Key Points Summary
The IRS has issued proposed guidance for applying and qualifying for the Low-Income Community bonus for small commercial Solar and Wind projects (under 5 megawatts). This guidance is not yet official, as there is a review/comment period until June 30, 2023.
Under the proposed guidelines, qualified solar and wind projects located in Low-Income Communities may receive an additional 10% or 20% tax credit. However, the program is capped and competitive, so not all projects are likely to qualify.
The program prioritizes projects that benefit the low-income or tribal community they are in, rather than projects that solely benefit a business.
Additional selection criteria have been added to further promote projects that benefit electrical cooperatives and/or areas of high poverty.
Under the Inflation Reduction Act of 2022 Section 48(e), qualified solar and wind projects under Section 48 Investment Tax Credit, could receive a 10% or 20% additional tax credit based on their location and/or benefit to low-income communities. This has potential to be huge for qualifying projects, as it can be stacked on top of the 30% ITC credit and potentially the 10% Domestic Content Credit to have 40-60% in tax credits on a new system (plus bonus depreciation! See Commercial Solar article for more details on the credits and depreciation.)
On May 31, 2023, the IRS issued proposed rules concerning the Low-Income Communities Bonus credit. (See Notice 23-107 for full text). The proposed rules outline specific application procedures, additional allocation criteria, and applicable definitions necessary to apply for the 2023 calendar year. These proposed rules are not yet ratified, and there is a comment period until June 30, 2023, and a process to approve the final version still to come but serves as the best guidance to date on the program. Below are some questions and their answers based on what we know today.
What types of projects are eligible?
Qualified solar and wind projects are defined as facilities that:
Generate electricity solely from a wind facility, solar energy property, or small wind energy property;
Have a maximum net output of less than 5 megawatts
Fit into at least one of the four categories of eligibility
What are the project categories and capacity limits?
The funding is tied to energy output, with a total funding of projects of 1.8 gigawatts of solar and wind projects, subdivided in categories. As most projects are under 1 megawatts (and the program has a 5 megawatt cap), this program will likely fund credits to several thousand projects this year in total.
| Category | Scenario | Energy Output |
|---|---|---|
| 1 | Located in a Low-Income Community | 700 megawatts |
| 2 | Located on Indian Land | 200 megawatts |
| 3 | Qualified Low-Income Residential Building Project | 200 megawatts |
| 4 | Qualified Low-Income Economic Benefit Project | 700 megawatts |
The proposed rule change also notably sub-divides Category 1, so that 560 megawatts of capacity is allocated to projects that have eligible behind-the-meter residential uses, and only 140 megawatts for projects that don’t meet that criterion – most notably rooftop solar for commercial properties.
Where are Low Income Communities defined?
Under § 48(e)(2)(A)(iii)(I), the term low-income community is generally defined under § 45D(e)(1), with certain modifications described elsewhere in § 45D(e), as any population census tract if the poverty rate for such tract is at least 20 percent, or, in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income.
What are the Additional Selection Criteria?
The proposed rule outlines two general criteria for projects, with at least 50% of the total Capacity Limitation being allocated to projects that meet at least one of the criteria (and priority given for any that meet both)
Ownership Criteria
- A qualified solar and wind facility would meet the Ownership if it is owned by a Tribal Enterprise, an Alaska Native Corporation, a renewable energy cooperative, a qualified renewable energy company that meets certain ownership requirements, or a qualified tax-exempt entity.
Geographic Criteria
- Located in a Persistent Poverty County (PPC) or a census tract that is designated in the Climate and Economic Justice Screening Tool (CEJST) as disadvantaged under certain criteria.
About the Author
Caleb Quaid is the founder of Regenerative Shift, a Tampa-based environmental consulting firm, working with businesses and communities on regenerative environmental initiatives and sustainability programs. Regenerative Shift focuses on life-creating and cost-saving holistic programs, including regenerative land and water projects and Inflation Reduction Act (IRA) consulting. As a public speaker, Caleb provides motivating insight into practical life-creating environmental practices and shows the business case for going green with tax incentives under the IRA.
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