Staying up to date on new Inflation Reduction Act (IRA) tax rules is crucial to avoiding risk when it comes to certain energy projects; and the rules around eligible energy tax credits in the IRA are changing again at the end of 2024.

Beginning in 2025, both the Investment Tax Credit (ITC) and Production Tax Credit (PTC) will change to a “technology neutral” approach; the ITC under section 48E and the PTC under section 45Y. Because this new approach to tech neutral credits has no analogue in prior tax law, the Treasury and IRS recently proposed regulations for both sections 48E and 45Y. Though not final, the official process of issuing IRS guidance for these new tax code sections has begun. Final regulations will be forthcoming as part of a separate effort. With the exception of energy storage, hydrogen, and some interconnection property, 48E and 45Y each allow a credit for technology that generates electricity and has a zero net emissions rate beginning in 2025.

However, it’s important to note that if carbon emissions exist but are properly captured, then the credit may be allowed.

ITC, section 48E, and transition rules

In some cases, the IRA replaces IRC section 48 with IRC section 48E starting on Jan. 1, 2025.

However, if a taxpayer begins construction (defined below) on a section 48 eligible project before 2025, even if it is placed in service on or after Jan. 1, 2025, and, even if there are carbon emissions, then new 48E may not actually apply and, instead, existing section 48 may remain in effect.

Furthermore, some technology like solar, wind, storage, and interconnection property (under 5MW) that do not have carbon emissions will continue to remain eligible for the ITC under new section 48E; either because they have no carbon emissions and produce electricity or are expressly listed in 48E.

Accordingly, current section 48 and section 48E have some pre-2025 transition rules within it.  

Most of the technologies in current section 48 have a transition rule, which means that with respect to ITC property, the construction of which begins before Jan. 1, 2025, current section 48 will remain in effect if construction began before Dec. 31, 2024, even though new section 48E otherwise takes effect in 2025.

There is an exception, however, for ground or ground water heating and cooling (sometimes called “heat pumps”) but only if construction begins before Jan. 1, 2035, in which case section 48 still applies even if placed in service after 2024.

Note: For this purpose the phrase, “beginning of construction” means complying with the IRS rules and definitions set forth in IRS Notice 2018-59, et. seq.

Therefore, it’s important to assess whether construction for stand-alone energy or storage projects, or  other projects such as real estate projects, that might use ITC eligible technology, will actually begin or otherwise qualify for section 48E after section 48 normally expires at the end of 2024, or whether current section 48 must apply.

Rules applicable to the clean electricity Investment Tax Credit – 48E

These proposed regulations are organized into five sections, proposed section 1.48E-1 through section 1.48E-5 (section 48E regulations). 

1. Proposed section 1.48E-1 would provide an overview of the section 48E regulations, including applicable definitions and the rules applicable to the calculation of section 48E credit. 
2. Proposed section 1.48E-2 would provide rules relating to a qualified facility, a qualified investment, a qualified property, and an energy storage technology (EST). 
3. Proposed section 1.48E-3 is reserved for rules relating to the increased credit amount for meeting the prevailing wage and apprenticeship requirements. A cross reference will be added to section 48E-3 in the final regulations when section 1.48E-3 is finalized. 
4. Proposed section 1.48E-4 would provide the rules of general application under section 48E, including the rules regarding the inclusion of qualified interconnection costs in the basis of a low-output associated qualified facility, rules for expansion of a facility and incremental production, rules for retrofitting an existing facility, rules for the ownership of a qualified facility or an EST, rules regarding the coordination of the section 48E credit with other federal income tax credits, and rules for credit recapture. 
5. Proposed section 1.48E-5 would provide rules pertaining to the determination of a GHG emissions rate for a facility under section 48E.

PTC, section 45Y, and transition rules

Similar transition principles apply to the section 45 PTC, and, if construction begins before Jan. 1, 2025, then the section 45 PTC will apply rather than the 45Y PTC as long as the project is eligible under section 45.  

Where construction begins on or after Jan. 1, 2025, some technologies like wind, solar, hydro etc. that do not burn/combust or gassify fuel will be allowed a production tax credit under 45Y because they have no carbon emissions.

But if a project does have an emission footprint, 45Y determines which technologies are eligible, and those with a carbon emission’s profile will likely not remain eligible under section 45Y unless the emissions are properly captured. 

Again: For this purpose, “beginning of construction” means complying with those IRS rules and definitions set forth in IRS Notice 2018-59, et. seq. 

Rules applicable to the clean electricity Production Tax Credit – 45Y

In a manner similar to that for 48E, the Treasury issued the following proposed 45Y regulations.

The proposed regulations under section 45Y are organized in five sections, proposed section 1.45Y-1 through section 1.45Y-5 (section 45Y regulations).

1. Proposed section 1.45Y-1 would provide an overview of the section 45Y regulations, generally applicable definitions, and general rules applicable to section 45Y, including a rule for calculating the credit for a CHP property.
2. Proposed section 1.45Y-2 would provide rules relating to qualified facilities for purposes of the section 45Y credit.
3. Proposed section 1.45Y-3 is reserved for rules relating to the increased credit amount for meeting the prevailing wage and apprenticeship requirements. A cross reference will be added to section 1.45Y-3 in the final regulations after section 1.45Y-3 is finalized.
4. Proposed section 1.45Y-4 would provide the rules of general application under section 45Y, including rules that attribute production to the taxpayer, rules for the expansion of a facility and incremental production, and rules for retrofits of an existing facility.
5. Proposed section 1.45Y-5 would provide rules pertaining to the determination of a greenhouse gas (GHG) emissions rate for a facility under section 45Y.

Quick checklist for ITC and PTC Energy Credits:

Determine when construction began or will begin on the energy technology.

• If construction begins before 2025, apply section 48 or 45.
• If construction begins in or after 2025, apply section 48E or 45Y.

Does ITC or PTC eligible technology have carbon emissions?

• If yes, can you utilize section 48 or 45 begin construction rules to safe harbor the project?
• If you have carbon emissions and cannot use section 48 or 45, then can you use an allowed carbon capture technology per IRC section 48E or 45Y to qualify the project?
  • If no carbon capture technologies are used but you will have carbon emissions, then STOP. You may not be eligible for either 48, 48E, 45, or 45Y given the zero emissions rules.

It’s important to note that, given the transition rule, it is possible for a taxpayer to be simultaneously eligible for the PTC or ITC under either 45, 45Y, 48, or 48E.  Taxpayers must therefore choose, and are forced to stick with that initial choice, as you cannot claim more than one of these four credits on the same property or facility, and you cannot switch between credits once one of credits is chosen.