A New Chapter for Clean Energy: Final ITC Regulations Unveiled

By Marc L. Schultz, Chris P. Colyer, Jason B. Brinkley, Tyler D. Eddington, and Sukhmani K. Singh

On December 4, 2024, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued final regulations (T.D. 10015) related to the energy credit under Section 48 of the Internal Revenue Code.¹ These regulations set forth final rules relating to the energy credit, including the application of additional requirements and incentives created by the Inflation Reduction Act of 2022 (IRA).² These new rules represent a key effort to modernize renewable energy incentives and align federal policy with rapidly evolving technologies.

Since its inception in the 1970s, the Section 48 investment tax credit (ITC) has been a cornerstone of renewable energy development, primarily supporting solar and wind energy systems. However, its temporary nature, limited scope, and dependency on periodic congressional reauthorization hindered its ability to adapt to new, diverse clean energy technologies. The IRA sought to address these challenges by extending and restructuring the ITC to include a broader array of technologies, such as energy storage, biogas systems, geothermal systems, and microgrid controllers. The IRA also introduced new mechanisms like elective pay and transferability to make these incentives more accessible, particularly to tax-exempt entities, tribal governments, and smaller developers historically excluded from federal tax benefits. The final regulations issued under the IRA build upon its foundation, operationalizing the expanded scope of the ITC and implementing innovative mechanism to address the barriers that have historically limited access to these incentives.

The final regulations reflect the proposed regulations issued in November 2023, incorporating changes based on the 350 written comments received, as detailed in the preamble. These regulations implement amendments to section 48 under the IRA and address several key areas. Specifically, they withdraw and reissue parts of the August 2023 proposed regulations related to the increased energy credit available when prevailing wage and registered apprenticeship (PWA) requirements are met. Additionally, they expand on the June 2023 proposed regulations by introducing further rules on recapturing increased credit amounts under PWA requirements in cases where credits are transferred under section 6418.

One of the notable changes made under the final regulations is the more taxpayer-friendly definition of an “energy project,” which bears upon eligibility for tax credits in several respects, including whether a project becomes subject to the PWA requirements, the domestic content bonus credit amount, and the increase in credit rate for energy communities, among other things. The proposed regulations provided a multifactor test, which would have required only two or more factors to be present among commonly owned but otherwise separate projects to be grouped as a single energy project.

The Treasury Department and the IRS agreed with commenters that the proposed regulations’ definition of energy project, described as ownership plus two factors, was too rigid and could have unintended impacts, such as preventing small rooftop solar installations from being eligible for a certain one-megawatt exception and treating multiple energy properties that are located in different states as a single energy project. Thus, in the case of multiple energy properties owned by a taxpayer, the final regulations now require that four or more factors be present 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 — a taxpayer-friendly revision of the rule that creates a higher threshold for the aggregation of separate projects into an energy project.

The final regulations also clarify rules for transferability of tax credits enabling project owners to sell all or part of their credits to unrelated taxpayers. This provides project developers, particularly those facing cash flow challenges, with immediate access to capital by transferring credits in exchange for cash. These transfers will likely enhance liquidity and broaden access to tax incentives, encouraging participation by smaller developers and new market entrants who may lack significant tax liabilities to offset.

In addition, the final regulations clarify the definition of energy property using a function-oriented approach, ensuring that integral components of clean energy systems qualify for the ITC. For example, biogas facilities can now include the costs of refining and upgrading equipment in the credit calculation which is a reversal from the proposed rules that had excluded such equipment. Similarly, owners of underground geothermal coils can now claim the credit if they also own a connected heat pump, resolving ambiguities regarding ownership requirements.

The final rules in Treasury Decision 10015 will take effect on the date of publication in the Federal Register, which is scheduled to be December 12, 2024. The Snell & Wilmer Tax and Renewable Energy Groups are continuing to review the final regulations and will provide a more detailed analysis.