The U.S. Treasury and IRS recently released proposed low-income adder regulations containing guidance for calendar year 2025 and succeeding years on allocations for the Clean Electricity Low-Income Communities Bonus Credit Amount Program established pursuant to the Inflation Reduction Act (IRA). 

The IRA created a number of new energy related federal income tax credits, one of which is the new IRC Section 48E clean electricity investment credit determined under section 48E(a) (section 48E credit). Beginning in 2025, the Investment Tax Credit (ITC) will change to a “technology neutral” approach under section 48E. Because this new approach to tech neutral credits has no analogue in prior tax law, new regulations are required. 

The new IRC section 48E(h) authorizes Treasury to establish a program for calendar years 2025 and succeeding years to award allocations of Capacity Limitation that increase the amount of the new clean electricity investment credit determined under section 48E(a) (section 48E credit) with respect to eligible property that is part of an applicable facility. This is commonly referred to as the “low-income adder.”

Applicants investing in certain clean electricity generation facilities that produce electricity without combustion and gasification may apply for an allocation of environmental justice capacity limitation to increase the amount of the clean electricity investment credit for the taxable year in which the facility is placed in service. 

What do the proposed regulations do?

The proposed regulations detailed in the Federal Register relate to specific definitions and requirements regarding the following topics:

1.  the definition of “applicable facility;”
2. definitions of “eligible property” under section 48E(h)(3);
3. the definition of “located in” for relevant geographic criteria;
4. definitions and requirements related to the term “financial benefit” and “electricity acquired at a below-market rate” under section 48E(h)(2)(D), as well as a manner to apply such  definitions, appropriately, to Category 3 facilities that are part of qualified low-income residential building projects and Category 4 facilities that are part of qualified economic benefit projects;
5. a rule for facilities placed in service prior to an allocation award;
6. reservations of Capacity Limitation allocation for applicant facilities that meet certain Additional Selection Criteria;
7. sub-reservations of Capacity Limitation allocation for facilities built in a low-income community;
8. the requirement to submit certain application materials demonstrating facility viability in order to allow for an efficient allocation process;
9. the requirement to submit certain documentation and attestations when a facility is placed in service; and
10. post-allocation compliance, including disqualification of allocations of Capacity Limitation and recapture of the section 48E(h) Increase.

As is the case now with IRC section 48 and 45, Treasury and the IRS propose that section 48E facilities placed in service prior to being awarded an allocation of Capacity Limitation would not be eligible to receive an allocation.

These regulations are proposed to apply to qualified facilities placed in service after Dec. 31, 2024, and during taxable years ending after the date the final regulations are filed for public inspection by the Office of the Federal Register.

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