From Kiplinger Personal Finance — By Michael Cohn
The Treasury Department and the Internal Revenue Service issued proposed regulations to update the investment tax credit rules to encompass various forms of renewable energy.
The proposed regulations, which were posted Friday, Nov. 17, update rules that haven’t been changed since 1987. The proposal updates the kinds of energy properties eligible for the Section 48 investment tax credit to reflect various changes in the energy industry, especially when it comes to technological advances on renewable energy, and updates from last year’s Inflation Reduction Act.
The proposed regs offer definitions of energy properties for which the ITC was available before the IRA, including, but are not limited to, solar process heat, fiber-optic solar property, combined heat and power system property, qualified fuel cell property, and qualified microturbine property.
The proposed rules also deal with technologies that were added to the investment tax credit as energy property by the IRA, including electrochromic glass, energy storage technology, microgrid controllers, and biogas property. The IRA added new provisions to the tax credit to permit smaller projects to include the cost of some kinds of interconnection property within their credit amount.
On top of that, the proposed regs contain general rules for the investment tax credit, including the application of the “80/20” rule to retrofitted energy property, dual use property, and issues related to multiple owners of an energy property. Under the 80/20 rule, an existing project is considered to be newly placed in service as long as all the used property in the project doesn’t represent more than 20% of the fair market value of the project after its refurbishment, with 80% or more of that fair market value represented by costs included in the depreciable basis of the new property.
The Treasury Department and the IRS have been rolling out a stream of guidance and regulations over the past year pertaining to the Inflation Reduction Act and its provisions related to the renewable energy industry, including electric vehicles and solar and wind credits.
The latest set of proposed regulations could have the effect of expanding the investment tax credit from a base of 6% up to 70% for qualifying projects.
“To continue the investment and jobs boom created by the Inflation Reduction Act, Treasury has focused on providing companies with clarity and certainty needed to secure financing and advance clean energy projects nationwide” said Deputy Secretary of the Treasury Wally Adeyemo in a statement Friday. “Today’s guidance provides clarity for offshore wind and battery storage projects, as well as small scale projects that need to connect to the grid. Ensuring these projects can move forward efficiently is key to creating good-paying clean energy jobs and lowering Americans’ utility bills.”
The Notice of Proposed Rulemaking offers greater clarity around the eligibility of power conditioning and transfer equipment like subsea export cables used in offshore wind projects, as well as certain power conditioning equipment located in onshore substations.
The notice also includes proposed rules around the eligibility of standalone battery storage for the investment tax credit, reflecting a provision in the Inflation Reduction Act to help support the development of long-duration energy storage to help utilities transition to renewable sources like wind and solar.
The notice also includes proposed rules pertaining to the inclusion of costs of interconnection-related property for lower-output clean energy installations, including the costs of upgrades to local transmission and distribution networks that are necessary to connect the clean energy. The aim is to lessen the costs and delays for new, smaller clean energy installations to connect to the grid and start producing power.
The notice also proposes updates to a variety of other technical definitions and rules to provide greater clarity and certainty for clean energy project developers.
The Treasury and the IRS said they will accept comments on the proposed regulations for 60 days.
Michael Cohn is Editor-in-Chief of Accounting Today.
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