty to taxpayers placing in service energy property before provisions expire and taxpayers seeking to begin construction before January 1, 2025 to maintain eligibility for the section 48 credit. The final regulations provide needed rules on what the law requires for taxpayers to begin job-gen­ erating construction of capital-intensive projects qualifying for section 48 credits. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date of publication in the Federal Register .

Statement of Availability of IRS Documents

IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publish­ ing Office, Washington, DC 20402, or by visiting the IRS website at https://www. irs.gov.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record­ keeping requirements.

Paragraph 1. The authority citation for part 1 is amended by:

a. Revising the entry for §1.48-9; b. Removing the entry for §§1.6418-01.6418-5; and c. Adding entries in numerical order for §§1.48-13, 1.48-14, and 1.6418-1 through 1.6418-5. The revision and additions read in part as follows:

Authority: 26 U.S.C. 7805 * * *

• ---

Section 1.48-9 also issued under 26 U.S.C. 48(a)(3)(D)(i) and (16). Section 1.48-13 also issued under 26 U.S.C. 48(a)(10)(C) and (16). Section 1.48-14 also issued under 26 U.S.C. 48(a)(16).

• ---

Section 1.6418-1 also issued under 26 U.S.C. 6418(g) and (h). Section 1.6418-2 also issued under 26 U.S.C. 6418(g) and (h). Section 1.6418-3 also issued under 26 U.S.C. 6418(g) and (h). Section 1.6418-4 also issued under 26 U.S.C. 6418(g) and (h). Section 1.6418-5 also issued under 26 U.S.C. 48(a)(10)(C) and 6418(g) and (h).

• ---

Par. 2. Section 1.48-9 is revised to read as follows:

§1.48-9 Definition of energy property.

(a) In general . For purposes of the credit determined under section 48 of the Internal Revenue Code (Code), the term energy property means property that, taking into account the definition of the term unit of energy property (defined in paragraph (f)(2)(i) of this section) and of other terms defined in paragraph (b) and other provisions of this section, meets the requirements of paragraph (c) of this section and is of a type of energy prop­

December 23, 2024 1408 Bulletin No. 2024–52

erty set forth in paragraph (e) of this sec­ tion. If a property is described more than once in the types of energy property set forth in paragraph (e), only a single sec­ tion 48 credit is allowed. Paragraph (d) of this section provides rules for property excluded from energy property. Paragraph (f) of this section provides rules for com­ ponents included in an energy property. Paragraph (g) of this section provides the applicability date for this section.

(b) Definitions related to requirements for energy property. For purposes of sec­ tion 48, this section, §§1.48-13 and 1.4814, and any provision of the Code or this chapter that expressly refers to any of the foregoing, the definitions in this paragraph (b) apply:

(1) Construction, reconstruction, or erection of energy property. The term con- struction, reconstruction, or erection of energy property means work performed to construct, reconstruct, or erect energy property either by the taxpayer or for the taxpayer in accordance with the taxpay­ er’s specifications.

(2) Acquisition of energy property . The term acquisition of energy property means a transaction by which a taxpayer acquires the rights and obligations to establish tax ownership of an energy property for Fed­ eral income tax purposes.

(3) Original use of energy property (i) In general . The term original use of energy property means the first use to which a unit of energy property is put, whether or not such use is by the taxpayer.

(ii) Retrofitted units of energy prop- erty . A retrofitted unit of energy property acquired by the taxpayer will be treated as not being put to original use by the taxpayer unless the rules in §1.48-14(a) regarding retrofitted energy property (80/20 Rule) or paragraph (e)(10)(v) of this section regarding modifications of certain energy storage technology apply. The question of whether a unit of energy property meets the 80/20 Rule or is mod­ ified (as described in paragraph (e)(10) (v) of this section) is a facts and circum­ stances determination.

(4) Allowable —(i) In general. For purposes of applying paragraph (c)(1)(ii) of this section, depreciation or amortiza­ tion in lieu of depreciation (collectively, depreciation ) is allowable with respect to energy property if such property is of

a character subject to the allowance for depreciation under section 167 of the Code and the basis or cost of such property is recovered using a method of depreciation (for example , the straight line method), which includes any additional first year depreciation deduction method of depre­ ciation (for example, under section 168(k) of the Code). Further, if an Internal Rev­ enue Service adjustment with respect to the Federal income tax or information return for such taxable year requires the basis or cost of such energy property to be recovered using a method of depreciation, depreciation is allowable to the taxpayer with respect to energy property.

(ii) Exclusions from allowable. For pur­ poses of paragraph (b)(4)(i) of this section, depreciation is not allowable with respect to energy property if the basis or cost of such property is not recovered through a method of depreciation but, instead, such basis or cost is recovered through a deduc­ tion of the full basis or cost of the energy property in one taxable year (for example, under section 179 of the Code).

(5) Placed in service —(i) In general. Energy property is considered placed in service in the earlier of:

(A) The taxable year in which, under the taxpayer’s depreciation practice, the period for depreciation with respect to such energy property begins; or

(B) The taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income. Energy property in a condition or state of readiness and availability for a specifically assigned function includes, but is not limited to, components that are acquired and set aside during the taxable year for use as replacements for a particu­ lar energy property (or energy properties) to avoid operational time loss and equip­ ment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. However, components acquired to be used in the construction of an energy property will not be considered in a con­ dition or state of readiness and availability for a specifically assigned function.

(ii) Energy property subject to §1.48-4 election to treat lessee as purchaser . Not­ withstanding paragraph (b)(5)(i) of this

section, energy property with respect to which an election is made under §1.48-4 to treat the lessee as having purchased such energy property is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.

(6) Unit of energy property . The term unit of energy property is defined in para­ graph (f)(2)(i) of this section. No provi­ sion of this section or §1.48-13 or §1.4814 uses the term unit in respect of energy property with any meaning other than that provided in paragraph (f)(2)(i) of this sec­ tion.

(7) Claim . With respect to a section 48 credit determined with respect to energy property of a taxpayer, the term claim means filing a completing Form 3468, Investment Credit, or any successor form(s) with the taxpayer’s timely filed (including extensions) Federal income tax return for the taxable year in which the energy property is placed in service, and includes the making of an election under section 6417 or 6418 of the Code and corresponding regulations with respect to such section 48 credit and made on the taxpayer’s Federal income tax return or annual information return.

(c) Requirements for energy prop- erty —(1) In general . Energy property must satisfy each of the requirements of paragraphs (c)(1)(i) through (v) of this section:

(i) The taxpayer constructs, recon­ structs, or erects the property, or, if the original use of the property commences with the taxpayer, acquires the property;

(ii) Depreciation (or amortization in lieu of depreciation) is allowable with respect to the property;

(iii) The property meets the perfor­ mance and quality standards as provided in paragraph (c)(2) of this section;

(iv) The construction of the property begins before the date provided in section 48 (if any such date is provided); and (v) The property is placed in service by the taxpayer by the date provided in sec­ tion 48 (if any such date is provided).

(2) Performance and quality stan- dards —(i) In general . Energy property must meet performance and quality stan­ dards, if any, that have been prescribed by the Secretary of the Treasury or her dele­ gate (after consultation with the Secretary

Bulletin No. 2024–52 1409 December 23, 2024

of Energy) and are in effect at the time of acquisition of the energy property.

(ii) Special rules for performance and quality standards —(A) Small wind energy property —( 1 ) Small wind energy property must meet one of the following perfor­ mance and quality standards in effect at the time of acquisition of the small wind turbine:

( i ) American Wind Energy Association Small Wind Turbine Performance and Safety Standard 9.1 (AWEA standards);

( ii ) International Electrotechnical Commission standards 61400-1, 61400-2, 61400-11, 61400-12 (IEC standards); or ( iii ) ANSI/ACP Small Wind Turbine Standard 101-1 (ACP standards).

( 2 ) Taxpayers may rely on a certifi­ cation that the performance and quality standards set forth in this paragraph (c) (2)(ii)(A)( 1 ) are met. Guidance published in the Internal Revenue Bulletin sets forth the requirements to certify that the per­ formance and quality standards provided in this paragraph (c)(2)(ii)(A)( 1 ) are met. See §601.601 of this chapter.

(B) Electrochromic glass property . To be eligible for the section 48 credit, electrochromic windows must be rated in accordance with the National Fenes­ tration Rating Council (NFRC) and sec­ ondary glazing systems must be rated in accordance with the Attachments Energy Rating Council (AERC) Rating and Certi­ fication Process, or subsequent revisions. See paragraph (e)(2)(ii) of this section for the definition of electrochromic glass property.

(iii) Time of acquisition . For purposes of applying performance and quality stan­ dards, the time of acquisition is the date the taxpayer enters into a binding contract (defined in paragraph (c)(2)(iv) of this sec­ tion) to acquire the property, or, in the case of property constructed, reconstructed, or erected by the taxpayer, the earlier of the date that—

(A) The taxpayer begins construction, reconstruction, or erection of the property, or

(B) The taxpayer and another person enter into a binding contract (as defined in paragraph (c)(2)(iv) of this section) requiring the other person to construct, reconstruct, or erect property and to place the property in service for an agreed upon use.

(iv) Binding contract . For purposes of this paragraph (c)(2), whether a contract is binding is determined based on the rules described in §1.168(k)-2(b)(5)(iii)(A).

(d) Property that is not energy prop- erty —(1) Interaction with section 45 . Energy property does not include any property that is part of a qualified facility the production from which is allowed as a credit determined under section 45 of the Code (section 45 credit) for the taxable year or any prior taxable year. However, see paragraph (f)(3) of this section for rules regarding property that is an integral part of an energy property that is also used by a qualified facility. See §1.48-14(f)(1) for rules regarding making an election under section 48(a)(5) to treat a qualified facility as an energy property.

(2) Other property . Energy property also does not include power purchase agreements, goodwill, going concern value, or renewable energy certificates.

(e) Types of energy property . The types of energy property eligible for a section 48 credit are:

(1) Solar energy property —(i) In gen- eral . Solar energy property is equipment that uses solar energy to generate electric­ ity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heat­ ing a swimming pool. Solar energy prop­ erty includes solar electric generation equipment (as defined in paragraph (e) (1)(ii) of this section), solar process heat equipment (as defined in paragraph (e)(1) (iii) of this section), and equipment that uses solar energy to heat or cool a struc­ ture or provide hot water for use in a struc­ ture, and parts related to the functioning of all such equipment.

(ii) Solar electric generation equip- ment. Solar electric generation equipment is equipment that converts sunlight into electricity through the use of devices such as solar cells or other collectors.

(iii) Solar process heat equipment . Solar process heat equipment is equip­ ment that uses solar energy to generate steam at high temperatures for use in industrial or commercial processes.

(2) Fiber-optic solar energy property and electrochromic glass property (i) Fiber-optic solar energy property . Fiber-optic solar energy property is equip­

ment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.

(ii) Electrochromic glass property . Electrochromic glass energy property uses electricity to change its light trans­ mittance properties (both visible and near infrared light) in order to heat or cool a structure. For purposes of section 48, windows, including secondary windows (also referred to as secondary glazings), that incorporate electrochromic glass are treated as electrochromic glass property.

(3) Geothermal energy property —(i) In general . Geothermal energy property is equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e)(2) of the Code), but only, in the case of electricity generated by geother­ mal power, up to (but not including) the electrical transmission stage. Geothermal equipment includes production equipment (as defined in paragraph (e)(3)(ii) of this section) and distribution equipment (as defined in paragraph (e)(3)(iii) of this sec­ tion).

(ii) Production equipment . For pur­ poses of paragraph (e)(3)(i) of this section, production equipment is equipment nec­ essary to bring geothermal energy from the subterranean deposit to the surface, including well-head and downhole equip­ ment (such as screening or slotting liners, tubing, downhole pumps, and associated equipment). Production, injection, and monitoring wells required for production of the geothermal deposit qualify as pro­ duction equipment. If geothermal energy is used to generate electricity, production equipment also includes the property nec­ essary to produce electricity. Production equipment does not include equipment used for exploration and development of geothermal deposits, such as drilling wells.

(iii) Distribution equipment . For pur­ poses of paragraph (e)(3)(i) of this sec­ tion, distribution equipment is equipment that transports geothermal energy from a geothermal deposit to the site of ultimate use. If geothermal energy is used to gen­ erate electricity, distribution equipment includes equipment that transports geo­ thermal fluids between the geothermal deposit and the power plant. Distribution equipment also includes components of a

December 23, 2024 1410 Bulletin No. 2024–52

building’s heating and/or cooling system, such as pipes and ductwork that distribute within a building the energy derived from the geothermal deposit.

(4) Qualified fuel cell property . Quali- fied fuel cell property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatts (kW) (1 kW in the case of a fuel cell power plant with a linear generator assembly) of electricity using an electrochemical or electromechanical process, and an electricity-only genera­ tion efficiency greater than 30 percent. For this purpose, electricity-only generation efficiency may be calculated by dividing the heat rate of the fuel cell (for example, kilowatt-hours (kWh) electricity produced per kilogram (kg) of fuel consumed) by the higher heating value of the fuel (for example, kWh per kg). A fuel cell power plant is an integrated system comprised of a fuel cell stack assembly, or linear gener­ ator assembly, and associated balance of plant components that converts a fuel into electricity using electrochemical or elec­ tromechanical means. A linear generator assembly does not include any assembly that contains rotating parts.

(5) Qualified microturbine property . Qualified microturbine property is a sta­ tionary microturbine power plant that has a nameplate capacity of less than 2,000 kW and an electricity-only generation efficiency of not less than 26 percent at International Standard Organization con­ ditions. A stationary microturbine power plant is an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associated balance of plant components that converts a fuel into elec­ tricity and thermal energy. A stationary microturbine power plant also includes all secondary components located between the existing infrastructure for fuel deliv­ ery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors.

(6) Combined heat and power system (CHP) property —(i) In general. CHP property is property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the genera­

tion of steam or other forms of useful ther­ mal energy (including heating and cooling applications). CHP property must produce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof). The energy effi­ ciency percentage of CHP property must exceed 60 percent (except in the case of CHP systems that use biomass within the meaning of section 45). CHP property does not include any property comprising a system if such system has a capacity in excess of 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities.

(ii) Components excluded. CHP prop­ erty does not include property used to transport the energy source to the gener­ ating facility or to distribute energy pro­ duced by the facility.

(7) Qualified small wind energy prop- erty . Qualified small wind energy prop- erty is property that uses a qualifying small wind turbine to generate electricity. A qualifying small wind turbine means a wind turbine that has a nameplate capacity of not more than 100 kW.

(8) Geothermal heat pump (GHP) property . GHP property is equipment that uses the ground, ground water, or other underground fluids as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

(9) Waste energy recovery property (WERP) —(i) In general . WERP is prop­ erty that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equip­ ment is not the generation of electricity. Examples of buildings or equipment the primary purpose of which is not the gen­ eration of electricity include, but are not limited to, manufacturing plants, medical care facilities, facilities on college cam­ puses, pipeline compressor stations, and associated equipment. WERP does not include any property that has a capacity in excess of 50 MW.

(ii) Coordination with CHP property . Any WERP that is part of a system that is a CHP property is not treated as WERP for purposes of section 48 unless the taxpayer

elects to not treat such system as a CHP property for purposes of section 48.

(10) Energy storage technology —(i) In general . Energy storage technology includes electrical energy storage prop­ erty described in paragraph (e)(10)(ii) of this section, thermal energy storage prop­ erty described in paragraph (e)(10)(iii) of this section, and hydrogen energy storage property described in paragraph (e)(10) (iv) of this section.

(ii) Electrical energy storage property . Electrical energy storage property is prop­ erty (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transpor­ tation of goods or individuals, electrical energy storage property includes, but is not limited to, rechargeable electrochem­ ical batteries of all types (such as lithium ion, vanadium flow, sodium sulfur, and lead-acid), ultracapacitors, physical stor­ age such as pumped storage hydropower, compressed air storage, flywheels, and reversible fuel cells.

(iii) Thermal energy storage prop- erty— (A) In general . Thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for sub­ sequent use; and provides energy for the heating or cooling of the interior of a res­ idential or commercial building. Thermal energy storage property includes equip­ ment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating, a residential or commercial building. It does not include property that transforms other forms of energy into heat in the first instance. Property that removes heat from, or adds heat to, a stor- age medium for subsequent use is prop­ erty 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 for heating or cooling of the interior of a residential or commercial building.

Bulletin No. 2024–52 1411 December 23, 2024

Paragraph (e)(10)(iii)(B) of this section provides a safe harbor for determining whether a thermal energy storage property has such a purpose. Thermal energy stor­ age property does not include a swimming pool, CHP property, or a building or its structural components. For example, ther­ mal energy storage property includes, but is not limited to, a system that adds heat to bricks heated to high temperatures that later use this stored energy to heat a build­ ing through the HVAC system; thermal ice storage systems that use electricity to run a refrigeration cycle to produce ice that is later connected to the HVAC system as an exchange medium for air conditioning the building; heat pump systems that store thermal energy in an underground tank, an artificial pit, an aqueous solution, a bore­ hole field, or a solid-liquid phase change material to be extracted for later use for heating and/or cooling; and air-to-water heat pump systems with a water storage tank. However, consistent with §1.4814(d), if thermal 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 storage property, the taxpayer’s basis in the thermal energy storage prop­ erty includes the total cost of the ther­ mal energy storage 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 of heating or cooling.

(B) Safe harbor . A thermal energy stor­ age property will be 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 res­ idential or commercial building if that thermal energy storage property is capa­ ble of storing energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for a minimum of one hour.

(iv) Hydrogen energy storage property . Hydrogen energy storage property is prop­ erty (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate

capacity of not less than 5 kWh, equiva­ lent to 0.127 kg of hydrogen or 52.7 stan­ dard cubic feet (scf) of hydrogen. Hydro­ gen energy storage property includes, but is not limited to, above ground storage tanks, underground storage facilities, and associated compressors. 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.

(v) Modifications of energy storage energy property . With respect to electri­ cal energy storage property and hydrogen energy storage property placed in service after December 31, 2022, energy storage technology that is modified as set forth in this paragraph (e)(10)(v) is treated as elec­ trical energy storage property described in paragraph (e)(10)(ii) of this section or hydrogen energy storage property described in paragraph (e)(10)(iv) of this section, except that the basis of any exist­ ing property prior to such modification is not taken into account for purposes of this section and section 48. This paragraph (e) (10)(v) applies to any electrical energy storage property and hydrogen energy storage property that either:

(A) Was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property had a nameplate capacity of less than 5 kWh and is modified in a manner that such property (after such modifica­ tion) 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 nameplate capacity of not less than 5 kWh.

(11) Qualified biogas property —(i) In general . Qualified biogas property is prop­ erty comprising a system that converts biomass (as defined in section 45K(c)(3), as in effect on August 16, 2022) into a gas that consists of not less than 52 percent methane by volume (tested at the point described in paragraph (e)(11)(ii) of this section), or is concentrated by such sys­ tem into a gas that consists of not less than 52 percent methane (tested at the point described in paragraph (e)(11)(ii) of this section), and captures such gas for sale or productive use and not for disposal via

combustion. Qualified biogas property also includes any property that is part of such system that cleans or conditions such gas, including gas upgrading equipment, to make the gas suitable for sale or pro­ ductive use. For example, qualified biogas property includes, but is not limited to, an anaerobic digester. Property that is an integral part of qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system and mixing or pumping equipment.

(ii) Methane content requirement. The methane content requirement described in section 48(c)(7)(A)(i) and paragraph (e) (11)(i) of this section is measured at the point at which the biogas exits the quali­ fied biogas property.

(iii) Flaring Allowance. While a qual­ ified biogas property generally may not capture biogas for disposal via combus­ tion, combustion in the form of flaring 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 is in compliance with all relevant Federal, State, regional, Tribal, and local laws and regulations.

(12) Microgrid controllers— (i) In gen- eral . A microgrid controller is equipment that is part of a qualified microgrid and is designed and used to monitor and control the energy resources and loads on such microgrid. A qualified microgrid is an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of elec­ tricity; is capable of operating in connec­ tion with the electrical grid and as a single controllable entity with respect to such electrical grid, and independently (and disconnected) from such electrical grid; and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)).

(ii) Capable of operating in connec- tion with the electrical grid. For purposes of this paragraph, a qualified microg­ rid includes an electrical system that is capable of operating in connection with the larger electrical grid, regardless of whether a connection to the larger electri­ cal grid exists.

(13) Other property included in sec- tion 48 . Any other property specified by

December 23, 2024 1412 Bulletin No. 2024–52

section 48 as energy property is energy property for purposes of this section and §§1.48-13 and 1.48-14.

(f) Property included in energy prop- erty —(1) In general. An energy property includes a unit of energy property (defined in paragraph (f)(2)(i) of this section) that meets the requirements of paragraph (c) of this section, that is not excluded from energy property as provided in paragraph (d) of this section, and that is of a type of energy property included in paragraph (e) of this section. Property owned by the tax­ payer that is an integral part of an energy property (as defined in paragraph (f)(3) of this section) is treated as part of that energy property. Energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the elec­ trical transmission stage. Energy property also generally does not include equipment that is an addition or modification to an existing energy property. However, see §1.48-14(a) for rules regarding retrofitted energy property (80/20 Rule) and para­ graph (e)(10)(v) of this section for rules regarding modifications of certain types of energy storage technology.

(2) Unit of energy property —(i) Defini- tion. The term unit of energy property means all functionally interdependent components of property (as defined in paragraph (f)(2) (ii) of this section) owned by the taxpayer that are operated together and that can oper­ ate apart from other energy properties within a larger energy project (as defined in §1.4813(d)). For rooftop solar energy property, all components of energy property that are installed on a single rooftop are treated as a single unit of energy property. See §1.4813(d) for rules regarding the treatment of multiple energy properties as an energy project for certain purposes.

(ii) Functionally interdependent —(A) In general. Except as provided in para­ graph (f)(3)(ii)(B) of this section, with respect to components of a unit of energy property, the term functionally interde- pendent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen as provided by section 48(a)(3) and (c) and as described in paragraph (e) of this sec­ tion.

(B) Components of certain energy property. In the case of solar process heat equipment, fiber-optic solar energy property, electrochromic glass property, GHP property, qualified biogas property, and microgrid controllers, with respect to components of such property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the energy property as provided by section 48(a)(3) and (c) and as described in para­ graph (e) of this section.

(3) Integral part —(i) In general. For purposes of the section 48 credit, property owned by a taxpayer is an integral part of an energy property owned by the same tax­ payer if it is used directly in the intended function of the energy property as pro­ vided by section 48(a)(3) and (c) and as described in paragraph (e) of this section and is essential to the completeness of the intended function. Property that is an inte­ gral part of an energy property is treated as part of that energy property. A taxpayer may not claim the section 48 credit for any property not owned by the taxpayer that is an integral part of energy property owned by the taxpayer. Multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be considered an integral part of each energy property so long as the cost basis for the shared property is properly allocated to each energy property. The total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared property. In addition, the exclusion in paragraph (d)(1) of this section does not apply to property that is shared by a qual­ ified facility (as defined in section 45(d)) and an energy property if it is an integral part of that energy property. The basis of any such property must be properly allo­ cated across the energy property and qual­ ified facility that share such property.

(ii) Power conditioning and transfer equipment . Property that is an integral part of energy property includes power condi­ tioning equipment and transfer equipment used to perform the intended function of the energy property as provided by section 48(a)(3) and (c) and as described in para­ graph (e) of this section. Power condition­

ing equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of elec­ tricity or thermal energy into a form suit­ able for use or transmission or distribution. Parts related to the functioning or protec­ tion of power conditioning equipment are also treated as power conditioning equip­ ment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters volt­ age to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distri­ bution lines. Examples of transfer equip­ ment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the function­ ing or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electri­ cal interrupters (such as circuit breakers, fuses, and other switches), and hardware and software used to monitor, operate, and protect transfer equipment. Power condi­ tioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or used by a qualified facility (as defined in section 45(d)), so long as the total cost basis of the integral property is properly allocated across the energy property and qualified facility that share such property.

(iii) Roads . Roads that are an integral part of an energy property are integral to the activity performed by the energy property such as onsite roads that are used for equip­ ment to operate and maintain the energy property. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property.

(iv) Fences. Fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property.

(v) Buildings . Generally, buildings are not integral parts of an energy property because they are not integral to the activ­ ity of the energy property. However, the structures described in paragraphs (f)(3)

Bulletin No. 2024–52 1413 December 23, 2024

(vi) and (vii) of this section are not treated as buildings for this purpose.

(vi) Structures essentially items of machinery or equipment . A structure that is essentially an item of machinery or equip­ ment is not treated as a building for pur­ poses of paragraph (f)(3)(v) of this section.

(vii) Structures that house certain property . A structure that houses property that is integral to the activity of an energy property is not treated as a building for purposes of paragraph (f)(3)(v) of this sec­ tion if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced if the energy prop­ erty it initially houses is replaced.

(4) Location of energy property. Any property that meets the requirements of paragraphs (f)(2) and (3) of this section is part of an energy property regardless of where such property is located.

(5) Examples . This paragraph provides examples illustrating property included in energy property.

(i) Example 1 . Solar energy property . X con­ structs a solar energy property (Solar Property) com­ prised of 500 separate solar panels. The solar panels are connected by wires, cables, and combiner boxes. Generated electricity is conditioned for subsequent use through one inverter and eventually carried to a substation that houses a transformer where the elec­ tricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. All components of the Solar Property up to the inverter are functionally interdependent compo­ nents of the Solar Property. The inverter and up to and including the transformer are integral parts of the Solar Property. Therefore, the Solar Property is an energy property for purposes of the section 48 credit. When X places the Solar Property in service, the cost of the components up to and including the transformer is included in the basis of the Solar Prop­ erty for purposes of computing the section 48 credit.

(ii) Example 2. Co-located energy properties . Assume the same facts as in paragraph (f)(5)(i) of this section ( Example 1 ), except that Y constructs a wind energy property (Wind Property) near X’s solar energy property (Solar Property). X’s Solar Property and Y’s Wind Property each connect to a substa­ tion that houses a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. X and Y each pay 50% of the cost of, and own a 50% undivided interest in, the transformer and related power conditioning equipment housed in the substa­ tion. X’s Solar Property and Y’s Wind Property are separate energy properties. When X and Y place their respective energy properties in service, the cost of the components up to and including 50% of the cost of the transformer and related power conditioning equipment is included in X’s and Y’s basis in their respective energy properties for purposes of comput­ ing the section 48 credit.

(iii) Example 3 . Qualified offshore wind energy project. Z constructs an offshore wind farm (Off­ shore Wind Energy Project) comprised of 150 tur­ bines (energy properties) for which Z makes a valid election under section 48(a)(5) to claim the section 48 credit in lieu of the section 45 credit. The alter­ nating current electricity generated by the individual wind turbines will be carried by inter-array cables to an offshore substation where a transformer will step up the voltage of the electricity and a converter will convert it to direct current so it may be transported by subsea export cables to an onshore substation adjacent to the point of interconnection with the elec­ trical grid. When the electricity reaches the onshore substation, it will flow into another converter where it will be converted back to alternating current, and then through a transformer and associated switch­ gear where it will be converted to electrical grid voltage and where the Offshore Wind Energy Proj­ ect can be electrically isolated from the grid. The electricity will then pass through an intertie that will take the electricity from the substation to the point of interconnection with the electrical grid. All compo­ nents of the Offshore Wind Energy Project, up to and including the transformer and switchgear housed in the onshore substation, are either functionally inter­ dependent components or integral parts of the energy properties that comprise the Offshore Wind Energy Project. Therefore, when Z places the Offshore Wind Energy Project in service, the cost of the components up to and including the transformer and switchgear housed in the onshore substation are included in the aggregate basis of the energy properties that com­ prise the Offshore Wind Energy Project for purposes of computing the section 48 credit.

(iv) Example 4. Co-located energy property and qualified facility. X constructs a wind facility (Wind Facility) that is co-located with an energy storage technology (Energy Storage). The Wind Facility and Energy Storage share power conditioning and trans­ fer equipment. The power conditioning and transfer equipment are integral parts of the Energy Storage, and are therefore considered energy property. There­ fore, X will include a properly allocated share of the shared power conditioning and transfer equip­ ment costs to determine the section 48 credit for the Energy Storage. If the Wind Facility otherwise satisfies the requirements of the section 45 credit, X may claim the section 45 credit with respect to the Wind Facility.

(g) Applicability date . This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after December 12, 2024.

Par. 3. Sections 1.48-13 and 1.48-14 are added to read as follows:

§1.48-13 Rules relating to the increased credit amount for prevailing wage and apprenticeship.

(a) In general . If a qualified energy project satisfies the requirements in para­ graph (b) of this section, the amount of the

credit determined under section 48(a) of the Internal Revenue Code (Code), after the application of section 48(a)(1) through (8), and (15), is equal to the credit deter­ mined under section 48(a) (section 48 credit) multiplied by five.

(b) Requirements . A qualified energy project satisfies the requirements of this paragraph (b) if it is one of the follow­ ing—

(1) A project with a maximum net out­ put of less than one megawatt (MW) of electrical (as measured in alternating cur­ rent) or thermal energy determined based on the nameplate capacity as provided in paragraph (e) of this section (One Mega­ watt Exception);

(2) A project the construction of which began prior to January 29, 2023; or

(3) A project that meets the prevailing wage requirements of section 48(a)(10) (A), §1.45-7(a)(2) and (3) and (b) through (d), and paragraph (c) of this section, the apprenticeship requirements of section 45(b)(8) and §1.45-8, and the recordkeep­ ing and reporting requirements of §1.4512. (c) Special rule applicable to general prevailing wage requirements —(1) In general . In addition to satisfying the pre­ vailing wage requirements under §1.457(a)(2) and (3) and (b) through (d), a tax­ payer must ensure that any laborers and mechanics employed (within the meaning of §1.45-7) by the taxpayer or any contrac­ tor or subcontractor in the construction of such energy project, and for the five-year period beginning on the date such project is placed in service, the alteration or repair of such project, are paid wages at rates not less than the prevailing rates for construc­ tion, alteration, or repair of a similar char­ acter in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with 40 U.S.C. chapter 31, subchapter IV. Subject to section 48(a)(10)(C) and this paragraph (c), for purposes of determining the increased credit amount under section 48(a)(9)(B)(iii), the taxpayer is deemed to satisfy the prevailing wage requirements of section 48(a)(10)(A)(ii) at the time such project is placed in service.

(2) Transition waiver of penalty for prevailing wage requirements . For pur­ poses of the transition waiver described in §1.45-7(c)(6)(iii), the penalty payment

December 23, 2024 1414 Bulletin No. 2024–52

required by §1.45-7(c)(1)(ii) to cure a failure to satisfy the Prevailing Wage Requirements in paragraph (b)(3) of this section is waived with respect to a laborer or mechanic who performed work in the construction, alteration, or repair of an energy project on or after January 29, 2023, and prior to December 12, 2024, if the taxpayer relied upon Notice 2022-61, 2022-52 I.R.B. 560, or the Proposed Regu­ lations (REG-132569-17) (88 FR 82188), corrected in 89 FR 13293 (Feb. 22, 2024), to determine when the activities of any laborer or mechanic became subject to the prevailing wage requirements, and the taxpayer makes the correction payments required by §1.45-7(c)(1)(i) with respect to such laborer and mechanics within 180 days of December 12, 2024.

(3) Exception . For purposes of satis­ fying the prevailing wage requirements of paragraph (b)(3) of this section, §1.457(a)(1) does not apply. (4) Recapture —(i) In general . In the case of an energy project that receives the increased credit amount under paragraph (a) of this section by reason of satisfying the requirements of paragraph (b)(3) of this section, the increased credit amount is subject to recapture for any project that does not satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to an alteration or repair of such project during the five-year period beginning on the date such project is originally placed in service (five-year recapture period) (but that does not cease to be investment credit property within the meaning of section 50(a) of the Code).

(ii) Recapture event —(A) In general . Any failure to satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the fiveyear recapture period is a recapture event. Any failure to satisfy the prevailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section with respect to the alteration or repair of any project during the five-year recapture period described in paragraph (c)(6) of this section remains subject to the cor­ rection and penalty provisions in §1.457(c), including the waiver provisions in §1.45-7(c)(6). Subject to §1.45-7(c)

(5) and (6), if the correction and penalty payments described in §1.45-7(c) are not made by the taxpayer on or before the date that is 180 days after the date of a final determination by the IRS (as defined in §1.45-7(c)(4)(ii)), the cure provision described in §1.45-7(c) does not apply and the increased credit amount is subject to recapture.

(B) Yearly determination . A determi­ nation of whether a recapture event has occurred under paragraph (c)(3)(ii) of this section must be made for each taxable year (or portion thereof) occurring within the five-year recapture period, beginning with the taxable year ending after the date the energy project is placed in service. Thus, for each taxable year beginning or end­ ing within the five-year recapture period, the taxpayer must determine whether the prevailing wage requirements of section 48(a)(10)(A), §1.45-7(b) through (d), and paragraph (c)(1) of this section are satis­ fied for the recapture year(s) occurring during each taxable year. If no alteration or repair work occurs during the five-year recapture period, the taxpayer is deemed to satisfy the Prevailing Wage Require­ ments described in paragraph (b)(3) of this section with respect to such taxable year.

(C) Carrybacks and carryforward adjusted . In the case of any recapture event described in paragraph (c)(3)(ii)(A) of this section, the carrybacks and car­ ryforwards under section 39 of the Code must be adjusted by reason of such recap­ ture event.

(iii) Correction and penalty payments not required if taxpayer is subject to recapture under section 48(a)(10)(C). If the IRS determines that a taxpayer that claimed the increased credit amount under section 48(a)(9)(B)(iii) or trans­ ferred a specified credit portion under section 6418 of the Code that includes the increased credit amount under section 48(a)(9)(B)(iii) failed to satisfy the pre­ vailing wage requirements in §1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the five-year recapture period and the tax­ payer does not make the correction and penalty payments provided in §1.45-7(c), then no penalty is assessed under §1.45-7, and the increased credit amount is subject to recapture. Taxpayers whose increased

credit amount is subject to recapture under this section may retain the amount of the section 48(a) credit (base credit) deter­ mined under section 48(a) of this section provided all requirements were met in the year of determination.

(5) Recapture amount —(i) In gen- eral . If a recapture event has occurred as described in paragraph (c)(3)(ii) of this section, the tax under chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by the applica­ ble recapture percentage multiplied by the increased credit amount allowed to the taxpayer pursuant to paragraphs (a) and (b)(3) of this section.

(ii) Applicable recapture percentage . If the recapture event occurs:

(A) Within one full year after the prop­ erty is placed in service, the recapture per­ centage is 100;

(B) Within one full year after the close of the period described in paragraph (c)(4) (ii)(A) of this section, the recapture per­ centage is 80;

(C) Within one full year after the close of the period described in paragraph (c)(4) (ii)(B) of this section, the recapture per­ centage is 60;

(D) Within one full year after the close of the period described in paragraph (c)(4) (ii)(C) of this section, the recapture per­ centage is 40; or

(E) Within one full year after the close of the period described in paragraph (c)(4) (ii)(D) of this section, the recapture per­ centage is 20.

(6) Recapture period . The five-year recapture period begins on the date the project is placed in service and ends on the date that is five full years after the placed-in-service date. Each 365-day period (366-day period in case of a leap year) within the five-year recapture period is a separate recapture year for recapture purposes.

(7) Increase in tax for recapture . The increase in tax under chapter 1 of the Code for the recapture of an increased credit amount claimed under paragraph (a) of this section occurs in the year of the recap­ ture event.

(8) Annual prevailing wage compli- ance report . In addition to the general reporting requirements in §1.45-12, a tax­ payer that has claimed an increased credit amount under paragraph (a) of this sec­

Bulletin No. 2024–52 1415 December 23, 2024

tion or transferred a specified credit por­ tion under section 6418 that includes an increased credit amount under paragraph (a) of this section is required to provide to the IRS information on the payment of prevailing wages with respect to any alteration or repair of the project during the recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guid­ ance published in the Internal Revenue Bulletin. See §601.601 of this chapter.

(9) Transferred specified credit por- tions . In the case of a transferred spec­ ified credit portion under section 6418, to which recapture of an increased credit amount under this paragraph (c) applies, the eligible taxpayer is required to notify the transferee taxpayer of the recapture event in accordance with the provisions of §1.6418-5(f)(2) and the transferee tax­ payer is responsible for any amount of increase in tax under section 48(a)(10)(C) and this paragraph (c) in accordance with the provisions of §1.6418-5(f)(3).

(d) Energy project defined —(1) In gen- eral . For purposes of the increased credit amount provided by section 48(a)(9) and paragraphs (b) and (c) of this section, the domestic content bonus credit amount provided by section 48(a)(12), and the increase in credit rate for energy commu­ nities provided in section 48(a)(14), the term energy project means one or more energy properties (multiple energy prop­ erties) that are operated as part of a single energy project. Multiple energy proper­ ties will be treated as one energy project if they are owned by a taxpayer (subject to the related taxpayer rule provided in paragraph (d)(2) of this section) and any four or more of the following factors are present:

(i) The energy properties are con­ structed on contiguous pieces of land;

(ii) The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;

(iii) The energy properties have a com­ mon intertie;

(iv) The energy properties share a com­ mon substation, or thermal energy off-take point;

(v) The energy properties are described in one or more common environmental or other regulatory permits;

(vi) The energy properties are con­ structed pursuant to a single master con­ struction contract; or

(vii) The construction of the energy properties is financed pursuant to the same loan agreement.

(2) Time of determination —(i) Energy project . A taxpayer may make the deter­ mination that multiple energy properties are an energy project either—

(A) At any point during the construc­ tion of the multiple energy properties, or

(B) During the taxable year in which the last such energy property is placed in service.

(ii) Placed in Service . An energy proj­ ect (as defined in §1.48-13(d)) is consid­ ered placed in service on the date the last of the energy properties within the energy project is placed in service.

(3) Related taxpayers —(i) Defini- tion . For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in §1.52-1(b)).

(ii) Related taxpayer rule . For pur­ poses of this section, related taxpayers are treated as one taxpayer in determining whether multiple energy properties are treated as an energy project with respect to which a section 48 credit may be deter­ mined.

(4) Separate reporting for energy prop- erties within an energy project . While multiple energy properties may be treated as a single energy project for specified purposes, this information must be sep­ arately reported for each energy prop­ erty within an energy project on Form 3468, Investment Credit, or any succes­ sor form(s), and such form must be filed with the taxpayer’s timely filed (including extensions) Federal income tax return for the taxable year in which the energy prop­ erty is placed in service.

(e) Nameplate capacity for purposes of the One Megawatt Exception— (1) In gen- eral . For purposes of paragraph (b)(1) of this section, whether an energy project has a maximum net output of less than 1 MW of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capacity. If an energy project is comprised of more than one energy property, the energy project’s maximum net output is calculated as the

sum of the nameplate capacity of each energy property. If applicable, taxpay­ ers should use the International Standard Organization (ISO) conditions to mea­ sure the maximum electrical generating output or usable energy capacity of an energy project. Paragraphs (e)(2) through (7) of this section provide rules for mea­ suring output for different types of energy properties to determine whether the One Megawatt Exception (as provided in paragraph (b)(1) of this section) applies. Because electrochromic glass property (as defined in §1.48-9(e)(2)(ii)), fiber-optic solar energy property (as defined in §1.489(e)(2)(i)), and microgrid controllers (as defined in §1.48-9(e)(12)) do not generate electricity or thermal energy, these energy properties are not eligible for the One Megawatt Exception.

(2) Nameplate capacity for energy properties that generate in direct cur- rent for purposes of the One Megawatt Exception. Only for energy properties that generate electricity in direct current, the taxpayer may choose to determine the maximum net output (in alternating cur­ rent) of each energy property that is part of the energy project by using the lesser of:

(i) The sum of the nameplate generating capacities within the unit of energy prop­ erty in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating current; or

(ii) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.

(3) Electrical generating energy prop- erty . In the case of an electrical generat­ ing energy property, the One Megawatt Exception is determined by using max­ imum electrical generating output in megawatts that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202.

(4) Electrical energy storage prop- erty . In the case of electrical energy stor­ age property (as defined in §1.48-9(e) (10)(ii)), the One Megawatt Exception is determined by using the storage device’s maximum net output. If the output of elec­

December 23, 2024 1416 Bulletin No. 2024–52

trical energy storage property is in direct current, apply the rules of paragraph (2) of this section.

(5) Thermal energy storage property and other property generating or distrib- uting thermal energy . In the case of ther­ mal energy storage property (as defined in §1.48-9(e)(10)(iii)) and other energy property that generates or distributes ther­ mal energy for productive use (for exam­ ple, geothermal energy property, GHP property, solar process heat property), the One Megawatt Exception is determined by using the property’s maximum net out­ put. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu per hour/3,412,140 = MW). The maximum net output is the maximum instantaneous rate of discharge and is determined based on the nameplate capacity of the equip­ ment that generates or distributes thermal energy for productive use (including dis­ tributing the thermal energy from the stor­ age medium). For purposes of determin­ ing the maximum net output of thermal energy storage property, if the nameplate capacity of the thermal energy storage is not available, the nameplate capacity of the equipment delivering thermal energy to the thermal energy storage may be used. For thermal energy storage property and other energy property distributing ther­ mal energy to a building or buildings, the nameplate capacity can be assessed as either the aggregate maximum thermal output of all individual heating or cooling elements within the building or buildings, or as the maximum thermal output that the entire project is capable of delivering to a building or buildings at any given moment. The maximum thermal output an entire project is capable of delivering at any given moment does not take into account the capacity of redundant equip­ ment if such equipment is not operated when the system is at maximum output during normal operation. For thermal energy storage property and other energy property that generates or distributes thermal energy for a productive use, the maximum thermal output that the entire system is capable of delivering is consid­ ered to be the greater of the rate of cooling or the rate of heating of the aggregate of

the nameplate capacity of the equipment distributing energy for productive use, including distributing the thermal energy from the thermal energy storage medium to the building or buildings. If such name­ plate capacity is unavailable, in the case of thermal energy storage property only, the maximum thermal output may instead be considered to be the greater of the rate of cooling or the rate of heating of the aggre­ gate of the nameplate capacity of all the equipment delivering energy to the ther­ mal energy storage property in the project.

(6) Hydrogen energy storage property and specified clean hydrogen production facilities . In the case of a hydrogen energy storage property (as defined in §1.48-9(e) (10)(iv)) or a specified clean hydrogen production facility (as defined in section 48(a)(15)(C)), the One Megawatt Excep­ tion is determined by using the property’s or facility’s maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per hour of hydrogen.

(7) Qualified biogas property. In the case of qualified biogas property, the One Megawatt Exception is determined by the property’s maximum net output. The max­ imum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour. Taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the Environmental Pro­ tection Agency (EPA) Greenhouse Gas Reporting Rule (GHGRR) at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known.

(f) Applicability date . This section applies to energy projects placed in ser­ vice in taxable years ending on or after December 12, 2024, and the construction of which begins after December 12, 2024.

§1.48-14 Rules applicable to energy property.

(a) Retrofitted energy property —(1) In general . For purposes of section 48(a)(3) (B)(ii), (5)(D)(iv), and (8)(B)(iii) of the

Internal Revenue Code (Code), a retro­ fitted energy property may be originally placed in service even though it contains some used components of the unit of energy property only if the fair market value of the used components of the unit of energy property is not more than 20 per­ cent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of the unit of energy property (80/20 Rule). Only the cost of new components of the unit of energy property is taken into account for purposes of computing the credit deter­ mined under section 48 (section 48 credit) with respect to the unit of energy property. The cost of new components of the unit of energy property includes all costs prop­ erly included in the depreciable basis of the new components. If the taxpayer sat­ isfies the 80/20 Rule with regard to the unit of energy property and the taxpayer pays or incurs new costs for property that is an integral part of the energy property (as defined in §1.48-9(f)(3)(i)), then the taxpayer may include the new costs paid or incurred for the property that is an integral part of the energy property in the basis of the energy property for purpose of the section 48 credit. In the case of an energy project (as defined in §1.48-13(d)), the 80/20 Rule is applied to each unit of energy property comprising an energy project.

(2) Excluded costs. Costs incurred for new components of property added to used components of a unit of energy prop­ erty may not be taken into account for pur­ poses of the section 48 credit unless the taxpayer satisfies the 80/20 Rule (as pro­ vided in paragraph (a)(1) of this section) by placing into service a unit of energy property for which the fair market value of the used components of property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used compo­ nents of property.

(3) Examples . This paragraph (a)(3) provides examples illustrating the provi­ sions of this paragraph (a):

(i) Example 1. Retrofitted solar energy property that satisfies the 80/20 Rule. Z owns an existing solar energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. Z replaces used components

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(iv) Recapture . If, for any subsequent annual measuring period (within the recap­ ture period specified in section 50(a) of the Code), the equipment’s use of energy from all qualifying sources is reduced below 50 percent of its total energy input (as deter­ mined under the rules of paragraph (b)(2) (ii) of this section), then recapture of the section 48 credit is required under section 50(a). (v) Example . On October 1, 2021, X, a calendar year taxpayer, places in service a unit of energy property that includes a sys­ tem that heats its office building by circu­ lating hot water heated by energy derived from a geothermal deposit through the building. The water heated by energy derived from a geothermal deposit is not hot enough to provide sufficient heat for the building. The circulation system includes an electric boiler in which the water is further heated before being circu­ lated in the heating system. Energy from the electric boiler is not from a qualifying source and therefore the system is dual use property. On a Btu basis, sixty percent of the total energy input to the circulating system during the initial annual measuring period (the 365-day period beginning on October 1, 2021) is energy derived from a geothermal deposit. Accordingly, the cir­ culation system, including the pumps and pipes that circulate the hot water through the building, are part of the unit of energy property and eligible for a section 48 credit. Sixty percent of the basis of the circulation system is taken into account in determining the section 48 credit for X’s unit of energy property. During the 365-day period beginning on October 1, 2023, forty-five percent of the total energy input to the circulating system (on a Btu basis) is energy derived from a geothermal deposit. X’s section 48 credit is therefore subject to recapture under section 50.

(c) Energy property eligible for mul- tiple Federal income tax credits —(1) In general . The basis of energy property may be eligible for calculating both the section 48 credit and another Federal income tax credit, subject to the limitation provided in paragraph (c)(2) of this section.

(2) Limitation. Except as provided in paragraph (g) of this section, a taxpayer may not claim both a section 48 credit and another Federal income tax credit with respect to the same basis in an energy

of the solar energy property with new components of property at a cost of $1.4 million. The retrofitted solar energy property constitutes a unit of energy property. The fair market value of the remaining original components of the retrofitted solar energy property is $100,000, which is not more than 20 per­ cent of the retrofitted solar energy property’s total value of $1.5 million (that is, the cost of the new components ($1.4 million) + the value of the remain­ ing original components ($100,000)). The value of the old components of the retrofitted solar energy property is 7 percent of the value of total value of the retrofitted solar energy property ($100,000/$1.5 mil­ lion), thus the retrofitted solar energy property will be considered newly placed in service for purposes of section 48, and Z will be able to claim a section 48 credit based on the cost of the new components ($1.4 million).

(ii) Example 2. Capital improvements to an exist- ing energy property that do not satisfy the 80/20 Rule. X owns an existing unit of energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. The fair market value of the unit of energy property is $1 million. During the tax year, X makes capital improvements to the unit of energy property. The expenditures for such capital improvements total $300,000. X may not claim a section 48 credit for the $300,000 spent on capital improvements during the tax year because the capital improvements did not satisfy the 80/20 Rule.

(iii) Example 3. Upgrades to a qualified hydro- power production facility that satisfies the 80/20 Rule : Y owns a qualified hydropower production facility (hydropower facility) as defined under section 45 and no taxpayer, including Y, has ever claimed a section 45 credit for the hydropower facil­ ity . The hydropower facility consists of a unit of energy property including water intake, water isola­ tion mechanisms, turbine, pump, motor, and genera­ tor. The associated impoundment (dam) and power conditioning equipment are integral parts of the unit of energy property. Y makes upgrades to the unit of energy property by replacing the turbine, pump, motor, and generator with new components at a cost of $1.5 million. Y does not make any upgrades to the property that is an integral part of the unit of energy property. The remaining original components of the unit of energy property have a fair market value of $100,000, which is not more than 20 percent of the retrofitted hydropower facility’s total value of $1.6 million (that is, the cost of the new components ($1.5 million) + the value of the remaining original components ($100,000)). Thus, the retrofitted hydro­ power facility will be considered newly placed in service for purposes of section 48, and Y will be able to make a valid section 48(a)(5) election and claim a section 48 credit based on the cost of the new com­ ponents ($1.5 million).

(b) Dual use property —(1) Definition . For purposes of section 48, the term dual use property means property that uses energy derived from both a qualifying source (that is, from an energy property defined in §1.48-9(a) (including a qual­ ified facility for which an election has been made as provided by paragraph (f)

of this section)) and from a non-qualify­ ing source (that is, sources other than an energy property defined in §1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f) of this section)).

(2) Qualification as energy property (i) In general . Dual use property quali­ fies as energy property if its use of energy from non-qualifying sources does not exceed 50 percent of its total energy input (as determined under the rules of para­ graph (b)(2)(ii) of this section) during an annual measuring period (as defined in paragraph (b)(2)(iii) of this section). If the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the basis of the energy property will be taken into account in computing the amount of the section 48 credit (for example, if 80 percent of the energy used by a dual use property is from qualifying sources, 80 percent of the basis of the dual use property will be taken into account in computing the amount of the section 48 credit).

(ii) Aggregation of energy inputs . The measurement of energy use required for purposes of paragraph (b)(2)(i) of this section may be made by comparing, on the basis of British thermal units (Btus), energy input to dual use property from all qualifying sources with energy input from all non-qualifying sources. To convert the energy inputs for CHP into Btus, the lower heating value of the fuel is used for CHP property and the higher heating value of the hydrogen is used for fuel cells. The Commissioner may also accept any other method that accurately establishes the rel­ ative annual use of energy derived from all qualifying sources and of energy input from all non-qualifying sources by dual use property.

(iii) Annual measuring period . For pur­ poses of paragraph (b)(2)(i) of this section, the term annual measuring period means with respect to an item of dual use prop­ erty the 365-day period (366-day period in case of a leap year) beginning with the day the dual use property is placed in service (initial annual measuring period) or a 365day period (366-day period in case of a leap year) beginning the day after the last day of the immediately preceding annual measuring period (subsequent annual measuring period).

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property. See paragraph (e) of this section for special rules regarding ownership of energy property.

(d) Incremental cost —(1) In general . For purposes of section 48, if a component of energy property is also used for a pur­ pose other than the intended function of the energy property, only the incremental cost of a component of energy property is included in the basis of the energy prop­ erty. The term incremental cost means the excess of the total cost of a compo­ nent over the amount that would have been expended for the component if that component were used for a non-qualifying purpose.

(2) Example . A installs solar energy property above the surface of an existing roof of a building that A owns. The solar energy property uses bifacial panels that convert to energy the light that strikes both the front and back of the panels. Therefore, along with installing the bifa­ cial panels, A is reroofing their building with a reflective roof that has a highly reflective surface. Because the reflective roof enables the panels’ generation of significant amounts of electricity from reflected sunlight, when installed in con­ nection with the solar energy property, it constitutes part of that energy property to the extent that the cost of the reflec­ tive roof exceeds the cost of reroofing A’s building with a non-reflective roof. The cost of reroofing with the reflective roof is $15,000 whereas the cost of a reroof­ ing with a standard roof for the building would be $10,000. The incremental cost of the reflective roof is $5,000, and that amount is included in A’s basis in the solar energy property for purposes of the sec­ tion 48 credit.

(e) Special rules concerning owner- ship —(1) Basis. For purposes of section 48, a taxpayer that owns an energy prop­ erty is eligible for the section 48 credit only to the extent of the taxpayer’s basis in the energy property. In the case of multiple taxpayers holding direct owner­ ship in an energy property, each taxpayer determines its basis based on its fractional ownership interest in the energy property.

(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of energy property for a section 48 credit to be determined with respect to such taxpayer’s interest. No

section 48 credit may be determined with respect to a taxpayer’s ownership of one or more separate components of an energy property if the components do not consti­ tute a unit of energy property. However, the use of property owned by one taxpayer that is an integral part of an energy prop­ erty owned by a second taxpayer will not prevent a section 48 credit from being determined with respect to the second tax­ payer’s energy property (though neither taxpayer would be eligible for a section 48 credit with respect to the first taxpayer’s property).

(3) Related taxpayers —(i) Defini- tion . For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in §1.52-1(b)).

(ii) Related taxpayer rule . For pur­ poses of this section, related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an invest­ ment in an energy property with respect to which a section 48 credit may be deter­ mined.

(4) Examples. The following examples illustrate the rules in this paragraph (e). In each example, X and Y are unrelated tax­ payers.

(i) Example 1. Fractional ownership required to satisfy section 48 . X and Y own fractional ownership interests in a GHP property that is a unit of energy property. Because X and Y each own a fractional ownership interest in a unit of energy property, a sec­ tion 48 credit may be determined with respect to X’s and Y’s fractional ownership interests in the unit of energy property.

(ii) Example 2. Separate ownership of GHP property . A GHP property is comprised of coils in the ground and several individual heat pumps used in conjunction with those coils. X owns both the coils in the ground and one of the individual heat pumps used in conjunction with the coils. Y owns one or more of the individual heat pump(s) used in con­ junction with the coils. No section 48 credit may be determined with respect to Y because Y owns merely a component of energy property rather than a unit of energy property as defined in §1.48-9(f)(2). How­ ever, while X does not own all of the individual heat pumps used in conjunction with the coils, X does own both the coils in the ground and one heat pump used in conjunction with the coils and thus owns an entire unit of energy property. Accordingly, X may compute a section 48 credit with respect to this unit of energy property.

(iii) Example 3. Shared ownership of property that is an integral part of separate energy proper- ties. X owns a wind energy property that is a unit of energy property and Y owns a solar energy prop­ erty that is a unit of energy property that are co-lo­

cated. Both X’s wind energy property and Y’s solar energy property connect to a substation that houses a step-up transformer where the electricity is stepped up to electrical grid voltage before being transmit­ ted to the electrical grid through an intertie. X and Y each own a 50 percent fractional ownership interest in the step-up transformer. The step-up transformer is an integral part of both the wind energy property and the solar energy property (as defined in §1.489(f)(3)(i)). As a result, X and Y may both compute a section 48 credit for their respective energy proper­ ties by including their respective bases in the step-up transformer.

(iv) Example 4. Separate ownership of property that is an integral part of separate energy property . X owns a wind energy property that is a unit of energy property and property that is an integral part of the wind energy property, specifically a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a solar energy property that is a unit of energy property that connects to X’s transformer. X and Y are not related persons within the meaning of paragraph (e)(3)(i) of this section. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48 credit for its solar energy property, but it cannot include any basis relating to the transformer.

(v) Example 5 . X owns a wind energy property that is a unit of energy property and a solar energy property that is a unit of energy property. Both the wind energy property and the solar energy property are connected to a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an inter­ tie. The transformer is an integral part of both the wind energy property and the solar energy prop­ erty (within the meaning of §1.48-9(f)(3)(i)) and is owned by Y. X and Y are related persons within the meaning of paragraph (e)(3)(i) of this section. X and Y are treated as one taxpayer under paragraph (e)(3) (ii) of this section. X may include the basis of the transformer in computing its section 48 credit with respect to the wind energy and the solar energy prop­ erty (but may not include more than 100% of that basis in the aggregate).

(f) Election to treat qualified facilities as energy property —(1) In general. If a taxpayer makes an election under sec­ tion 48(a)(5)(C) (pursuant to paragraph (f)(5) of this section) to treat qualified property that is part of a qualified invest­ ment credit facility as energy property with respect to which a section 48 credit may be determined, such property will be treated as energy property for pur­ poses of section 48. No section 45 credit may be determined with respect to any qualified investment credit facility and the requirements of section 45 are not imposed on a qualified investment credit facility.

(2) Qualified investment credit facility . The term qualified investment credit facil­ ity means any facility—

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(i) That is a qualified facility (within the meaning of section 45) described in section 45(d)(1) through (4), (6), (7), (9) or (11);

(ii) That meets the placed in service and beginning of construction requirements (if any) provided in section 48;

(iii) With respect to which no credit has been allowed under section 45; and

(iv) For which the taxpayer makes an irrevocable election under section 48(a) (5) and paragraph (f)(5) of this section.

(3) Qualified property . The term qual- ified property means property that meets each of the requirements of paragraphs (f)(3)(i) through (iv) of this section. Regardless of where qualified property is located, any qualified property that meets the requirements of this paragraph (f)(3) is part of a qualified investment credit facility with respect to which a section 48 credit may be determined.

(i) The property is tangible personal property or other tangible property (not including a building or its structural com­ ponents), but only if such other tangible property is an integral part of the qualified investment credit facility.

(ii) Depreciation (or amortization in lieu of depreciation) is allowable (as defined in §1.48-9(b)(4)) with respect to the property.

(iii) The taxpayer constructs, recon­ structs, or erects the property (as defined in §1.48-9(b)(1)) or acquires the property (as defined in §1.48-9(b)(2)) if the original use of the property (as defined in §1.489(b)(3)) commences with the taxpayer. (iv) The property is not intangible property.

(4) Definitions related to requirements for qualified property.

(i) Tangible personal property . The term tangible personal property means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items that are structural com­ ponents of such buildings or structures). Tangible personal property includes all property (other than structural compo­ nents) that is contained in or attached to a building. Further, all property that is in the nature of machinery (other than structural components of a building or other inher­ ently permanent structure) is considered tangible personal property even though

located outside a building. Local law is not controlling for purposes of determin­ ing whether property is or is not tangible property or tangible personal property. Thus, tangible property may be personal property for purposes of the section 48 credit even though under local law the property is considered to be a fixture and therefore real property.

(ii) Other tangible property . The term other tangible property means tangible property other than tangible personal property (not including a building and its structural components), that is used as an integral part of furnishing electrical energy by a person engaged in a trade or business of furnishing any such service.

(iii) Integral part —(A) In general . Property owned by a taxpayer is an inte­ gral part of a qualified investment credit facility owned by the same taxpayer if it is used directly in the intended function of the qualified investment credit facility and is essential to the completeness of the intended function of the qualified invest­ ment credit facility. A taxpayer may not claim the section 48 credit for any prop­ erty that is not owned by the taxpayer, regardless of whether that property is oth­ erwise an integral part of the taxpayer’s qualified investment credit facility.

(B) Power conditioning and transfer equipment . Property that is an integral part of a qualified investment credit facility includes power conditioning equipment and transfer equipment used to perform the intended function of the qualified invest­ ment credit facility. Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of elec­ tricity or thermal energy into a form suit­ able for use or transmission or distribution. Parts related to the functioning or protec­ tion of power conditioning equipment are also treated as power conditioning equip­ ment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy prop­ erties and equipment that alters voltage in order to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distri­

bution lines. Examples of transfer equip­ ment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware used to monitor, operate, and protect transfer equipment.

(C) Roads . Roads that are an integral part of a qualified investment credit facil­ ity are integral to the activity performed by the qualified investment credit facility; these include onsite roads that are used for equipment to operate and maintain the qualified investment credit facility. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by a qualified investment credit facility.

(D) Fences. Fencing is not an integral part of a qualified investment credit facil­ ity because it is not integral to the activity performed by the energy property.

(E) Buildings . Generally, buildings are not integral parts of a qualified investment credit facility because they are not integral to the activity of the qualified investment credit facility. However, the structures described in paragraphs (f)(4)(iii)(F) and (G) of this section are not treated as build­ ings for this purpose.

(F) Structures essentially items of machinery or equipment . A structure that is essentially an item of machinery or equipment is not treated as a building for purposes of paragraph (f)(4)(iii)(E) of this section.

(G) Structures that house certain prop- erty . A structure that houses property that is integral to the activity of a qualified investment credit facility is not treated as a building for purposes of paragraph (f)(4)(iii)(E) of this section if the use of the structure is so closely related to the use of the housed qualified investment credit facility that the structure clearly can be expected to be replaced if the qual­ ified investment credit facility it initially houses is replaced.

(5) Time and manner of making elec- tion —(i) In general . To make an election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility

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as a qualified investment credit facility, a taxpayer must claim the section 48 credit with respect to such qualified invest­ ment credit facility on a completed Form 3468, Investment Credit, or any successor form(s), and file such form with the tax­ payer’s timely filed (including extensions) Federal income tax return for the taxable year in which the qualified investment credit facility is placed in service. The taxpayer must also attach a statement to its Form 3468, or any successor form(s), filed with its timely filed Federal income tax return (including extensions) that includes all of the information required by the instructions to Form 3468, or any suc­ cessor form(s) for each qualified invest­ ment credit facility subject to an election under section 48(a)(5) and paragraph (f) of this section. A separate election must be made for each qualified facility that meets the requirements provided in paragraph (f)(2)of this section to be treated as a qualified investment credit facility. If any taxpayer owning an interest in a qualified facility makes an election with respect to such qualified facility, that election is binding on all taxpayers that directly or indirectly own an interest in the qualified facility.

(ii) Special rule for partnerships and S corporations . In the case of a qualified facility owned by a partnership or an S corporation, the election under paragraph (f) of this section is made by the partner­ ship or S corporation and is binding on all ultimate credit claimants (as defined in §1.50-1(b)(3)(ii)) of a section 48 credit. The partnership or S corporation must file a Form 3468, Investment Credit, or any successor form(s), with its timely filed partnership or S corporation return (including extensions) with respect to Federal income tax for the taxable year in which the qualified investment credit facility is placed in service to indicate that it is making the election and attach a statement that includes all of the informa­ tion required by the instructions to Form 3468, or any successor form(s) for each qualified facility subject to the election. The ultimate credit claimants must claim the section 48 credit on a completed Form 3468, or any successor form(s), and file such form with a timely filed (including extensions) Federal income tax return for the taxable year in which the ultimate

credit claimant’s distributive share or pro rata share of the section 48 credit is taken into account under section 706(a) of the Code or section 1366(a) of the Code, respectively. The partnership or S corpo­ ration making the election must provide the ultimate credit claimants with the necessary information to complete Form 3468, or any successor form(s), to claim the section 48 credit.

(6) Election irrevocable . The election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility as an energy property is irrevocable.

(g) Coordination rule for sections 42 and 48 credits. As provided under sec­ tion 50(c)(3)(C), in determining eligible basis for purposes of calculating a section 42 credit, a taxpayer is not required to reduce its basis in an energy property by the amount of the section 48 credit deter­ mined with respect to the property. The basis of an energy property may be used to determine a section 48 credit and may also be included in eligible basis to deter­ mine a section 42 credit. See paragraph (e) of this section for special rules regarding ownership of energy property.

(h) Qualified interconnection costs included in certain lower-output energy properties —(1) In general. For purposes of determining the section 48 credit, energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (h)(2) of this section) in con­ nection with the installation of energy property (as defined in §1.48-9(a)) that has a maximum net output of not greater than five megawatts (MW) (as measured in alternating current) (as described in paragraph (h)(3) of this section). The qualified interconnection property must provide for the transmission or distribu­ tion of the electricity produced or stored by such energy property and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (h)(6) of this section. If the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal income tax principles may require the taxpayer to reduce the amounts of costs treated as paid or incurred for qualified interconnection property to determine a section 48 credit.

(2) Qualified interconnection prop- erty. The term qualified interconnection

property means, with respect to an energy project that is not a microgrid controller, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnec­ tion; is either constructed, reconstructed, or erected by the taxpayer, (as defined in §1.48-9(b)(1)), or for which the cost with respect to the construction, recon­ struction, or erection of such property is paid or incurred by such taxpayer; and the original use (as defined in §1.48-9(b)(3)), of which, pursuant to an interconnection agreement (as defined in paragraph (h)(4) of this section), commences with a util­ ity (as defined in paragraph (h)(5) of this section). For purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d) (4) must be taken into account, as appli­ cable, with such original use determined on the date of the sale-leaseback or lease. Qualified interconnection property is not part of an energy property. As a result, qualified interconnection property is not taken into account in determining whether an energy project satisfies the prevailing wage and apprenticeship requirements in section 48(a)(10)(A) and (11), the require­ ments for the domestic content bonus credit amount referenced in section 48(a) (12), or the increase in credit rate for energy communities provided in section 48(a)(14). (3) Five-Megawatt Limitation —(i) In general . The Five-Megawatt Limitation is measured at the level of the energy prop­ erty in accordance with section 48(a)(8) (A). The maximum net output of an energy property is measured only by nameplate generating capacity (in alternating cur­ rent) of the unit of energy property, which does not include the nameplate capac­ ity of any integral property, at the time the energy property is placed in service. The nameplate generating capacity of the unit of energy property is measured inde­ pendently from any other energy proper­ ties that share the same integral property.

(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. For pur­ poses of paragraph (h)(1) of this section,

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the determination of whether an energy property has a maximum net output of not greater than five MW (as measured in alternating current) is based on the name­ plate capacity for purposes of paragraph (h)(1) of this section. If applicable, tax­ payers should use the International Stan­ dard Organization (ISO) conditions to measure the maximum electrical gener­ ating output or usable energy capacity of an energy property. Paragraphs (h)(3)(iv) and (v) of this section provide rules for applying the Five-Megawatt Limitation (as provided in paragraph (h)(1) of this section) to electrical generating energy property and electrical energy storage property, respectively.

(iii) Nameplate capacity for energy properties that generate in direct current for purposes of the Five-Megawatt Lim- itation. For energy properties that gener­ ate electricity in direct current, the tax­ payer may choose to determine whether an energy property has a maximum net output of not greater than five MW (in alternating current) by using the lesser of:

(A) The sum of the nameplate gener­ ating capacities within the unit of energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating cur­ rent; or

(B) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.

(iv) Electrical generating energy property . In the case of an electrical gen­ erating energy property, the Five-Mega­ watt Limitation is determined by using the maximum electrical generating out­ put in MW that the unit of energy prop­ erty is capable of producing on a steady state basis and during continuous opera­ tion under standard conditions, as mea­ sured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applica­ ble, taxpayers should use the ISO condi­ tions to measure the maximum electrical generating output of a unit of energy property.

(v) Electrical energy storage property . In the case of electrical energy storage property (as defined in §1.48-9(e)(10)(ii)), the Five-Megawatt Limitation is deter­ mined by using the energy storage proper­

ty’s maximum net output as its nameplate capacity.

(4) Interconnection agreement . The term interconnection agreement means an agreement with a utility for the purposes of interconnecting the energy property owned by such taxpayer to the transmis­ sion or distribution system of the utility. In the case of the election provided under section 50(d)(5) (relating to certain leased property), the term includes an agreement regarding energy property leased by such taxpayer.

(5) Utility . For purposes of section 48(a)(8) and this paragraph (h), the term utility means the owner or operator of an electrical transmission or distribution system that is subject to the regulatory authority of a State or political subdivi­ sion thereof, any agency or instrumental­ ity of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative.

(6) Reduction to amounts chargeable to capital account . In the case of costs paid or incurred for qualified intercon­ nection property as defined in paragraph (h)(2) of this section, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules similar to the rules of section 50(c) (including section 50(c)(3)).

(7) Examples . This subparagraph pro­ vides examples illustrating the application of the general rules provided in paragraph (h)(1) of this section and the Five-Megawatt Limitation provided in this paragraph (h).

(i) Example 1 . Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by taxpayer . X places in service two solar energy properties (Solar Prop­ erties) each with a maximum net output of 4 MW (as measured in alternating current by using the nameplate capacity of an inverter, which is the first component of property attached to each of the Solar Properties that inverts the direct current electricity into alternating current). Each inverter is an inte­ gral part of each Solar Property but is not shared by the Solar Properties. The Solar Properties share a step-up transformer, which is an integral part of both Solar Properties. As part of the development of the Solar Properties, payment of qualified inter­ connection costs is required by the utility to modify and upgrade the utility’s transmission system at or beyond the point of interconnection to accommo­ date such interconnection. X has an interconnection agreement with the utility that allows for a maxi­ mum output of 10 MW (as measured in alternating current). The interconnection agreement provides

the total cost to X of the qualified interconnection property. X may include the costs X paid or incurred for qualified interconnection property subject to the terms of the interconnection agreement, to calculate X’s section 48 credits for each of the Solar Proper­ ties because each has a maximum net output of not greater than five MW (alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculat­ ing the aggregate section 48 credit amount for both Solar Properties.

(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by separate taxpayers. X places in service a solar energy property (Solar Prop­ erty) with a maximum net output of 3 MW (as mea­ sured in alternating current by using the nameplate capacity of the first component of property attached to the Solar Property that inverts the direct current electricity into alternating current). Y places in ser­ vice a wind facility (Wind Facility), for which Y has made a valid election under section 48(a)(5), with a maximum net output of 4 MW (as measured in alter­ nating current). The Solar Property and the Wind Facility share a step-up transformer, which is an inte­ gral part of both facilities. As part of the development of the Solar Property and the Wind Facility, payment of qualified interconnection costs is required by the utility to modify and upgrade the transmission system at or beyond the point of interconnection to accommodate that interconnection. X and Y are party to the same interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The inter­ connection agreement provides the total cost of the qualified interconnection property to X and Y. X and Y may include the costs paid or incurred by X and Y, respectively, for qualified interconnection property subject to the terms of the interconnection agree­ ment, to calculate their respective section 48 credits for the Solar Property and the Wind Facility because each has a maximum net output of not greater than five MW (in alternating current).

(iii) Example 3. Application of Five-Megawatt Limitation to an interconnection agreement for a single energy property. X develops three solar prop­ erties (Solar Properties) located in close proximity. The Solar Properties are not considered an energy project pursuant to the definition in §1.48-13(d). Each of the Solar Properties is a unit of energy prop­ erty that has a maximum net output of 4 MW. The nameplate capacity of each Solar Property is deter­ mined by using the sum of the nameplate generating capacities within the unit of each Solar Property in direct current, which is deemed the nameplate gen­ erating capacity of each Solar Property in alternating current. Electricity from the three Solar Properties feeds into a single gen-tie line and a common point of interconnection with the transmission system. X is party to a separate interconnection agreement with the utility for each of the Solar Properties and each interconnection agreement allows for a maxi­ mum output of 10 MW (as measured in alternating current). X may include the costs it paid or incurred for qualified interconnection property for each of the Solar Properties to calculate its section 48 credit for each of the Solar Properties, subject to the terms of each interconnection agreement, because each of

December 23, 2024 1422 Bulletin No. 2024–52

the Solar Properties has a maximum net output of not greater than five MW (in alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48 credit amount for both Solar Properties.

(iv) Example 4. Application of Five-Megawatt Limitation to a single interconnection agreement for multiple energy properties. The facts are the same as in paragraph (h)(7)(iii) of this section ( Example 3 ), except that X is party to one interconnection agreement with the utility with respect to the three solar energy properties (Solar Properties) and the interconnection agreement allows for a maximum output of 12 MW (as measured in alternating cur­ rent). With respect to each of the three Solar Prop­ erties, X may include the costs it paid or incurred for qualified interconnection property for each Solar Property to calculate its section 48 credit for each Solar Property, subject to the terms of the intercon­ nection agreement, because each Solar Property has a maximum net output of not greater than five MW (in alternating current).

(v) Example 5. Application of Five-Megawatt Limitation to an Energy Project. The facts are the same as in paragraph (h)(7)(iv) of this section ( Example 4 ), except that the three solar energy prop­ erties (Solar Properties) are also subject to a common power purchase agreement, and as a result are con­ sidered an energy project (as defined in §1.48-13(d)). With respect to each of the three Solar Properties, X may include the costs it paid or incurred for quali­ fied interconnection property to calculate its section 48 credit for each of the three Solar Properties, sub­ ject to the terms of the interconnection agreement, because each of the Solar Properties has a maximum net output of not greater than five MW (in alternating current).

(vi) Example 6. Utility payment reducing costs borne by taxpayer . In year 1, X places in service a solar energy property (Solar Property) with a maxi­ mum net output of 3 MW (as measured in alternat­ ing current by using the nameplate capacity of the inverter attached to the solar energy property, which is the first component of property attached to each of the Solar Properties that inverts the direct current electricity into alternating current). X is party to an interconnection agreement with a utility for the pur­ pose of connecting the Solar Property to the trans­ mission or distribution system of the utility. Pursuant to the interconnection agreement, X pays $1 million to the utility, and the utility places in service qual­ ified interconnection property. In year 1, X had no reasonable expectation of any payment from the utility or other parties with respect to the qualified interconnection property. The $1 million is properly chargeable to the capital account of X, subject to paragraph (h)(6) of this section. X properly includes the $1 million paid to the utility in determining its credit under section 48 for Year 1. In Year 4, tax­ payer Y enters into an agreement with the utility under which Y pays the utility $100,000 for the use of qualified interconnection property placed in ser­ vice by the utility pursuant to the interconnection agreement between X and the utility. The utility pays $100,000 to X. Under these circumstances, the pay­ ment from the utility in year 4 would not require X to reduce the amount treated as paid or incurred for the

qualified interconnection property for the purpose of determining the section 48 credit in year 1.

(vii) Example 7. Non-utility payment reducing costs borne by taxpayer. The facts in year 1 are the same as in paragraph (h)(7)(vi) of this section ( Exam- ple 6 ). In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays X $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the inter­ connection agreement between X and the utility. Y pays $100,000 to X. In year 1, X had no reasonable expectation of any payment from Y for subsequent agreements with Y or other parties with respect to the qualified interconnection property. Under these circumstances, the payment from Y in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48 credit in year 1.

(i) Cross references . (1) For rules regarding the coordination of the section 42 credit and section 48 credit, see section 50(c)(3). (2) For rules regarding the denial of double benefit for qualified biogas prop­ erty, see section 45(e).

(3) For applicable recapture rules, see section 50(a).

(4) For rules regarding the credit eligi­ bility of property used outside the United States, see section 50(b)(1).

(5) For rules regarding the credit eligi­ bility of property used by certain tax-ex­ empt organizations, see section 50(b)(3). See section 6417(d)(2) of the Code for an exception to this rule in the case of an applicable entity making an elective pay­ ment election.

(6) For application of the normalization rules to determine the section 48 credit taken by certain regulated companies, including rules regarding the election not to apply the normalization rules to energy storage technology (as defined in section 48(c)(6)), see section 50(d)(2). (j) Applicability date . This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after December 12, 2024.

Par. 4. Section 1.6418-5 is amended by adding paragraph (f) and revising para­ graph (j) to read as follows:

§1.6418-5 Special rules.

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(f) Notification and impact of recap- ture under section 48(a)(10)(C)— (1) In general. In the case of any election under

§1.6418-2 or §1.6418-3 with respect to any specified credit portion described in §1.6418-1(c)(2)(ix), if, during any tax­ able year, there is recapture under section 48(a)(10)(C) of the Code and §1.48-13(c) (4) of any increased credit amount under section 48(a)(9)(B)(iii) before the close of the recapture period (as described in §1.48-13(c)(6)), such eligible taxpayer and the transferee taxpayer must follow the notification process in paragraph (f)(2) of this section with the Federal income tax consequences of recapture impacting the transferee taxpayer as described in para­ graph (f)(3) of this section.

(2) Notification requirements . The noti­ fication requirements for the eligible tax­ payer are the same as for an eligible tax­ payer that must report a recapture event as described in paragraph (d)(2)(i) of this section, except that the recapture amount that must be computed is defined in §1.4813(c)(5). (3) Impact of recapture —(i) Section 48(a)(10)(C) recapture event . The trans­ feree taxpayer is responsible for any amount of tax increase under section 48(a)(10)(C) and §1.48-13(c)(5) upon the occurrence of a recapture event under §1.48-13(c)(4), provided that if an eli­ gible taxpayer retains any amount of an eligible credit determined with respect to an energy property directly held by the eligible taxpayer, the amount of the tax increase under section 48(a)(10)(C) and §1.48-13(c)(5) that the eligible taxpayer is responsible for is equal to the recap­ ture amount multiplied by a fraction, the numerator of which is the total credit amount that the eligible taxpayer retained, and the denominator of which is the total credit amount determined for the energy property. The amount of the tax increase under section 48(a)(10)(C) that the trans­ feree taxpayer is responsible for is equal to the recapture amount multiplied by a fraction, the numerator of which is the specified credit portion transferred to the transferee taxpayer, and the denominator of which is the total credit amount deter­ mined for the energy property.

(ii) Impact of section 48(a)(10)(C) recapture event on basis of energy prop- erty held by eligible taxpayer . The eligi­ ble taxpayer must increase the basis of the energy property (as of the first day of the taxable year in which the recapture

Bulletin No. 2024–52 1423 December 23, 2024

event occurs) by an amount equal to the recapture amount provided to the eligible taxpayer by the transferee taxpayer pur­ suant to the notification required under paragraph (f)(2) of this section and the recapture amount on any credit amounts retained by the eligible taxpayer in accor­ dance with section 48(a)(10)(C) and §1.48-13(c)(4).

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(j) Applicability dates —(1) In gen- eral . Except as provided in paragraph (j)

(2) of this section, this section applies to taxable years ending on or after April 30, 2024. For taxable years ending before April 30, 2024, taxpayers, however, may choose to apply the rules of this section and §§1.6418-1 through 1.6418-3 pro­ vided the taxpayers apply the rules in their entirety and in a consistent manner.

(2) Paragraph (f) of this section. Para­ graph (f) of this section applies to taxable years ending on or after December 12, 2024.

Douglas W. O’Donnell,

Deputy Commissioner.

Approved: November 25, 2024.

Aviva R. Aron-Dine, Deputy Assistant Secretary of the Trea-

sury (Tax Policy).

(Filed by the Office of the Federal Register TBD, TBD, and published in the issue of the Federal Reg­ ister for TBD, TBD FR TBD)

December 23, 2024 1424 Bulletin No. 2024–52