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The Treasury Department and IRS on Wednesday finalized rules for a major clean energy project tax credit that was extended in the 2022 Inflation Reduction Act (Solar Power World).  
 
What’s going on: “[T]he final rules [for] the Sec. 48 Energy Credit—also known as the federal investment tax credit … retain the core framework of the proposed rules and guidance Treasury and the IRS issued in November 2023, [but] clarify general rules for the ITC and its definitions of property eligible for the credit.”  

• The IRA extended the ITC and the related production tax credit until 2025, when both will change over to a “tech-neutral” approach. The current energy tax code gives credits for specific technologies, such as wind or solar (E&E News, subscription).  
• In addition to wind and solar, energy technologies recognized by the credit include nuclear fission and fusion, hydropower, marine and hydrokinetic, geothermal and some types of waste energy recovery property (Solar Power World). 

Major changes: The updated rules allow “project owners to include the costs of upgrading equipment in the basis, which is used to calculate the value of the Section 48 credit” ( Law360, subscription). The 2023 version prohibited upgrading equipment in order to qualify.

• In addition, the new definitions reflect “what Treasury intended to be broad but functional descriptions of integral components for various renewable energy technologies eligible under Internal Revenue Code Section 48 without making the rules obsolete as companies rapidly innovate their systems” (Law360).  

What else is new: The finalized rules keep the clarification “that owners of offshore wind farms can claim the credit for power conditioning and transfer equipment (e.g., subsea cables) that they own” (Solar Power World). The rules also: 

• Clarify that owners of underground coils can claim the credit if they own at least one heat pump that is used with the coils; 
• Say the ITC “may be claimed for energy storage technology that co-located with and shares power conditioning equipment with a qualified facility for which a Sec. 45 credit (PTC) is claimed”; and  
• Make clear “that hydrogen energy storage property does not need to store hydrogen that is solely used as energy and not for other purposes.” 

Why it’s important: “Manufacturers appreciate the work done to finalize the guidance for the federal ITC,” said NAM Vice President of Domestic Policy Chris Phalen. “Our industry needs access to reliable and affordable energy as demand continues to grow, and the ITC is an important tool in achieving American energy and manufacturing dominance.”