Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10024]

RIN 1545-BR17

Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document sets forth final regulations regarding the clean electricity production credit and the clean electricity investment credit established by the Inflation Reduction Act of 2022. These final regulations provide rules for determining greenhouse gas emissions rates resulting from the production of electricity; petitioning for provisional emissions rates; and determining eligibility for these credits in various circumstances. The final regulations affect all taxpayers that claim the clean electricity production credit with respect to a qualified facility or the clean electricity investment credit with respect to a qualified facility or energy storage technology, as applicable, that is placed in service after 2024.

DATES:

Effective date:

These regulations are effective on January 15, 2025.

Applicability dates:

For dates of applicability, see §§ 1.45Y-1(e), 1.45Y-2(d), 1.45Y-3(d) 1.45Y-4(e), 1.45Y-5(j), 1.48E-1(e), 1.48E-2(h), 1.48E-3(f), 1.48E-4(j), and 1.48E-5(l).

FOR FURTHER INFORMATION CONTACT:

Maksim Berger, John M. Deininger, Martha M. Garcia, Boris Kukso, Nathaniel Kupferman, and Alexander Scott at (202) 317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This Treasury decision amends the Income Tax Regulations (26 CFR part 1) to implement the statutory provisions of sections 45Y and 48E of the Internal Revenue Code (Code). The regulations contained in this Treasury decision are issued by the Secretary of the Treasury or her delegate (Secretary) pursuant to the authority granted under sections 45Y(f), 48E(i) and 7805(a) of the Code (final regulations).

Section 45Y(f) provides an express delegation of authority to the Secretary to prescribe rules to implement section 45Y, “including calculation of greenhouse gas emissions rates for qualified facilities and determination of clean electricity production credits under section 45Y.” Section 48E(i) provides an express delegation of authority to prescribe rules “regarding implementation of [section 48E].”

Finally, section 7805(a) authorizes the Secretary “to prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

On August 30, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-100908-23) in the

Federal Register

(88 FR 60018),

corrected in

88 FR 73807 (Oct. 27, 2023), and 89 FR 25550 (April 11, 2024), providing guidance on the Prevailing Wage and Apprenticeship (PWA) requirements under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D (PWA proposed regulations).

On November 22, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-132569-17) in the

Federal Register

(88 FR 82188),

corrected in

89 FR 2182 (January 12, 2024), proposing rules that would provide guidance under section 48 (section 48 proposed regulations). On February 22, 2024, the Treasury Department and the IRS published a second correction to the proposed regulations in the

Federal Register

(89 FR 13293) that re-opened the comment period through March 25, 2024. Among other matters, the section 48 proposed regulations withdrew and reproposed § 1.48-13 of the PWA proposed regulations addressing the PWA requirements under section 48, the rules under section 48(a)(9)(B)(i) related to an energy project with a maximum net output of less than one megawatt of electrical (as measured in alternating current) or thermal energy (One Megawatt Exception), and the recapture rules under section 48(a)(10)(C) related to the prevailing wage requirements. Although the section 48 proposed regulations withdrew certain portions of the PWA proposed regulations, the section 48 proposed regulations incorporated the preamble to the PWA proposed regulations for generally applicable rules.

On June 3, 2024, a notice of proposed rulemaking (REG-119283-23) relating to the clean electricity production credit determined under section 45Y (section 45Y credit) and the clean electricity investment credit determined under section 48E (section 48E credit) was published in the

Federal Register

(89 FR 47792) proposing amendments to 26 CFR part 1 (proposed regulations).

See

the Background and Explanation of Provisions sections of the preamble to the proposed regulations, which is incorporated in this preamble to the extent consistent with the following Summary of Comments and Explanation of Revisions. Additionally, the Treasury Department and the IRS requested comments on the proposed definition of a qualified facility with a maximum net output of less than one megawatt (as measured in alternating current) for purposes of the One Megawatt Exception under section 45Y(a)(2)(B)(i). The proposed regulations incorporated the preamble to the PWA proposed regulations for generally applicable rules.

On June 25, 2024, the Treasury Department and the IRS published final regulations (T.D. 9998) in the

Federal Register

(89 FR 53184) adopting the PWA proposed regulations (PWA final regulations) with certain modifications and revisions in response to public comments on the PWA proposed regulations. Comments received on generally applicable rules in response to the PWA proposed regulations, including rules that merely referenced section 48 or 48E, are addressed in the PWA final regulations. The preamble to the PWA final regulations explained that comments received regarding the specific PWA requirements related to the One Megawatt Exception under sections 45Y, 48, and 48E, and the recapture rules in section 48(a)(10)(C), whether received in response to the PWA proposed regulations or the section 48 proposed regulations, would be addressed in future guidance. Because proposed § 1.48E-3 of the PWA proposed regulations generally incorporated the rules of proposed § 1.48-13, the PWA final regulations did not include final regulations under section 48E. Proposed § 1.48E-3 of the PWA proposed regulations and the provisions relating to section 48E of the proposed regulations would be addressed in future guidance.

On December 12, 2024, the Treasury Department and the IRS published final regulations (T.D. 10015) in the

Federal Register

(89 FR 100598) adopting the section 48 proposed regulations, including the rules for the PWA requirements in § 1.48-13 (section 48 final regulations). The Treasury Department and the IRS addressed the comments related to the PWA requirements with respect to section 48 including the One Megawatt Exception

under section 48(a)(9)(B)(i), the recapture rules under section 48(a)(10)(C), and the definition of an energy project in the section 48 final regulations.

As described in the Summary of Comments and Explanation of Revisions, this Treasury decision adopts the proposed regulations with certain modifications after full consideration of all comments received, including comments pertaining to the One Megawatt Exception under section 45Y(a)(2)(B)(i) and to issues related to the PWA requirements under section 48E and proposed § 1.48E-3.

Summary of Comments and Explanation of Revisions

I. Overview

The Treasury Department and the IRS received over 1,800 written comments timely submitted by the August 2, 2024, comment submission deadline, in response to the proposed regulations, which are available for public inspection at

https://www.regulations.gov

or upon request. A public hearing was held in person on August 12, 2024, and telephonically on August 13, 2024, at which 36 speakers provided testimony over the two days. After careful consideration of the comments and testimony, the proposed regulations are adopted with modifications as described in this Summary of Comments and Explanation of Revisions.

Comments summarizing the statute or the proposed regulations, recommending statutory revisions to sections 45Y and 48E or other statutes, or addressing issues that are outside the scope of this rulemaking (such as revising other Federal regulations and recommending changes to IRS forms) are generally not described in this Summary of Comments and Explanation of Revisions or adopted in these final regulations. In addition to modifications described in this Summary of Comments and Explanation of Revisions, the final regulations also include non-substantive grammatical or stylistic changes to the proposed regulations. Unless otherwise indicated in this Summary of Comments and Explanation of Revisions, provisions of the proposed regulations with respect to which no comments were received are adopted without substantive change.

The Treasury Department and the IRS consulted extensively with scientific and technical experts from across the Federal government, including personnel from the Department of Energy (DOE), the Environmental Protection Agency (EPA), and the Department of Agriculture (USDA), in developing and drafting these final regulations. The Treasury Department and the IRS had regular working group meetings with these experts from the time that sections 45Y and 48E were enacted by the Inflation Reduction Act (IRA) through the drafting and publication of the proposed and final regulations. These meetings included discussions on the full range of issues related to determining greenhouse gas emissions rates for the production of electricity, petitioning for provisional emissions rates, and determining eligibility for the section 45Y and 48E credits in various circumstances. These meetings also included comprehensive briefing and full consideration of the issues raised in the comments received on the proposed regulations and proposed § 1.48E-3 of the PWA proposed regulations. In addition, experts from the DOE, the EPA, and the USDA reviewed multiple drafts of the proposed and final regulations in their entirety. The conclusions reached in these final regulations and explained in this Summary of Comments and Explanation of Revisions were deeply informed by these working group meetings and the scientific and technical expertise that was shared in those meetings.

For purposes of this preamble, a provision of the proposed regulations, for example, § 1.45Y-1 of the proposed regulations, is referred to as “proposed § 1.45Y-1.”

II. Rules Specific to Section 45Y

Proposed § 1.45Y-1 provided an overview of proposed §§ 1.45Y-1 through 1.45Y-5 and definitions of terms for purposes of proposed §§ 1.45Y-1 through 1.45Y-5, including the terms “combined heat and power system (CHP) property,” “metering device,” “related person,” “unrelated person,” and “qualified facility.”

A. Metering Device

Proposed § 1.45Y-1(a)(5)(i) through (iii) defined, for purposes of section 45Y(a)(1)(A)(ii)(II), the term “metering device;” provided standards for maintaining and operating a metering device for purposes of section 45Y(a)(1)(A)(ii)(II) and proposed § 1.45Y-1(a)(5), including by providing that a metering device should meet certain standards and be properly calibrated, and provided rules related to monitoring and locating the metering device. Proposed § 1.45Y-1(a)(5)(iv) provided examples illustrating the rules provided by proposed § 1.45Y-1(a)(5).

Commenters provided feedback on the definition of “metering device.” Two commenters noted that the proposed regulations defined a “metering device” related to “energy revenue metering,” and asserted that metering devices typically measure energy production, not revenue. The commenters recommended revising the term “energy revenue metering” to “energy production metering” in the final regulations.

The Treasury Department and the IRS have determined that, because energy revenue metering encompasses energy production measurement as part of its function, the commenters' concern is addressed by the proposed regulations. Therefore, these final regulations adopt the definition of metering device as proposed.

Another commenter requested that the final regulations provide clarifications regarding third-party metering requirements. The commenter requested that the Treasury Department and the IRS clarify whether operation of the metering device by a third party could be fully remote, or if the meter owner must be granted access to the site. The commenter further requested that the final regulations clarify whether the meter can be located prior to energy delivery to storage, or whether it must be located at the point of interconnection. Finally, the commenter requested clarification regarding whether the section 45Y credit amount is determined at the point of sale or where the electricity is metered.

Section 45Y(a)(1)(A) provides, in part, that the amount of the credit is the kilowatt hours of electricity produced by the taxpayer at a qualified facility and in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed or stored by the taxpayer during the taxable year. Proposed § 1.45Y-1(a)(5)(ii) required a metering device to meet the requirements of the American National Standards Institute C12.1-2022 standard, or subsequent revisions, be revenue grade with a +/−0.5% accuracy, and be properly calibrated and maintained in proper working order according to the instructions of its manufacturer. If a metering device satisfies the requirements in § 1.45Y-1(a)(5)(ii), the statutory language of section 45Y(a)(1)(A) would not prevent operation by a third party to be fully remote. As to whether the metering device can be located prior to energy delivery to storage or whether it must be located at the point of interconnection, the location of the meter should not matter provided the meter meets the requirements in § 1.45Y-1(a)(5)(ii). Accordingly, the final regulations adopt

proposed § 1.45Y-1(a)(5) without change, and do not impose a specific location requirement for such metering device based on the lack of such a requirement in the statutory language.

B. Related and Unrelated Persons

Proposed § 1.45Y-1(a)(7) provided a definition of the term “related person” and special rules for the treatment of corporations that are members of a consolidated group (as defined in § 1.1502-1(h)).

Proposed § 1.45Y-1(a)(11) provided a definition of the term “unrelated person;” rules for the sales of electricity to individual consumers; and an example illustrating the application of these rules.

A commenter requested clarification regarding the sale to an unrelated person requirement. The commenter pointed to Notice 2008-60, 2008-30 I.R.B. 178, which provides guidance on the section 45 credit by clarifying that the requirement of a sale to an unrelated person will be treated as satisfied if the producer of electricity sells electricity to a related person for resale by the related person to a person that is not related to the producer. The commenter requested that the Treasury Department and the IRS likewise confirm that under section 45Y, a sale to a related person for the purposes of resale to an unrelated person will also be treated as a sale to an unrelated person if there is no metering device owned and operated by a third party.

The Treasury Department and the IRS disagree that the rule in Notice 2008-60 that is applicable to the section 45 credit, under which the sale of electricity to a related party with a subsequent sale to an unrelated party is treated as a sale to an unrelated party, should apply to the section 45Y credit. Section 45 does not include a provision similar to section 45Y(a)(1)(A)(ii), which provides that either (I) a taxpayer must sell the electricity to an unrelated party, or (II) the taxpayer's qualified facility must be equipped with a metering device owned and operated by an unrelated person, and the electricity must be sold, consumed or stored by the taxpayer during the taxable year. The inclusion of section 45Y(a)(1)(A)(ii) demonstrates that Congress intended to allow the section 45Y credit for related party sales only if the taxpayer produces electricity at a qualified facility that has a metering device owned and operated by an unrelated person. Congress did not carve out an exception for related party sales for purposes of resale to unrelated persons and the final regulations cannot create one. To allow taxpayers to apply the concepts provided in Notice 2008-60 to the section 45Y credit for sales to unrelated parties would undermine the metering obligation in section 45Y(a)(1)(A)(ii)(II). Accordingly, the Treasury Department and the IRS cannot adopt the commenter's recommendation and the rule will be adopted as proposed.

C. Credit Phase Out

Proposed § 1.45Y-1(c) provided rules for calculating the amount of the credit under section 45Y(a) and the applicable phase-out percentages; defined the term “applicable year” and provided rules for determining the applicable year, including rules regarding the use of certain datasets in determining the applicable year. The definition of “applicable year” also applies for purposes of the section 48E credit phase-out rules. In the preamble to the proposed regulations, the Treasury Department and the IRS requested comments on which datasets are most appropriate to determine the applicable year and why.

Commenters generally agreed with the Treasury Department and the IRS that the Energy Information Administration's (EIA) Electric Power Annual and Monthly Energy Review, the EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks (GHGI), the EPA Greenhouse Gas Reporting Program (GHGRP), and the Emissions and Generation Resource Integrated Database (eGrid) are suitable datasets to determine the applicable year and recommended the final rules adopt one or more of these dataset(s) as providing the timeliest assessment of emissions to minimize potential confusion. One commenter suggested using a single annually published government data source, and recommended the EIA Monthly Energy Review that delineates electricity sector greenhouse gas (GHG) emissions for 2022 and the following years.

Review of the comments confirmed that the EIA Electric Power Annual and the EPA GHGI are well-established data sources that are representative of the annual GHG emissions from the production of electricity in the United States. Moreover, the requirement in § 1.45Y-1(c)(4) that both the EIA Electric Power Annual and the EPA GHGI must be assessed separately increases certainty that emissions from the power sector meet the required levels.

Another commenter requested that the Treasury Department and the IRS consider whether a single year drop in GHG emissions of less than the applicable year threshold followed by GHG emissions increases in subsequent years should trigger the phase-out of the credits.

Section 45Y(d)(3) describes the term “applicable year” as the later of 2032, or the calendar year in which the Secretary determines that the annual GHG emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual GHG emissions from the production of electricity in the United States for calendar year 2022. Section 45Y(d)(2) provides that the section 45Y credit phases out over a four-year period subsequent to the applicable year. The statutory language describes the applicable year as a single year, and the credit phase-out begins subsequent to the applicable year. Based on the statutory language, the phase-out period is a continual period. Therefore, the statutory language does not grant the Treasury Department and the IRS authority to reverse a determination that GHG emissions were at a sufficient level to meet the definition of the applicable year. For this reason, the comment is not adopted.

D. Qualified Facility

The proposed regulations adopted the statutory definition of a “qualified facility.” Section 45Y(b)(1)(A) provides, in part, that a qualified facility is a facility for which the GHG emissions rate is not greater than zero. The GHG emissions rate is further defined in section 45Y(b)(2). Section 45Y(b)(1)(B) provides that a facility is only treated as a qualified facility during the 10-year period beginning on the date the facility was originally placed in service.

A commenter asked for clarification regarding changes to a facility that impact its GHG emissions rate from electricity generation and whether such changes impact a qualified facility's credit eligibility. The commenter requested confirmation that a facility that initially operates with greater than zero GHG emissions but later operates with not greater than zero GHG emissions can still be considered a qualified facility under section 45Y. The commenter suggested clarifying that in the case of such a facility, the 10-year credit period begins when the facility first becomes a “qualified facility” operating at commercial scale with not greater than zero GHG emissions. The commenter asserted that providing a different interpretation would disincentivize facilities that are built with the capacity to produce power with greater than zero GHG emissions from undertaking such investment.

The Treasury Department and the IRS note that section 45Y(b)(1)(B) treats a facility as a qualified facility only

during the 10-year period beginning on the date the facility was originally placed in service. Generally, a qualified facility is considered placed in service in the earlier of (i) the taxable year in which, under the taxpayer's deprecation practice, the period for depreciation with the respect to such property begins; or (ii) the taxable year in which the qualified facility is placed in a condition or state of readiness and availability to produce electricity, whether in a trade or business or in the production of income. Accordingly, a facility that initially operates with greater than zero GHG emissions may later be treated as a qualified facility if it meets the requirements under section 45Y(b) in a taxable year, but only during the 10-year period beginning on the date the facility was originally placed in service. For example, taxpayer places in service a facility in year 1 that has GHG emission that are greater than zero. In year 6, the facility has GHG emissions that are not greater than zero and is a qualified facility under section 45Y. If the facility continues to have not greater than zero GHG emissions, the facility continues to be a qualified facility under section 45Y and taxpayer may claim the section 45Y credit until year 10 (years 6 through 10), provided the facility continues to have not greater than zero GHG emissions for each of the remaining years. The Treasury Department and the IRS cannot adopt the commenter's recommendation and the rule will be adopted as proposed.

A commenter asserted that a facility qualifying for a section 45Y credit should not cease to be a qualified facility if, for a limited time or in a limited amount, it has a GHG emissions rate above zero (for example, as a result of a temporary change in fuel or feedstock). The commenter referenced Notice 2008-60, which it described as allowing the use of minimal fossil fuels for flame startup and stabilization in an open-loop biomass facility that qualifies under section 45. The commenter stated that zero-carbon fuels are not always available. The commenter emphasized that the proposed regulations under section 48E, in contrast to those under section 45Y, provide flexibility for purposes of recapture for those facilities that produce 10 grams of CO

2

e per kWh. As a result, the commenter requested that the final regulations allow a facility to claim the section 45Y credit for the days or months of the year during which the facility produces electricity with a GHG emissions rate of zero. The commenter asserted that flexibility is needed for de minimis emissions or periods during the tax year.

Section 45Y(b)(1)(A) defines a qualified facility as having a GHG emissions rate from the production of electricity of not greater than zero. The statute does not provide a de minimis exception and the final regulations cannot create one. Accordingly, a facility cannot qualify for the section 45Y credit in a taxable year during the 10-year credit period after such facility is originally placed in service if such facility has a GHG emissions rate from the production of electricity of greater than zero, even if for a limited time or in a limited amount. However, the Treasury Department and the IRS note that a facility's failure to qualify for the section 45Y credit in one or more taxable years does not prevent such facility from qualifying for the section 45Y credit in any other taxable years during the 10-year credit period after such facility is originally placed in service. The statute allows a facility a 10-year credit period from the date the facility is originally placed in service, and a facility can be considered a qualified facility for any taxable year during such 10-year credit period in which it satisfies the requirements of the section 45Y credit.

E. Combined Heat and Power (CHP) Property

Proposed § 1.45Y-1(a)(2) defined “combined heat and power (CHP) property.” Proposed § 1.45Y-1(d) set forth the credit eligibility requirements for CHP property; provided rules for determining the energy efficiency percentage of CHP property and for calculating electricity produced by CHP property; and defined the term “heat rate” and provided rules for its calculation.

Section 45Y(g)(2) generally provides special rules for the calculation of the credit with respect to CHP property. Section 45Y(g)(2)(A)(i) states that “the kilowatt hours of electricity produced by a taxpayer at a qualified facility shall include any production in the form of useful thermal energy by any combined heat and power system property within such facility.” Section 45Y(g)(2)(A)(i) requires the thermal energy output from a CHP property to be included in determining the energy that qualifies for the credit in contrast to a non-CHP facility, for which only the electricity generation should be credited. For example, if a CHP property produces 1 kWh of electricity output and 1 kWh of thermal output, then the taxpayer that owns the CHP property may compute a credit based on production of 2 kWh of electricity.

Section 45Y(g)(2)(B) provides that the term “combined heat and power property” has the same meaning given such term by section 48(c)(3) (without regard to subparagraphs (A)(iv), (B), and (D) thereof). Section 48(c)(3)(C)(i) and proposed § 1.45Y-1(d)(2) define the energy efficiency percentage for purposes of a CHP property as a fraction—(I) the numerator of which is the total useful electrical, thermal, and mechanical power produced by the system at normal operating rates, and expected to be consumed in its normal application, and (II) the denominator of which is the lower heating value of the fuel sources for the system. Section 45Y(g)(2)(C)(ii) provides that the term “heat rate” means the amount of energy used by the qualified facility to generate 1 kilowatt hour of electricity, expressed as British thermal units per net kilowatt hour generated. Proposed § 1.45Y-1(d)(3)(ii) addressed how to determine the “heat rate” for a qualified facility that includes CHP property that uses combustion. In the preamble to the proposed regulations, the Treasury Department and the IRS requested comments regarding the application of the energy efficiency percentage requirements to CHP property for which there is no combustion and whether the statutory definition of “heat rate” for this property should be further clarified in the final regulations.

One commenter addressed the application of the energy efficiency percentage requirements to CHP property involving nuclear power and recommended the final regulations adopt the EIA's definition of “heat content” as a substitute for the lower heating value used to calculate the energy efficiency of a CHP property. The commenter emphasized that the lower heating value usually applies to combustion fuels, not fuels such as uranium that are non-combustible, and for non-combustion fuels the lower heating value should be the same as the heat content. Another commenter made a similar request that the final regulations permit the use of a nuclear reactor's maximum licensed thermal output to serve as the functional equivalent of the lower heating value of fuel sources, in recognition that nuclear fission does not involve combustion.

A separate commenter requested the final regulations establish a methodology for taxpayers to determine the energy efficiency percentage for CHP property using non-combustible fuel sources for which there is no lower heating value. With respect to the definition of heat rate, the commenter asserted that the methodology in proposed § 1.45Y-1(d)(3)(ii)(B) to calculate heat rate does not take into account that there is no lower heating

value for CHP property using non-combustible fuel sources. The commenter further questioned the accuracy of the formula for converting from BTU to kWh to calculate electricity produced by CHP property because the formula relies upon a definition of heat rate that does not account for CHP property using non-combustion fuel sources. The commenter recommended providing a conversion formula in the final regulations for CHP property using non-combustion fuel sources.

The Treasury Department and the IRS recognize there is a gap in the current guidance regarding how to calculate the energy efficiency percentage and heat rate for fuels without lower heating values as referenced in section 48(c)(3)(C)(i)(II) and the proposed methodology in proposed § 1.45Y-1(d)(3)(ii)(B). The lower heating value is intended to provide a measure for the energy released when a fuel is combusted under certain conditions. Fuels that are not combusted will not have a lower heating value, but the amount of energy such fuels could release under certain conditions can still be measured.

The Treasury Department and the IRS agree with commenters that the final regulations should permit the use of a nuclear reactor's thermal output to serve as the functional equivalent of the lower heating value of fuel sources, in recognition that nuclear fission does not involve combustion. The final regulations are amended accordingly. With respect to other technologies, the Treasury Department and the IRS will continue to consult with experts in order to develop additional approaches that are either generally applicable or appropriate for other particular technologies. The final regulations are therefore also amended to reflect this continuing consideration and to provide flexibility to prescribe these additional approaches in guidance published in the Internal Revenue Bulletin. Section 1.45Y-1(d)(2) and (d)(3)(ii)(B) of the final regulations are revised accordingly.

In addition, for organizational purposes, the definition under proposed § 1.45Y-1(a)(2) of a unit of a qualified facility for purposes of CHP property, has been moved within the definition of a unit of a qualified facility under § 1.45Y-2(b)(2)(i).

F. 80/20 Rule

The 80/20 Rule is designed to broaden the availability of investment and production tax credits by providing a new original placed in service date for a qualified facility that includes some components of property previously placed in service, rather than requiring the qualified facility to be composed entirely of new components of property. In the context of section 45Y, the 80/20 Rule applies at the qualified facility level to the components of property within the unit of qualified facility. Proposed § 1.45Y-4(d)(1) provided that for purposes of section 45Y(b)(1)(B), a facility may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility, provided the fair market value of the used components of the unit of qualified facility is not more than 20 percent of the total value of the unit of qualified facility (that is, the cost of the new components of property plus the fair market value of the used components of property within the unit of qualified facility).

Although this section focuses on the 80/20 Rule in the section 45Y context, section III.E. of this Summary of Comments and Explanation of Revisions describes some comments received on both sections 45Y and 48E. This includes discussion of the interaction between the rule for addition of a new unit or an addition of capacity (Incremental Production Rule) and the 80/20 Rule. As described in that section, the Treasury Department and the IRS agree that the statutory provisions allowing for new units and additions of capacity provided in sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i) are separate and distinct from the 80/20 Rule. If a retrofitted facility satisfies the 80/20 Rule, the final regulations provide that the facility will be treated as newly placed in service even if the taxpayer also satisfies the provisions regarding new units and additions of capacity. These final regulations provide an additional example, in § 1.45Y-4(c)(5)(v) that specifically addresses decommissioned and restarted facilities. In response to a comment, the Treasury Department and the IRS removed the reference to a decommissioned nuclear facility in Example 3 in § 1.45Y-4(c)(6)(iii) to avoid referring to decommissioned and restarted nuclear facilities in the additions of capacity rule and the 80/20 Rule. Additionally, § 1.45Y-4(d)(1) is clarified to confirm that a qualified facility that meets the requirements of section 45Y(b)(1)(A) may claim the full section 45Y credit rather than the credit resulting from the addition of a new unit or an addition of capacity.

While commenters generally supported the need for the 80/20 Rule for the section 45Y credit, commenters also asked for clarity regarding the application of the 80/20 Rule. A commenter requested clarification that a facility that previously qualified for a credit under section 45 or 48 and is later retrofitted may be eligible for a section 45Y or 48E credit if it satisfies the 80/20 Rule. The Treasury Department and the IRS agree that if a qualified facility under section 45 or an energy property under section 48 is later retrofitted in a manner that satisfies the 80/20 Rule, it will be considered a new qualified facility and may be eligible for a section 45Y or 48E credit so long as the qualified facility meets all requirements of section 45Y or 48E.

Another commenter generally stated that under Notice 2018-59, 2018-28 I.R.B. 196, the 80/20 Rule applies at the property level and not the project or system level. The commenter requested that the 80/20 Rule similarly only apply at the property level for the section 45Y credit. In response to this comment, the Treasury Department and the IRS confirm that for purposes of the section 45Y credit, the 80/20 Rule does not apply to a project or system but instead to a qualified facility. Proposed § 1.45Y-4(d)(1) set forth the 80/20 Rule for purposes of the section 45Y credit and applies the rule to a retrofitted qualified facility. The 80/20 Rule applies at the qualified facility level to the components of property within the unit of qualified facility. The final regulations retain this application of the 80/20 Rule to the section 45Y credit.

Another commenter requested clarification regarding how the 80/20 Rule is applied for purposes of section 45Y by comparing its application to section 48E. The commenter pointed out that proposed § 1.48E-4(c)(4) looked only to functionally interdependent components of property (and not integral property) to determine what is considered new components of the unit of qualified facility, while proposed § 1.45Y-4(d) did not. This commenter requested clarification regarding which components are included in the determination under the 80/20 Rule for purposes of the section 45Y credit. Similarly, another commenter recommended that the final regulations define a “unit of qualified facility” as the specific components necessary for the production of electricity and not the integral property essential to the completeness of that function. With respect to dam-based hydropower facilities, another commenter supported proposed § 1.45Y-4(d) permitting existing dam-based hydroelectric facilities to qualify for the 80/20 Rule. The commenter asked to confirm that the 80/20 Rule is applied on a turbine-by-turbine basis and not the whole facility, because individual turbines may be repowered separately. As noted

earlier, the 80/20 Rule applies at the qualified facility level to the components of property within the unit of qualified facility and therefore in the context of a hydropower facility the 80/20 Rule cannot be applied on a turbine-by-turbine basis.

The Treasury Department and the IRS decline to modify the proposed rule in response to these requests for specific applications to particular technologies. Proposed § 1.45Y-2(b)(2)(i) provided that for purposes of the section 45Y credit, the unit of qualified facility includes all functionally interdependent components of property (as defined in proposed § 1.45Y-2(b)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other property to produce electricity.

Proposed §§ 1.45Y-4(d)(2) and 1.48E-4(c)(3) both provided that the cost of new components of the unit of qualified facility includes all costs properly included in the depreciable basis of the new components of property of the unit of qualified facility. Under both proposed §§ 1.45Y-2(b)(2) and 1.48E-2(b)(2), a unit of qualified facility only includes functionally interdependent components of property and not integral property. Thus, the Treasury Department and the IRS agree with the commenter that only functionally interdependent property is taken into account to determine whether a retrofitted qualified facility satisfies the 80/20 Rule for purposes of sections 45Y and 48E. Proposed § 1.48E-4(c)(4) provided a rule allowing costs for integral property to be included in determining the section 48E credit after it has been determined that the qualified facility has satisfied the 80/20 Rule. Because the section 45Y credit is a production tax credit calculated based on electricity produced and not the amount of investment in the qualified facility, there is no need for a rule similar to proposed § 1.48E-4(c)(4) in the final regulations under section 45Y.

III. Rules Specific to Section 48E

Proposed § 1.48E-1(b)(1) provided rules for determining the amount of the credit; defined the term “applicable percentage;” and explained how to determine the applicable percentage for a qualified facility. Proposed § 1.48E-1(c) provided the credit phase-out rules and proposed § 1.48E-1(c)(3) defined applicable year for purposes of the credit phase-out rules by reference to proposed § 1.45Y-1(c)(3).

See

section II.C. of this Summary of Comments and Explanation of Revisions for a discussion of those rules.

A. Organization of Proposed § 1.48E-2

Proposed § 1.48E-2(a) defined a qualified facility for purposes of section 48E. Proposed § 1.48E-2(b) described the property included in a qualified facility for purposes of section 48E, defined the terms “unit of qualified facility” as well as “functionally interdependent” and “integral part” (both as they apply to a qualified facility), and provided several examples to illustrate the rules. Proposed § 1.48E-2(c) provided rules for the coordination of the section 48E credit with certain other Federal income tax credits with respect to qualified facilities. Proposed § 1.48E-2(d) provided rules for determining the qualified investment with respect to a qualified facility. Proposed § 1.48E-2(e) defined the term “qualified property.” Proposed § 1.48E-2(f) defined certain terms related to requirements for qualified property, including “tangible personal property,” “other tangible property,” “construction, reconstruction, or erection of qualified property,” “acquisition of qualified property,” “original use of qualified property,” “depreciation allowable,” “placed in service” and “claim.” Proposed § 1.48E-2(g) provided rules for energy storage technology (EST).

The Treasury Department and the IRS determined that the organization of proposed § 1.48E-2, as it related to qualified facilities, did not adhere to the organization of section 48E. The final regulations reorganize § 1.48E-2 to more clearly follow the organization of section 48E. The Treasury Department and the IRS do not intend for the reorganization of § 1.48E-2 to create any substantive differences from the rules as they were provided in the proposed regulations.

As reorganized, § 1.48E-2(a) of these final regulations provides the rules for determining the qualified investment with respect to a qualified facility. Section 1.48E-2(b) defines the term “qualified facility” as it relates to section 48E, as well as the term “placed in service.” Section 1.48E-2(c) defines the term “qualified property.” Section 1.48E-2(d) provides the rules for property included in a qualified facility, including a description of “unit of qualified facility” and “integral part,” and provides examples illustrating these rules. Section 1.48E-2(e) provides definitions related to the requirements for qualified property. Section 1.48E-2(f) provides rules for the coordination of the section 48E credit with certain other Federal income tax credits with respect to qualified facilities and includes examples to illustrate those rules. Section 1.48E-2(g) provides rules relating to EST. Finally, the definition of the term “claim” for both a qualified facility and EST is moved to § 1.48E-1(a)(2) and is modified to also apply to the other Federal income tax credits described in section 48E(b)(3)(C).

B. Qualified Investment With Respect to a Qualified Facility and Qualified Property

Proposed § 1.48E-2(d) described a qualified investment with respect to any qualified facility. Proposed § 1.48E-2(e) defined “qualified property” for purposes of proposed § 1.48E-2(a).

A commenter requested that the final regulations clarify that the qualified property included in a qualified investment in a qualified hydropower facility includes all the components and property identified as qualified property in prior guidance under section 48, up through and including the substation at which the electrical voltage is stepped up to transmission voltage. Similarly, another commenter asked whether the scope of qualified property under section 48E(b)(2) includes all property identified as energy property under section 48(a)(3), unless explicitly excluded under section 48E.

The Treasury Department and the IRS recognize that some technologies may be creditable under both sections 48 and 48E. Although the rules for eligibility differ between the two sections, they share many overlapping concepts (for example, functional interdependence and integral property). For those facilities that generate electricity and for EST that are eligible for both the section 48 and 48E credits, the Treasury Department and the IRS expect similar property to be eligible. However, the application of these concepts to a specific facility or EST is ultimately a fact-specific determination.

That said, unlike section 48, these final regulations are technology neutral, and the rules are meant to apply to all qualified facilities. A definitive response to these comments would require the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which may include information beyond that which was provided by the commenters. Because more information is needed to make the determinations requested by the commenters, the requested clarifications are not addressed in these final regulations.

C. Energy Storage Technology Overview

1. In General

Proposed § 1.48E-2(g) provided rules defining a unit of EST. Section 48E(c)(2)

defines the term “energy storage technology” by reference to section 48(c)(6) (noting that the beginning of construction requirement in section 48(c)(6)(D) does not apply). A commenter suggested clarifying that EST may include either “property . . . which receives, stores, and delivers energy for conversion,” or “thermal energy storage property,” by reading the “and” between sections 48(c)(6)(A)(i) and (ii) as disjunctive. The Treasury Department and the IRS confirm that the term “and” between sections 48(c)(6)(A)(i) and (ii) is disjunctive for purposes of section 48E(c)(2) and property described in section 48(c)(6)(A)(i) or (ii) are included as EST.

2. Functionally Interdependent

Proposed § 1.48E-2(g)(2)(i) provided that, for purposes of the section 48E credit, a unit of EST includes all functionally interdependent components of property (as defined in proposed § 1.48E-2(g)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other property to perform the intended function of the EST. Proposed § 1.48E-2(g)(2)(ii) provided that components are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components to perform the intended function of the EST.

A commenter requested that the Treasury Department and the IRS explicitly clarify that the section 48E credit can be claimed with respect to EST that is co-located and used in conjunction with electricity generation equipment for which the section 45 or 45Y credits are claimed, without regard to whether the EST would be considered a functionally interdependent component or an integral part of the electricity generation equipment under other rules or whether the EST and electricity generation equipment are owned by the same or different taxpayers.

Section 48E(a) provides that the clean electricity investment credit is determined separately with respect to any qualified facility and any EST. This statutory text establishes an important categorical distinction between qualified facilities and ESTs. While integral property may be shared by a co-located qualified facility and an EST, a unit of qualified facility and a unit of EST cannot share components for purposes of section 48E. Further, the Treasury Department and the IRS confirm that an EST is eligible for the section 48E credit if it satisfies the requirements of section 48E, even if the EST is co-located with a qualified facility that has claimed the section 45 or 45Y credits.

See

section III.C.6. of this Summary of Comments and Explanation of Revisions for additional discussion of comments on co-located, or “hybrid,” projects that include an EST and qualified facility.

3. Qualified Investment With Respect to Energy Storage Technology

Proposed § 1.48E-2(g)(4) provided that the qualified investment with respect to any EST for a taxable year is the basis of any EST placed in service by the taxpayer during such taxable year. Commenters requested clarification that the entire cost basis of EST property that converts energy to electricity is eligible for the section 48E credit, even if some functionally interdependent property is used to produce heat. The commenters asserted that there is no statutory requirement that the energy stored be exclusively converted to electricity and that the Code is silent about any minimum percentage requirement of energy being converted to electricity.

Proposed § 1.48E-2(g)(6)(i) described electrical energy storage property as property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity and has a nameplate capacity of not less than 5 kWh. This definition is adopted from section 48E(c)(2), which defines “energy storage technology” including electrical energy storage property by reference to section 48(c)(6). Because the purpose of an electrical energy storage property is to receive, store and deliver energy for conversion to electricity, not to produce thermal energy, components of property of an energy storage property used to produce thermal energy would be subject to the incremental cost rule discussed in section III.G. of this Summary of Comments and Explanation of Revisions.

4. Placed in Service

Proposed § 1.48E-2(g)(5)(i) provided rules for determining when an EST has been placed in service for purposes of the section 48E credit. Notwithstanding the general rules provided in proposed § 1.48E-2(g)(5)(i), an EST with respect to which an election is made under section 50(d)(5) of the Code and § 1.48-4 to treat the lessee as having purchased such EST is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.

Commenters suggested expanding the definition of placed in service for EST because “energy storage may charge and discharge prior to being ready for commercial operation.” Specifically, a commenter suggested that EST property should be treated as placed in service when (i) such property has all licenses, permits, and approval required to store and dispatch power, (ii) pre-operational testing is complete, (iii) the taxpayer has title to the property, and (iv) the property is available to store and discharge power on a regular, commercial basis.

Instead of providing specific indicia of when an EST is treated as being placed in service, the rule in proposed § 1.48E-2(g)(5)(ii) provided general principles for a taxpayer to determine when an EST has been placed in service that are broadly applicable to all types of EST. These principles are based upon the placed in service rules provided by § 1.48-9(b)(5), which generally adopt the placed in service rules of § 1.46-3(d)(1). The general principles under § 1.46-3(d)(1) have applied to the section 48 credit since its enactment. These principles are well-understood, general standards for determining when property is placed in service, and they are widely relied upon by industry. The Treasury Department and the IRS view the general principles provided by the proposed rule as adequate for determining when EST is placed in service, and as sufficiently broad to address these commenters' concerns. Therefore, the final regulations adopt the placed in service rules as proposed.

5. Electrical Energy Storage Property

Proposed § 1.48E-2(g)(6)(i) described electrical energy storage property as property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transportation of goods or individuals, electrical energy storage property includes but is not limited to rechargeable electrochemical batteries of all types (such as lithium-ion, vanadium redox flow, sodium sulfur, and lead-acid); ultracapacitors; physical storage such as pumped storage hydropower, compressed air storage, and flywheels; as well as reversible fuel cells.

Commenters asked for clarification regarding what constitutes property “primarily used” in the transportation of goods or individuals. One commenter suggested that the final regulations

provide a bright line rule and clarify that property that receives, stores, and delivers energy for conversion to electricity and is intended to be used for less than 35 percent of its hours of use in a calendar year for transporting goods or individuals is not considered “primarily used in the transportation of goods or individuals.” In this commenter's view, property, including a school bus, that receives, stores, and delivers energy for conversion to electricity that is used less than 35 percent of its hours of use in a calendar year for transporting goods or individuals is not primarily used for transportation. However, the commenter clarified that if electric school buses paired with a bidirectional vehicle-to-grid (V2G) charger are permitted to qualify as EST, then the charger itself should not be considered part of the electrical energy storage property.

The final regulations mirror the language of section 48E(c)(2), which adopts the definition of EST provided in section 48(c)(6)(A), and excludes property primarily used in the transportation of individuals or goods. The Treasury Department and the IRS consider school buses as primarily used in transportation because the primary reason for a taxpayer to acquire school buses is to transport individuals, not store energy, notwithstanding the overall amount of time buses are used to actually transport individuals. A “bright line” test requested by the commenter is not feasible because any given situation and determination is fact dependent.

In addition, there are other IRA tax incentives intended to benefit some technologies for which these commenters seek section 48E credit eligibility. For instance, section 45W of the Code provides a tax credit for vehicles such as electric school buses. Furthermore, a notice of proposed rulemaking (REG-118269-23) published in the

Federal Register

(89 FR 76759) on September 19, 2024, regarding the section 30C alternative fuel vehicle refueling property credit (September 2024 proposed regulations) proposed a definition for property primarily used in the transportation of goods or individuals and not for the production of electricity for purposes of sections 48 and 48E. In particular, proposed § 1.48E-2 provided that energy storage property is primarily used in the transportation of goods or individuals and not for the production of electricity, and therefore is not EST eligible for the section 48E credit, if a credit is claimed under section 30C for such property. Comments regarding this proposed definition will be further addressed in the Treasury decision that finalizes the September 2024 proposed regulations. The Treasury Department and IRS note that energy storage property for which the section 30C credit is not claimed may be creditable as EST under sections 48 and 48E if that property meets the requirements of those tax credits.

6. Hybrid Systems (Qualified Facility + EST)

Several commenters addressed the treatment of qualified facilities, such as solar generation facilities, and EST that are co-located, or so-called “hybrid” projects. At least one commenter supported treating a qualified facility and EST as separate for purposes of the section 48E credit. The commenter emphasized that such an approach is critical for the long-term success of the section 45Y and 48E credits, and importantly, will align with the goal of the domestic content bonus credit amount to reshore clean energy supply chains.

Other commenters requested that taxpayers be able to elect a single section 48E credit for hybrid systems, consisting of a qualified facility and an EST, and sought clarification of whether property included in a unit of EST may be included in a unit of qualified facility. A commenter noted that for purposes of rooftop solar and storage hybrid systems, the EST and the solar energy property are dependent upon each being placed in service because both are essential to the completeness of the intended function of the hybrid system. Commenters asserted that including EST in the definition of “integral part” of a qualified facility and providing examples of dual eligibility for section 48 and 48E credits during the transition period would help maintain consistency and reduce administrative burdens. One commenter recommended modifying proposed § 1.48E-2(b) to clarify that EST may (but is not required to) be considered an integral part of a qualified facility. Commenters stated that such a clarification would align with current guidance for the domestic content bonus credit amount and the test for determining whether multiple energy properties will be considered an energy project under the section 48 proposed regulations. Another commenter stated that this approach would allow for increased technological flexibility for purposes of the section 48E credit and would allow residential solar energy developers to continue claiming a single credit for hybrid systems. A commenter claimed that adding EST as an integral part of a qualified facility would allow utility scale solar energy developers the option to claim separate credits for the EST and the qualified facility under the section 48E proposed regulations.

Another commenter suggested permitting a taxpayer developing a hybrid system and claiming the section 48E credit on both the qualified facility and EST to elect to treat them as a single energy project. Other commenters requested that the final regulations clarify that even if qualified facilities and EST are separate categories under section 48E, a taxpayer developing a hybrid system that incorporates both may file a single Form 3468,

Investment Credit,

and register only once for purposes of section 6418 of the Code relating to transfer elections for eligible credits (section 6418 credit transfer elections).

As noted earlier in section III.C.2. of this Summary of Comments and Explanation of Revisions, the statutory framework of section 48E does not support treating a qualified facility and EST as a single creditable property. Instead, the text of section 48E repeatedly treats a qualified facility and EST as separately creditable properties. Accordingly, there is no statutory basis to allow taxpayers an option to claim a single credit for hybrid systems that include both qualified facilities and EST. In addition, although beyond the scope of these final regulations, the Treasury Department and the IRS note that, because a hybrid system would be considered two separate eligible credit properties, a taxpayer would need to register them separately for purposes of making section 6418 credit transfer elections.

See

§§ 1.6418-1(d) and 1.6418-4.

Some commenters also requested that the final regulations provide an option to claim a single credit for a hybrid system rather than two credits, one for the EST and one for the qualified facility, in part, because those commenters currently enter into a single leasing agreement with customers for both a solar qualified facility and an EST. These commenters expressed concern about whether, under the proposed regulations, they would need to enter into separate contracts for the solar qualified facility and the EST. These commenters noted that if they are able to use a single contract, the contract will need to have separate term lengths for the solar qualified facility and the EST to satisfy the leasing rules for tax purposes. These commenters raised the issue that since a solar qualified facility and an EST generally have different useful lives the leasing rules could not cover both the solar qualified facility and the EST if they claimed separate credits.

The Treasury Department and the IRS are not aware of any case law or guidance related to leasing rules that would require a taxpayer to break up the scope of a lease into components before analyzing whether there is a true lease for tax purposes regardless of the useful life of different assets included in the lease. In order to claim section 48E credits for both the solar qualified facility and an EST that are part of a combined solar qualified facility and EST, a taxpayer must retain ownership of both at the time such property is placed in service. This is true regardless of whether there are separate credits or separate credit calculations required for a solar qualified facility and an EST. While the final regulations define a unit of property as a qualified facility or an EST for purposes of section 48E, the final regulations are not intended to apply more broadly to define what comprises a unit of property for any other purpose of the Code.

Another commenter requested that the section 48E credit be made available for pumped storage hydropower property, including if such property overlaps or shares property with a qualified hydropower facility that has claimed or will claim the credit under section 45 or 45Y, and that no allocation of costs is required with respect to such overlapping property.

The Treasury Department and the IRS confirm that an EST is eligible for a separate section 48E credit if it satisfies the requirements of section 48E and the section 48E regulations. A taxpayer that makes a qualified investment with respect to a qualified facility or an EST is eligible for the section 48E credit only to the extent of the taxpayer's eligible investment in the qualified facility or EST. As described in proposed § 1.48E-2(b)(3)(vi), multiple qualified facilities (whether owned by one or more taxpayers), including qualified facilities with respect to which a taxpayer has claimed a credit under section 48E, 45, or 45Y or another Federal income tax credit, may include shared property that may be considered part of a qualified investment for each qualified facility so long as the cost basis for the shared property is properly allocated to each qualified facility and the taxpayer only claims a section 48E credit with respect to the portion of the cost basis properly allocable to the qualified facility for which the taxpayer is claiming a section 48E credit. The proposed rule addresses the commenter's concerns and will be adopted as proposed.

7. Thermal Energy Storage Property

Proposed § 1.48E-2(g)(6)(ii) defined thermal energy storage property as property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Thermal energy storage property includes equipment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating a residential or commercial building. Thermal energy storage property does not include a swimming pool, CHP property, or a building or its structural components.

Several commenters requested additional examples of thermal energy storage property and asked whether specific property would be considered part of thermal energy storage. For example, a commenter recommended including an example of thermal energy storage property that includes phase change materials operating as a battery in place of a refrigeration cycle to reduce energy consumption in cold storage. Several commenters requested an example allowing for solar thermal systems to be treated as thermal energy storage property and noted that solar thermal systems are explicitly eligible under the section 48 credit. A commenter specifically contended that solar thermal systems that collect energy from the sun to heat a storage medium (for example, water) and then provide energy through an HVAC system for a residential or commercial building should be treated as thermal energy storage systems under section 48E.

Another commenter suggested clarifying that energy storage technology includes property capable of discharging both heat and electricity regardless of how the facility's heat is utilized as long as the facility has an electrical nameplate capacity of at least 5 kWh and the taxpayer claims a section 48E credit only on the parts of the facility that are essential to receiving, storing, and delivering energy for the conversion to electricity (that is, excluding components related to discharging heat). A different commenter suggested clarifying that thermal energy storage property includes property directly connected to a refrigeration system given that refrigeration systems are a subset of HVAC systems. Another commenter requested clarifying that otherwise-qualifying property that operates squarely within an HVAC ecosystem, or directly in connection with such a system, and that directly impacts the temperature of air being conditioned by an HVAC system, is “directly connected” to such system within the meaning of section 48E (and section 48); and non-structural, energy-saving, portable products that are incorporated into building elements specifically because of their energy-saving properties are not themselves “a building or its structural components,” and remain non-structural even if integrated into a ceiling.

Another commenter suggested providing examples of thermal energy storage property that include thermal ice or chilled water storage systems that use electricity to run a refrigeration cycle to produce ice or chilled water that is later connected to the HVAC system as an exchange medium for air conditioning the building, heat pump systems that store thermal energy in an underground tank or borehole field to be extracted for later use for heating and/or cooling, and electric furnaces that use electricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system. Similarly, a commenter recommended several modifications to the examples of thermal energy storage in proposed § 1.48E-2(g)(6)(ii): (i) replace the reference to “thermal ice storage systems” with “chilled water or ice storage systems,” (ii) acknowledge that tanks could be above or below ground, and (iii) include “electric boilers that use electricity to heat water and later use this stored energy to provide heat and/or domestic hot water to a building through the HVAC system.” Several other commenters suggested clarifying whether the phrase “directly connect to” in proposed § 1.48E-2(g)(6)(ii) means that thermal storage systems that function as self-contained heating or cooling systems qualify as thermal energy storage property.

The Treasury Department and the IRS agree that the definition of thermal energy storage property requires clarification. Proposed § 1.48E-2(g)(6)(ii) defined thermal energy storage property, in part, as a system which “removes heat from, or adds heat to, a storage medium for subsequent use.” The Treasury Department and the IRS understand the phrase “adds heat to” as including equipment that is involved in adding, or transferring, already-existing heat from one medium to the storage medium, but not equipment involved in transforming other forms of energy into heat in the first instance. Equipment that just adds (or removes) heat includes technologies, like heat pumps, that draw heat from the ambient air or other stores of heat and adds that heat to a storage medium.

By contrast, equipment that transforms other forms of energy into heat in the first instance, for example through combustion or electric resistance, is not property that “removes heat from, or adds heat to” a storage medium and is therefore not an eligible component of a thermal energy storage property. For example, a conventional gas boiler with an integrated storage tank would not generally be thermal energy storage property, as it would generate new heat in the first instance through combustion and subsequently add that heat to the storage medium, rather than merely adding existing heat to the storage medium. While the gas boiler elements would not be part of such property, the integrated storage tank, may be thermal energy storage property if it otherwise meets the thermal energy storage property definition. Further, an air-to-water heat pump with a thermal storage tank, for example, would generally be thermal energy storage property provided it otherwise meets the definition of thermal energy storage. This could be the case even if the heat pump also serves a purpose in the connected HVAC system's real-time heating or cooling of a building. In that case, the thermal storage tank would be thermal energy storage property and the heat pump may also qualify as part of the thermal energy storage property to the extent the taxpayer's costs exceed the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cooling.

See

section III.G. of the Summary of Comments and Explanation of Revisions for discussion of the Incremental Cost Rule.

Proposed § 1.48E-2(g)(6)(ii) included an example of electric furnaces that use electricity to heat bricks to high temperatures and later use this stored energy to heat a building through the HVAC system. The Treasury Department and the IRS acknowledge that this example needs to be refined to more precisely delineate the scope of eligible thermal energy storage property. Whereas the heated bricks and equipment that adds heat generated by the furnace to those bricks, or removes heat from the bricks, is eligible thermal energy storage property, the electric furnace equipment that transforms energy into the thermal energy via electrical resistance in the first instance is not. Section 1.48E-2(g)(6)(ii) of the final regulations provides that thermal energy storage property does not include property that transforms other forms of energy into heat in the first instance.

With respect to subsequent use, the Treasury Department and the IRS also agree that additional clarity is warranted. The statute requires that thermal energy storage property must be able to perform certain functions, not simply perform heat transfer. Any heat transfer may take some amount of time and heat does not immediately dissipate even if no effort is made to store it. While some commenters asserted that such heat transfer is subsequent use, the Treasury Department and the IRS disagree. A plain reading of the statute supports the conclusion that thermal energy storage property does not include property that simply engages in heat transfer. The thermal energy storage property must be able to

store

the thermal energy. The Treasury Department and the IRS find that a minimum time interval for subsequent use provides certainty for taxpayers and sound tax administration.

Accordingly, the final regulations clarify that property that “removes heat from, or adds heat to, a storage medium for subsequent use” is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building. The final regulations also provide a safe harbor for thermal energy storage property. If the thermal energy storage property can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for a minimum of one hour, it is deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building.

These final regulations also add that thermal energy storage property may store thermal energy in an artificial pit, an aqueous solution, or a solid-liquid phase change material, in addition to the underground tank or a borehole field already included in the proposed regulations, in order to be extracted for later use for heating and/or cooling. The final regulations clarify that sources of thermal energy that transform other forms of energy into heat, such as electric boilers, are not thermal energy storage property.

The Treasury Department and the IRS clarified the definition of thermal energy storage property and the examples in the final regulations to illustrate what constitutes thermal energy storage property. The final regulations provide revised examples of thermal energy storage property, and those examples are intended to be a non-exhaustive list. The Treasury Department and the IRS have also determined that the revised description of thermal energy storage property in § 1.48E-2(e)(6)(ii) provides taxpayers with a sufficient means to determine whether specific property qualifies as thermal energy storage property. To the extent that commenters asked whether additional systems, configurations, or technologies would qualify as thermal energy storage property, such a determination would require the Treasury Department and the IRS to conduct a complete factual analysis of the system, configuration, or technology, which may include information beyond that which was provided by the commenters. Because more information is needed to make any such determinations requested by the commenters, the final regulations do not provide such additional requested clarifications.

Several commenters recommended clarifying that thermal energy storage property includes property providing energy for the heating or cooling of the interior of an industrial building, or other types of buildings. A commenter asserted that a wide variety of buildings are served by thermal energy storage, such as city halls, libraries, and jails, and that the definition of thermal energy storage property should not be limited to residential or commercial settings. Commenters requested that property used to convey stored energy and deliver it to building spaces (such as pipes and pumps), used to distribute stored thermal energy for heating or cooling or to supply domestic hot water for consumption in a residential or commercial building, be included within the definition of thermal energy storage property. One commenter recommended defining thermal energy storage property to include equipment, including pipes and pumps, used to distribute stored thermal energy to and within buildings. The commenter noted that such a clarification would necessitate incorporation of a dual use rule consistent with § 1.48-14(b), because thermal energy storage may use pipes to distribute stored thermal energy to and within buildings that are also used by non-qualifying sources.

One commenter requested clarifying whether thermal energy storage property includes liquid desiccant storage systems that use electricity to store energy in liquid desiccants that remove latent heat from the air for use in a connected HVAC system. Another

commenter noted that most solar thermal systems are combination or hybrid systems that provide thermal storage in the form of water or another fluid for a variety of applications. Regarding such combination systems, other commenters recommended clarifying that thermal energy property includes water heating applications and providing an example of such applications.

Section 48E(c)(2) defines EST as having the same meaning as under section 48(c)(6), and section 48(c)(6) defines EST to include thermal energy storage property. The statutory definition of thermal energy storage property under section 48(c)(6)(C) provides that such property is directly connected to a HVAC, removes heat from, or adds heat to, a storage medium for subsequent use, and provides energy for the heating or cooling of the interior of a residential or commercial building. To maintain consistency with the statutory text, the final regulations maintain the wording regarding eligible building applications set forth in section 48(c)(6)(C)(i)(III). With respect to property used to distribute stored thermal energy, such as pipes and pumps, the final regulations provide a function-oriented method to evaluate whether property is a functionally interdependent or an integral part of thermal energy storage property. Beyond the examples included in the proposed regulations and additional examples added here, commenters have described a number of additional innovative technologies that might qualify as thermal energy storage property. However, application of the functional definition of thermal energy storage property provided at section 48E(c)(2) (by reference to section 48(c)(6)) would be necessary to determine if these technologies are, in fact, examples of qualifying thermal energy storage property. Moreover, the examples contained in proposed § 1.48E-2(g)(6)(ii) are a non-exhaustive list. Therefore, the final regulations do not adopt all the recommended additional examples.

Because section 48E(c)(2) provides that the term “energy storage technology” has the meaning given such term in section 48(c)(6), the final regulations incorporate modifications made to the section 48 proposed regulations by the section 48 final regulations to clarify the definition of EST, including with respect to thermal energy property.

8. Hydrogen Energy Storage Property

Proposed § 1.48E-2(g)(6)(iii) provided that hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Proposed § 1.48E-2(g)(6)(iii) also provided that hydrogen energy storage property must store hydrogen that is solely used as energy and not for other purposes, such as for the production of end products (for example, fertilizer), and set forth examples of hydrogen energy storage property.

A commenter stated that property storing hydrogen should be at least 1 GWh in capacity (which is equivalent to 96,554 gallons of liquid hydrogen storage capacity or about 25.4 metric tons) in order to qualify as hydrogen energy storage property. The Treasury Department and the IRS note that section 48E(c)(2) defines “energy storage technology” as having the meaning given such term in section 48(c)(6) (without the application of the beginning of construction deadline). Section 48(c)(6) defines “energy storage technology” as, in part, having a nameplate capacity of not less than 5 kilowatt hours. Accordingly, the final regulations do not adopt the commenter's suggestion, as doing so would be inconsistent with the statute.

a. End Use Requirement

Numerous commenters disagreed with the requirement that hydrogen energy storage property must store hydrogen that is solely used as energy and not for other purposes, which the commenters referred to as the “end use requirement.” Commenters noted that the end use requirement is not statutorily prescribed and asserted that it would be difficult, if not impossible, to implement. Commenters asserted that a single industrial customer may have multiple uses for hydrogen, sometimes for energy and sometimes for other purposes such as stripping pollutants from flue gas streams, and that customers are not generally willing to restrict their use in order to indemnify the hydrogen energy storage property against investment credit recapture risk. Commenters also pointed out that hydrogen storage projects may sell to intermediaries in which case the end use of hydrogen is not necessarily known, and ensuring that the end use requirement is respected by export markets would be impossible. A commenter contended that the limited number of examples and use cases offered in the proposed regulations raise several questions for taxpayers and hydrogen storage developers.

Some commenters also maintained that the end use requirement would be inconsistent with the Biden Administration's U.S. National Clean Hydrogen Roadmap. One of these commenters stated that a major build-out of hydrogen storage facilities targeting exclusively power sector end use makes little sense from a strategic perspective. A commenter asserted that the definition of EST in section 48(c)(6)(A)(i), which includes “hydrogen, which stores energy,” simply recognizes that hydrogen is inherently a form of energy itself. A commenter also claimed that section 48(c) only sets out affirmative requirements for EST and that, therefore, hydrogen storage property that is not primarily used in the transportation of goods or individuals should qualify for the section 48E credit regardless of where the stored hydrogen ends up. Commenters further noted that some energy uses may be indirect (for example, via intermediary molecules), further complicating application of an end use requirement.

Commenters also asserted that an end use requirement would bifurcate and adversely affect the hydrogen market, and that additional uses for hydrogen, such as feedstock for industrial processes, could present significant decarbonization opportunities. A commenter asserted that disallowing the section 48E credit for hydrogen storage from serving applications such as steel production and iron refining would be a significant disservice to America and delay or prevent massive reductions in carbon emissions while hindering U.S. manufacturing of essential construction materials. Commenters noted that a hydrogen end use requirement would disadvantage large-scale hydrogen storage facilities relative to smaller ones.

Commenters expressed concern that hydrogen energy storage is being unfairly singled out for disadvantageous treatment as compared to other EST, noting that the proposed regulations do not place an end use restriction on electricity stored within and discharged from batteries or other storage technologies; noting that energy withdrawn from batteries may be used for any purpose without losing its eligibility status. Commenters contended that the end use requirement would unduly push potential customers towards using battery-focused solutions instead of letting batteries and hydrogen solutions compete on equal footing, or in cases in which no alternative exists, would continue to extend the use of

existing technologies, fuels, and processes.

Some commenters supported the principle of an energy-based end use requirement for hydrogen energy storage property. One commenter sought clarification that “energy” was not limited to electricity production. Another commenter supported the principle of an energy-based end use limitation by comparing the statutory text of section 48(c)(6) from three legislative bills, including the version ultimately enacted by Congress, but opposed the “solely” criteria and cited practical challenges including administrability. Commenters generally requested that if an end use requirement is maintained that it be clarified and altered, and safe harbors provided. For example, a commenter suggested providing a rebuttable presumption of meeting the end use requirement if a taxpayer can demonstrate that it stored hydrogen predominantly for energy use.

Commenters also suggested creating a safe harbor as long as the facility itself uses some of the stored hydrogen for energy or the facility is an open access facility. A commenter requested flexible rules for determining the end use of hydrogen, including permitting taxpayers to assign withdrawn hydrogen based on commercial sales arrangements, or, alternatively, being able to rely on a mass balance approach based on the inputs and outputs to the storage property during the year. Commenters also suggested that the end use requirement conclude with the end of the 5-year recapture period provided by section 50. Several commenters suggested inverting the end use requirement to only disqualify property used to store hydrogen that is solely used for non-energy end products, or to exempt common carrier infrastructure from the end use requirement. Another commenter recommended a rule under which a facility that uses “qualified clean hydrogen” as defined under section 45V of the Code is deemed to qualify under section 48E if such hydrogen is used to create electricity.

Several commenters recommended implementing a dual use safe harbor to permit a taxpayer to claim a reduced section 48E credit when a portion of stored hydrogen is used for a purpose other than energy. Commenters noted that a dual use safe harbor could apply if at least half of the hydrogen in hydrogen energy storage property is used for energy purposes. In contrast, other commenters were opposed to any dual use approach to the end use limitation and asserted that such an approach would be unworkable, requiring “unknowable, unprovable, unmonitorable, unauditable facts.”

Commenters asked for clarification regarding what constitutes energy use of stored hydrogen and what documentation is needed to demonstrate such energy use. Several commenters were opposed to any recordkeeping requirements related to the end use of hydrogen and contended that such requirements would be unduly burdensome to taxpayers given the fungibility of hydrogen. Another commenter noted that there are currently no recordkeeping or documentation precedents available for a taxpayer to efficiently demonstrate the final end use of hydrogen stored in such taxpayer's hydrogen energy storage property. The commenter asserted that, as there is no available documentation pathway for tracking hydrogen molecules through to their end use, it would be both impractical and prohibitively costly for a taxpayer to develop and implement such recordkeeping practices.

After consideration of the comments received, the Treasury Department and the IRS agree that section 48(c)(6)(A)(i) does not require that hydrogen energy storage property store hydrogen that will be used for the production of energy. The Treasury Department and the IRS recognize commenters' concerns regarding the administrative challenges the end use requirement could present for taxpayers and agree that it should be removed. The final regulations therefore do not adopt the requirement that hydrogen energy storage property store hydrogen that is solely used as energy and not for other purposes such as for the production of end products like fertilizer.

b. Hydrogen Storage Media

Many commenters provided feedback regarding the qualifying types of hydrogen storage media. Specifically, a commenter requested expanding the definition of hydrogen energy storage to include storage of ammonia and electrolytic hydrogen derivative e-fuels. A commenter also requested that the Treasury Department and the IRS recognize and clarify that, unlike electricity, hydrogen is a chemical building block for other molecules that are capable of more efficiently carrying hydrogen. According to the commenter, this means that hydrogen can be stored as a physical material medium such as a metal hydride. The commenter also requested confirmation that the examples of hydrogen storage mediums provided in the preamble to the proposed regulations are non-exhaustive and that the type of storage medium is intentionally unlimited.

The Treasury Department and the IRS decline to adopt comments requesting that the final regulations provide that chemical storage (that is, equipment used to store hydrogen carriers (such as ammonia and methanol)) is hydrogen energy storage property. Section 48E(c)(2) provides that the term “energy storage technology” has the meaning given to such term in section 48(c)(6). Section 48(c)(6)(A)(i) defines “energy storage technology” as property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy), and has a nameplate capacity of not less than 5 kilowatt hours. Section 48(c)(6)(A) references hydrogen, but not compounds containing hydrogen.

c. Hydrogen Storage Components and Equipment

Several commenters requested clarifications regarding the components included in the definition of hydrogen energy storage. Commenters generally requested that the final regulations expand the list of integral and functionally interdependent equipment to be more inclusive of existing and future hydrogen energy storage property technologies. One commenter noted that while the functional interdependence test provided by the proposed regulations is helpful, specifying further what components are considered part of hydrogen energy storage is paramount. The commenter requested additional examples that address specific components including equipment needed to functionally store hydrogen, equipment used to change the phase of matter, equipment used to liquify hydrogen prior to storage, equipment used to convert stored hydrogen to ammonia to be used as a carrier of that stored hydrogen, equipment used to store electrolytic hydrogen derivative e-fuels, and any related and necessary pipelines. Similarly, commenters requested that additional components and equipment be specifically identified as eligible parts of hydrogen energy storage property, including hydrogen liquefaction and related equipment and other equipment required to operate underground hydrogen storage property.

A commenter requested that the final regulations demarcate between equipment used for hydrogen production, conditioning, transportation, and storage. The commenter emphasized that a clear demarcation is necessary to prevent

gaming the system if storage property would qualify for the section 48E credit under section 48(c)(6) and the production equipment will, in many or most cases, be associated with the production tax credit under section 45V. The commenter suggested that the proper demarcation between hydrogen production and conditioning, transportation, or storage equipment is the point at which any post-production conditioning to remove impurities or to put the hydrogen into a saleable form is completed. The commenter stated that, in distinguishing hydrogen production equipment from storage equipment, the associated conditioning equipment should include all equipment necessary to treat, process, compress, pump, or perform other physical action on hydrogen prior to its storage or delivery. The commenter noted that equipment used to convert hydrogen into ammonia, methanol, or another hydrogen carrier also should be associated with post-production processing of hydrogen and not eligible for the section 48E credit. Similarly, the commenter asserted that equipment, such as compressors, used to liquify hydrogen (liquefaction) to put it into a deliverable and salable form should not qualify as hydrogen energy storage property, including the equipment necessary for liquefaction, conversion to ammonia, methanol, or other hydrogen carrier, and dissociation or cracking equipment necessary to convert a hydrogen carrier back into hydrogen. The commenter emphasized that if compressors are used in direct connection with storage devices, rather than to change the form of the hydrogen (for example, from gas to liquid), compressors are integral to the storage equipment and should qualify for the section 48E credit. Another commenter stated that the definition of hydrogen storage property should be limited to tanks and caverns of scale, and the associated equipment necessary to fill or discharge hydrogen from those tanks or caverns.

Commenters also requested further guidance on the eligibility of pipelines as hydrogen energy storage property noting that there are specific cases in which hydrogen pipelines that are directly connected to an energy storage facility can operate as hydrogen storage, by providing additional volumes that can adjust pressure in direct coordination with the storage facility compression system. One commenter requested clarification of the term “primarily” in the phrase “other than property primarily used in the transportation of goods or individuals” as applied to pipelines that can be used to store hydrogen. Another commenter suggested clarifying the scope of hydrogen storage property with respect to transportation, customer delivery, and use.

One commenter that opposed the inclusion of pipelines, rail cars, and truck trailers in the definition of hydrogen storage property, noted that if hydrogen has been stored in qualified storage property, such as tanks or underground storage salt caverns, the energy storage property should end at the valve where the stored hydrogen is delivered into a pipeline system. Additional commenters recommended limiting the treatment of hydrogen pipelines as integral or interdependent to hydrogen storage property. Commenters pointed to Federal Energy Regulatory Commission (FERC) rulings and applicable case law, such as

Hawaiian Independent Refinery, Inc.

v.

U.S.,

697 F.2d 1063 (Fed. Cir. 1983), which delineate the circumstances under which pipeline systems would be considered part of the storage facility. One commenter recommended only including pipelines directly linked to storage facilities and further recommended that the final regulations more precisely define the boundary between storage and transportation infrastructure. This commenter's proposed guideline would define the boundary between storage and transportation infrastructure by only considering specific interconnected pipeline segments as part of the storage system: point-to-point lines starting from the storage facility and ending at the first intersection point with explicit compression equipment. Commenters also requested a safe harbor for interconnecting pipelines whereby the pipelines would be deemed integral or interdependent to a hydrogen storage facility if (i) the complex is conceived and designed concurrently, and all offsite interconnecting pipeline components are placed into service within twenty four months of the date on which the first such component is placed into service, and (ii) the offsite interconnecting components are within 100 miles of the storage facility or within the same State as the storage facility.

Commenters proposed the inclusion of additional examples that would provide additional specific eligible components and provide capitalization rules; establish eligibility of pipelines connecting storage facilities if exclusive to use of those facilities; and establish eligibility of purification equipment intended to return the purity of hydrogen post-storage to its purity level upon entering storage.

A commenter suggested allowing tanks and associated equipment for the storage of ammonia when used as a hydrogen carrier to qualify for the section 48E credit but stated that equipment used to disassociate ammonia into hydrogen (referred to as cracking) is a separate function from hydrogen storage and should not be treated as hydrogen energy storage property.

The Treasury Department and the IRS agree that clarifying the definition of hydrogen energy storage property is warranted. Hydrogen liquefaction equipment may prepare hydrogen for storage in the hydrogen energy storage property, making such property an integral part of hydrogen energy storage property. The final regulations provide that property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment.

Section 48E(c)(2) generally defines “energy storage technology” as having the meaning given such term in section 48(c)(6). Section 48(c)(6)(A)(i) defines “energy storage technology” as excluding property primarily used in the transportation of goods or individuals and not for the production of electricity. In general, whether property is “primarily” used in the transportation of goods or individuals and not for the production of electricity, is dependent on the facts and circumstances. Pipelines, trailers, and railcars are property primarily used in the transportation of goods or individuals and not for the production of electricity. Accordingly, such property generally would not be considered part of hydrogen energy storage property for purposes of section 48E.

The Treasury Department and the IRS recognize that there are specific cases in which hydrogen pipelines that are directly connected to an energy storage facility can operate as hydrogen storage. Hydrogen energy storage property may have hydrogen pipelines that are used as gathering and distribution lines to transport hydrogen within the hydrogen energy storage property, making such hydrogen pipelines an integral part of the hydrogen energy storage property. These gathering and distribution lines are not pipelines used to transport hydrogen outside of the hydrogen energy storage property. The final regulations clarify that property that is an integral part of hydrogen energy storage property includes, but is not limited to, gathering and distribution lines within a hydrogen energy storage property.

The Treasury Department and the IRS decline to provide additional examples of integral equipment and functionally interdependent equipment in the context of hydrogen energy storage property. The final regulations provide a function-oriented method to determine whether a technology is EST that is broad enough to encompass nascent technologies without rendering the regulations quickly obsolete. It is impossible to enumerate every technology that may be eligible for the section 48E credit given the ever-changing nature of the industry and pace of technological development. Although these regulations do not list all technologies that may qualify for the section 48E credit, the final regulations provide adequate guidance and examples to illustrate the application of the rules for taxpayers to analyze a particular technology. The Treasury Department and the IRS, therefore, do not adopt commenters' requests concerning specific technologies.

9. Modification of Energy Storage Technology

Proposed § 1.48E-2(g)(7) provided that with respect to electrical energy storage property and hydrogen energy storage property, modified as set forth in proposed § 1.48E-2(g)(7), such property will be treated as an electrical energy storage property (as described in proposed § 1.48E-2(g)(6)(i)) or a hydrogen energy storage property (as described in proposed § 1.48E-2(g)(6)(iii)), except that the basis of the existing electrical energy storage property or hydrogen energy storage property prior to such modification is not taken into account for purposes of proposed § 1.48E-2(g)(7) and section 48E.

Commenters noted that taxpayers often replace energy storage equipment to manage the natural degradation of storage assets over time and to prolong the useful life of these projects, even if such improvements do not meet a 5-kWh capacity threshold. One commenter therefore contended that references to nameplate capacity in section 48E are best read to disregard any degradation of the EST between when it is placed in service and when capacity is added. The same commenter contended that modifications to EST should be eligible for the section 48E credit if one of the 5kWh nameplate measurement tests under proposed § 1.48E-2(g)(7)(i) and (ii) are met, regardless of any degradation that has occurred to the EST's nameplate capacity since its original in-service date. The commenter requested clarifying that the nameplate capacity after a modification is the nameplate capacity of such property before the modification plus the capacity added by the modification. Another commenter suggested permitting a “modification that leads to a demonstrated increase in capacity (measured and recorded immediately before such modifications) of not less than 5kWh,” to be eligible for the section 48E credit.

Another commenter explained that nameplate capacity of EST is typically defined when initial interconnection is approved, meaning that taxpayers who wish to claim the estimated expenditures of storage augmentation under section 48E will need to modify the original interconnection agreement or oversize their assets before placing them into service. The commenter requested that the section 48E rules recognize the eligibility of storage augmentation beyond nameplate capacity and suggested that the estimated expenditures associated with augmentation of qualifying EST be fully eligible for the section 48E credit. Another commenter suggested clarifying that augmentation of EST over time is eligible for the section 48E credit, either by treating estimated future augmentation costs at the time the EST is originally placed in service as eligible, with recapture provisions if estimated costs are not realized, or by treating any costs related to augmentation that are incurred as part of the upfront investment to construct an energy storage site as eligible. The commenter described augmentation as the periodic upgrade to capacity over a project's lifetime by either adding new inverters and enclosures or recycling batteries to old enclosures and adding new batteries behind an existing inverter.

Section 48E(c)(2) defines EST by reference to section 48(c)(6). Proposed § 1.48E-2(g)(7)(i) and (ii) applied the rules for modification of EST described in section 48(c)(6)(A)(i). In defining EST, section 48(c)(6)(A)(i) uses the term “nameplate capacity.” Accordingly, the rules for modification of EST apply with respect to the nameplate capacity of EST, and do not take into account potential degradation of the EST prior to its modification. The final regulations clarify that for purposes of the modification rules, the increase in nameplate capacity is equal to the difference between nameplate capacity immediately after the modification and nameplate capacity immediately prior to the modification. To maintain consistency with the statute, the final regulations do not adopt commenters' suggestions to measure an increase in nameplate capacity in a different manner.

A commenter also suggested clarifying that a modification is taken into account whether the increase in capacity is within an existing enclosure, the existing enclosure is expanded, a new enclosure is added for the increased capacity, or a new enclosure is constructed to include both the existing capacity and the added capacity.

Section 48(a)(6)(B) defines modifications of EST without any reference to physical space limitations. Proposed § 1.48E-2(g)(7) also does not address limiting modifications of EST based on physical space. The Treasury Department and the IRS conclude that a modification of EST is not limited by the physical space occupied by the EST before or after the modification and adopt the proposed regulations without change.

D. Rules for Certain Lower-Output Qualified Facilities

Proposed § 1.48E-4(a)(1) provided rules for qualified facilities with a maximum net output of not greater than 5 megawatts to include qualified interconnection costs in the basis of an associated qualified facility. Proposed § 1.48E-4(a)(1) provided that the qualified investment for a qualified facility includes amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of a qualified facility that has a maximum net output of not greater than 5 MW (as measured in alternating current) (Five-Megawatt Limitation). Proposed § 1.48E-4(a)(1) also provided that the qualified interconnection property must provide for the transmission or distribution of the electricity produced by a qualified facility and must be properly chargeable to the capital account of the taxpayer as reduced by the rules in proposed § 1.48E-4(a)(6). Proposed § 1.48E-4(a)(2) defined the term “qualified interconnection property.” Proposed § 1.48E-4(a)(2) further provided that qualified interconnection property is not taken into account to determine if a qualified facility meets the requirements for the increase in credit rate for energy communities or domestic content because qualified interconnection property is not part of a qualified facility. Proposed § 1.48E-4(a)(3) described the Five-Megawatt Limitation as a measurement taken at the qualified facility level. Proposed § 1.48E-4(a)(3)(i) provided that the maximum net output of a qualified facility is measured only by the nameplate generating capacity of the unit of qualified facility, which does

not include the nameplate capacity of any integral property, at the time that the qualified facility is placed in service. Proposed § 1.48E-4(a)(3)(i) additionally provided that the nameplate generating capacity of the unit of qualified facility is measured independently from any other qualified facilities that share the same integral property. Proposed § 1.48E-4(a)(3)(ii) provided how the nameplate capacity at a qualified facility is measured. Proposed § 1.48E-4(a)(4) defined the term “interconnection agreement” and proposed § 1.48E-4(a)(5) defined the term “utility.” Proposed § 1.48E-4(a)(6) provided that expenses paid or incurred for qualified interconnection property and amounts otherwise chargeable to capital account with respect to such expenses must be reduced under rules similar to the rules contained in section 50(c). Proposed § 1.48E-4(a)(6) provided that the taxpayer must pay or incur the interconnection property costs, and therefore, any reimbursement, including by a utility, must be accounted for by reducing the taxpayers' expenditure to determine eligible costs. The preamble to proposed § 1.48E-4(a)(6) explained that a taxpayer that is reimbursed for these costs may not include such reimbursed costs in the amount paid or incurred by the taxpayer for qualified interconnection property. In the case of a utility reimbursing a taxpayer for costs the taxpayer pays or incurs for qualified interconnection property, the utility should provide the taxpayer with information regarding such costs by the date on which the project is placed in service.

The preamble to the proposed regulations explained that the Treasury Department and the IRS are aware of common situations in which a taxpayer could ultimately receive a payment, credit, or service from another entity, including a utility, related to the costs the taxpayer pays or incurs for qualified interconnection property. For example, one taxpayer may place in service a qualified facility and make payments to a utility with respect to qualified interconnection property involving the addition, modification, or upgrade to the utility's transmission system related to such qualified facility. Subsequently, a different taxpayer may, at a later date, place in service a qualified facility and make payments to the same utility related to the same additions, modifications, or upgrades to the utility's transmission system that were made in response to the first taxpayer's interconnection. The utility may pay, credit, or provide services to the first taxpayer in an amount related to the costs paid by the second taxpayer. The likely amount or timing of any such payment, credit, or service would be unknown at the time the first taxpayer interconnects to the utility's transmission system.

Additionally, in the preamble to the proposed regulations, the Treasury Department and the IRS requested comments on several issues related to reimbursements. The Treasury Department and the IRS requested comment on whether such payment, credit, or service received by the first taxpayer, as a result of subsequent payments made to a utility by other parties, should be treated as a reimbursement to the first taxpayer and impact the amount of the costs of qualified interconnection property that the first taxpayer may include in its basis for purposes of the section 48E credit. The Treasury Department and the IRS also requested comment on whether the costs paid by the second taxpayer should be treated as amounts paid or incurred for qualified interconnection property in connection with the installation of the second taxpayer's qualified facility. The Treasury Department and the IRS requested comment on industry practices relevant to the determination of costs paid or incurred for qualified interconnection property, including the accounting treatment of costs paid or incurred for qualified interconnection property. The Treasury Department and the IRS also requested comment on whether any clarifications are needed regarding the tax treatment of amounts paid or incurred for qualified interconnection property, including reimbursement of costs paid or incurred by a taxpayer for qualified interconnection costs.

In addition to updates discussed in Sections III.D.1 through 6, the final regulations clarify the definition of an interconnection agreement in § 1.48E-4(a)(4) by stating that in the case of the election provided under section 50(d)(5) (relating to certain leased property), the term includes an agreement regarding a qualified facility leased by such taxpayer.

1. Qualified Interconnection Property

Some commenters requested clarification on whether certain costs are considered amounts paid or incurred for qualified interconnection property. A commenter requested that the final regulations confirm that equipment required to modify and upgrade transmission or distribution systems beyond the point of interconnection would be considered qualified interconnection property.

Section 48E(b)(4) provides that the term “qualified interconnection property” has the meaning given such term in section 48(a)(8)(B). Section 48(a)(8)(B) defines, in relevant part, the term “qualified interconnection property” to mean, with respect to an energy project that is not a microgrid controller, any tangible property that is part of an addition,

modification, or upgrade

to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnection. Proposed § 1.48E-4(a)(2) adopted this definition. The Treasury Department and the IRS confirm that under this definition, tangible property required to modify and upgrade transmission or distribution systems beyond the point of interconnection would (provided the property satisfies the other requirements of section 48(a)(8)(B)) be considered qualified interconnection property and eligible for inclusion in basis for purposes of the section 48E credit.

Another commenter requested that the final regulations expand the definition of qualified interconnection property to include grid-enhancing property. A definitive response to this comment would require the Treasury Department and the IRS to conduct a complete factual analysis of the property in question, which would include information beyond that which was provided by the commenter. Because more information is needed to make the determinations requested by the commenter, the requested clarifications are not addressed in these final regulations.

A commenter requested that, in instances in which the taxpayer funds network upgrades and is then later reimbursed by the transmission owner, taxpayers not be required to account for any reimbursements of interconnection-related expenses paid in later years to the taxpayer. Another commenter requested that in such a scenario, the final regulations should disregard reimbursements to the extent that the reimbursement is includable in the taxpayer's gross income. The commenter also asserted that in circumstances in which the taxpayer receives a later payment from a customer utilizing the qualified interconnection property, the taxpayer be permitted to treat the payments as revenue, rather than reimbursement. One of the commenters also requested confirmation that taxpayers can include in their basis qualifying interconnection costs recovered through “Transmission

Owner Initial Funding.” According to the commenters, in certain regional markets, the transmission owner funds the costs of interconnection upgrades for which a taxpayer is responsible, and the taxpayer then reimburses the transmission owner over a certain period, typically 20 years. The commenters requested that a taxpayer with such an arrangement be allowed to include the full amount of interconnection costs that it will ultimately pay over that period in calculating their section 48E credit for the taxable year that the qualified facility is placed in service.

The Treasury Department and the IRS note that the statute limits qualified interconnection property to tangible property. In the case of a taxpayer that pays costs over 20 years, the commenters do not describe whether these amounts paid may include amounts that are not tangible property. To the extent commenters are asking generally about the inclusion of the full allocated cost of interconnection upgrades and, therefore, any amounts paid or incurred by the taxpayer for qualified interconnection property, the Treasury Department and the IRS recognize these payments could include a number of markups that the utility that builds and owns the relevant interconnection property might charge for that property (whether currently or over a later reimbursement period), such as the markup for a rate of return or other costs (for example, a tax gross-up). Whether specific costs are allowable would be a fact-specific inquiry related to, among other things, whether such costs are incurred with respect to eligible tangible property. Therefore, the final regulations do not adopt commenters' suggestion to provide that the full allocated cost of interconnection upgrades is always eligible, although in many cases it may be. However, the Treasury Department and the IRS clarify that it is not determinative whether such costs are charged upfront or over time.

The final regulations under § 1.48E-4(a)(2) also clarify that for purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) must be taken into account, as applicable, with such original use determined on the date of the sale-leaseback or lease.

2. Interaction With Other Bonus Credit Amounts

Commenters requested that the final regulations clarify the interaction between the rules for qualified interconnection costs and the computation of the domestic content bonus credit amount and the increased credit amount for energy projects located in an energy community since this clarification was provided in section 48.

Section 48E(b)(4) provides that the term “qualified interconnection property” has the meaning given such term in section 48(a)(8)(B). Section 48(a)(8)(B) defines qualified interconnection property as distinct from the definition of “energy property” provided in section 48(a)(3). Additionally, section 48(a)(8)(A) includes amounts paid or incurred for qualified interconnection property meeting certain requirements for purposes of determining the credit under section 48(a). Similarly, section 48E(b)(1) includes expenditures paid or incurred by the taxpayer for qualified interconnection property meeting certain requirements for purposes of determining a qualified investment under section 48E(a) and defines qualified interconnection property discretely from a qualified facility eligible under section 48E(a)(1). Given that qualified interconnection property is not part of a qualified facility, § 1.48E-4(a)(2) provides that qualified interconnection property is not taken into account to determine if a qualified facility meets the requirements for the increase in credit rate for energy communities or domestic content. Therefore, no further clarification is needed in the final regulations.

Additionally, because the credit under section 48E(a) is calculated by multiplying the applicable percentage—which includes any domestic content bonus credit amount—by the basis of the qualified facility—which includes amounts paid or incurred by the taxpayer for qualified interconnection property, qualified interconnection costs are taken into account in calculating the domestic content bonus credit amount and the increased credit amounts for energy projects located in an energy community and for certain facilities placed in service in connection with low-income communities.

3. Basis Reduction

For purposes of section 48E(b), the term “qualified interconnection property” has the meaning given such term in section 48(a)(8)(B). There are no additional references to section 48(a)(8) other than section 48(a)(8)(B). As a result, the basis reduction language in section 48(a)(8)(E), which provides that in the case of expenses paid or incurred for interconnection property, amounts otherwise chargeable to capital account with respect to such expenses are to be reduced under rules similar to the rules of section 50(c), is not explicitly incorporated. However, the Treasury Department and the IRS determined that the section 50(c) basis reduction rules apply because section 50(c) provides for basis adjustments to investment credit property generally. Section 50(c) has two basis adjustment rules that could apply to interconnection property, section 50(c)(1) or (3). Although interconnection property is not part of a qualified facility as provided in proposed § 1.48E-4(a)(2), qualified interconnection costs are included in the basis used to calculate the section 48E credit. Therefore, the Treasury Department and the IRS confirm the special rule in section 50(c)(3)(A), which provides for a basis reduction of 50 percent in the case of any section 48E credit, applies to qualified interconnection property that is properly chargeable to capital account of the taxpayer which is the amount included in the basis used to calculate the section 48E credit.

4. Reimbursements and Other Cost Reductions

The proposed regulations requested comment on several issues related to reimbursement. Generally, the proposed regulations requested feedback on treatment of reimbursements in common situations in which a taxpayer could ultimately receive a payment, credit, or service from another entity, including a utility, related to the costs the taxpayer pays or incurs for qualified interconnection property. The proposed regulations also requested comments on the outcome when a different taxpayer makes payments to a utility for the same additions, modifications, or upgrades of another taxpayer. Comments were also requested on industry practices and tax implications of reimbursements. In response to these requests, a commenter requested the final regulations clarify that a taxpayer is not required to reduce its section 48E credit on account of any reimbursement of interconnection costs in the absence of a fixed right (that is specific in amount and time) to receive the reimbursement at the time the taxpayer incurs the interconnection costs. This commenter recommended that the final regulations include rules that are administrable and provide only a single credit on qualified interconnection costs (for example, a case in which another possible section 48E claimant reimburses directly or indirectly a first claimant).

Other commenters requested clarification of the reimbursement rules under specific scenarios. One commenter suggested that for cases in

which the taxpayer funds network upgrades and is later reimbursed by the transmission owner, the final regulations should avoid accounting for any reimbursements of interconnection-related expenses paid in later years to the taxpayer.

Another commenter suggested that including reimbursed interconnection costs in the credit basis should be based on whether the amounts are includible in gross income. The commenter stated that in circumstances in which a utility reimburses a qualified facility owner under a set schedule, the final rule should disregard the utility's reimbursements to the extent that the reimbursement is includable in a taxpayer's gross income. The commenter added that if a subsequent interconnection customer's use of the qualified interconnection property results in a later payment or credit to the taxpayer, the payment or credit should be treated as revenue rather than reimbursement. The commenter also requested clarification that in circumstances in which a qualified facility owner pays for qualified interconnection property

without

reimbursement, the owner should be able to utilize the full cost of those facilities in determining its investment tax credit.

The Treasury Department and the IRS recognize that situations may arise in which the initial amount paid or incurred for qualified interconnection property is reduced after the taxable year in which the taxpayer claims the section 48E credit. The Treasury Department and the IRS also recognize that other complicated situations may arise in determining whether a taxpayer has paid or incurred qualified interconnection costs. The comments received confirmed that these questions are not unique to the reimbursement of qualified interconnection costs and may also arise in the context of other tax credits. Therefore, the determination of whether qualified interconnection costs have been paid or incurred by the taxpayer and whether such amounts are reduced by virtue of transactions with the utility or with a third party should be based on generally applicable Federal tax principles.

In consideration of the comments, the final regulations revise the rule under § 1.48E-4(a)(6) regarding reduction to amounts chargeable to capital account to reflect the application of Federal tax principles to such transactions in determining the amount a taxpayer paid or incurred for qualified interconnection costs. The final regulations at § 1.48E-4(a)(1) explain that if the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal tax principles may require the taxpayer to reduce the amount treated as paid or incurred for qualified interconnection property to determine a section 48E credit. The final regulations at § 1.48E-4(a)(7) also include two additional examples related to reducing costs borne by the taxpayer.

5. Five-Megawatt Limitation

Some commenters provided feedback on the measurement rule for the Five-Megawatt Limitation provided at proposed § 1.48E-4(a)(3). Two commenters suggested that the Five-Megawatt Limitation be modified to clarify the relevant measurement is performed at the point of output (that is, 5 MW AC at the inverter) rather than nameplate generation capacity to better align with section 48E(b)(1)(B). As described by one of the commenters, the text of section 48E(b)(1)(B) does not contain the words “nameplate” or “capacity” and instead it specifically refers to the 5 MW limit by reference to “output . . . measured in alternating current” which, for solar photovoltaic systems can only be read to refer to post-inverter measurement. Another commenter recommended that the final regulations refer only to output measured in alternating current, without presuming that the direct current nameplate capacity is identical. Additionally, this commenter requested that the final regulations specifically clarify that qualified facilities be defined at the inverter level for the limited purpose of evaluating if they meet the Five-Megawatt Limitation, as this is the source of any alternating current output.

Measuring output with accuracy and consistency must be done using a defined standard. The Treasury Department and the IRS conclude that nameplate generating capacity is the best and most practical measure of the maximum net output of a unit of qualified facility. Nameplate generating capacity is an objective and identifiable standard that can be accurately measured with consistency. Therefore, the Treasury Department and the IRS do not adopt the comment suggesting changes to the use of nameplate capacity. The final regulations at § 1.48E-4(a)(3)(ii) retain the rule that the determination of whether a qualified facility has a maximum net output of not greater than 5 MW (as measured in alternating current) is based on the nameplate capacity of the unit of qualified facility.

Regarding measurement of the Five-Megawatt Limitation in alternating or direct current, the Treasury Department and the IRS understand the commenter's concerns and agree that the rule provided in the proposed regulations should be revised. Section 48E(b)(1)(B)(i)(I) refers to a maximum net output of not greater than five megawatts (as measured in alternating current). Proposed § 1.48E-4(a)(3)(ii) provided for nameplate capacity in alternating current, without addressing types of qualified facilities, such as solar facilities, that generate electricity in direct current. Nameplate capacity for these types of qualified facilities is measured before the facility's output is converted to alternating current by an inverter. Because an inverter would be considered property that is an integral part of the qualified facility and not part of the unit of qualified facility itself, measuring the nameplate capacity of a qualified facility that generates electricity in direct current would be difficult under the proposed regulations.

However, in response to comments, the final regulations provide a method of measuring nameplate capacity for a qualified facility that generates electricity in direct current. The final regulations at § 1.48E-4(a)(3)(iii) provide that, for qualified facilities that generate electricity in direct current, the taxpayer determines whether a qualified facility has a maximum net output of not greater than 5 MW (in alternating current) by using the lesser of: (i) the sum of the nameplate generating capacities within the unit of qualified facility in direct current, which is deemed the nameplate generating capacity of the unit of qualified facility in alternating current; or (ii) the nameplate capacity of the first component of the qualified facility that inverts the direct current electricity generated into alternating current. This rule provides flexibility for taxpayers while ensuring that the maximum net output (in alternating current) of a qualified facility can be determined in an administrable and reasonably accurate manner for qualified facilities that generate electricity in direct current.

A few commenters suggested providing additional examples to illustrate output rules for interconnection property. Another commenter recommended finalizing Example 1 in proposed § 1.48E-4(a)(7)(i) which specified that two section 48E facilities, each with a maximum output of 5 MW AC, can share—and treat as qualified interconnection property—a step-up transformer, which is integral to both properties.

In response to commenters that requested additional clarification of the Five-Megawatt Limitation, the final

regulations add an additional example under § 1.48E-4(a)(7) as well as provide clarifications to the existing examples. These clarifications illustrate the revised method of measuring nameplate capacity for a qualified facility that generates electricity in direct current. The clarifications also demonstrate the application of the Five-Megawatt Limitation in cases in which the nameplate capacity differs from the maximum output provided in the interconnection agreement. Specifically, the newly added example describes the application of the Five-Megawatt Limitation to separate interconnection agreements for a single qualified facility made up of units of a qualified facility owned by a single taxpayer. In that example, although the taxpayer has interconnection agreements with the utility that each allow for a maximum output of 10 MW (as measured in alternating current), the taxpayer may include the costs taxpayer paid or incurred for qualified interconnection property, subject to the terms of the interconnection agreement, to calculate the taxpayer's section 48E credits for each of the qualified facilities because each has a maximum net output of not greater than 5 MW (alternating current).

6. Energy Storage Technology

Two commenters suggested that the final regulations permit interconnection costs for stand-alone EST. Both commenters explained that although sections 48E(b) and (c) do not mention eligible interconnection costs in the context of stand-alone EST, the term “qualified interconnection property” is defined by reference to section 48(a)(8). Therefore, according to the commenters, this result is supported because the statutory text of that section expressly includes “amounts paid or incurred by the taxpayer for qualified interconnection property . . . to provide for the transmission or distribution of the electricity produced or stored by such property.” These commenters also added that this result would reconcile sections 48 and 48E and would advance the IRA's express policy of encouraging storage deployment.

Based on the explicit language of section 48E, the Treasury Department and the IRS disagree that including costs for qualified interconnection property for a standalone EST is supported by the statute. Section 48E(c)(1), which describes the qualified investment

with respect to EST,

does not refer to qualified interconnection property.

Section 48E(b)(1) generally provides, in part, that the qualified investment with respect to any qualified facility for any taxable year includes the amount of any expenditures which are both paid or incurred by the taxpayer for qualified interconnection property in connection with a qualified facility which has a maximum net output of not greater than 5 megawatts (as measured in alternating current), and placed in service during the taxable year of the taxpayer. The amount of any expenditures which are paid or incurred by the taxpayer for qualified interconnection property must also be properly chargeable to capital account of the taxpayer. Section 48E(b)(4) defines qualified interconnection property by reference to section 48(a)(8)(B). While commenters are correct that the reference to qualified interconnection property in section 48(a)(8)(A) also refers to “electricity stored,” the cross-reference applicable for qualified facilities is to section 48(a)(8)(B) (the definition of qualified interconnection property) and there is no similar cross-reference in section 48E to support including the costs of qualified interconnection property for an EST. The overt omission of a reference to qualified interconnection property in section 48E(c), which provides rules for determining qualified investment with respect to an EST is instructive. The clear exclusion of qualified interconnection property for EST under section 48E(c)(1), particularly when compared to its inclusion in section 48E(b)(1)(B)(i)(I), demonstrates Congressional intent. Therefore, the final regulations do not adopt commenters' recommendation that expenditures paid or incurred by the taxpayer for qualified interconnection property are includible in the section 48E credit for EST.

As discussed earlier, the Treasury Department and the IRS understand that some hybrid systems (such as those for a solar qualified facility and EST) operate under a single interconnection agreement.

1

In these situations, while expenditures paid or incurred by a taxpayer for qualified interconnection property are not includible in the section 48E credit for an EST, those expenditures paid or incurred for qualified interconnection property that are properly allocated to the qualified facility (for example, the solar qualified facility) may be included in the credit base for the qualified facility's qualified investment for the section 48E credit.

1

In some configurations, the addition of EST to a qualified facility may have no or limited impact on the interconnection costs of that hybrid facility.

E. 80/20 Rule

As noted earlier, the 80/20 Rule is designed to broaden the availability of the investment credit by providing a new original placed in service date for a qualified facility that includes some components of property previously placed in service, rather than requiring the qualified facility to be composed entirely of new components of property. In the context of section 48E, the 80/20 Rule applies at the qualified facility level to the components of property within the unit of qualified facility or unit of EST.

Proposed § 1.48E-4(c)(1) provided that for purposes of section 48E(b)(3)(A)(ii), a facility may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility, provided that the fair market value of the used components of the unit of qualified facility is not more than 20 percent of the unit of qualified facility's total value (that is, the cost of the new components of property plus the value of the used components of property within the unit of qualified facility). In addition to providing a new placed in service date for a qualified facility that includes some components of property that have previously been placed in service, the 80/20 Rule also encourages investment in the retrofitting of existing facilities.

Although this section focuses on the 80/20 Rule in the section 48E context, section II.F. of this Summary of Comments and Explanation of Revisions describes comments received on both sections 45Y and 48E. As described in that section, the Treasury Department and the IRS confirm that if a qualified facility under section 45 or energy property or EST under section 48 is later retrofitted in a manner that satisfies the 80/20 Rule, it will be considered a new qualified facility or a new EST and may be eligible for a section 48E credit so long as the qualified facility or EST meets all requirements of section 48E. Additionally, the Treasury Department and the IRS confirm that section 48E does not refer to a project or system but in the case of section 48E to a qualified facility and an EST.

1. Relevance of Prior Section 48 Guidance

Prior guidance and regulations under section 48 are not binding for purposes of section 48E. However, several commenters stated that application of the 80/20 Rule as proposed violated longstanding precedent under section 48. These commenters stated that under section 48 as previously applied,

taxpayers would be allowed to claim the section 48E credit for capital improvements as well as additions or modifications to existing property without regard to the 80/20 Rule. Further, some commenters suggested that the 80/20 Rule as originally applied in the section 48 context was only relevant for addressing the “original use requirement” for property and was not intended to prevent additions of new property from qualifying for a credit. These commenters pointed to Example 2 in § 1.48-2(b)(7) and Examples 4 and 5 in § 1.48-2(c), to illustrate that, in the context of the section 48 credit, the 80/20 Rule was intended to address the “original use requirement.” Consistent with this view, several commenters asserted that the prohibition against claiming the section 48E credit for additions that do not meet the 80/20 Rule (Excluded Costs Rule) is inconsistent with the statute and regulations and should be removed.

One commenter, like many others that asserted that the application of the 80/20 Rule for purposes of section 48E is contrary to historical precedent, also focused on the negative economic impact. The commenter stated that the proposed regulations would negatively impact the economics of both existing and future development of clean energy projects and that existing project investments were based on reasonable reliance that future capital improvements would be eligible for the section 48E credit without regard to the 80/20 Rule. Similarly, another commenter stated it did not see a policy rationale for application of the 80/20 Rule in the manner provided in the proposed regulations, as it would lead to uneconomic decisions, such as favoring demolition and rebuilding instead of capital expenditures to modify an existing energy property and, like others, pointed to what they view as inconsistency with more than 60 years of prior investment tax credit (ITC) precedent.

The Treasury Department and the IRS understand the concerns raised by commenters. However, prior guidance and regulations based on section 48 are not binding for purposes of section 48E. Section 48E provides a credit only for a qualified investment with respect to a qualified facility or an EST and not for components of property within a qualified facility or an EST. For the reasons provided here, the Treasury Department and the IRS believe that the best interpretation of “qualified investment with respect to a qualified facility or an EST” is that if a taxpayer does not place in service a qualified facility or an EST, a taxpayer is not eligible for a credit. Therefore, the application of the 80/20 Rule to the section 48E credit in the proposed regulations benefits taxpayers by providing a path to access the section 48E credit when less than an entirely new qualified facility or EST is placed in service.

Section 48E contains several features that require the credit to be analyzed at the level of a qualified facility or an EST. The PWA requirements are applied to a qualified facility or an EST under section 48E(a)(2)(A) and (B). Likewise, determining whether the increased credit amounts for domestic content and energy communities also apply to a qualified facility or an EST. Finally, determining whether a taxpayer may include qualified interconnection property expenditures is tied to the maximum net output of a qualified facility. These determinations cannot be made with respect to individual components of property. This statutory construction clearly contemplates calculating the credit on the basis of an entire qualified facility or EST. Applying the 80/20 Rule for purposes of section 48E provides taxpayers with an opportunity for additions of property to an existing facility or an EST to be eligible for the section 48E credit if the rule is satisfied.

Other commenters pointed to what they describe as longstanding rules that otherwise ITC-eligible improvements made to existing energy property may qualify for the ITC. One commenter stated that the IRA did not change this rule in any way. According to this commenter, application of the 80/20 Rule has always uniquely been relevant for purposes of the production tax credit (PTC) and is simply not relevant for purposes of the ITC. The Treasury Department and the IRS affirm the role of the 80/20 Rule in the ITC context to allow for additions of new property to an existing facility or EST to be eligible for the section 48E credit if the rule is satisfied.

2. Excluded Costs

Several commenters asserted that section 48E allows a credit for adding components or making capital additions to a qualified facility. One commenter concluded that capital improvements should not be penalized under the 80/20 Rule. According to the commenter, owners of a qualified facility, such as a solar qualified facility, should be allowed to upgrade or replace components and claim new section 48E credits. The commenter pointed to two examples in the existing Treasury Regulations under section 48 that the commenter stated illustrate the proper interpretation of the original use requirement in § 1.48-2(b)(7) and the difference between a reconditioned or rebuilt unit of property previously placed in service and/or the use of “some used parts,” on the one hand, and the addition of new property or capital improvements, on the other.

Another commenter stated that the excluded costs described in proposed § 1.48E-4(c)(5) are unclear because a taxpayer is always adding new components to used components, and it should be reworded to clarify that it does not imply that the taxpayer must exclude the cost of new components when a taxpayer adds them to used components.

Some of these commenters requested that the 80/20 Rule and the Excluded Costs Rule provided at proposed § 1.48E-4(c)(5) not apply for section 48E purposes to additions of otherwise eligible new components of property added to an existing qualified facility on which a PTC was not claimed. As an example, the commenter asserted that the owner of a solar qualified facility should be able to make capital improvements to upgrade or replace existing solar modules or inverters and claim a new section 48E credit without regard to the 80/20 Rule on such capital improvements. This commenter stated that the 80/20 Rule should only apply when a new category of components is added to an existing qualified facility comprised of different categories of components (such as wind being added to solar), then that new category of component should be treated as a separate “unit of qualified facility.” The commenter stated that this result is also consistent with the IRA generally, which does not prevent a taxpayer from claiming both a PTC with respect to the output of a qualified facility and an ITC with respect to any associated EST. The commenter stated that this is also consistent with Notice 2018-59.

Another commenter explained that the 80/20 Rule has its origins under the section 48 credit and in the context of the section 48 regulations the phrase, “some used parts,” that has been the focus of the IRS's administrative practice for almost 60 years. According to the commenter, Rev. Rul. 68-111, 1968-1 C.B. 29, reflects the proper application of the 80/20 Rule albeit under a prior version of the section 48 credit. The commenter asserted that the Excluded Costs Rule in proposed § 1.48E-4(c)(5) distorts the 80/20 Rule by shifting the focus from the use of “used parts” at the time the unit of property is originally placed in service to “new” property and capital improvements that are added later.

The Treasury Department and the IRS note that the application of the 80/20 Rule clarifies that expenditures for components of property that are not a unit of qualified facility can only qualify if the 80/20 Rule is satisfied, and thus any new property and capital improvements added later that are not a unit of qualified facility are ineligible for a section 48E credit unless the 80/20 Rule is satisfied. In response to the commenters that asserted that section 48E allows a credit for a component of property rather than a qualified facility, the Treasury Department and the IRS disagree with commenters' interpretation of the statutory language. The Treasury Department and the IRS also emphasize that existing regulations under § 1.48-2 do not reflect the current version of section 48 and are not applicable to section 48E. Additionally, a taxpayer who makes a capital improvement to an existing facility should consider the application of the Incremental Production Rule provided in § 1.45Y-4(d). Similarly, a taxpayer that makes modifications to an EST should consider the application of the rule provided at § 1.48E-2(g)(7).

Another commenter suggested that the purpose of the 80/20 Rule is to allow a facility that was placed in service prior to January 1, 2025, to nevertheless satisfy the requirement in section 48E(b)(3)(A)(ii) that a qualified facility be placed in service after December 31, 2024, if a substantial portion of the facility is reconstructed after 2024.

The Treasury Department and the IRS disagree that the 80/20 Rule is tied to a particular year. The 80/20 Rule allows a taxpayer to treat an existing facility as originally placed in service at a later date by adding new components of property that represent at least 80 percent of the value of the unit of qualified facility. A retrofitted qualified facility or EST will be eligible for the section 48E credit if it meets the requirements of the 80/20 Rule before the section 48E credit phases out.

3. Recapture

A commenter stated that if the Treasury Department and the IRS retain the Excluded Costs Rule as written, the final regulations should further clarify that investment tax credit recapture rules will not apply to additions of property that do not satisfy the 80/20 Rule. Generally, recapture under section 48E is governed by section 50(a)(1)(A), which provides for recapture of the credit if property ceases to be investment credit property. Additions of property that do not satisfy the 80/20 Rule and that are thus subject to the Excluded Costs Rule are not included in the calculation of the section 48E credit. Accordingly, there is no credit to recapture with respect to such additions of property.

4. Original Use Requirement

Some commenters asserted that the original use requirement applies only to

acquired

property, and therefore, the 80/20 Rule is unnecessary for other types of property. These commenters pointed to section 48E(b)(2)(C), which provides, in part, that qualified property means property (i) the construction, reconstruction, or erection of which is completed by the taxpayer, or (ii) which is acquired by the taxpayer if the original use of such property commences with the taxpayer. This language was incorporated at proposed § 1.48E-2(f)(3) through (5). The commenters cited this language to support their view that the original use requirement applies only to acquired property. Therefore, according to the commenters, the “original use” requirement applies to property acquired by a taxpayer, but does not apply to property the construction,

reconstruction,

or erection of which is completed by the taxpayer. The commenters concluded that this statutory language supports the position that capital additions to an existing qualified facility or EST qualify for the section 48E credit.

The Treasury Department and the IRS disagree with the commenters' interpretation of the statutory language and corresponding language in the proposed regulations. The commenters are correct that section 48E(b)(2)(C)(ii) requires original use for acquired property, whereas section 48E(b)(2)(C)(i) does not mention original use with respect to property that is constructed, reconstructed, or erected by or for the taxpayer, however, that is because an original use requirement is unnecessary in the latter context. The taxpayer that is claiming a credit for property that it constructed, reconstructed, or erected by or for such taxpayer will necessarily be the original user of such property. Although some commenters suggested the 80/20 Rule has historically been applied in the section 48 context with respect to the original use requirement, the Treasury Department and the IRS emphasize that the 80/20 Rule was first applied to the section 48 credit through guidance issued in the Internal Revenue Bulletin providing beginning of construction guidance. The Treasury Department and the IRS reiterate that for section 48E purposes, the 80/20 Rule allows a taxpayer that retrofits an existing facility to treat such facility as a new qualified facility or EST.

5. EST

In the context of section 48E, the proposed regulations discussed the 80/20 Rule for purposes of retrofitting a qualified facility but did not specifically address the application of the 80/20 Rule to EST. Some commenters asked if the 80/20 Rule applied to EST. Commenters requested that the final regulations clarify that the 80/20 Rule also applies to EST, including battery energy storage systems and pumped storage hydropower. Another commenter stated that new component categories, like EST, added to existing facilities should be treated as separate units of qualifying facility and exempted from the 80/20 Rule.

In response to these comments, the Treasury Department and the IRS note that the 80/20 Rule applies to EST. The 80/20 Rule, as it is applied to EST, is a separate rule from the modification of EST provided by the section 48E(c)(2) reference incorporating section 48(c)(6)(B) (modifications of EST). The final regulations adopt the application of the 80/20 Rule for EST, and this Summary of Comments and Explanation of Revisions addresses EST in regard to the 80/20 Rule. With respect to the addition of EST to a site with an existing qualified facility, the Treasury Department and the IRS note that an EST is separate from a qualified facility as discussed in section III.C.2. of this Summary of Comments and Explanation of Revisions. As a result, merely adding an EST to a site with an existing qualified facility does not require application of the 80/20 Rule.

6. Specific Technologies

Some commenters asked for specific clarifications regarding the 80/20 Rule and particular technologies. A commenter suggested that in the case of a hydropower facility combined with a pumped storage hydropower facility, each powerhouse generating unit (turbine or pump turbine, generator and controls) should be considered a unit of qualified facility for purposes of the final regulations. Additionally, this commenter asserted, that, in the case of a wind facility, the functionally interdependent components of a unit of qualified facility should be the turbine, tower, and foundation pad. In both cases, the commenter requested that the 80/20 Rule apply to the functionally interdependent components of the unit of qualified facility.

For purposes of the section 45Y and section 48E credits, the unit of qualified facility includes all functionally interdependent components of property (as defined in proposed § 1.48E-

2(d)(2)(ii)) owned by the taxpayer that are operated together and that can operate apart from other property to produce electricity. The final regulations adopt these rules, which provide a function-oriented approach to determine if property is considered part of the qualified facility that generates electricity, to ensure that the final regulations are broad enough to encompass nascent technologies without rendering the regulations quickly obsolete. After consideration of the comments, an example of the application of the 80/20 Rule to a qualified hydropower production facility has been added to the final regulations under § 1.48E-4(c)(6)(v). Additionally, the Treasury Department and the IRS made revisions to Example 3 of § 1.48E-4(c)(6)(iii), similar to those made for § 1.45Y-4(d)(3)(iii), that removed the reference to a decommissioned nuclear facility to avoid referring to decommissioned and restarted nuclear facilities in the Incremental Production Rule and the 80/20 Rule.

Another commenter specifically asked that the 80/20 Rule be eliminated for certain types of facilities such as power generation, thermal generation, or CHP facilities upgraded to be carbon neutral. To support this request, the commenter noted that the 80/20 Rule discourages the use of existing infrastructure in CHP applications. While the Treasury Department and the IRS appreciate the concerns raised for particular technologies, as described in the preamble to the proposed regulations, a qualified facility generally does not include equipment that is an addition or modification to an existing qualified facility or EST. However,

see

§ 1.48E-4(b) regarding the Incremental Production Rule.

7. Interaction Between the Incremental Production Rule and the 80/20 Rule

Some commenters were concerned about the interaction of the Incremental Production Rule and the 80/20 Rule and the provided at proposed §§ 1.45Y-4(c) and 1.48E-4(b). One commenter requested that the Treasury Department and the IRS make clear that the provision for retrofitted facilities is separate and distinct from the requirements for the Incremental Production Rule, and that if there is any overlap between the two, the 80/20 Rule should control. The commenter stated that a retrofitted facility that results in the addition of capacity should be treated as newly placed in service if it meets the 80/20 Rule (rather than requiring the retrofitted facility to follow the Incremental Production Rule).

Another commenter recommended clarifying when to apply one rule or the other in situations in which both the 80/20 and Incremental Production rules could apply. A commenter also asserted that the statutory text under sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i), regarding the Incremental Production Rule, is without regard to the 80/20 Rule or the facility's original placed in service date, and that, therefore, Congress sought to incentivize investment in existing facilities without requiring taxpayers to meet the 80/20 Rule. Similarly, commenters recommended providing an example of a decommissioned facility without any reference to the 80/20 Rule, and to revise Example 3 in proposed § 1.45Y-4(d)(3)(iii), regarding the 80/20 Rule, to remove the reference to decommissioning.

The Treasury Department and the IRS agree that the Incremental Production Rule provided in sections 45Y(b)(1)(C) and 48E(b)(3)(B)(i) are separate and distinct from the 80/20 Rule. If a retrofitted facility satisfies the 80/20 Rule, the final regulations provide that the facility will be treated as newly placed in service even if the taxpayer also satisfies the Incremental Production Rule. Separately, these final regulations provide an additional example, in § 1.48E-4(b)(5), which specifically addresses decommissioned and restarted facilities. Additionally, § 1.48E-4(c)(1) is clarified to confirm that a qualified facility or EST may claim the full available credit rather than the credit resulting from an addition of capacity. Finally, Example 3 in § 1.45Y-4(d)(3)(iii) is modified to remove the reference to decommissioning.

Another commenter requested clarification that even if a facility placed in service before 2025 (pre-2025 facility) fails the 80/20 Rule, property that is added to the facility may still qualify for the section 48E credit under the Incremental Production Rule in section 48E(b)(3)(B)(i). Proposed § 1.48E-4(b)(1) provided, in part, that the term qualified facility includes either a new unit or an addition of capacity placed in service after December 31, 2024, in connection with a facility described in section 48E(b)(3)(A) (without regard to section 48E(b)(3)(A)(ii)), which was placed in service before January 1, 2025, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity. Thus, a pre-2025 facility that fails the 80/20 Rule may still qualify for the section 48E credit under the Incremental Production Rule. Additionally, the Treasury Department and the IRS confirm that this rule will apply to a pre-2025 facility regardless of whether it satisfies the 80/20 Rule.

8. Other Comments

While the majority of commenters that opposed the 80/20 Rule suggested eliminating it, particularly the Excluded Costs Rule, one commenter provided an additional recommendation. This commenter recommended that the proposed regulations be revised to permit taxpayers to elect either the 80/20 Rule or a rule based on the original cost of the qualified facility (Original Cost Rule). Under the Original Cost Rule as proposed by the commenter, a qualified facility would be treated as originally placed in service, even though it contains some used components of property, provided the cost of the new components of the unit of qualified facility is at least 50 percent of the original cost of the unit of qualified facility. Original cost would be defined as the unadjusted GAAP book basis at the time the qualified facility was originally placed in service. The commenter also explained that this new rule could be limited in its application and stated that outside of sections 45 and 48 an 80/20 Rule currently applies to determine eligibility for bonus depreciation under section 168(k)(7) and the carbon oxide sequestration credit under section 45Q of the Code. Therefore, the commenter requested that the final regulations adopt an optional Original Cost Rule limited to section 45Y and section 48E qualified facilities, which would limit the effect to the section 45Y and 48E credits and permit the 80/20 Rule adopted in other contexts to remain in place.

The Treasury Department and the IRS understand the commenter's desire for a less restrictive standard than what the proposed 80/20 Rule provides, but the Treasury Department and the IRS think the 80/20 Rule strikes the appropriate balance between allowing taxpayers flexibility and creating an incentive for new investment. Therefore, the final regulations do not adopt the commenter's proposal.

After consideration of all comments expressing opposition to the 80/20 Rule in the context of section 48E, the Treasury Department and the IRS decline to modify or abandon the 80/20 Rule as requested. Section 48E(b)(1) provides that the section 48E credit is available for the qualified investment with respect to any qualified facility for any taxable year that includes the basis of any qualified property placed in service by the taxpayer during such

taxable year which is part of a qualified facility. Section 48E(c)(1) provides that a credit for the qualified investment with respect to an EST for any taxable year is the basis of any EST placed in service by the taxpayer during such taxable year. The 80/20 Rule is designed to broaden the availability of the section 48E credit to provide a new original placed in service date for a qualified facility or EST that includes some components of a qualified facility or EST that have already been placed in service, rather than requiring the entire unit of qualified facility or EST to be composed of only new property. The 80/20 Rule also encourages retrofitting an existing qualified facility or EST provided there is sufficient new investment. As described earlier in this section on the 80/20 Rule, if a qualified facility under section 45 or energy property under section 48 is retrofitted in a manner that satisfies the 80/20 Rule, it will be considered a new qualified facility and may be eligible for the section 45Y or 48E credits if the qualified facility meets all of the sections 45Y and 48E requirements.

Section 48E(c)(2) incorporates the lone express rule for modification of existing energy property that is found in section 48(c)(6)(B). This special rule is limited to modifications of existing EST. The inclusion of this specific provision suggests that modifications of existing EST that do not meet the 80/20 Rule or the Incremental Production Rule are ineligible for the section 45Y or 48E credits. Adopting the 80/20 Rule for the section 48E credit is favorable to taxpayers and encourages substantial additional investment in existing qualified facilities and EST.

As discussed in section IV.G. of this Summary of Comments and Explanation of Revisions, the ownership rules provided that the section 45Y and 48E credits are available for an entire unit of qualified facility or unit of EST and not for individual components of property. The 80/20 Rule is consistent with the ownership rules because it ensures that a qualified facility or EST that is retrofitted to a sufficient extent is considered a new qualified facility or EST, whereas the addition of mere components is not eligible for the section 48E credit.

F. Qualified Progress Expenditures

Section 48E(d)(1) provides that rules similar to the rules of former section 46(c)(4) and (d) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) apply for purposes of section 48E(a). Footnote 5 of the proposed regulations explained that the rules provided by § 1.46-5 related to qualified progress expenditures apply for purposes of section 48E(a).

Several commenters requested that the final regulations provide additional clarifications related to whether qualified progress expenditures are allowable for purposes of elective payment elections under section 6417 (section 6417 elective payment elections). Commenters requested clarifying the application of qualified progress expenditure payments to “applicable entities,” as defined in section 6417(d)(1), and confirming that progress expenditures permitted by section

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