Editor: Mo Bell-Jacobs, J.D.

Federal income tax credits have been used to incentivize investment in clean–energy projects for decades. The Sec. 48 energy credit is a component of the Sec. 46 investment tax credit (ITC). The ITC dates back to the Revenue Act of 1962, P.L. 87–834, and provides a tax credit for investment in renewable energy property. Similarly, the production tax credit (PTC) under Sec. 45 dates back to the Energy Policy Act of 1992, P.L. 102–486, and provides a tax credit for renewable electricity generated and sold from qualified energy resources.

Sec. 48 provides the ITC for certain qualifying energy property, such as solar, small wind, fuel cell, combined heat and power (CHP), biogas, and geothermal property, among others (Sec. 48(a)(3)). The credit amount is determined based upon a percentage of the taxpayer’s basis in the eligible energy property (Sec. 48(a)(1)).

Sec. 45 provides the PTC for electricity produced from certain renewable energy resources, such as wind, biomass, geothermal energy, and solar energy (Sec. 45(c)). The credit amount is determined on a per–kilowatt–hour (KWh) basis, whereby the amount of electricity produced from qualified energy resources at a qualified facility (during a 10–year period) and sold to an unrelated person is multiplied by the applicable credit rate (Sec. 45(a)).

The Inflation Reduction Act of 2022, P.L. 117–169, modified the legacy ITC and PTC and introduced new “tech–neutral” energy credits that phase in as the legacy ITC and PTC phase out. On Jan. 15, 2025, Treasury and the IRS published final regulations (T.D. 10024, 90 Fed. Reg. 4006) for the tech–neutral credits.

Phasing in tech-neutral energy credits

The Sec. 48 and 45 credits are generally no longer available for energy property for which construction did not commence before Jan. 1, 2025. Despite this phaseout date, taxpayers may be able to qualify for the new tech–neutral energy credits under Secs. 48E and 45Y for clean–energy projects placed in service after Dec. 31, 2024.

Specifically, Sec. 48E replaces the Sec. 48 ITC, providing an investment tax credit for investment in qualified facilities used for the generation of electricity and energy–storage technology. Likewise, Sec. 45Y replaces the legacy PTC, providing a production tax credit for the production of electricity at a qualified facility (Secs. 45(d) and 48(a)(3)). Under both the Sec. 48E and 45Y credits, the qualified facility may qualify for a credit regardless of the type of clean–energy technology used to generate electricity, provided it has a greenhouse gas (GHG) emissions rate “not greater than zero” and other applicable requirements are met (Secs. 48E(b)(3) and 45Y(b)(1)(A)). Taxpayers may rely on a qualified facilities “anticipated” GHG emissions rate. An actual emissions rate of greater than 10 grams of CO₂e per KWh within five years of the facility’s placed–in–service date would result in a recapture of the credit (Sec. 48E(g)). Rules for computing a credit under Sec. 48E or 45Y are similar to those of the legacy ITC and PTC.

Note, however, that the tech–neutral credits generally require that the qualified facility generate electricity. As a result of this requirement, certain technologies that would have otherwise qualified under the legacy credits may not qualify under the tech–neutral credits. Examples of technologies that may not qualify under the new tech–neutral credits include certain CHP systems and biogas properties that produce fuel but not electricity. One exception is that energy–storage technology may continue to qualify for the Sec. 48E credit.

Congress added these tech–neutral credits to the Internal Revenue Code to ensure that the Sec. 48E and 45Y credits remain relevant as clean–energy technology advances, marking an important shift in the clean–energy incentive tax regime.

Determining emissions rates under the tech-neutral credits

The new tech–neutral credits require that qualified facilities producing electricity do so with a GHG emissions rate of not greater than zero. The GHG emissions rate is expressed as grams of carbon dioxide per KWh (Secs. 45Y(b)(2)(A) and (e)(1)). The rules apply the determinations for emissions rates to combustion and gasification (C&G) facilities and non–C&G facilities (Regs. Secs. 1.45Y–5(c) and (d)). The regulations establish that certain non–C&G facilities have a GHG emissions rate that is “not greater than zero” (Regs. Sec. 1.45Y–5(c)(2)). These would include wind facilities, hydropower facilities, marine and hydrokinetic facilities, solar facilities, geothermal facilities, nuclear fission facilities, nuclear fusion facilities, and waste energy recovery property.

For a facility not listed within the final regulations’ technologies deemed to have a GHG emissions rate not greater than zero, such as a C&G facility, a taxpayer may demonstrate the facility produces GHG emissions of not more than zero in one of three ways. This includes the technology being listed in the annual table of GHG emissions rates published by Treasury; utilizing a lifecycle analysis (LCA) demonstrating that the facility does not produce net GHG emissions; or seeking a letter from the Department of Energy (DOE) certifying that the qualifying facility does not produce net GHG emissions. Taxpayers utilizing an LCA or the DOE certification process must file a petition with the IRS to allow for the use of the provisional emissions rate.

C&G facilities’ GHG emission rates must be determined by considering lifecycle GHG emissions as described in the Clean Air Act, P.L. 88–206, as amended (Sec. 45Y(b)(2)(B)). The final regulations state that an LCA meeting certain requirements is required to determine the GHG emissions rate (Regs. Sec. 1.45Y–5(d)). These requirements include, for example, calculations on direct emissions (id.). Principles for included emissions include (1) direct emissions from feedstock generation, production, and extraction; feedstock and fuel transport; transporting and distributing fuels to an electricity production facility; handling, processing, upgrading, and storing feedstocks; combustion and gasification; and (2) significant indirect emissions (Regs. Sec. 1.45Y–5(d)(2)(v)). Conversely, LCAs “must not take into account” emissions from facility construction, siting, decommissioning, or maintenance; emissions from infrastructure associated with the facility; and emissions from the distribution of electricity to consumers (Regs. Sec. 1.45Y–5(d)(2)(vi)). The list of requirements the LCA must comply with was expanded under the final regulations to include temporal scales, spatial scales, and categorization of products.

Considerations for properties that may qualify under both legacy and tech-neutral credits

While Secs. 48E and 45Y are available for qualifying facilities or energy–storage technology placed in service after Dec. 31, 2024, the phaseout for both them and the Sec. 48 and certain Sec. 45 credits are determined based upon the beginning–of–construction date, not the placed–in–service date (Secs. 48(a)(7) and 45(b)(5); compare Secs. 45Y(d) and 48E(e)). It is therefore possible to have the same clean–energy project qualify for both the legacy credits and the tech–neutral credits. A taxpayer would not, however, be able to claim both credits (e.g., a Sec. 48 and Sec. 48E credit) for the same property but would rather be required to choose which credit it is claiming.

If a taxpayer is in the unique situation in which they may claim either a legacy credit or a tech–neutral credit, there are several considerations to keep in mind. One is the treatment of a facility expansion and incremental production, as the tech–neutral credits allow taxpayers to claim a credit for the expansion of an existing facility that results in “either a new unit or an addition of capacity” (Regs. Sec. 1.45Y–4(c)). While this should not be confused with retrofitted facilities, it does provide flexibility for taxpayers that was generally not available under the PTC or ITC. Another consideration is the treatment of multiple properties as a single project. The final regulations provide that for purposes of the Sec. 45Y(a)(2)(B)(i) exception from the prevailing wage and apprenticeship requirements for determining the credit for facilities with a maximum net output of less than 1 megawatt (the 1 megawatt exception), taxpayers may be required to aggregate the nameplate capacities of qualified facilities if such facilities have “integrated operations” with one another (Regs. Secs. 1.45Y–3(c) and 1.48E–3(c)). As a result, grouped facilities may be subject to the prevailing wage and apprenticeship requirements. This grouping approach under the tech–neutral credit rules is different from those under the legacy credits. The difference sets taxpayers up for different analyses of their eligibility for the increased credit amount connected to the prevailing wage and apprenticeship requirements, the domestic content bonus credit, and the energy community bonus credit. Key distinctions also exist for qualified facilities with a nameplate capacity in excess of 1 megawatt, including, for example, the requirement to calculate the domestic content bonus credit and energy community bonus credit at each individual qualified facility.

Benefiting from tech-neutral energy credits requires evaluating nuances

The shift from the legacy ITC and PTC credits to the tech–neutral credits is a significant change in policy, creating both winners and losers. There are a number of technical nuances to be evaluated to ensure that projects qualify for these new credits, including the transition dates between the two sets of credits, the general requirement of electricity production, and the requirement for development of new technologies with GHG emissions rates not greater than zero. While certain types of property may no longer qualify for the ITC or PTC, the new regime opens the door to incentivize the design and development of innovative new technologies that produce zero–emissions electricity to support U.S. energy transition.

Editor

Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.

For additional information about these items, contact the author(s) at the email address(es) listed below.

Contributors are members of or associated with RSM US LLP.

Authors

Debbie Gordon, J.D., LL.M. (Deborah.Gordon@rsmus.com), Washington, D.C.; Sara Hutton, J.D., LL.M. (Sara.Hutton@rsmus.com), Detroit; Brent Sabot, CPA, MST (Brent.Sabot@rsmus.com), Washington, D.C.; Marisa Slabbert, CPA (Marisa.Slabbert@rsmus.com), Philadelphia; and Niven Hemraj, J.D., LL.M. (Niven.Hemraj@rsmus.com), Washington, D.C.