Internal Revenue Service Finalizes New Rules for Investment Tax Credit (IRC 48 and 48E) and Production Tax Credit (IRC 45 and 45Y)

On January 7, 2025, the Internal Revenue Service (IRS) and United States Department of the Treasury released TD 10045, which outlines final regulations in Internal Revenue Code (IRC) Section 45Y for the clean electricity production tax credit (PTC) and Section 48E for the clean electricity investment tax credit (ITC), established by the Inflation Reduction Act of 2022. The “clean electricity” standard is the new long-term “tech-neutral” guideline, which replaces the “tech-specific” version for the renewable energy PTC and ITC in Sections 45 and 48 regarding energy credits. The new regulations in Sections 45Y and 48E apply to facilities placed in service after December 31, 2024, versus the old regulations in Sections 45 and 48 for facilities beginning construction on or before December 31, 2024.

Changes from the Interim Proposed Regulations 

The biggest change from the interim proposed regulations is the definition of a “single” versus “multiple” energy project or energy facility. The new regulations modify the definition of energy projects consisting of one or more energy properties that are part of a single project. Multiple energy properties will be treated as one energy project if, at any point during the construction of the multiple energy properties, they are owned by a single taxpayer and any four or more of seven factors¹ are met. The original rule proposal required meeting only two of the seven factors to qualify as an energy project. Commenters were concerned that the common construction and loan agreement factors could result in overinclusive effects such as thousands of separate residential rooftop systems being treated as one “energy project.” These concerns justified shifting the qualifying criteria from two factors to four factors.

The definition of “clean energy” under the regulations in Sections 45Y and 48E include energy storage technologies (EST), such as electric batteries and thermal energy storage as well as facilities that generate electricity with less than zero greenhouse gas (GHG) emissions. The rules also include standards for GHG metering, electricity sales between related and unrelated persons, combined heat and power property, and the credit phaseout beginning in 2032 or when certain GHG emissions reductions are met.

For Section 48E credits, the new rules define qualified facilities and properties, including energy storage technologies, hybrid systems, and thermal energy storage systems. Facilities claiming Section 48E credits cannot simultaneously claim other federal energy credits, with facility costs appropriately allocated between credit categories. The rules continue to make a distinction between clean energy projects that use combustion and gasification and those that do not, such as wind, solar, hydropower, and several other technologies. Combustion and gasification projects must perform an analysis to verify their zero emission status.

The new regulations expand the scope of eligible energy properties to include emerging technologies. Although standards set by the IRS and Department of Energy must still be met, eligible energy property now includes energy storage technologies, waste energy recovery property (WERP), combined heat and power (CHP) systems, geothermal heat pump (GHP) property, qualified biogas property, and microgrid controllers. It is important to correctly classify the type of energy property at issue, as requirements to meet credit eligibility vary.

What Has Not Changed 

In keeping with the previous IRC Sections 45 and 48 regulations under TD 10015, the retrofit facility 80/20 Rule has remained the same. The 80/20 Rule states that retrofitted facilities may be treated as new if 80% of the facility’s components are new compared to the reused equipment for which the fair market value cannot be greater than 20%. Thus, new equipment must be valued at four times the fair market value of the reused equipment to be considered a “new” qualified facility.

Additionally in keeping with previous regulations, the Incremental Cost provision has been kept for mixed-use property, such as P solar on a roof including a portion of the roof cost itself, PV solar carports including a portion of the carport itself, and integrated systems like HVAC with geothermal where some HVAC costs can be included. Overall, the formulae to determine incremental cost is the actual costs minus the replacement cost or minimal compliance cost of the non-energy property. For example, the incremental cost of a solar roof would be the cost of the full solar and roof costs minus the cost of a minimally code compliant roof to take into account the mixed-use nature. In the case of an HVAC upgrade adding geothermal, the incremental cost would be calculated by subtracting the replacement cost of the old HVAC system from the full contract value of the upgraded geothermal system.

The Trump Factor 

As a final note at the time of writing this article, the new Trump administration has issued a set of executive orders pulling back some aspects of the Green New Deal. Thus far, our interpretation is that an executive order cannot revoke a bipartisan tax law passed roughly two years ago by Congress. If any portion of the Green New Deal would be revoked, likely the biggest tax piece would be Section 48C because it has a major discretionary component. As discussed in a recent quarterly CPE² webinar, the majority of job creation and private investment from the IRA-2022 has benefited Republican districts, and the bill was originally a bipartisan effort; therefore, repealing the whole tax law would be difficult.

The new executive orders, however, can stop the Department of Energy from awarding further grants to various energy projects. To date, the major pieces of the Green New Deal that are being curtailed include limiting electric vehicle charging stations made available through the National Electric Vehicle Infrastructure Formula Program and the Charging and Fueling Infrastructure Discretionary Grant Program.

Overall, at this juncture, the Trump administration is too new to know for sure whether other aspects of the Green New Deal or IRA-2022 might be repealed. Adding to this, the new IRS regulations are lengthy and complex, coming in at more than 400 pages. Our Ryan team has studied these regulations and can assist you to see if your business qualifies for the Section 48 or 45 green energy credits. Please reach out to the experts below who can help you decipher these complex rules. 

¹ 1. The energy properties are constructed on contiguous pieces of land; 2. The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements; 3. The energy properties have a common intertie; 4. The energy properties share a common substation, or thermal energy off-take point; 5. The energy properties are described in one or more common environmental or other regulatory permits; 6. The energy properties are constructed pursuant to a single master construction contract; or 7. The construction of the energy properties are financed pursuant to the same loan agreement.

² https://tax.ryan.com/prepare-your-business-for-the-upcoming-election.

TECHNICAL INFORMATION CONTACTS:

Ian Boccaccio
Principal
Ryan
469.399.4545
ian.boccaccio@ryan.com

Scott Stogsdill
Director
Ryan
469.399.4496
scott.stogsdill@ryan.com

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