As long as there’s been an Energy Community Tax Credit Bonus, C&I solar companies have been wondering: How does the Energy Community Tax Credit Bonus affect my company?
The US Treasury Department and the IRS recently issued guidance to clear up the confusion. What does it mean for C&I solar, installers, and people in Energy Communities? Let’s take a look.
First, we have to take a step back and answer the question…
What is an Energy Community?
According to EnergyCommunities.gov, the IRA defines an Energy Community as (text taken directly from the website):
A “brownfield site”
These are properties where redevelopment is complicated by potential environmental hazards — as defined in certain subparagraphs of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). To qualify, a brownfield site must either have been previously identified by federal, state, or tribal resources as a hazard-affected site, or confirmed as such through an Environmental Site Assessment. Small projects with a nameplate capacity of 5 megawatts or less also qualify if a Phase I Environmental Site Assessment has been completed.
A “metropolitan statistical area” or “non-metropolitan statistical area”
These areas must have had significant employment or revenue tied to fossil fuel industries (since any time after 2009). Specifically, at least 0.17% of direct employment or 25% of local tax revenues must be related to the extraction, processing, transport, or storage of coal, oil, or natural gas. Additionally, these areas must have an unemployment rate at or above the national average for the previous year.
A census tract (or directly adjoining census tract)
This category includes tracts where a coal mine closed after 1999 or a coal-fired electric generating unit retired after 2009. The tax credit bonus also applies to directly adjoining census tracts. This provision is intended to support communities impacted by the transition away from coal-based energy production.
OK, so only the US government could consider wording like this to be a “clarification”. But, we can see that generally speaking, Energy Communities are places that have been adversely affected by traditional energy production methods.
The Energy Communities website provides a searchable map to help clarify.
Now that we have a little more insight on the communities themselves, we can start to look into…
What does the Energy Community Tax Credit Bonus mean for installers?
The Energy Community Tax Credit Bonus is a significant financial incentive that amplifies the profitability of renewable energy projects within defined “Energy Communities”. When a project is eligible for the Production Tax Credit (PTC) or Clean Electricity Production Credit (CEPC) and situated within an Energy Community, it receives a 10% increase to the base credit amount.
To put it in perspective, the base credit amount refers to the initial tax credit a project can earn under Sections 45, 48, 45Y, or 48E of the Internal Revenue Code before the application of the Energy Community Tax Credit Bonus. This increase, in the form of a 10% bonus for PTC or a 10 percentage point rise for Investment Tax Credits (ITC), can significantly boost the financial viability of renewable energy projects.
For solar PV projects, this effectively translates to enhanced savings and increased revenues for developers working within these Energy Communities. With the Energy Community Tax Credit Bonus in play, the economic case for renewable energy investment in these communities becomes even stronger — accelerating the transition towards cleaner energy sources and contributing to the overall sustainability goals.
Why did the IRS issue this update?
The definitions of Energy Communities and the qualifying criteria for this bonus credit were initially broad and complex, leading to uncertainty and a need for further guidance. Recognizing this, the IRS issued Notice 2023-29 in April 2023 to provide clarity on the eligibility requirements and the bonus credit program under the Inflation Reduction Act.
The Notice outlined detailed guidelines and proposed regulations to help project developers, investors, and impacted communities better navigate the Energy Community Tax Credit Bonus program.
How do I know if a site qualifies for the ECTCB?
As a PV installer, the first step is to assess if your current or prospective solar projects are located in Energy Communities. Resources such as the Energy Communities Map can help you identify these areas.
Once you have a potential qualifying project, consult with a tax professional to ensure that your project meets all the IRS requirements to capitalize on the Energy Community Tax Credit Bonus.
The Energy Community Tax Credit Bonus offers a lucrative incentive for solar PV installers to contribute to the revitalization of communities impacted by energy sector changes. By understanding and leveraging this bonus, you can drive both the growth of your business and the adoption of clean energy.
Have more questions about the Energy Community Tax Credit Bonus and how your company can use it? Schedule a personalized demo — or get the info right now by clicking the chat box at the lower right of the screen.