[Federal Register Volume 88, Number 224 (Wednesday, November 22, 2023)]
[Proposed Rules]
[Pages 82188-82223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25539]



[[Page 82187]]

Vol. 88

Wednesday,

No. 224

November 22, 2023

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Definition of Energy Property and Rules Applicable to the Energy 
Credit; Proposed Rule

Federal Register / Vol. 88 , No. 224 / Wednesday, November 22, 2023 / 
Proposed Rules

[[Page 82188]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-132569-17]
RIN 1545-BO40


Definition of Energy Property and Rules Applicable to the Energy 
Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, public hearing, and partial 
withdrawal of notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would amend 
the regulations relating to the energy credit for the taxable year in 
which eligible energy property is placed in service. This document also 
withdraws and reproposes, for additional clarity, portions of 
previously proposed regulations regarding the increased energy credit 
amount available if prevailing wage and registered apprenticeship 
requirements are met. In connection with the Inflation Reduction Act of 
2022, the proposed regulations would: update the types of energy 
property eligible for the energy credit, including additional types of 
energy property added by that law; clarify the application of new 
credit transfer rules to the energy credit recapture rules applicable 
to failures to satisfy the prevailing wage requirements, including 
notification requirements for eligible taxpayers; and include qualified 
interconnection costs in the basis of some lower-output energy 
properties. The proposed regulations would also provide additional 
requirements and rules generally applicable to energy property, such as 
rules regarding: functionally interdependent components; property that 
is an integral part of an energy property; application of an ``80/20 
Rule'' to retrofitted energy property; dual use property; separate 
ownership of components of an energy property; property that could be 
eligible for multiple Federal income tax credits; and the election to 
treat qualified facilities eligible for the renewable electricity 
production credit instead as property eligible for the energy credit. 
The proposed regulations would impact taxpayers who invest in energy 
property eligible for the energy credit.

DATES: Written or electronic comments must be received by January 22, 
2024. A public hearing on these proposed regulations is scheduled to be 
held on February 20, 2024, at 10 a.m. ET. Requests to speak and 
outlines of topics to be discussed at the public hearing must be 
received by January 22, 2024. If no outlines are received by January 
22, 2024, the public hearing will be cancelled. Requests to attend the 
public hearing must be received by 5 p.m. on February 15, 2024. The 
public hearing will be made accessible to people with disabilities. 
Requests for special assistance during the hearing must be received by 
5 p.m. on February 14, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132569-
17) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of Treasury (Treasury Department) and the 
IRS will publish for public availability any comments submitted, 
whether electronically or on paper, to the IRS's public docket.
    Send paper submissions to: CC:PA:LPD:PR (REG-132569-17), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Office of Associate Chief Counsel (Passthroughs & Special Industries) 
at (202) 317-6853 (not a toll-free number); concerning submissions of 
comments or the public hearing, Vivian Hayes, (202) 317-6901 (not toll-
free number) or by email to <a href="/cdn-cgi/l/email-protection#a5d5d0c7c9ccc6cdc0c4d7cccbc2d6e5ccd7d68bc2cad3"><span class="__cf_email__" data-cfemail="4a3a3f28262329222f2b3823242d390a233839642d253c">[email protected]</span></a> (preferred).

SUPPLEMENTARY INFORMATION: 

Background

    This notice of proposed rulemaking consists of several proposed 
amendments to the existing Income Tax Regulations (26 CFR part 1) under 
section 48 of the Internal Revenue Code (Code) addressing the energy 
credit determined under section 48 (section 48 credit) for purposes of 
sections 38 and 46 of the Code (proposed regulations). This notice of 
proposed rulemaking also withdraws and reproposes portions of another 
notice of proposed rulemaking (REG-100908-23) proposing regulations 
under section 48 that were published in the Federal Register (88 FR 
60018) on August 30, 2023. This notice of proposed rulemaking would 
also propose additional regulations under section 6418 of the Code to 
supplement a notice of proposed rulemaking (REG-101610-23) published in 
the Federal Register (88 FR 40496) on June 21, 2023.
    Section 38 allows certain business credits against the Federal 
income tax imposed by chapter 1 of the Code (chapter 1). Among the 
credits allowed by section 38 are the investment credit determined 
under section 46, which includes the energy credit determined under 
section 48. See sections 38(b)(1) and 46(2). Section 48(a)(1) generally 
provides that the energy credit for any taxable year is the energy 
percentage of the basis of each energy property placed in service 
during such taxable year. For most types of energy property, 
eligibility for the section 48 credit and, in some cases, the amount of 
the section 48 credit for which energy property is eligible, are 
dependent upon meeting certain deadlines for beginning construction of 
the energy property and for placing the energy property in service.
    Section 48 was originally enacted by section 2 of the Revenue Act 
of 1962, Public Law 87-834, (76 Stat. 960, 963) to spur economic growth 
by encouraging investments in various capital projects across many 
industries including energy, transportation, and communications. 
Section 48 has been amended many times since its enactment, most 
recently by section 13102 of Public Law 117-169, 136 Stat. 1818 (August 
16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). 
The IRA amended section 48 in several ways, including by making 
additional types of energy property eligible for the section 48 credit, 
providing a special rule to allow certain lower-output energy 
properties to include qualified interconnection costs in the basis of 
associated energy property, and providing an increased credit amount 
for energy projects that satisfy prevailing wage and apprenticeship 
requirements, a domestic content bonus credit amount, and an increase 
in credit rate for energy communities.
    The current Income Tax Regulations at Sec.  1.48-9, which provide 
definitions and eligibility rules for determining whether property is 
energy property eligible for the section 48 credit, were published on 
January 23, 1981 (T.D. 7765, 46 FR 7287). Those regulations were 
amended on July 21, 1987 (T.D. 8147, 52 FR 27336), to provide rules for 
dual use property, but have not been updated since 1987, before many of 
the current types of energy property became eligible for the section 48 
credit.
    Prior to proposing amendments to the existing regulations under 
section 48, the Treasury Department and the IRS have twice requested 
comments on issues to be addressed. On October 26, 2015, the Treasury 
Department and the

[[Page 82189]]

IRS published Notice 2015-70, 2015-43 I.R.B. 604, to request comments 
regarding statutory updates to section 48 preceding those made by the 
IRA. On October 24, 2022, in response to the passage of the IRA, the 
Treasury Department and the IRS published Notice 2022-49, 2022-43 
I.R.B. 321, to request general as well as specific comments on issues 
arising under section 48, among other sections, that were amended or 
added by the IRA. After consideration of comments submitted in response 
to Notice 2015-70 and Notice 2022-49, and after consultation with the 
Department of Energy, the Treasury Department and the IRS propose the 
revisions to the existing regulations under section 48 contained in 
this notice of proposed rulemaking.
    On August 30, 2023, the Treasury Department and the IRS published 
in the Federal Register (88 FR 60018) a notice of proposed rulemaking 
(REG-100908-23) proposing rules regarding the increased credit amount 
available for taxpayers satisfying prevailing wage and registered 
apprenticeship requirements established by the IRA (August Proposed 
Regulations). The August Proposed Regulations provided rules addressing 
the recapture under section 48(a)(10)(C) of increased credit amounts 
from only initially satisfying the prevailing wage requirements under 
section 48(a)(10)(A) and (B). Comments were requested and a public 
hearing has been scheduled for November 21, 2023. This notice of 
proposed rulemaking withdraws certain portions of the August Proposed 
Regulations and reproposes regulations that would provide additional 
guidance on the prevailing wage and apprenticeship requirements under 
section 48, including the statutory exception for energy projects with 
a maximum output of less than one megawatt (MW) and the recapture rules 
under section 48(a)(10)(C) related to the prevailing wage requirements.
    Although this notice of proposed rulemaking withdraws certain 
portions of the August Proposed Regulations, the Explanation of 
Provisions section in the preamble to the August Proposed Regulations 
generally remains relevant. Therefore, to the extent not inconsistent 
with the Summary of Comments and Explanation of Provisions section of 
this preamble, the Explanation of Provisions section of the August 
Proposed Regulations is incorporated by reference in this notice of 
proposed rulemaking. This notice of proposed rulemaking does not 
address written comments that were submitted in response to the 
regulations proposed in the August Proposed Regulations. Any comments 
received in response to this notice of proposed rulemaking, including 
comments on the reproposed regulations, will be addressed in the 
Treasury Decision adopting these regulations as final regulations. This 
notice of proposed rulemaking does not extend the comment period or 
affect the scheduled hearing for the August Proposed Regulations.
    On June 21, 2023, the Treasury Department and the IRS published in 
the Federal Register (88 FR 40496) a notice of proposed rulemaking 
(REG-101610-23) proposing rules concerning the election under section 
6418 of the Code established by the IRA to transfer certain Federal 
income tax credits, including the section 48 credit (June Proposed 
Regulations). The June Proposed Regulations provided proposed rules 
addressing notification requirements and the impact of credit recapture 
rules under sections 50(a), 49(b), and 45Q(f)(4) of the Code in 
proposed Sec.  1.6418-5. Comments were requested and a public hearing 
on the June Proposed Regulations was held on August 23, 2023. This 
document amends those June Proposed Regulations to add guidance to 
proposed Sec.  1.6418-5 that describes the recapture rules relating to 
failing to satisfy the prevailing wage and apprenticeship requirements 
under section 48(a)(10) and (11), including the statutory exception for 
energy projects with a maximum output of less than 1 MW in section 
48(a)(9)(B)(i), and the recapture rules under section 48(a)(10)(C) 
related to the prevailing wage requirements. This notice of proposed 
rulemaking does not address written comments that were submitted in 
response to the regulations proposed in the June Proposed Regulations. 
Any comments received in response to this notice of proposed 
rulemaking, including the amendments to the June Proposed Regulations, 
will be addressed in the Treasury Decision adopting these regulations 
as final regulations. This notice of proposed rulemaking does not 
otherwise extend the comment period for the June Proposed Regulations.

Summary of Comments and Explanation of Provisions

I. Requirements for Energy Property

    For purposes of the section 48 credit, energy property consists of 
all the components of property that meet the statutory requirements for 
an energy property as defined by section 48. Components of an energy 
property are those that would be included in a unit of energy property 
because they are functionally interdependent (as described in proposed 
Sec.  1.48-9(f)(2)(ii)) as well as property owned by the same taxpayer 
that is an integral part of such energy property (as described in 
proposed Sec.  1.48-9(f)(3)). Additionally, components of property must 
not be a type of property specifically excluded from energy property 
(as described in proposed Sec.  1.48-9(d)).
    Section 48(a)(3)(B)-(D) provides general requirements for all types 
of energy property. Section 48(a)(3)(B)(i) defines energy property as 
property that is constructed, reconstructed, or erected by the 
taxpayer. Alternatively, section 48(a)(3)(B)(ii) provides that energy 
property can also include property which the taxpayer acquires if the 
original use of such property commences with the taxpayer. Section 
48(a)(3)(C) provides that to be eligible as energy property, 
depreciation (or amortization in lieu of depreciation) must be 
allowable for the property. Section 48(a)(3)(D) provides that to be 
eligible as energy property, the property must also meet any 
performance and quality standards that have been prescribed by the 
Secretary of the Treasury or her delegate (Secretary), after 
consultation with the Secretary of Energy, and are in effect at the 
time of the taxpayer's acquisition of the property. Under section 
48(a)(3), energy property does not include property that is part of a 
qualified facility the production from which is allowed a renewable 
electricity production credit determined under section 45 (section 45 
credit) for the taxable year or any prior taxable year. Lastly, where 
section 48 provides dates by which construction of energy property must 
begin or when energy property must be placed in service, such energy 
property must meet those deadlines to be eligible for the section 48 
credit at specified energy percentages. Proposed Sec.  1.48-9(a) would 
provide this general overview of the definition of energy property.

A. Definitions Related to Requirements for Energy Property

    Before 1990, section 48 defined the term ``section 38 property'' to 
include, among other types of property, energy property eligible for 
the section 48 credit. The Revenue Reconciliation Act of 1990, Public 
Law 101-508, 104 Stat. 1388 (November 5, 1990) removed the term 
``section 38 property'' in amending section 48. However, section 48 is 
one of the credits that comprise the investment credit for any taxable 
year determined under section 46, which is included in section 38(b)(1) 
and remains subject to the general business credit rules under section 
38. As a result, rules

[[Page 82190]]

related to ``section 38 property'' remain generally applicable to the 
section 48 credit. The Treasury Department and the IRS published 
regulations under Sec. Sec.  1.48-1 and 1.48-2 to provide guidance with 
respect to section 38 property. Section 1.48-1 was last substantially 
revised on October 11, 1988 (T.D. 8233, 53 FR 39592) and Sec.  1.48-2 
was last revised on June 28, 1985 (T.D. 8031, 50 FR 26698). Although 
subsequent amendments to section 48 have made some of the rules 
provided by these regulations inapplicable, those rules continue to 
provide useful definitions, some of which Sec.  1.48-9 of these 
proposed regulations (proposed Sec.  1.48-9) would adopt.
1. Construction, Reconstruction, or Erection of Energy Property
    Section 48(a)(3)(B)(i) defines energy property as property that is 
constructed, reconstructed, or erected by the taxpayer. Existing Sec.  
1.48-2(b)(1) provides that property is considered as constructed, 
reconstructed, or erected by the taxpayer if the work is performed for 
the taxpayer in accordance with the taxpayer's specifications. Proposed 
Sec.  1.48-9(b)(1) would largely adopt the definition of the term 
``constructed, reconstructed, or erected'' from existing Sec.  1.48-
2(b)(1) while modifying it to address energy property.
2. Acquisition and Original Use of Energy Property
    Section 48(a)(3)(B)(ii) provides that energy property includes 
property that is acquired by the taxpayer if the original use of such 
property commences with the taxpayer. Existing Sec.  1.48-2(b)(6) 
provides that property is deemed to be acquired when reduced to 
physical possession or control by the taxpayer. Proposed Sec.  1.48-
9(b)(2) would adopt the concepts from existing Sec.  1.48-2(b)(6), and 
provide additional clarification that the term ``acquisition of energy 
property'' means a transaction by which a taxpayer obtains rights and 
obligations with respect to energy property, including title to the 
energy property under the law of the jurisdiction in which the energy 
property is placed in service, unless the property is possessed or 
controlled by the taxpayer as a lessee, and physical possession or 
control of the energy property. In addition, existing Sec.  1.48-
2(b)(7) defines the term ``original use'' as the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. Proposed Sec.  1.48-9(b)(3) largely would 
adopt the Sec.  1.48-2(b)(7) definition of original use while modifying 
it to address energy property.
3. Depreciation Allowable
    Section 48(a)(3)(C) requires that energy property be property with 
respect to which depreciation (or amortization in lieu of depreciation) 
is allowable, and existing Sec.  1.48-1(b) explains when depreciation 
is allowable with respect to section 38 property. Specifically, Sec.  
1.48-1(b) provides that a deduction for depreciation is allowable if 
the property is of a character subject to the allowance for 
depreciation under section 167 of the Code and the basis (or cost) of 
the property is recovered through a method of depreciation, including, 
for example, the unit of production method and the retirement method as 
well as methods of depreciation that measure the life of the property 
in terms of years. Proposed Sec.  1.48-9(b)(4)(i) generally would adopt 
the Sec.  1.48-1(b) rule for determining whether depreciation is 
``allowable'' under section 48, with certain modifications to update 
the described methods of depreciation and to make the definition 
specific to energy property as defined in section 48. Proposed Sec.  
1.48-9(b)(4)(i) would also clarify that the 100-percent additional 
first year depreciation provided by section 168(k) of the Code is 
considered a method of depreciation.
    In addition, existing Sec.  1.48-1(b)(3) provides language 
describing when depreciation is not allowable to the taxpayer for 
purposes of defining section 38 property. Section 1.48-1(b)(3) provides 
that if the cost of property is not recovered through a method of 
depreciation but through a deduction of the full cost in one taxable 
year, for purposes of Sec.  1.48-1(b)(1) a deduction for depreciation 
with respect to such property is not allowable to the taxpayer. 
However, if an adjustment with respect to the income tax return for 
such taxable year requires the cost of such property to be recovered 
through a method of depreciation, a deduction for depreciation will be 
considered as allowable to the taxpayer.
    Proposed Sec.  1.48-9(b)(4)(ii) generally would adopt this rule 
from Sec.  1.48-1(b)(3) to determine when depreciation is not 
allowable, with certain modifications to update the described methods 
of depreciation and to make the definition specific to energy property 
as defined in section 48. Proposed Sec.  1.48-9(b)(4) would provide 
that if the basis or cost of energy property is not recovered through a 
method of depreciation but through a deduction of the full cost in one 
taxable year, a deduction for depreciation with respect to such 
property is not allowable to the taxpayer.
    However, proposed Sec.  1.48-9(b)(4)(i) would provide that if an 
IRS adjustment with respect to an income tax return or information 
return for such taxable year requires the basis or cost of such 
property to be recovered using a method of depreciation, including any 
additional first year depreciation deduction provision in the Code, a 
deduction for depreciation will be considered as allowable to the 
taxpayer.
4. Performance and Quality Standards for Energy Property
    Section 48(a)(3)(D) provides that energy property is property that 
meets the performance and quality standards (if any) that have been 
prescribed by the Secretary by regulations (after consultation with the 
Secretary of Energy), and are in effect at the time of the acquisition 
of the property. Existing Sec.  1.48-9(m)(1) provides that ``energy 
property must meet quality and performance standards, if any, that have 
been prescribed by the Secretary (after consultation with the Secretary 
of Energy) and are in effect at the time of acquisition.'' Proposed 
Sec.  1.48-9(c)(2) would adopt this rule for performance and quality 
standards for energy property from Sec.  1.48-9(m)(1).
    After consultation with the Department of Energy, proposed Sec.  
1.48-9(c)(2)(ii) would provide special rules for performance and 
quality standards with respect to both small wind and electrochromic 
glass property. These clarifications are needed to ensure that the 
intended energy production or savings occurs.
a. Performance and Quality Standards for Small Wind Energy Property
    Proposed Sec.  1.48-9(c)(2)(ii)(A) would provide that small wind 
energy property must meet the performance and quality standards in 
effect at the time of acquisition of the small wind turbine set forth 
in one of the following: the American Wind Energy Association Small 
Wind Turbine Performance and Safety Standard 9.1-2009, or subsequent 
revisions (AWEA); International Electrotechnical Commission 61400-1, 
61400-2, 61400-11, 61400-12, or subsequent revisions (IEC); or the 
ANSI/ACP 101-1-2021, the Small Wind Turbine Standard, or subsequent 
revisions (ACP). Proposed Sec.  1.48-9(c)(2)(ii)(A) would also provide 
that certification requirements applicable to such performance and 
quality standards for small wind energy property are provided in 
guidance published in the Internal Revenue Bulletin, such as Notice 
2015-4, 2015-5 I.R.B. 407, and

[[Page 82191]]

its successor, Notice 2015-51, 2015-31 I.R.B. 133.
b. Performance and Quality Standards for Electrochromic Glass Property
    As described in part I.C.2.b of this Summary of Comments and 
Explanation of Provisions, electrochromic glass is incorporated into 
either an electrochromic window or secondary glazing product. 
Accordingly windows, including secondary glazings, that incorporate 
electrochromic glass are electrochromic glass property for purposes of 
the section 48 credit. Proposed Sec.  1.48-9(c)(2)(ii)(B) would also 
adopt the requirement that windows that incorporate electrochromic 
glass must be rated in accordance with the National Fenestration Rating 
Council (NFRC) and would provide that secondary glazing systems must be 
rated in accordance with the Attachments Energy Rating Council (AERC) 
Rating and Certification Process, or subsequent revisions.
c. Time of Acquisition
    Existing Sec.  1.48-9(m)(2) provides that the time of acquisition 
for purposes of applying quality and performance standards for energy 
property is either (i) the date the taxpayer enters into a binding 
contract to acquire the property; or (ii) for property constructed, 
reconstructed, or erected by the taxpayer, the earlier of the date that 
the taxpayer begins construction, reconstruction, or erection of the 
property, or the date the taxpayer and another person enter into a 
binding contract requiring the other person to construct, reconstruct, 
or erect property and place the property in service for an agreed upon 
use. Proposed Sec.  1.48-9(c)(2)(iii) would adopt the rule for the 
``time of acquisition'' from Sec.  1.48-9(m)(2) only for purposes of 
applying the performance and quality standards for energy property.
d. Binding Contract
    Section 1.168(k)-2(b)(5)(iii)(A) provides the following definition 
of a binding contract in the context of the acquisition of qualified 
property for the allowance of additional first year depreciation under 
section 168(k) of the Code:

    A contract is binding only if it is enforceable under State law 
against the taxpayer or a predecessor, and does not limit damages to 
a specified amount (for example, by use of a liquidated damages 
provision). For this purpose, a contractual provision that limits 
damages to an amount equal to at least five percent of the total 
contract price will not be treated as limiting damages to a 
specified amount.

    Proposed Sec.  1.48-9(c)(2)(iv) would adopt this definition of the 
term ``binding contract'' from Sec.  1.168(k)-2(b)(5)(iii)(A) for 
purposes of applying the performance and quality standards for energy 
property.
5. Placed in Service
    Section 48(a) provides that the energy credit for any taxable year 
is the energy percentage of the basis of each energy property placed in 
service during such taxable year. As part of the regulations under 
section 46 for the investment credit, Sec.  1.46-3(d)(1) provides 
general rules for determining when a taxpayer has placed a property in 
service for the section 48 credit. Property is considered placed in 
service in the earlier of the taxable year in which, under the 
taxpayer's depreciation practice, the period for depreciation with 
respect to such property begins; or the taxable year in which the 
property is placed in a condition or state of readiness and 
availability for a specifically assigned function, whether in a trade 
or business, in the production of income, in a tax-exempt activity, or 
in a personal activity.
    Proposed Sec.  1.48-9(b)(5) largely would adopt the general rules 
from Sec.  1.46-3(d)(1) for determining whether a taxpayer has placed 
an energy property in service with certain modifications. As discussed 
previously, to be eligible for the section 48 credit, energy property 
must be property with respect to which depreciation (or amortization in 
lieu of depreciation) is allowable. Further, one requirement for 
determining if depreciation is allowable with respect to energy 
property is that the basis or cost of such energy property is recovered 
using a method of depreciation. Accordingly, proposed Sec.  1.48-
9(b)(5)(i) clarifies that the taxable year in which energy property is 
placed in service would be the earlier of the taxable year in which the 
period for depreciation of such property begins, or the taxable year in 
which the energy property is placed in a condition or state of 
readiness and availability for a specifically assigned function in 
either a trade or business or in the production of income.
    In addition, section 50(b)(3) of the Code provides that tax-exempt 
organizations cannot determine an investment tax credit, including the 
section 48 credit, unless the property is used predominantly in an 
unrelated trade or business, so the proposed regulations do not include 
a rule applicable to tax-exempt use. However, section 6417(d)(2) of the 
Code provides that an applicable entity (as defined in section 
6417(d)(1), and including a tax-exempt organization) making an elective 
payment election under section 6417 can determine an applicable credit 
(defined in section 6417(b), and including the section 48 credit) 
without regard to section 50(b)(3), by treating any property with 
respect to which the section 48 credit is determined as used in a trade 
or business of the applicable entity. (See the rules of proposed Sec.  
1.6417-2(c)(2) contained in the notice of proposed rulemaking (REG-
101607-23) published in the Federal Register (88 FR 40528) on June 21, 
2023.) Thus, if the rules under section 6417(d)(2) apply, the general 
rule adopted in proposed Sec.  1.48-9(b)(5)(i) would apply to determine 
when the energy property is placed in service by an applicable entity.
    Section 1.46-3(d)(3) provides that notwithstanding the provisions 
of Sec.  1.46-3(d)(1), property with respect to which an election is 
made under Sec.  1.48-4 to treat the lessee as having purchased such 
property is considered placed in service by the lessor in the taxable 
year in which possession is transferred to such lessee. Proposed Sec.  
1.48-9(b)(5)(ii) would adopt the special rule from Sec.  1.46-3(d)(3) 
for determining when a leased property has been placed in service.

B. Property Excluded From Energy Property

    Section 48(a)(5) generally provides an election to treat certain 
types of qualified facilities as defined in section 45(d), referred to 
as a ``qualified investment credit facility,'' as energy property for 
purposes of section 48. However, section 48(a)(5)(B) provides that no 
section 45 credit is allowed for any taxable year with respect to any 
qualified investment credit facility. Section 48(a)(5)(C) provides, in 
part, that the term ``qualified investment credit facility'' means any 
qualified facility with respect to which no section 45 credit has been 
allowed for which the taxpayer makes an irrevocable election. 
Accordingly, proposed Sec.  1.48-9(d) would exclude from energy 
property any property that is part of a qualified facility with respect 
to which a section 45 credit is allowed for any taxable year, including 
any prior taxable year.
    The Treasury Department and the IRS understand that energy storage 
technologies eligible for the section 48 credit are often co-located 
with qualified facilities eligible for the section 45 credit and may 
share power conditioning and transfer equipment. In consideration of 
this practice, the proposed rules would provide that power conditioning 
and transfer equipment that is shared by a qualified

[[Page 82192]]

facility (as defined in section 45(d)) and an energy property may be 
treated as an integral part of the section 48 energy property. Such 
shared property is not considered part of a qualified facility and, 
therefore, the sharing of such property will not impact the ability of 
a taxpayer to claim the section 48 credit for the energy property or 
the section 45 credit for the qualified facility. The Treasury 
Department and the IRS request comments regarding whether additional 
guidance is needed on this rule.

C. Types of Energy Property

    Proposed Sec.  1.48-9(e) would expand upon the definitions of 
energy property provided in existing Sec.  1.48-9 to account for new 
technologies that were added by amendments to section 48, including by 
section 13102 of the IRA. Generally, the definitions of the types of 
energy property provided in the proposed regulations do not provide 
specific beginning of construction or placed in service deadlines. 
Taxpayers should refer to the current statutory language of section 48 
for specific requirements applicable to each type of energy property 
with respect to any particular taxable year. The following definitions 
in proposed Sec.  1.48-9(e) for the different types of energy 
properties were developed by the Treasury Department and the IRS in 
consultation with the Department of Energy.
1. Solar Energy Property
    Section 48(a)(3)(A)(i) provides that energy property includes solar 
energy property and defines solar energy property as any property that 
is equipment that uses solar energy to generate electricity, to heat or 
cool (or provide hot water for use in) a structure, or to provide solar 
process heat, excepting property used to generate energy for the 
purposes of heating a swimming pool.
    Existing Sec.  1.48-9(d)(1) defines solar energy property as 
including equipment and materials (and parts related to the functioning 
of such equipment) that use solar energy directly to (i) generate 
electricity, (ii) heat or cool a building or structure, or (iii) 
provide hot water for use within a building or structure. Further, 
existing Sec.  1.48-9(d)(3), in part, defines solar electric generation 
equipment as equipment that uses solar energy to generate electricity 
through a process that involves the transformation of sunlight into 
electricity through the use of such devices as solar cells or other 
collectors.
    In response to Notice 2015-70, commenters requested that the 
Treasury Department and the IRS provide guidance regarding specific 
components that may be considered solar energy property, including in 
photovoltaic (PV) systems (including concentrated PV systems), non-PV 
concentrated solar power systems (passive solar), solar process, and 
thermal systems. Several commenters requested that the regulations 
explicitly list certain types of technologies as solar energy property, 
such as integrated thermoplastic roofing and racking systems. Other 
commenters requested that the regulations simply define solar energy 
property to include common components such as controllers to manage use 
of solar energy, mounting structures, energy storage technology, power 
conditioning equipment, and step-up transformers.
    Proposed Sec.  1.48-9(e)(1)(i) would depart from the existing 
definition of solar energy property at Sec.  1.48-9(d)(1) by adopting a 
modified version of the current statutory definition, which provides 
that solar energy property is equipment that uses solar energy to 
generate electricity, to heat or cool a structure, or to provide solar 
process heat, and parts related to the functioning of such equipment. 
Proposed Sec.  1.48-9(e)(1)(ii) would define the term ``solar electric 
generation equipment'' as equipment that converts sunlight into 
electricity through the use of devices such as solar cells or other 
collectors, while adopting the current statutory exclusion for any 
property used to generate energy for the purposes of heating a swimming 
pool. The proposed regulations would eliminate the exclusion for 
passive solar in existing Sec.  1.48-9(d)(2) because section 48 does 
not distinguish between passive and active solar energy systems. 
Finally, the proposed regulations would apply the functional 
interdependence test as described in part I.D.2 of this Summary of 
Comments and Explanation of Provisions to determine whether components 
are included as part of solar energy property.
    Existing Sec.  1.48-9(d)(7) provides that solar energy property 
does not include equipment that uses solar energy to generate steam at 
high temperatures for use in industrial or commercial processes (solar 
process heat). This definition conflicts with section 48(a)(3)(A)(i). 
Accordingly, the proposed regulations would adopt the statutory 
language by explicitly including solar process heat within the 
definition of the term ``solar energy property.'' After consultation 
with the Department of Energy, proposed Sec.  1.48-9(e)(1)(iii) would 
define ``solar process heat equipment'' as equipment that uses solar 
energy to generate heat for use in industrial or commercial processes.
2. Fiber-Optic Solar Energy Property and Electrochromic Glass Property
a. Fiber-Optic Solar Energy Property
    Section 48(a)(3)(A)(ii) provides that energy property includes 
equipment that uses solar energy to illuminate the inside of a 
structure using fiber-optic distributed sunlight. The Treasury 
Department and the IRS received no comments in response to Notice 2022-
49 regarding fiber-optic solar energy property. Accordingly, proposed 
Sec.  1.48-9(e)(2)(i) would adopt the statutory definition of fiber-
optic solar energy property. Additionally, the proposed regulations 
would apply the functional interdependence test as described in part 
I.D.2 of this Summary of Comments and Explanation of Provisions to 
determine whether components are included as part of fiber-optic solar 
energy property.
b. Electrochromic Glass Property
    Section 48(a)(3)(A)(ii) was modified by the IRA to add 
electrochromic glass property as a type of energy property. That 
provision defines electrochromic glass property as equipment that uses 
electricity to change its light transmittance properties in order to 
heat or cool a structure. The Treasury Department and IRS consulted 
with the Department of Energy to determine the types of property 
eligible as electrochromic glass property. Accordingly, Sec.  1.48-
9(e)(2)(ii) would provide that there are only two types of 
electrochromic glass property: (i) electrochromic glass incorporated 
into a full window that is installed directly into a building or (ii) 
electrochromic glass incorporated into a secondary window (known as 
secondary glazing) that is installed on top of an existing window. For 
each type of electrochromic glass property, there is a separate control 
package consisting of electronics, power supply, sensors, and software 
necessary to control the operations of the electrochromic glass 
property. Thus, electrochromic glass property is not only comprised of 
electrochromic glass but also the relevant window or secondary glazing 
property that incorporates the electrochromic glass property. 
Therefore, in addition to the electronic controls package that includes 
the power electronics, sensors, wires, and software systems, the 
electrochromic window or secondary glazing also includes the 
electrochromic glass coating and the balance of window and installation 
components including glass, flashing, framing, and sealants, as 
applicable, to the type of electrochromic glass property.

[[Page 82193]]

    In response to Notice 2022-49, several commenters provided input on 
the definition of electrochromic glass property. Several commenters 
requested a narrow definition. Other commenters suggested adopting a 
broader definition of electrochromic glass property. One commenter 
stated that interpretations of the terms ``electrochromic glass'' or 
``dynamic glass'' should be expanded to include any material or 
technology that meets or exceeds the performance criteria for such 
components established by the most recent Energy Star or International 
Energy Conservation Code (IECC) standards in effect at the time such 
component is placed in service.
    In response to the comments and after consultation with the 
Department of Energy, the proposed regulations would clarify the 
definition of electrochromic glass property. Proposed Sec.  1.48-
9(e)(2)(ii) would adopt the statutory definition of electrochromic 
glass property while providing that light transmittance properties 
include both visible light and near infrared light. Additionally, as 
mentioned previously, proposed Sec.  1.48-9(c)(2)(ii)(B) would adopt 
the performance and quality standards that new electrochromic windows 
must be rated in accordance with the NFRC and secondary glazing systems 
must be rated in accordance with the AERC Rating and Certification 
Process, or subsequent revisions. The application of these performance 
and quality standards are needed to ensure that the intended energy 
savings occurs from the installation of electrochromic glass property.
    The Treasury Department and the IRS received comments requesting 
guidance concerning the eligible components of electrochromic glass 
property. Similar to the other energy properties, the proposed 
regulations would apply the functional interdependence test as 
described in part I.D.2 of this Summary of Comments and Explanation of 
Provisions to determine whether components are included as part of 
electrochromic glass property. This approach provides a technology-
neutral way to determine what is considered included in the energy 
property that is broad enough to encompass technological changes. In 
the case of electrochromic glass property, for example, an 
electrochromic glass system includes the full controls package, the 
electrochromic glass coating, and the balance of window and 
installation components including glass, flashing, framing, and 
sealants.
3. Geothermal Energy Property
    Section 48(a)(3)(A)(iii) provides that energy property includes 
geothermal property, and defines geothermal property as equipment used 
to produce, distribute, or use energy derived from a geothermal deposit 
(within the meaning of section 613(e)(2) of the Code), but only, in the 
case of electricity generated by geothermal power, up to (but not 
including) the electrical transmission stage.
    Existing Sec.  1.48-9(c)(10)(i) defines ``geothermal equipment'' as 
equipment that produces, distributes, or uses energy derived from a 
geothermal deposit. Existing Sec.  1.48-9(c)(10) generally provides 
that geothermal property includes production and distribution 
equipment. Proposed Sec.  1.48-9(e)(3)(i) would adopt this definitional 
framework by providing that geothermal energy property is equipment 
used to produce, distribute, or use energy derived from a geothermal 
deposit (within the meaning of section 613(e)(2)), and includes 
production equipment (as defined in proposed Sec.  1.48-9(e)(3)(ii)) 
and distribution equipment (as defined in proposed Sec.  1.48-
9(e)(3)(iii)).
    Proposed Sec.  1.48-9(e)(3)(ii) would adopt a modified definition 
of production equipment from existing Sec.  1.48-9(c)(10)(ii) in three 
respects. First, proposed Sec.  1.48-9(e)(3)(ii) would provide, in 
part, that production equipment includes equipment necessary to bring 
geothermal energy from the subterranean deposit to the surface. Second, 
while existing Sec.  1.48-9(c)(10)(ii) provides that reinjection wells 
required for production may qualify as production equipment, proposed 
Sec.  1.48-9(e)(3)(ii) would expand the types of wells that may qualify 
as production equipment to production, injection, and monitoring wells. 
Third, proposed Sec.  1.48-9(e)(3)(ii) would also include the 
electricity generating equipment as production equipment for those 
projects that convert geothermal energy to electricity.
    Proposed Sec.  1.48-9(e)(3)(iii) would adopt a modified definition 
of distribution equipment from existing Sec.  1.48-9(c)(10)(iii). The 
existing regulations provide that distribution equipment includes 
components of a heating system, such as pipes and ductwork that 
distribute the energy derived from the geothermal deposit within a 
building. Proposed Sec.  1.48-9(e)(3)(iii) would also add components of 
a building's heating or cooling system as distribution equipment. The 
proposed regulations would apply the functional interdependence test as 
described in part I.D.2 of this Summary of Comments and Explanation of 
Provisions to determine whether components are included as part of 
geothermal energy property.
    In response to Notice 2015-70, one commenter requested that the 
regulations be modified to include as credit eligible costs incurred to 
drill failed or non-producing wells, and in some scenarios, for the 
margin or contingency that a subsidiary contractor requires to be paid 
to perform under an engineering, procurement, and construction (EPC) 
contract. While the proposed regulation would expand the types of wells 
that may be considered production equipment, it would not specifically 
include costs incurred to drill failed or non-producing wells. In many 
cases costs incurred to drill failed or non-producing geothermal wells 
are already recoverable through intangible drilling costs under Sec.  
1.612-5. It is also unclear whether the margin or contingency that a 
subsidiary contractor requires to be paid to perform under an EPC 
contract can be recovered by a taxpayer. However, if such costs are 
recoverable, such recovery would likely occur through capitalizing the 
costs to the underlying mineral interest and claiming depletion 
deductions under section 613(e). Therefore, the Treasury Department and 
the IRS have determined that these costs cannot be included in the 
basis of the geothermal energy property for purposes of calculating the 
section 48 credit.
4. Qualified Fuel Cell Property
    Section 48(a)(3)(A)(iv) provides that energy property includes 
qualified fuel cell property. As modified by the IRA, section 48(c)(1) 
defines ``qualified fuel cell property'' as a fuel cell power plant 
that has a nameplate capacity of at least 0.5 kilowatt (kW) (1 kW in 
the case of a fuel cell power plant with a linear generator assembly) 
of electricity using an electrochemical process or electromechanical 
process and an electricity-only generation efficiency greater than 30 
percent. Electricity-only generation efficiency may be calculated by 
dividing the heat rate of the fuel cell (for example, kilowatt-hours 
(kWh) electricity produced per kilogram (kg) of fuel consumed) by the 
higher heating value of the fuel (for example, kWh per kg). Section 
48(c)(1)(C) defines the term ``fuel cell power plant'' as an integrated 
system comprised of a fuel cell stack assembly, or linear generator 
assembly, and associated balance of plant components that converts a 
fuel into electricity using electrochemical or electromechanical means.
    The Treasury Department and the IRS received few comments regarding 
qualified fuel cell property in response to Notice 2022-49. As 
discussed, the

[[Page 82194]]

proposed regulations are intended to provide a technology-neutral way 
to determine what is included in energy property that is broad enough 
to encompass technological changes and do not include rules for a 
particular type of product. As a result, proposed Sec.  1.48-9(e)(4) 
would adopt the statutory definition of qualified fuel cell property. 
The proposed regulations would also apply the functional 
interdependence test as described in part I.D.2 of this Summary of 
Comments and Explanation of Provisions to determine whether components 
are included as part of qualified fuel property.
5. Qualified Microturbine Property
    Section 48(a)(3)(A)(iv) provides that energy property includes 
qualified microturbine property. Section 48(c)(2) defines ``qualified 
microturbine property'' as a stationary microturbine power plant that 
has a nameplate capacity of less than 2,000 kW and an electricity-only 
generation efficiency of not less than 26 percent at International 
Standard Organization conditions. Section 48(c)(2)(C) provides that a 
``stationary microturbine power plant'' is an integrated system 
comprised of a gas turbine engine, a combustor, a recuperator or 
regenerator, a generator or alternator, and associated balance of plant 
components that convert a fuel into electricity and thermal energy. A 
stationary microturbine power plant also includes all secondary 
components located between the existing infrastructure for fuel 
delivery and the existing infrastructure for power distribution, 
including equipment and controls for meeting relevant power standards, 
such as voltage, frequency, and power factors.
    The Treasury Department and the IRS received no comments regarding 
qualified microturbine property in response to the request for comment 
published in Notice 2022-49. Therefore, proposed Sec.  1.48-9(e)(5) 
would adopt the statutory definition of qualified microturbine 
property. The proposed regulations would also apply the functional 
interdependence test as described in part I.D.2 of this Summary of 
Comments and Explanation of Provisions to determine whether components 
are included as part of qualified microturbine property.
6. Combined Heat and Power System Property
    Section 48(a)(3)(A)(v) includes combined heat and power system 
(CHP) property as a type of energy property. Section 48(c)(3)(A) 
defines CHP property as property comprising a system that uses the same 
energy source for the simultaneous or sequential generation of 
electrical power, mechanical shaft power, or both, in combination with 
the generation of steam or other forms of useful thermal energy 
(including heating and cooling applications). Section 48(c)(3)(A) 
further provides, in part, that a CHP property must produce at least 20 
percent of its total useful energy in the form of thermal energy that 
is not used to produce electrical or mechanical power (or combination 
thereof), and at least 20 percent of its total useful energy in the 
form of electrical or mechanical power (or combination thereof), and 
that the energy efficiency percentage of the system must exceed 60 
percent.
    Section 48(c)(3)(B) provides that the credit for CHP property is 
reduced to the extent that a CHP property has an electrical or 
mechanical capacity in excess of applicable limits. Subject to the 
exception for CHP property that uses closed or open-loop biomass as 
feedstock, CHP property with capacity in excess of the applicable 
capacity limit (15 MW or a mechanical capacity of more than 20,000 
horsepower or an equivalent combination of electrical and mechanical 
energy capacities) is eligible for only a fraction of the otherwise 
allowable section 48 credit. The fraction is equal to the applicable 
capacity limit divided by the capacity of the CHP property. However, 
CHP property with a capacity in excess of 50 MW or a mechanical energy 
capacity in excess of 67,000 horsepower or an equivalent combination of 
electrical and mechanical energy capacities does not qualify for the 
section 48 credit.
    Section 48(c)(3)(C) provides that the energy efficiency percentage 
of a CHP property is the fraction (1) 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 (2) the denominator of which is the lower 
heating value of the fuel sources for the system. The energy efficiency 
percentage and the percentages under section 48(c)(3)(A)(ii) are 
determined on a British thermal unit (Btu) basis. Section 
48(c)(3)(C)(iii) specifically provides that the term ``combined heat 
and power system property'' does not include property used to transport 
the energy source to the facility or to distribute energy produced by 
the facility.
    Additionally, section 48(c)(3)(D) provides that a CHP property with 
a fuel source that is at least 90 percent from closed or open-loop 
biomass that would otherwise qualify for the section 48 credit but for 
the failure to meet the efficiency standard is eligible for a credit 
reduced in proportion to the degree to which the system fails to meet 
the efficiency standard. For example, a system that would otherwise be 
required to meet the 60-percent efficiency standard, but which only 
achieves 30-percent efficiency, would be permitted to claim a credit 
equal to one-half of the otherwise allowable credit (that is, a five 
percent credit).
    In response to Notice 2015-70, several commenters requested that 
the definition of CHP property be modified by relaxing certain 
requirements. Specifically, commenters requested that the definition of 
CHP property be modified by eliminating or reducing the requirement 
that a facility produce at least 20 percent of its total useful energy 
in the form of electrical or mechanical power (or combination thereof). 
This modification would allow waste heat to power (WHP) property, which 
uses waste heat from industrial processes to generate electricity, to 
qualify as CHP property despite its inability to meet certain statutory 
requirements. Since the comments to Notice 2015-70 were received, 
Congress amended section 48 by adding waste energy recovery property 
(WERP) as a type of energy property in the Consolidated Appropriations 
Act, 2021, Public Law 116-260, 134 Stat. 1182 (Dec. 27, 2020). 
Additional information on requirements for WERP is provided in part 
I.C.9 of this Summary of Comments and Explanation of Provisions.
    Proposed Sec.  1.48-9(e)(6)(i) would adopt a simplified version of 
the statutory definition of CHP property. Additionally, proposed Sec.  
1.48-9(e)(6)(ii) would provide that CHP property does not include 
property used to transport the energy source to the generating facility 
or to distribute energy produced by the facility. The proposed 
regulations would also apply the functional interdependence test as 
described in part I.D.2 of this Summary of Comments and Explanation of 
Provisions to determine whether components are included as part of CHP 
property.
7. Qualified Small Wind Energy Property
    Section 48(a)(3)(A)(vi) provides that energy property includes 
qualified small wind energy property. Section 48(c)(4) defines 
qualified small wind energy property as property using a qualifying 
small wind turbine (which has a nameplate capacity of not more than 100 
kW) to generate electricity. The Treasury Department and the IRS 
received no comments regarding qualified small wind energy property in 
response to Notice 2015-70.

[[Page 82195]]

Accordingly, proposed Sec.  1.48-9(e)(7) would adopt the statutory 
definition of qualified small wind energy property. The proposed 
regulations would apply the functional interdependence test as 
described in part I.D.2 of this Summary of Comments and Explanation of 
Provisions to determine whether components are included as part of 
qualified small wind energy property.
8. Geothermal Heat Pump Equipment
    Section 48(a)(3)(A)(vii) provides that energy property includes 
geothermal heat pump equipment. The statute provides, in part, that 
geothermal heat pump equipment is equipment that uses the ground or 
ground water as a thermal energy source to heat a structure or as a 
thermal energy sink to cool a structure. The Treasury Department and 
the IRS received no comments regarding geothermal heat pump equipment 
in response to Notice 2015-70. As a result, proposed Sec.  1.48-9(e)(8) 
would adopt the statutory definition of qualified geothermal heat pump 
equipment while providing the modification that in addition to the 
ground and ground water, other underground working fluids may be used 
as a thermal energy source or as a thermal energy sink. The proposed 
regulations would apply the functional interdependence test as 
described in part I.D.2 of this Summary of Comments and Explanation of 
Provisions to determine whether components are included as part of 
geothermal heat pump equipment.
    Additionally, while section 48(a)(3)(A)(vii) does not specify 
energy distribution equipment and components of a building's heating 
and/or cooling system as components of geothermal heat pump equipment, 
such equipment may be integral to the function of the geothermal heat 
pump equipment, to heat or cool a structure. Thus, energy distribution 
equipment may be considered geothermal heat pump equipment. See section 
I.E.3. of this preamble for a discussion of an integral part of energy 
property.
9. Waste Energy Recovery Property (WERP)
    Section 48(a)(3)(A)(viii) provides that energy property includes 
WERP. Section 48(c)(5)(A) defines WERP as property (with a capacity not 
in excess of 50 MW) that generates electricity solely from heat from 
buildings or equipment if the primary purpose of such building or 
equipment is not the generation of electricity. Additionally, section 
48(c)(5)(C) prevents taxpayers from claiming a double benefit by 
providing that any property that could be treated as WERP (determined 
without regard to section 48(c)(5)), which is part of a CHP property is 
not treated as WERP for purposes of section 48 unless the taxpayer 
elects not to treat such system as a CHP property for purposes of 
section 48.
    Proposed Sec.  1.48-9(e)(9), would adopt the statutory definition 
of WERP. The proposed regulations would also apply the functional 
interdependence test as described in part I.D.2 of this Summary of 
Comments and Explanation of Provisions to determine whether components 
are included as part of WERP. Additionally, after consultation with the 
Department of Energy, proposed Sec.  1.48-9(e)(9) would provide 
examples of buildings or equipment the primary purpose of which is not 
the generation of electricity including, but not limited to, 
manufacturing plants, medical care facilities, facilities on college 
campuses, pipeline compressor stations, and associated equipment.
10. Energy Storage Technology
    Section 48(a)(3)(A)(ix) was added by the IRA to provide that energy 
property includes energy storage technology. Section 48(c)(6)(A)(i) 
defines energy storage technology to mean 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 (or, in the case of hydrogen, that 
stores energy), and has a nameplate capacity of not less than 5 kWh. 
Section 48(c)(6)(A)(ii) provides that thermal energy storage property 
is also energy storage technology.
    Section 48(c)(6)(B) provides a rule for modifications of energy 
storage technology. In the case of any property that either was placed 
in service before August 16, 2022, and would be described in section 
48(c)(6)(A)(i), except that such property has a capacity of less than 5 
kWh and is modified in a manner that such property (after such 
modification) has a nameplate capacity of not less than 5 kWh, or is 
energy storage technology (as described in section 48(c)(6)(A)(i)) and 
is modified in a manner that such property (after such modification) 
has an increase in nameplate capacity of not less than 5 kWh, such 
property is treated as energy storage technology (as described in 
section 48(c)(6)(A)(i)) except that the basis of any existing property 
prior to such modification is not taken into account for purposes of 
section 48.
    Section 48(c)(6)(C) defines thermal energy storage property, for 
purposes of section 48(c)(6) as property comprising a system that: is 
directly connected to a heating, ventilation, or air conditioning 
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. Section 
48(c)(6)(C)(ii) provides that thermal energy storage property does not 
include a swimming pool, a combined heat and power system property, or 
a building or its structural components.
    The Treasury Department and the IRS received comments addressing 
energy storage technologies in response to Notice 2022-49. Some 
comments discussed the definition of energy storage technology and how 
broadly energy storage technology should be interpreted in the 
regulations. For example, a commenter requested that guidance define 
energy storage broadly based on its characteristics and capabilities, 
rather than using a technology-based definition that could 
unintentionally exclude developing technologies. Some commenters 
requested that the definition of energy storage technology focus more 
on capability and less on a particular technology. Other commenters 
requested confirmation that certain specific technologies would be 
included within the definition of energy storage technology and that 
the definition be based on the underlying definition for the technology 
provided in section 48(c)(6), as opposed to the specific 
functionalities of the energy storage technology. After consideration 
of these comments, proposed Sec.  1.48-9(e)(10) would adopt the 
statutory definition of energy storage technology.
    Commenters also provided input on hydrogen storage, including a 
variety of recommendations on what the definition of hydrogen storage 
property should include. For example, one commenter suggested that 
``energy storage technology'' with respect to hydrogen storage includes 
all equipment, facilities, storage receptacles, dedicated vehicles and 
vessels used to compress, liquify, store, and distribute hydrogen and 
hydrogen carriers, such as ammonia, methanol, and other forms of 
hydrogen carriers. Another commenter requested that regulations include 
a broad list of components of energy storage technologies including the 
storage receptacle itself and all pressure vessels, piping, valves, and 
tanks among many other components. This commenter also suggested that 
property that facilitates use of ammonia, methanol and other hydrogen 
carriers be included as hydrogen energy storage technology. Another 
commenter noted that the regulations should provide specific use 
limitations for stored hydrogen such as

[[Page 82196]]

for use solely in energy-related activities.
    Section 48(c)(6)(A) already defines energy storage technology 
(including hydrogen storage) and thermal energy storage property based 
on the general functions of the relevant energy storage technology. 
Hydrogen energy storage property must store hydrogen that is solely 
used for the production of energy and not for the production of end 
products, such as fertilizer. For example, this would include, but is 
not limited to, hydrogen used to produce heat, to generate electricity, 
or to be used in a fuel cell vehicle. The type of hydrogen storage 
medium (for example, physical based or material based), is not limited. 
Proposed Sec.  1.48-9(e)(10)(iv) therefore would adopt that rule. The 
Treasury Department and the IRS request comments on alternative 
approaches to assessing limitations on the use of hydrogen energy 
storage property, including whether additional clarification is needed 
regarding the production of energy from hydrogen, and what type of 
documentation would be needed to demonstrate that a hydrogen energy 
storage property was used to store hydrogen solely used for the 
production of energy.
    Proposed Sec.  1.48-9(e)(10) would apply the functional 
interdependence test as described in part I.D.2 of this Summary of 
Comments and Explanation of Provisions to determine whether components 
are included as part of an energy storage technology. This approach 
provides a technology-neutral way to determine what is considered 
energy storage technology and is broad enough to encompass 
technological changes. The proposed regulations would, however, provide 
additional guidance in the form of a non-exclusive list of examples of 
different types of energy storage technologies. The list is non-
exclusive because it would be impossible to list all the types of 
technologies that could qualify currently, and the Treasury Department 
and the IRS acknowledge the importance of leaving the language broad to 
allow future technological advances in energy storage technologies to 
qualify.
    Additionally, rechargeable electrochemical batteries of all types 
meet the functional definition by receiving energy in the form of 
electricity, storing electro-chemical energy, and producing 
electricity. A commenter requested that re-used or ``second life'' 
batteries should be considered ``new energy property.'' Generally, used 
property cannot be considered ``new property'' for purposes of the 80/
20 Rule, which is described in part III.A. of this Summary of Comments 
and Explanation of Provisions. However, proposed Sec.  1.48-9(e)(10)(v) 
would provide that recycled components may be used to meet the 
modification rule for energy storage technology. The Treasury 
Department and the IRS request comments on whether ``second life'' 
batteries should be considered new components for purposes of the 80/20 
Rule. Additionally, the Treasury Department and the IRS request comment 
on what types of components may be used to modify an existing energy 
storage technology, and whether there are any challenges with recycled 
components being used to meet the modification rule.
    Energy storage technology excludes property primarily used in the 
transportation of goods or individuals and not for the production of 
electricity under section 48(c)(6)(A)(i). The Treasury Department and 
the IRS understand that this exclusion, at a minimum, would apply to 
batteries and other energy storage technology that are incorporated 
into or otherwise physically integrated within motor vehicles and other 
modes of transportation of goods or individuals and from which an 
electric motor of such vehicle or other mode of transportation draws 
electricity for propulsion. The Treasury Department and the IRS do not 
intend that this exclusion apply to batteries and other energy storage 
technology that may be used to charge or recharge such vehicles or 
other modes of transportation, if the batteries and other energy 
storage technologies are physically separate from such vehicles or 
other modes of transportation. The Treasury Department and the IRS 
request comments as to how the exclusion for property primarily used in 
the transportation of goods or individuals and not for the production 
of electricity should be defined and the specific types of property 
that may be covered or not covered by this exclusion.
    Although the list of examples of energy storage technologies that 
proposed Sec.  1.48-9(e)(10) would provide is nonexclusive, and 
therefore many other technologies that are not addressed would meet 
these functional definitions, there are some examples that do not meet 
the functional definition. For example, some technologies are marketed 
as ``virtual batteries,'' which are aggregations of controllable 
electricity demand providing similar electrical grid services to an 
electrical grid battery. Such ``virtual batteries'' receive energy in 
the form of electricity, but they do not store it for later discharge 
as electricity. The function of ``virtual batteries'' is to shift 
demand to different points in time. Because such demand shifting is not 
a storage activity for purposes of section 48(c)(6), this technology is 
not an energy storage technology. There are other technologies for 
which the determination of whether they meet the statutory requirements 
of section 48(c)(6) is less clear. The Treasury Department and the IRS 
request comments on whether these other types of technologies should be 
considered energy storage technologies.
11. Qualified Biogas Property
    Section 48(a)(3)(A)(x) was added by the IRA to provide that energy 
property includes qualified biogas property. Section 48(c)(7)(A) 
defines qualified biogas property as property comprising a system that 
converts biomass (as defined in section 45K(c)(3), as in effect on the 
date of enactment of section 48(a)(3)(A) (August 16, 2022)) into a gas 
that consists of not less than 52 percent methane by volume, or is 
concentrated by such system into a gas that consists of not less than 
52 percent methane, and captures such gas for sale or productive use, 
and not for disposal via combustion. Section 48(c)(7)(B) provides that 
qualified biogas property includes any property that is part of such 
system that cleans or conditions such gas.
    In response to Notice 2022-49, the Treasury Department and the IRS 
received several comments regarding qualified biogas property. Many 
commenters supported adopting a broad definition of qualified biogas 
property to include all the related technologies that commenters stated 
could be utilized in qualified biogas property. After consideration of 
these comments, proposed Sec.  1.48-9(e)(11) would adopt the statutory 
definition of qualified biogas property.
    Additionally, at least one commenter stated that when gas is being 
upgraded and injected into a pipeline, upgrading equipment is necessary 
to condition the gas into the appropriate mixture for injection into 
the pipeline and should be part of the qualified biogas property. In 
the commenter's view, the eligibility of this upgrading equipment 
hinges on the meaning of the phrase ``captures such gas for sale or 
productive use.'' The commenter asserted that the statute should 
encompass such conversion of biogas to a more portable product such as 
a compressed or liquified gas. Therefore, the commenter asserted that 
upgrading equipment be included in a qualified biogas property because 
it captures such biogas for sale or

[[Page 82197]]

productive use and includes any property that is part of such qualified 
biogas property that cleans or conditions such gas.
    After consideration of these comments, proposed Sec.  1.48-9(e)(11) 
would provide that components of property are considered qualified 
biogas property if they are functionally interdependent, that is, if 
the placing in service of each component is dependent upon the placing 
in service of each of the other components in order to perform the 
intended function of the qualified biogas property as described in 
proposed Sec.  1.48-9(e)(11)(i). This approach would provide a 
technology-neutral way to determine what is considered included in a 
qualified biogas property and is broad enough to encompass 
technological changes. Additionally, proposed Sec.  1.48-9(e)(11)(i) 
provides examples of functionally interdependent components of the 
qualified biogas property including, but not limited to, a waste 
feedstock collection system, a landfill gas collection system, mixing 
or pumping equipment, and an anaerobic digester.
    Regarding the upgrading equipment that is necessary to condition 
biogas into the appropriate mixture for injection into the pipeline, 
this equipment is not functionally interdependent with the qualified 
biogas property that converts biomass into a gas containing not less 
than 52 percent methane and captures such gas for sale or productive 
use as specified in the statute. While this upgrading equipment makes 
the injection of biogas into a pipeline possible, such upgrading 
equipment is not necessary to satisfy the statutory requirements that 
the biogas converted from biomass contain not less than 52 percent 
methane, and that it be captured for sale or productive use. In support 
of including upgrading equipment necessary to prepare the biogas for 
injection into the pipeline, commenters point to the statutory language 
that qualified biogas property includes any property that is part of 
such system that cleans or conditions such gas. However, unlike 
upgrading equipment that is necessary for injection of the biogas into 
the pipeline, cleaning and conditioning equipment is part of the 
necessary process to convert biomass into gas that is not less than 52 
percent methane and capture gas for sale or productive use. Therefore, 
proposed Sec.  1.48-9(e)(11)(i) would clarify that upgrading equipment 
is not a functionally interdependent component of qualified biogas 
property. The Treasury Department and the IRS request comments 
regarding what types of components may be included within the 
definition of cleaning and conditioning property provided in the 
definition of qualified biogas property in section 48(c)(7)(B).
    One commenter had recommendations about the application of the 
requirement in section 48(c)(7)(A)(ii) that a qualified biogas property 
captures such gas for sale or productive use, and not for disposal via 
combustion. This commenter noted that some properties that produce 
electricity from gas using a combustion process, may flare waste or 
tail gas, including during commissioning or maintenance periods. The 
commenter recommended a de minimis exception so that sale or use of gas 
in this manner will not prevent a property that produced such gas from 
being a qualified biogas property. The Treasury Department and the IRS 
request additional comments on whether such an exception is necessary 
and what should be considered de minimis for this purpose.
    Lastly, several comments addressed the methane requirements in the 
statutory definition by commenting on how and when methane content 
should be measured and whether methane monitoring is required. After 
consideration and coordination with the Department of Energy, the 
proposed regulations would adopt a rule addressing the production point 
at which methane content must be measured. Proposed Sec.  1.48-
9(e)(11)(ii) would provide that the methane requirements described in 
section 48(c)(7)(A)(i)(I) and section 48(c)(7)(A)(i)(II) are measured 
at the point at which gas exits the biogas production system (which may 
include an anerobic digester, landfill gas collectors, or thermal 
gasification equipment) of a qualified biogas property. This is the 
point at which a taxpayer generally must determine whether it will 
convert the biogas to fuel for sale or use it directly to generate heat 
or fuel an electricity generation unit.
12. Microgrid Controllers
    Section 48(a)(3)(A)(xi) was added by the IRA to provide that energy 
property includes microgrid controllers. Section 48(c)(8)(A) defines a 
microgrid controller as equipment that is part of a qualified microgrid 
and designed and used to monitor and control the energy resources and 
loads on such microgrid. Section 48(c)(8)(B) defines a qualified 
microgrid as an electrical system that includes equipment that is 
capable of generating not less than 4 kW and not greater than 20 MW of 
electricity; is capable of operating in connection with the electrical 
grid and as a single controllable entity with respect to such 
electrical grid, and independently (and disconnected) from such 
electrical grid; and is not part of a bulk-power system (as defined in 
section 215 of the Federal Power Act (16 U.S.C. 824o)).
    In response to Notice 2022-49, the Treasury Department and the IRS 
received several comments requesting clarification on the definition of 
microgrid controllers, with some commenters suggesting a broad 
interpretation and others suggesting a narrow interpretation. 
Additionally, several commenters identified certain components that 
should be included as part of an eligible microgrid controller.
    Several commenters asserted that the focus of the microgrid 
controller definition should be on capability and not the availability 
of an interconnection with the utility grid. In response to these 
comments, proposed Sec.  1.48-9(e)(12)(ii) would clarify that an 
eligible microgrid includes an electrical system that is capable of 
operating in connection with the larger electrical grid whether or not 
the microgrid is physically connected to the electrical grid. For 
example, a microgrid located in a remote area that does not have a 
larger electrical grid to which it can physically connect can still be 
a qualified microgrid.
    After consideration of these comments, proposed Sec.  1.48-
9(e)(12)(i) would adopt the statutory definition of a microgrid 
controller. The Treasury Department and the IRS request comments on 
whether the rules for functionally interdependent property provided in 
proposed Sec.  1.48-9(f)(2)(ii) would be sufficient to determine the 
components that should be included as part of a microgrid controller, 
or whether another test is needed due to the specific role of microgrid 
controllers and their components.
13. Other Property Included in Section 48
    Because future legislation may add additional types of energy 
property to section 48, proposed Sec.  1.48-9(e)(13) would provide that 
any other property specified by section 48 as energy property is 
treated as energy property for purposes of these proposed regulations. 
The general rules and requirements applicable to energy property 
provided in these proposed regulations would also apply to such 
property.

D. Definition of Energy Property and Scope of Included Components

    Since shortly after the enactment of section 48, energy property 
eligible for the section 48 credit has been

[[Page 82198]]

interpreted by the Treasury Department and the IRS to include, in 
addition to energy generation property, costs related to components 
such as power conditioning equipment, transfer equipment, and parts 
related to the functioning of that equipment.
    On November 9, 1978, the Energy Tax Act of 1978, amended section 48 
by adding a new subsection (then section 48(l)) to define ``energy 
property.'' Public Law 95-816, 92 Stat. 2174. On January 23, 1981, the 
Treasury Department and the IRS promulgated T.D. 7765 to provide 
additional guidance regarding the definition of energy property. 46 FR 
7287-01. The preamble to T.D. 7765 states that ``[i]n response to 
comments, the definition of solar energy property was expanded to make 
it clear that it includes storage devices, power conditioning 
equipment, transfer equipment, and property solely related to the 
functioning of those items. However, such equipment does not include 
transmission equipment.''
    The preamble to T.D. 7765 also provides that ``[a] number of 
comments cited specific legislative history to the effect that wind 
energy property includes `transfer equipment.' '' The preamble to T.D. 
7765 defines ``transfer equipment'' as including equipment that permits 
the aggregation of electricity generated by several windmills and 
equipment that alters voltage in order to permit transfer to a 
transmission line. The preamble to T.D. 7765 concludes that transfer 
equipment is specifically added to the definition of wind energy 
property, however, transfer equipment does not include transmission 
lines.
    Existing Sec.  1.48-9(d)(3) defines ``solar energy property'' as 
equipment that uses solar energy to generate electricity, and includes 
storage devices, power conditioning equipment, transfer equipment, and 
parts solely related to the functioning of those items. This section 
also provides that solar energy property used to generate electricity 
includes only equipment up to (but not including) the stage that 
transmits or uses electricity.
    Existing Sec.  1.48-9(e) defines ``wind energy property'' as 
consisting of a windmill, wind-driven generator, storage devices, power 
conditioning equipment, transfer equipment, and parts solely related to 
the functioning of those items. Section 48(a)(3) no longer includes 
wind energy property as a type of energy property. However, qualified 
wind facilities (including qualified offshore wind facilities) may be 
qualified investment credit facilities that a taxpayer may elect to 
treat as energy property if they meet all the requirements provided in 
section 48(a)(5).
    While not specifically addressed in section 48, Internal Revenue 
Bulletin guidance interpreting section 48 has provided that 
functionally interdependent components, are considered components of 
energy property eligible for the section 48 credit. In Notice 2018-59, 
2018-28 I.R.B. 196, the Treasury Department and the IRS clarified what 
components are considered part of an energy property. Section 7.01(1) 
of Notice 2018-59 states that an energy property generally includes all 
components of property that are functionally interdependent (unless 
such equipment is an addition or modification to an energy property). 
Notice 2018-59 provides that components of property are functionally 
interdependent if the placing in service of each component is dependent 
upon the placing in service of each of the other components in order to 
generate electricity. Further, Notice 2018-59 relies upon the rationale 
provided in Revenue Ruling 94-31, 1994-1 C.B. 16, to provide that 
functionally interdependent components of property that can be operated 
and metered together and can begin producing electricity separately 
from other components of property within a larger energy project will 
be considered an energy property.
    In the context of defining ``section 38 property,'' Sec.  1.48-
1(d)(4) provides that ``section 38 property'' is ``used as an integral 
part of one of the specified activities if it is used directly in the 
activity and is essential to the completeness of the activity.'' 
Section 1.48-1(d)(4) also provides that ``[p]roperty shall be 
considered used as an integral part of one of the specified activities 
if so used either by the owner of the property or by the lessee of the 
property.'' Notice 2018-59 incorporates the concept of integral 
property from Sec.  1.48-1(d) to provide that certain property that is 
an integral part of an energy property is included in energy property 
for purposes of the section 48 credit. While Notice 2018-59 explained 
that property that is ``functionally interdependent'' to the generation 
of electricity was treated as a unit of energy property, it also 
provided that certain other property that was integral to the 
production of electricity are included in determining what costs to 
include in the basis of energy property and the date on which 
construction began. Section 7.02(1) of Notice 2018-59 includes an 
example illustrating that, while a transmission tower located at a site 
where energy property is located is not energy property because 
transmission is not an integral part of the activity performed by the 
energy property, a custom-designed transformer that steps up the 
voltage of electricity produced at an energy property to the voltage 
needed for transmission is power conditioning equipment, which is an 
integral part of the activity performed. In addition, section 7.02(2) 
of Notice 2018-59 explains that onsite roads used to operate and 
maintain the energy property are integral to the production of 
electricity, but not roads used primarily to access the site or 
primarily for employee or visitor vehicles. Similarly, sections 7.02(3) 
and (4) of Notice 2018-59 explain that fences are not integral to the 
production of electricity nor are buildings, unless the building is 
essentially an item of machinery or equipment, or a structure that 
houses property that is integral to the activity of an energy property 
if the use of the structure is so closely related to the use of the 
housed energy property that the structure clearly can be expected to be 
replaced when the energy property it initially houses is replaced.
    In response to a request for comments regarding the definition and 
scope of energy property in Notice 2015-70, several commenters 
requested that the regulations provide a specific list of eligible 
components and define each type of component. Commenters specifically 
requested that the regulations provide definitions for conversion 
equipment, power conditioning equipment, transfer equipment, and other 
property commonly used in conjunction with energy property. Further, 
some commenters requested that the regulations include safety equipment 
such as electrical panels, rapid shut-down equipment, and utility 
disconnection equipment as eligible components when used in conjunction 
with energy property. Conversely, several commenters recommended that 
the regulations not provide a technical definition or list of 
components because innovations in energy property may require that such 
a definition would need to be continually updated.
    Commenters requested that the regulations be clarified to include 
as energy property all components located before the point at which 
voltage of the electricity is increased to the voltage of the 
transmission line, referred to as the ``separation point,'' such as 
step-up transformers, dead end structures, switches, switch gear 
buildings, voltage regulators, and hardware and software used to 
monitor, operate, and protect such property. Additionally, one 
commenter requested that the

[[Page 82199]]

regulations be clarified to include as energy property all components 
located beyond the separation point, such as switches, circuit 
breakers, lighting or surge arrestors, and metering equipment, if the 
use of such components is primarily related to the functioning or 
protection of components located at or before the separation point.
    One challenge in providing definitions of what components to 
include in energy property is in determining what components are common 
to all energy property, without limiting or constraining future 
technological advances. To avoid limiting future energy technologies, 
the Treasury Department and the IRS consulted with the Department of 
Energy and determined that the best option is to adopt a function-
oriented approach to describe the types of components that are 
considered energy property. Accordingly, proposed Sec.  1.48-9(f) would 
adopt the concepts of functional interdependence and property that is 
an integral part of an energy property as provided in Internal Revenue 
Bulletin guidance issued previously by the Treasury Department and the 
IRS.
1. Unit of Energy Property
    Proposed Sec.  1.48-9(f)(2)(i) would provide that a unit of energy 
property consists of all functionally interdependent components of 
property (as defined in proposed Sec.  1.48-9(f)(2)(ii)) owned by the 
taxpayer that are operated together and that can operate apart from 
other energy properties within a larger energy project (as defined in 
proposed Sec.  1.48-13(d) and discussed in part II.C of this Summary of 
Comments and Explanation of Provisions).
2. Functional Interdependence
    Proposed Sec.  1.48-9(f)(2)(ii) would provide that components of 
property are functionally interdependent if the placing in service of 
each component is dependent upon the placing in service of each of the 
other components in order to generate or to store electricity, thermal 
energy, or hydrogen, or otherwise perform its intended function as 
provided in section 48(c) and as described in proposed Sec.  1.48-9(e). 
Energy property, with certain exceptions, includes all components 
necessary to generate or store electricity or thermal energy for 
transmission, distribution, or use up to (but not including) the stage 
that transmits, distributes, or uses electricity or thermal energy. In 
the case of qualified biogas property, microgrid controllers, 
electrochromic glass property, and fiber-optic solar energy property, 
components of such energy property are functionally interdependent if 
the placing in service of each component is dependent upon the placing 
in service of each of the other components in order to perform the 
intended function of the energy property as provided by section 48(c) 
and as described in proposed Sec.  1.48-9(e). Additionally, energy 
property generally would not include equipment that is an addition or 
modification to an existing energy property unless the rules regarding 
retrofitted energy property described in proposed Sec.  1.48-14(a) and 
part III.A. of this Summary of Comments and Explanation of Provisions 
apply.
3. Integral Part of an Energy Property
    Proposed Sec.  1.48-9(f)(3)(i) would provide that property owned by 
a taxpayer that is an integral part of an energy property owned by that 
same taxpayer is energy property. To be part of an energy property, 
such property must be used directly in the intended function of the 
energy property as provided by section 48(c) and as described in Sec.  
1.48-9(e) and be essential to the completeness of the intended 
function. Proposed Sec.  1.48-9(f)(3)(ii) would describe power 
conditioning equipment and transfer equipment, and would provide that 
such components, and parts related to the functioning of those 
components, are energy property when they meet the definition of 
integral part provided in Sec.  1.48-9(f)(3)(i).
    Many commenters requested clarification on the eligible components 
of an offshore wind facility. Proposed Sec.  1.48-9(f)(5)(iii) would 
provide an example that applies the integral part rule to include power 
conditioning and transfer equipment as part of a qualified offshore 
wind facility but excludes transmission and distribution equipment from 
being part of the qualified offshore wind facility. This example is 
consistent with the view of the Joint Committee on Taxation in the 
General Explanation of Tax Legislation Enacted in the 116th Congress, 
JCS 1-22 (February 2022). According to that document, ``[q]ualified 
offshore wind facilities are qualified wind facilities . . . and 
include property owned by the taxpayer necessary to condition 
electricity for use on the electrical grid such as subsea cables and 
voltage transformers.'' Id. at 498.
    Furthermore, consistent with Notice 2018-59, proposed Sec.  1.48-
9(f)(3)(iii) would provide as further examples of integral property 
onsite roads that are used for equipment to operate and maintain the 
energy property. Section 1.48-9(f)(3)(iii) would also clarify that 
roads primarily for access to the site, or roads used primarily for 
employee or visitor vehicles, are not integral parts of an energy 
property. Proposed Sec.  1.48-9(f)(3)(iv) and (v) would also provide 
that fences and buildings (also referred to as structures) are 
generally not integral parts of an energy property because they are not 
integral to the activity of the energy property. However, a building 
may be an integral part of a unit of energy property if it is 
essentially an item of machinery or equipment, or a structure that 
houses property that is integral to the activity of an energy property, 
if the use of the structure is so closely related to the use of the 
housed energy property that the structure clearly can be expected to be 
replaced when the energy property it initially houses is replaced. The 
Treasury Department and the IRS request comments on whether additional 
types of property meet the requirements provided in proposed Sec.  
1.48-9(f)(3) and could be considered an integral part of an energy 
property.
4. Location of Energy Property
    Section 48 and the existing regulations thereunder are silent 
regarding the credit eligibility of components of an energy property 
located in different locations. However, the Treasury Department and 
the IRS have provided analogous guidance regarding the credit 
eligibility of offsite components for the residential energy efficient 
property tax credit under section 25D of the Code (section 25D credit).
    In Notice 2013-70, 2013-47 I.R.B. 528, the Treasury Department and 
the IRS provided guidance addressing the eligibility for the section 
25D credit for offsite components of solar electric property. 
Specifically, Q&A <greek-i>25 of Notice 2013-70 addressed the issue of 
whether a taxpayer that installs solar panels as part of solar electric 
property other than directly on the taxpayer's home may claim the 
section 25D credit. Q&A <greek-i>25 concluded that the taxpayer would 
be able to claim the section 25D credit because the solar electric 
property expenditure was made for property that, consistent with the 
requirements of the section 25D credit, uses solar energy to generate 
electricity for use in a dwelling unit that is used as a residence by 
the taxpayer. The fact that the solar panels were not directly located 
on the taxpayer's home did not change the analysis or the eligibility 
of the taxpayer's expenditure for purposes of the section 25D credit.
    Similarly, Q&A <greek-i>26 of Notice 2013-70 addressed a scenario 
in which a taxpayer purchases solar panels that are

[[Page 82200]]

placed on an offsite solar array (community solar project) and 
connected to the local public utility's electrical grid that supplies 
electricity to the taxpayer's residence. The taxpayer enters into a 
direct contractual arrangement with the utility to allow the taxpayer 
to provide electricity to the electrical grid using a net metering 
system that measures the amount of electricity produced by the 
taxpayer's solar panels and transmitted to the electrical grid and the 
amount of electricity used by the taxpayer's residence and drawn from 
the electrical grid. The contract states that the taxpayer owns the 
electricity transmitted by the solar panels to the electrical grid 
until drawn from the electrical grid at his residence. Q&A <greek-i>26 
determined that offsite solar panels under this type of contractual 
arrangement with a utility that supplies electricity to the taxpayer's 
residence also meet the definition of a solar electric property 
expenditure eligible to claim the section 25D credit. In response to 
Notice 2015-70, many commenters referenced Notice 2013-70 when 
requesting that existing Sec.  1.48-9 be modified to allow components 
of energy property to be situated in different locations without 
affecting the eligibility of the energy property for the section 48 
credit.
    After consideration of the comments received, the Treasury 
Department and the IRS have determined that if property is a 
functionally interdependent part of an energy property (as defined in 
Sec.  1.48-9(f)(2)(ii)), or an integral part of an energy property (as 
defined in Sec.  1.48-9(f)(3)(i)), such property is part of an energy 
property regardless of where it is located. Proposed Sec.  1.48-9(f)(4) 
would adopt this position.
5. Property Excluded From Energy Property
    Proposed Sec.  1.48-9(d)(2) would also clarify that certain types 
of intangible property, such as power purchase agreements, renewable 
energy certificates, goodwill, and going concern value, are not energy 
property because they are not functionally interdependent with other 
components of an energy property as defined in proposed Sec.  1.48-
9(f)(2)(ii) and are not an integral part of an energy property as 
defined in proposed Sec.  1.48-9(f)(3)(i).

II. Rules Relating to the Increased Credit Amount for Prevailing Wages 
and Apprenticeships

    The IRA amended several sections of the Code including section 48 
to provide increased credit amounts for taxpayers who satisfy certain 
requirements, including an increased credit amount for satisfying 
prevailing wage and apprenticeship (PWA) requirements. This same 
increased credit amount is also generally available under certain 
sections of the Code including section 48 with respect to energy 
projects with a maximum net output of less than one megawatt (One-
Megawatt Exception). Additionally, this same increased credit amount is 
available under certain sections of the Code including section 48 if 
beginning of installation or beginning of construction (BOC) occurs 
before January 29, 2023 (BOC Exception).
    The Treasury Department and the IRS issued proposed Sec.  1.48-13 
as part of the August Proposed Regulations to provide guidance 
concerning the increased credit amount available for taxpayers 
satisfying the PWA requirements. This notice of proposed rulemaking 
withdraws Sec.  1.48-13 as proposed in the August Proposed Regulations 
and reproposes in a new Sec.  1.48-13 (proposed Sec.  1.48-13) the 
substance of the withdrawn rules with minor changes and additional 
rules with respect to the increased credit amount available for 
taxpayers under section 48(a)(9).
    Proposed Sec.  1.48-13 would provide special rules affecting the 
basis of energy property that include: (i) the definition of an energy 
project for purposes of the PWA requirements as well as other 
delineated purposes discussed in part II.C of this Summary of Comments 
and Explanation of Provisions and (ii) guidance concerning the One-
Megawatt Exception discussed in part II.D of this Summary of Comments 
and Explanation of Provisions. These proposed regulations also provide 
guidance on the recapture rules under section 48(a)(10)(C) applicable 
to failures to satisfy the PWA requirements.

A. General Rules

    For properties placed in service after December 31, 2022, the 
section 48 credit is generally six percent of the basis of energy 
property described in section 48(a)(2)(A)(i) and two percent of the 
basis of energy property described in section 48(a)(2)(A)(ii). If a 
taxpayer satisfies the PWA requirements, the One-Megawatt Exception, or 
the BOC Exception, then the section 48 credit for the basis of each 
energy property placed in service during the taxable year is multiplied 
by five.
    To satisfy the prevailing wage requirements under section 
48(a)(10)(A) and (B) (Prevailing Wage Requirements), a taxpayer must 
ensure that any laborers and mechanics employed by the taxpayer or any 
contractor or subcontractor in: (i) the construction of any energy 
project, and (ii) the alteration or repair of that energy project (for 
the five-year period beginning on the date such project is originally 
placed in service), are paid wages at rates not less than the 
prevailing rates for construction, alteration, or repair of a similar 
character in the locality in which that energy project is located as 
most recently determined by the Secretary of Labor, in accordance with 
subchapter IV of chapter 31 of title 40, United States Code (Davis-
Bacon Act). Section 48(a)(10)(B) provides that rules similar to the 
rules of section 45(b)(7)(B) apply for purposes of the correction and 
penalty related to the failure to satisfy the Prevailing Wage 
Requirements.
    Section 48(a)(10)(C) provides a recapture rule applicable to 
failures to satisfy the Prevailing Wage Requirements with respect to 
alterations or repairs that occur during the five-year period after the 
energy project is placed in service (section 48(a)(10)(C) recapture). 
Specifically, section 48(a)(10)(C) instructs the Secretary, by 
regulations or other guidance, to provide for recapturing the benefit 
of any increase in the credit allowed by the Prevailing Wage 
Requirements with respect to failures to satisfy the Prevailing Wage 
Requirements during the five-year period after the energy project is 
placed in service. Section 48(a)(10)(C) clarifies that the failures 
during the five-year period remain subject to the correction and 
penalty provisions in section 45(b)(7)(B) (as referenced in section 
48(a)(10)(B)) and provides that the period and percentage of the credit 
that is recaptured is determined under rules similar to the rules in 
section 50(a). Subject to the section 48(a)(10)(C) recapture (including 
the correction and penalty provisions in section 45(b)(7)(B)), the 
taxpayer is deemed at the time the energy project is placed in service 
to satisfy the Prevailing Wage Requirements for alterations or repairs 
for the five-year period beginning after such project is originally 
placed in service. Section 48(a)(11) provides that rules similar to the 
rules of section 45(b)(8) apply for purposes of the apprenticeship 
requirements.
    The August Proposed Regulations provided guidance for taxpayers 
claiming an increased credit amount under section 48(a)(9)(A)(i) with 
respect to an energy project that satisfies the PWA requirements, the 
One-Megawatt Exception, or the BOC Exception. The August Proposed 
Regulations provided that to satisfy the PWA requirements, the energy 
project must meet the

[[Page 82201]]

Prevailing Wage Requirements of section 48(a)(10)(A) and proposed Sec.  
1.45-7(b)-(d), the apprenticeship requirements of section 45(b)(8) and 
proposed Sec.  1.45-8, and the recordkeeping and reporting requirements 
of proposed Sec.  1.45-12. In addition, under the August Proposed 
Regulations, to satisfy the Prevailing Wage Requirements with respect 
to section 48(a)(10)(A)(ii), a taxpayer also would be required to 
ensure that any laborer and mechanic employed by the taxpayer or any 
contractor or subcontractor in the construction of any energy project, 
as well any alteration or repair of an energy project in the five-year 
period beginning on the date a project is placed in service, are paid 
wages at rates not less than the prevailing rates for construction, 
alteration, or repair of a similar character in the locality in which 
the energy project is located in accordance with the Davis-Bacon Act. 
The August Proposed Regulations also provided that the increased credit 
amount was subject to section 48(a)(10)(C) recapture for any project 
that failed to satisfy the Prevailing Wage Requirements in proposed 
Sec.  1.45-7 with respect to an alteration or repair of such project 
for the five-year period beginning on the date such project is 
originally placed in service (but that does not cease to be investment 
credit property within the meaning of section 50(a) of the Code).

B. Section 48(a)(10)(C) Recapture Rules

    The Treasury Department and the IRS have determined that additional 
guidance on the section 48(a)(10)(C) recapture rules is necessary. 
Proposed Sec.  1.48-13 would provide additional guidance on the section 
48(a)(10)(C) recapture rules related to the Prevailing Wage 
Requirements. The proposed regulations also provide other minor 
technical corrections to the August Proposed Regulations.
    In addition to largely restating the general rules in the August 
Proposed Regulations, proposed Sec.  1.48-13 would clarify that a 
taxpayer that has claimed an increased credit amount under section 
48(a)(9)(A)(i) and 48(a)(9)(B)(iii) but failed to satisfy the 
Prevailing Wage Requirements set forth in proposed Sec.  1.45-7(b)-(d) 
with respect to any period during the five-year period beginning on the 
date a project is placed in service is subject to section 48(a)(10)(C) 
recapture of a portion (up to 100 percent) of the increased credit 
amount. Proposed Sec.  1.48-13 would also clarify that the failure to 
satisfy the Prevailing Wage Requirements in proposed Sec.  1.45-7(b)-
(d) with respect to any period during the five-year period beginning on 
the date a project is placed in service remains subject to the 
correction and penalty provisions in proposed Sec.  1.45-7(c)(1).
    Section 48(a)(10)(C) requires that the recapture period and 
percentage of such recapture be determined under rules similar to the 
rules of section 50(a). Consistent with that requirement, proposed 
Sec.  1.48-13 would also clarify that the five-year recapture period 
under section 48(a)(10)(C) would begin on the day an energy project is 
placed in service and end on the day that is five full years after the 
placed-in-service date. Proposed Sec.  1.48-13 would also provide that 
each 365-day period (366-day period in case of a leap year) within the 
recapture period is a separate recapture year. The proposed regulations 
would provide that the recapture amount is determined consistent with 
the percentages set forth in section 50(a) based on the year in which 
the section 48(a)(10)(C) recapture event is determined to have 
occurred.
    The Treasury Department and the IRS understand that the five-year 
recapture period is unlikely to align with a taxpayer's taxable year. 
The proposed regulations would provide that whether a section 
48(a)(10)(C) recapture event has occurred is determined at the close of 
taxable year that begins or ends within the five-year recapture period. 
In addition to the reporting and recordkeeping requirements contained 
in proposed Sec.  1.45-12, the proposed regulations would provide for 
an annual information reporting requirement that verifies compliance 
with the Prevailing Wage Requirements following the close of each 
recapture year consistent with the forms and instructions prescribed by 
the IRS. The IRS anticipates that the annual compliance reporting 
obligation will be made at the time the taxpayer files its income tax 
or other annual return following the close of each recapture year.
    Under proposed Sec.  1.48-13, if the increased credit amount is 
subject to section 48(a)(10)(C) recapture, then the increase in tax 
under chapter 1 for the recapture of the increased credit amount would 
be assessed with respect to the taxable year in which the section 
48(a)(10)(C) recapture event occurred. The proposed regulations also 
clarify that a taxpayer whose increased credit amount is subject to 
section 48(a)(10)(C) recapture may still be entitled to the base amount 
of the energy credit under section 48(a) if they meet the requirements 
to claim the credit. Additionally, the proposed regulations clarify the 
application of the transferability rules under section 6418 to a 
section 48(a)(10)(C) recapture event and include a proposed addition to 
Sec.  1.6418-5 confirming the notification requirements for an eligible 
taxpayer and that a transferee taxpayer is responsible for any amount 
of tax increase under section 48(a)(10)(C).

C. Definition of Energy Project

    Under section 48(a)(9)(A)(ii), an energy project is a project 
consisting of one or more energy properties that are part of a single 
project. Proposed Sec.  1.48-13(d) would provide a definition of 
``energy project'' for purposes of the increased credit amount for the 
PWA requirements (provided by section 48(a)(9)), the domestic content 
bonus credit amount (provided by section 48(a)(12)), and the increase 
in credit rate for energy communities (provided in section 48(a)(14)). 
For these purposes, the term energy project means one or more energy 
properties that are operated as part of a single project. Section 45 
qualified facilities that are co-located with section 48 energy 
property will not be considered part of an energy project (unless they 
elect under section 48(a)(5) to be treated as energy property). 
Multiple energy properties would be treated as one energy project, if 
at any point during the construction of the multiple energy properties, 
they are owned by a single taxpayer (subject to the related taxpayer 
rule discussed later in this part) and any two or more of the following 
factors (also set forth in section 7.01(2)(a) of Notice 2018-59 as 
factors indicating that multiple energy properties are operated as part 
of a single project) are present:
    1. The energy properties are constructed on contiguous pieces of 
land;
    2. The energy properties are described in a common power purchase, 
thermal energy, or other off-take agreement or agreements;
    3. The energy properties have a common intertie;
    4. The energy properties share a common substation, or thermal 
energy off-take point;
    5. The energy properties are described in one or more common 
environmental or other regulatory permits;
    6. The energy properties are constructed pursuant to a single 
master construction contract; or
    7. The construction of the energy properties are financed pursuant 
to the same loan agreement.
    Under proposed Sec.  1.48-13(d)(2), related taxpayers would be 
treated as one taxpayer in determining whether multiple energy 
properties are treated as an energy project. Related taxpayers would be 
defined as members of a group of trades or businesses that are under

[[Page 82202]]

common control (as defined in Sec.  1.52-1(b)).
    Proposed Sec.  1.48-13(d)(3) would also provide that if multiple 
energy properties are treated as a single project for beginning of 
construction purposes with respect to the section 48 credit, the 
multiple energy properties would also be treated as one energy project 
for purposes of the PWA requirements, the domestic content bonus credit 
amount, and the increase in section 48 credit rate for energy 
communities. This rule would apply to an energy project for which 
construction begins after the date final regulations are published in 
the Federal Register.

D. One-Megawatt Exception

    Section 48(a)(9)(B)(i) and Sec.  1.48-13 of the August Proposed 
Regulations would provide that the increased credit amount is also 
available under section 48 with respect to energy projects with a 
maximum net output of less than 1 MW of electrical (as measured in 
alternating current) or thermal energy. The August Proposed Regulations 
do not address how to determine the maximum net output of a project.
    The Department of Energy has advised the Treasury Department and 
the IRS that for energy projects that generate electricity, the 
determination of an energy project's nameplate capacity will provide 
the necessary guidance to determine the maximum electrical generating 
output in MWs of electrical (as measured in alternating current) or 
thermal energy that the unit is capable of producing on a steady state 
basis and during continuous operation under standard conditions. 
Proposed Sec.  1.48-13(e) would thus provide a rule for the 
determination of nameplate capacity as expressed in MWs of electrical 
(as measured in alternating current) or thermal energy. Because 
electrochromic glass property, fiber-optic solar, and microgrid 
controllers do not generate electricity or thermal energy, these energy 
properties are not eligible for the One-Megawatt Exception. The 
Treasury Department and the IRS request comments on whether other 
methods of measurement may allow these energy properties to use the 
One-Megawatt Exception.
    Under proposed Sec.  1.48-13(e)(1), the nameplate capacity for an 
electrical generating unit would mean the maximum electrical generating 
output in MWs that the unit is capable of producing on a steady-state 
basis and during continuous operation under standard conditions, as 
measured by the manufacturer and consistent with the definition 
provided in 40 CFR 96.202. Where applicable, those rules provide that 
the International Standard Organization (ISO) conditions are used to 
measure the maximum electrical generating output.
    Proposed Sec.  1.48-13(e)(2) through (4) would provide rules for 
energy storage technologies. Generally, electrical energy storage 
property would look to the storage device's nameplate capacity in MWs 
under proposed Sec.  1.48-13(e)(2). As with energy properties that 
generate electricity, nameplate capacity for an electrical energy 
storage property would mean the maximum electrical generating output in 
MWs that the unit is capable of producing on a steady state basis and 
during continuous operation under standard conditions, as measured by 
the manufacturer and consistent with the definition provided in 40 CFR 
96.202.
    Proposed Sec.  1.48-13(e)(3) would provide that for thermal energy 
storage property, taxpayers must use the equivalent value of 3.4 
million British Thermal Units per hour (mmBtu/hour) for heating and 284 
tons for cooling to determine whether the thermal energy storage 
property satisfies the One-Megawatt Exception (Btu per hour/3,412,140 = 
MW). The Treasury Department and the IRS request comments on whether 
these tests are suitable or whether another test should apply for 
measuring the One-Megawatt Exception for thermal energy storage 
property.
    Proposed Sec.  1.48-13(e)(4) would provide that for hydrogen energy 
storage property, 1 MW is equivalent to 3.4 mmBtu/hour, and using the 
higher heating value of hydrogen, this can be converted to 10,500 scf 
per hour. Therefore, proposed Sec.  1.48-13(e)(4) would provide that 
for a hydrogen energy storage property to satisfy the One-Megawatt 
Exception, an eligible hydrogen producing, or hydrogen storage energy 
property must be designed to have a maximum net output of less than 3.4 
mmBtu/hour of hydrogen or equivalently 10,500 scf per hour of hydrogen.
    Proposed Sec.  1.48-13(e)(3) through (5) would provide that to 
apply the One-Megawatt Exception to energy projects that produce 
thermal energy or fuels, taxpayers must use the equivalent value of 3.4 
million British thermal units (mmBtus) per hour (Btu per hour/3,412,140 
= MW). For certain technologies that produce fuels, such as qualified 
biogas property (proposed Sec.  1.48-13(e)(5)), hydrogen energy storage 
property (proposed Sec.  1.48-13(e)(4)), and specified hydrogen 
production facilities (as defined in section 48(a)(15)(C)) (proposed 
Sec.  1.48-13(e)(4)), taxpayers may use equivalent maximum fuel volume 
flows in standard cubic feet (scf) per hour to assess the One-Megawatt 
Exception. Taxpayers can use equivalent volume flows using the default 
high heat value conversion factors found in Table C-1 to Subpart C of 
Part 98, Title 40 of the Greenhouse Gas Reporting Rule promulgated by 
the Environmental Protection Agency. Otherwise, taxpayers may calculate 
their own equivalent volumetric flow if the heat content of the gas is 
known.
    For property generating thermal energy, proposed Sec.  1.48-
13(e)(3) would provide that the equivalents for 1 MW that should be 
used are 3.4 mmBtu/hour for heating and equivalently 284 tons for 
cooling should be used to determine whether the energy property 
satisfies the One-Megawatt Exception. Proposed Sec.  1.48-13(e)(3) 
would also specify that for projects delivering thermal energy to a 
building or buildings, the One-Megawatt Exception can be assessed as 
either the aggregate maximum thermal output of all individual heating 
or cooling elements within the building or buildings or as the maximum 
thermal output that the entire project is capable of delivering to a 
building or buildings at any given moment.

III. Rules Applicable to Energy Property

A. Retrofitted Energy Property (80/20 Rule)

    The Treasury Department and the IRS have published several pieces 
of Internal Revenue Bulletin guidance regarding the eligibility of 
retrofitted equipment added to qualified facilities and energy property 
for purposes of the section 45 and 48 credits. In Notice 2016-31, 2016-
23 I.R.B. 1025, the Treasury Department and the IRS considered the 
application of the Five Percent Safe Harbor provided in section 5.01 of 
Notice 2013-29, 2013-20 I.R.B. 1085, to retrofitted qualified 
facilities for purposes of applying the beginning of construction 
requirement to the section 45 credit. Section 6.01 of Notice 2016-31 
cites to Revenue Ruling 94-31 and Notice 2008-60, 2008-2 C.B. 178, for 
the concept that a qualified facility may qualify as originally placed 
in service even though it contains some used property, provided the 
fair market value of the used property is not more than 20 percent of 
the qualified facility's total value (that is, the cost of the new 
property plus the value of the used property). This concept has become 
known as the ``80/20 Rule.''
    Similarly, Notice 2018-59 addressed the application of the 80/20 
Rule to retrofitted energy property for purposes

[[Page 82203]]

of the applying the beginning of construction rules to the section 48 
credit. Section 7.05(1) of Notice 2018-59 provides that retrofitted 
energy property may qualify as originally placed in service even though 
it contains some used components of property, provided it satisfies the 
80/20 Rule. Further, this section of the notice provided that, for 
purposes of the 80/20 Rule, the cost of the new energy property 
includes all properly capitalized costs of the new energy property.
    In response to requests for comment in Notice 2015-70 and Notice 
2022-49, several commenters requested that the regulations address the 
applicability of the 80/20 Rule to energy property for purposes of the 
section 48 credit. After consideration of the comments, proposed Sec.  
1.48-14(a) would apply the 80/20 Rule to energy property for purposes 
of the section 48 credit.

B. Dual Use Property

    Existing Sec.  1.48-9 includes a dual use equipment rule (Dual Use 
Rule). The preamble to T.D. 8147 notes that the regulations prior to 
amendment by T.D. 8147 required that equipment must use only energy 
from a single qualifying source (solar energy property, wind energy 
property, or geothermal equipment) to qualify as energy property. In 
changing from a single source rule to the Dual Use Rule, the preamble 
to T.D. 8147 explained that the Treasury Department and the IRS 
reconsidered the legislative history of the investment tax credit and 
determined that, ``while Congress did not intend that property that 
does not use qualified energy be eligible for the business energy 
credit as solar, wind, or geothermal property, Congress also did not 
intend to adopt an all or nothing rule for dual use solar, wind, or 
geothermal energy property.''
    Accordingly, the Dual Use Rule in existing Sec.  1.48-9 provides 
that a solar energy property, wind energy property, and geothermal 
equipment are eligible for the section 48 credit to the extent of the 
property's basis or cost allocable to its annual use of energy from a 
qualified source, provided the use of energy from ``non-qualifying'' 
sources does not exceed 25 percent of the total energy input of the 
property during an annual measuring period. Notably, the Dual Use Rule 
provided in Sec.  1.48-9 also precludes an energy property from 
receiving and aggregating energy from a combination of qualifying 
sources (solar energy property, wind energy property, and geothermal 
equipment). Because the Dual Use Rule requires that a solar energy 
property, wind energy property, or geothermal equipment must use a 
minimum of 75 percent of energy from a qualified source during an 
annual measuring period to qualify for a section 48 credit. This rule 
became known as the ``75-percent Cliff.''
    The Dual Use Rule provided in existing Sec.  1.48-9 also provides 
that, if in the first annual measuring period, the applicable 
percentage (based on usage from a qualifying source) is between 75 
percent and 100 percent, only a proportionate amount of the eligible 
basis of the energy property should be taken into account in computing 
the amount of the section 48 credit. If less than 75 percent of the 
energy used is from qualifying sources, then the eligible basis is 
zero, and the property is not eligible for the section 48 credit.

1. Alternatives to the 75-Percent Cliff

    In response to Notice 2015-70, many commenters requested that the 
regulations be modified to reduce the Dual Use Rule's current 75-
percent Cliff to a 50-percent Cliff. Commenters cited as support for 
this proposal the statutory language of section 25D(d)(1), which allows 
for full credit eligibility if a solar water heating property receives 
at least 50 percent of its energy inputs from the sun. Applying this 
premise to the investment tax credit under section 48 would allow an 
energy property to be eligible for 100 percent of the section 48 credit 
if it receives at least 50 percent of its energy input from a 
qualifying source but would render the energy property ineligible for 
the section 48 credit if less than 50 percent of its energy input is 
from a qualifying source. Commenters asserted that a 50-percent Cliff 
would be more equitable than the 75-percent Cliff.
    Several commenters also recommended that the regulations be 
modified to provide that if greater than 50 percent of energy received 
by an energy property is from a qualifying source that the energy 
property is eligible for a full section 48 credit. Conversely, if the 
energy property receives less than 50 percent of its energy input from 
a qualifying source, the qualifying basis of the energy property is 
reduced incrementally for the annual measuring period. Importantly, 
this rule would reduce the credit but not disqualify the energy 
property entirely from credit eligibility. The benefit of adopting this 
rule is that it would eliminate the ``all or nothing'' dynamic of the 
current 75-percent Cliff and, as a result, would provide certainty that 
an energy property will remain credit eligible. The main obstacle to 
adopting this rule is that it would be expensive for taxpayers to 
measure with great accuracy the relative amounts of energy input from 
different qualifying sources.
    Many commenters suggested changing the Dual Use Rule to a ``Primary 
Use Rule'' modeled on the ``Primary Use'' Test for asset class 
depreciation determinations, changes in use, and for asset disposition 
purposes. According to commenters, this approach is popular because the 
Primary Use Test could be performed at the same time (on the placed in 
service date) and manner in which the taxpayer determines the primary 
use of the asset for depreciation purposes. The challenge of this 
approach is that it also depends upon taxpayers correctly using the 
depreciation asset class determination procedures and reporting any 
changes in primary use to the IRS for recapture. Moreover, the scope of 
the Primary Use Test seems inappropriate for the section 48 credit 
because the Primary Use Test merely serves to determine how the 
property is depreciated rather than whether the property can be 
depreciated. Applying this test to determine credit eligibility may 
increase, beyond what was intended, the credit available to a taxpayer.
    After consideration of the comments, the Treasury Department and 
the IRS have determined it would be most consistent with statutory 
intent to reduce the applicable threshold of the Dual Use Rule to 50 
percent resulting in the adoption of a 50-percent Cliff. Therefore, 
proposed Sec.  1.48-14(b)(2)(i) would require an energy property to 
derive a minimum of 50 percent of energy from a qualifying source 
during an annual measuring period. Similar to the operation of the 75-
percent Cliff in existing Sec.  1.48-9, if the energy used from 
qualifying sources is between 50 percent and 100 percent, only a 
proportionate amount of the eligible basis of the energy property will 
be taken into account in computing the amount of the section 48 credit. 
If less than 50 percent of the energy used is from qualifying sources, 
then the eligible basis is zero, and the property is not eligible for 
the section 48 credit. The Treasury Department and the IRS recognize 
that the Dual Use Rule is no longer relevant to determining the 
eligibility of energy storage technology placed in service after 
December 31, 2022, because the IRA added energy storage technology as 
an energy property effective for property placed in service after 
December 31, 2022. However, the Dual Use Rule may still have other 
applications under section 48. The Treasury Department and the IRS 
request comments on the application of the Dual Use Rule to

[[Page 82204]]

section 48 after its amendment by the IRA.
2. Aggregation of Energy Inputs
    While T.D. 8147 significantly amended existing Sec.  1.48-9 to 
permit 25 percent of energy used by energy property from non-qualifying 
sources, it did not allow the aggregation of energy from multiple 
energy properties to be treated as energy from qualifying sources for 
purposes of the Dual Use Rule.
    In response to Notice 2015-70, several commenters requested a 
revised rule to permit taxpayers to calculate credit basis by 
aggregating all inputs from qualifying sources that would otherwise 
individually qualify for the section 48 credit (all types of energy 
property and any qualified facilities for which an election is made to 
claim the section 48 credit as a ``qualified investment credit 
facility'' under section 48(a)(5)). After consideration of the comments 
received, proposed Sec.  1.48-14(b)(2)(ii) would revise the Dual Use 
Rule to permit the aggregation of energy inputs from more than one 
energy property.
3. Measurement Period
    Existing Sec.  1.48-9(c)(10)(iv) and (d)(6) provides that an annual 
measuring period is the period during which the portion of dual use 
property's basis or cost allocable to use of energy from a qualified 
source is measured. An annual measuring period for an item of dual use 
property is defined as the 365-day period beginning with the day it is 
placed in service or a 365-day period beginning the day after the last 
day of the immediately preceding annual measuring period.
    In response to Notice 2015-70, several commenters requested that 
the regulations provide a clarification of the annual measurement rules 
applicable to dual use property. Several of these commenters' concerns 
were tied to energy storage technology. Because the IRA now includes 
energy storage technology as eligible property, many of these specific 
concerns may have been eliminated. However, the proposed regulations 
would still address these concerns by adopting these annual measurement 
rules for application to the Dual Use Rule. Accordingly, a taxpayer may 
claim the section 48 credit when it places an energy property in 
service, and all relevant time periods, including depreciation and 
recapture, begin on that date. After consideration of the comments, 
proposed Sec.  1.48-14(b)(2)(iii) would provide that an annual 
measuring period for an item of dual use property is any period of 365 
consecutive days (366 days in a leap year) beginning with the day the 
dual use property is placed in service.
4. Dual Use Property and Microgrid Controllers
    Certain equipment is necessary for a microgrid controller to 
perform its functions, but such equipment may also have been required 
to be installed even without the presence of a microgrid. An example is 
a communications system (for example, a local ethernet network or a 
commercial wireless network). A microgrid controller must be connected 
to a communications system to operate properly. Such a communications 
system could be considered part of the microgrid controller itself. 
However, the communications system could also be used for other 
purposes and may not be dedicated to the microgrid system. The Dual Use 
Rule would be inapplicable in this scenario because the scenario does 
not involve the use of energy derived from both a qualifying source and 
from sources other than a qualifying source (non-qualifying source). 
The Treasury Department and the IRS request comments on whether a rule 
is needed to address this situation for microgrid controllers or other 
potentially similar situations for which the Dual Use Rule would not 
apply.

C. Energy Property That Could Be Eligible for Multiple Credits

    Section 48 and the existing regulations thereunder are silent 
regarding the eligibility of components of energy property for multiple 
credits. However, in Notice 2013-70, the Treasury Department and the 
IRS considered the ability of a single taxpayer to claim section 25D 
and section 48 credits for different uses of the same energy property. 
In Q&A <greek-i>27 of Notice 2013-70, a taxpayer purchased and 
installed solar electric property to generate electricity for the 
taxpayer's residence. The taxpayer also expected the solar electric 
property to generate excess electricity that would be sold to a 
utility. Q&A <greek-i>27 determined that the taxpayer may not claim the 
section 25D credit for the full amount of the solar electric property 
expenditure because the property not only generates electricity for use 
in the taxpayer's residence, but it also generates electricity for sale 
by the taxpayer. As a result, the taxpayer may only claim the section 
25D credit for the portion of the solar electric property expenditure 
that relates to the electricity generated for use in the taxpayer's 
home. However, the taxpayer may be able to claim the section 48 credit 
for a portion of the solar electric property expenditure if the 
requirements of section 48 are satisfied. Notice 2013-70 did not 
separately analyze whether the taxpayer had met the requirements to 
claim the section 48 credit.
    Several commenters requested a modification of the regulations to 
allow section 48 credit eligibility in scenarios involving different 
taxpayers that claim different credits related to different components 
of an energy property. This may also occur in situations in which 
different taxpayers own components of energy property as discussed in 
part III.E.1 of this Summary of Comments and Explanation of Provisions. 
After consideration of these comments, proposed Sec.  1.48-14(c)(1) 
would provide that the same energy property may be eligible for both 
the section 48 credit and another credit subject to certain limitations 
that proposed Sec.  1.48-14(c)(2) would provide.

D. Incremental Cost

    Existing guidance under section 48 provides that only the 
incremental cost of energy property is included in the eligible basis 
for purposes of determining the section 48 credit. Existing Sec.  1.48-
9(k) defines incremental cost as the excess of the total cost of 
equipment over the amount that would have been expended for the 
equipment if the equipment were not used for a qualifying purpose 
related to the section 48 credit. The existing regulations provide as 
an example, a scenario in which energy property costing $100 performs a 
pollution control function as well as a non-qualifying function. The 
example states that it would cost $60 solely to perform the non-
qualifying function, thus the incremental cost to the energy property 
would be $40.
    The Treasury Department and the IRS received no comments regarding 
the incremental cost rule in response to Notice 2015-70. Thus, proposed 
Sec.  1.48-14(d)(1) would continue to apply this incremental cost 
approach and would provide that only the incremental cost of energy 
property is included in the eligible basis of the energy property for 
purposes of computing the section 48 credit.

E. Special Rules Concerning Ownership

1. Separate Ownership of Energy Property
    Section 48 and the existing regulations thereunder are silent 
regarding whether the components of an energy property can be owned by 
multiple taxpayers. In Revenue Ruling 78-268, 1978-2 C.B. 10, the 
Treasury Department and the IRS addressed a situation involving four 
owners that shared a common tenancy in an electric

[[Page 82205]]

generating facility: two investor-owned utilities, a tax-exempt 
cooperative, and a tax-exempt municipality-owned utility. The specific 
issue raised in this Revenue Ruling was whether ownership by the tax-
exempt entities disqualified the entire electric generating facility 
from the investment tax credit. Former section 48(a)(4) effectively 
stated that property owned by a tax-exempt entity could not be 
investment tax credit property. Revenue Ruling 78-268 concluded that 
the two investor-owned utilities were eligible for the investment tax 
credit despite the fact that the electric generating facility was not 
credit-eligible property in the hands of the tax-exempt entities. This 
revenue ruling has been interpreted to stand for the proposition that 
fractional interests in common tenancies should be treated as separate 
assets for Federal income tax purposes.
    Several commenters requested the adoption of a rule that separate 
parties that own an interest in energy property are eligible for the 
section 48 credit to the extent of their fractional ownership 
interests. Further, these commenters also requested the adoption of a 
rule that, if components of energy property are owned by separate 
taxpayers, each taxpayer would be eligible for the section 48 credit to 
the extent of their cost basis in the components of energy property 
that they own. These commenters cite Revenue Ruling 78-268 as support 
for the proposition that fractional interests in common tenancies 
should be treated as separate assets for Federal income tax purposes.
    Many commenters requested that the regulations address situations 
involving energy property with multiple owners, such as solar condos 
and community solar facilities. These commenters requested that the 
regulations be clarified to state that shared ownership does not affect 
the credit eligibility of an energy property, regardless of the 
ownership structure. To support this position, several commenters cite 
to section 25C(e)(1) (redesignated as section 25C(f)(1) of the Code by 
the IRA) and section 25D(e)(5) that treat a tenant-stockholder (as 
defined in section 216 of the Code) in a cooperative housing 
corporation (as defined in section 216) as making his or her 
proportionate share (as defined in section 216(b)(3)) of any 
expenditures of such corporation. Similarly, sections 25C(f)(1) and 
25D(e)(6) treat an individual member of a condominium management 
association as having made the individual's proportionate share of any 
expenditures of such association. As a result, a tenant-stockholder in 
a cooperative or a member of a condominium association may claim a 
section 25C or 25D credit for their proportional share of the 
expenditure of the cooperative or condominium association for credit 
eligible property.
    Several commenters expressed concerns about credit eligibility and 
the ownership of offshore wind property. For example, a group of 
commenters requested confirmation that certain transfer and power 
conditioning equipment necessary to deploy offshore wind is eligible 
for a section 48 credit, but also that the transfer and power 
conditioning equipment is eligible for section 48 even if owned by a 
separate entity from the entity that owns the offshore wind turbines or 
if the transfer and power conditioning equipment is shared between 
multiple offshore wind facilities as part of a shared transmission 
solution.
    The Treasury Department and the IRS have determined that a taxpayer 
that owns an energy property is eligible for the section 48 credit only 
to the extent of the taxpayer's eligible basis in the energy property. 
In the case of multiple parties that hold ownership shares in an energy 
property, each party is eligible for the section 48 credit to the 
extent of the party's fractional ownership interest. Proposed Sec.  
1.48-14(e)(2) would adopt this position. Proposed Sec.  1.48-14(e)(4) 
also would provide examples illustrating the treatment of multiple 
owners of an energy property.
    As described in part I.D.3 of this Summary of Comments and 
Explanation of Provisions with regard to qualified offshore wind 
property, functionally interdependent components do not include power 
conditioning and transfer equipment such as subsea cables and voltage 
transformers necessary to condition electricity for use on the 
electrical grid. However, the power conditioning and transfer equipment 
are integral parts of the qualified offshore wind property, and thus, 
are energy property. In contrast, transmission and distribution 
equipment are not functionally interdependent components of an energy 
property nor are they an integral part of an energy property. If the 
taxpayer owns both the unit of energy property and at least a portion 
of the related power conditioning and transfer equipment, that taxpayer 
would be able to calculate the section 48 credit on the eligible basis 
of the energy property, including the taxpayer's basis in the integral 
power conditioning and transfer equipment. In the case of multiple 
parties that hold ownership shares in an energy property, each party is 
eligible for the section 48 credit to the extent of its fractional 
ownership interest. If power conditioning and transfer equipment owned 
by one taxpayer is an integral part of an energy property owned by an 
unrelated taxpayer, the taxpayer that owns the power conditioning and 
transfer equipment would not be eligible for the section 48 credit but 
the taxpayer that owns the energy property would be eligible for the 
section 48 credit.
    For example, if Taxpayer A owns only power conditioning and 
transfer equipment that is an integral part of an energy property owned 
by unrelated Taxpayer B, Taxpayer A would not be eligible for the 
section 48 credit. However, this would not prevent Taxpayer B from 
claiming a section 48 credit on the basis of the energy property that 
it owns. In addition, if unrelated taxpayers Taxpayer A and Taxpayer B 
jointly own power conditioning and transfer equipment that is an 
integral part of a qualified offshore wind facility, but only Taxpayer 
B owns the unit of energy property (that is, the qualified offshore 
wind facility), only Taxpayer B may claim the section 48 credit. The 
amount of Taxpayer B's section 48 credit is calculated by taking into 
account both Taxpayer B's share of the basis in the power conditioning 
and transfer equipment and Taxpayer B's basis in the unit of energy 
property (that is, Taxpayer B's basis in qualified offshore wind 
facility).
2. Related Taxpayers
    Section 48 does not define the term ``related taxpayers.'' This 
term was defined in existing Sec.  1.48-9(q)(10)(i) in the context of 
qualified intercity buses. This provision states that related taxpayers 
are treated as one taxpayer in determining the increase in operating 
capacity of qualifying intercity buses and in determining the qualified 
investment in qualified intercity buses for the energy credit. Existing 
Sec.  1.48-9(q)(10)(i) also provides that related taxpayers are members 
of a group of trades or businesses that are under common control (as 
defined in Sec.  1.52-1(b)). The Treasury Department and the IRS 
received no comments regarding the related taxpayer rule in response to 
Notice 2015-70. As a result, proposed Sec.  1.48-14(e)(3) would 
incorporate the rule provided in the existing regulations.

F. Coordination With Other Code Provisions

1. Election To Treat Qualified Facilities as Energy Property
    Section 48(a)(5) allows a taxpayer that owns a qualified facility 
(as defined in

[[Page 82206]]

section 45(d)) to elect to claim the section 48 credit in lieu of the 
section 45 credit. Section 48(a)(5)(A) provides that if the taxpayer 
makes an election, the qualified facility will be treated as part of a 
qualified investment credit facility, and therefore deemed energy 
property eligible for a section 48 credit. A qualified investment 
credit facility is defined in section 48(a)(5)(C) as a qualified 
facility described in section 45(d)(1)-(4), (6), (7), (9), or (11), 
with respect to which no credit has been allowed under section 45, and 
for which the taxpayer makes an irrevocable election to claim the 
section 48 credit in lieu of any section 45 credit. Qualified 
facilities for which a taxpayer is eligible to make an election under 
section 48(a)(5) include wind, closed- and open-loop biomass, 
geothermal, solar, landfill gas, trash, hydropower, marine and 
hydrokinetic facilities.
    Only with respect to a qualified investment credit facility, 
section 48(a)(5)(D) defines ``qualified property'' as tangible personal 
property or other tangible property (not including a building or its 
structural components), but only if such property is used as an 
integral part of the qualified investment credit facility; with respect 
to which depreciation (or amortization in lieu of depreciation) is 
allowable; that is constructed, reconstructed, erected, or acquired by 
the taxpayer; and the original use of the property commences with the 
taxpayer.
    Notice 2009-52, 2009-25 I.R.B. 1094, provides taxpayers with 
procedures to make an election under section 48(a)(5). Proposed Sec.  
1.48-14(f)(6) would adopt the procedures in Notice 2009-52 and, as a 
result, Notice 2009-52 will be obsoleted upon the publication of the 
final regulations in the Federal Register.
a. Interaction of Section 45 Credit Requirements With Section 48 Credit
    In response to Notice 2015-70, several commenters requested that 
the regulations address whether and to what extent the definition of 
``qualified investment credit facility'' provided in section 
48(a)(5)(C) makes the rules that generally apply for determining a 
taxpayer's section 45 credit applicable to qualified facilities for 
which the taxpayer makes an election. Additionally, Notice 2022-49 
requested comments on whether guidance is needed to determine whether a 
qualified investment credit facility that elects to claim the section 
48 credit in lieu of the section 45 credit is subject to all of the 
requirements of section 45, including the requirement that electricity 
generated by the qualified investment credit facility be sold to an 
unrelated person, and what factors the Treasury Department and the IRS 
should consider regarding such guidance. Several commenters responded 
and generally were not supportive of imposing the requirements of 
section 45 on a qualified investment credit facility that elects to 
claim the section 48 credit in lieu of the section 45 credit. One 
commenter pointed out, for example, that section 48 only cross-
references specific provisions of section 45(d) and not all of section 
45(d) nor all of section 45. This commenter noted that because section 
48 is an investment tax credit rather than a production tax credit, the 
rationale for requiring sales of energy from a qualified investment 
credit facility to unrelated persons is inapplicable.
    Section 45(a) sets forth the amount of the production tax credit 
for a taxable year. It does not determine whether a facility is a 
``qualified facility'' (that definition is set forth in section 45(d)). 
Section 45(a) specifies the amount of the credit for a qualified 
facility by formula (0.3 cents (increased credit amount under section 
45(a)(6) if the requirements of 45(a)(6)(B) are met) multiplied by the 
kWh of electricity generated and sold to an unrelated person. This 
statutory structure appears to make the requirement that electricity be 
sold to an unrelated person relevant only for determining the amount of 
the section 45 tax credit, not eligibility for the section 48 tax 
credit. Therefore, after consideration of these comments, the Treasury 
Department and the IRS have determined that the requirements of section 
45 are not imposed on a qualified investment credit facility that 
elects to claim the section 48 credit in lieu of the section 45 credit. 
Proposed Sec.  1.48-14(f)(1) would adopt this position.
b. Time and Manner of Making Election
    Section 2 of Notice 2009-52 provides that, to make the election 
with respect to a qualified facility, a taxpayer must claim the energy 
credit on a completed Form 3468, Investment Credit, and file such form 
with the taxpayer's income tax return for the year in which the 
property is placed in service. The taxpayer must make a separate 
election for each qualified facility that is to be treated as a 
qualified investment credit facility. Proposed Sec.  1.48-14(f)(6)(i) 
would adopt this procedure with some modifications. If any taxpayer 
owning an interest in a qualified investment credit facility makes an 
election under section 48(a)(5), that election would be binding on all 
taxpayers that directly or indirectly own an interest in the facility.
    Additionally, proposed Sec.  1.48-14(f)(6)(ii) would provide a 
similar special rule for partnerships and S corporations, which would 
require that the election be made at the entity level and is binding on 
all ultimate credit claimants (as defined in Sec.  1.50-1(b)(3)(ii)) 
who must claim the credit in proportion to their respective qualified 
investment in the energy property. The credit is claimed on each 
claimant's completed Form 3468, or any successor form(s), and filed 
with a timely filed (including extensions) return for the taxable year 
in which the partnership or S corporation makes the election.
2. Coordination Between Section 42 and 48 Credits
    Section 50(c)(3)(A) provides the general rule that a taxpayer's 
basis in an energy property is reduced by 50 percent of the amount of a 
section 48 credit determined with respect to the taxpayer's investment 
in the energy property. Section 13102(i) of the IRA amended section 
50(c) to provide an exception to that rule for property placed in 
service after December 31, 2022. As a result, a taxpayer that has 
claimed a section 48 credit with respect to its basis in an energy 
property is not required to reduce its basis in the energy property 
when determining eligible basis for purposes of calculating a low-
income housing credit under section 42 of the Code (section 42 credit). 
Accordingly, the basis of energy property may be used to determine a 
section 48 credit and may also be included in eligible basis when 
determining a section 42 credit.

G. Rules for Certain Lower-Output Energy Properties To Include 
Qualified Interconnection Costs in the Basis of Associated Energy 
Property

    Section 13102(j) of the IRA added section 48(a)(8)(A) to the Code, 
which provides that, for purposes of determining the section 48 credit 
with respect to energy property (as defined in section 48(a)(3)) that 
has a maximum net output of not greater than 5 MW (as measured in 
alternating current) (Five-Megawatt Limitation), a taxpayer may include 
amounts paid or incurred by the taxpayer for qualified interconnection 
property in connection with the installation of the energy property to 
provide for the transmission or distribution of the electricity 
produced or stored by such energy property. Additionally, these costs 
must be properly chargeable to the capital account of the taxpayer.
    Section 48(a)(8)(B) defines ``qualified interconnection property'' 
to mean, with respect to an energy project that is not

[[Page 82207]]

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; either that is constructed, 
reconstructed, or erected by the taxpayer, or for which the cost with 
respect to the construction, reconstruction, or erection of such 
property is paid or incurred by such taxpayer; and the original use of 
which, pursuant to an interconnection agreement, commences with a 
utility.
    Section 48(a)(8)(C) defines an ``interconnection agreement'' as an 
agreement with a utility for the purposes of interconnecting the energy 
property owned by such taxpayer to the transmission or distribution 
system of such utility.
    Section 48(a)(8)(D) defines the term ``utility'' for purposes of 
section 48(a)(8) as the owner or operator of an electrical transmission 
or distribution system that is subject to the regulatory authority of a 
State or political subdivision thereof, any agency or instrumentality 
of the United States, a public service or public utility commission or 
other similar body of any State or political subdivision thereof, or 
the governing or ratemaking body of an electric cooperative.
    Section 48(a)(8)(E) provides a special rule for interconnection 
property. In the case of expenses paid or incurred for interconnection 
property, amounts otherwise chargeable to capital account with respect 
to such expenses must be reduced under rules similar to the rules of 
section 50(c).
1. Qualified Interconnection Property
    Notice 2022-49 requested comments on several aspects of the 
treatment of qualified interconnection property, specifically the types 
of eligible costs, the required documentation, and the Five-Megawatt 
Limitation.
    Qualified interconnection property costs arise from installation of 
tangible property that is part of an addition, modification, or upgrade 
to a transmission or distribution system at or beyond the point of 
interconnection. Energy property includes all functionally 
interdependent property owned by the taxpayer. Additionally, property 
owned by the taxpayer that is an integral part of such energy property 
is energy property. This may include power conditioning equipment owned 
by the taxpayer and used to condition electricity into a form suitable 
for use or transmission. However, qualified interconnection property, 
which is most similar in function to transmission and distribution 
property, is neither property that is a functionally interdependent 
component of an energy property nor an integral part of an energy 
property. Therefore, qualified interconnection property is not energy 
property. Accordingly, proposed Sec.  1.48-14(g)(2) would clarify that 
qualified interconnection property is not taken into account in 
determining whether an energy property satisfies the requirements for 
the domestic content bonus credit amount referenced in section 
48(a)(12)(B) and the increase in credit rate for energy communities 
provided in section 48(a)(14).
    Consistent with section 48(a)(8)(A), however, proposed Sec.  1.48-
14(g) would clarify that, in connection with the installation by a 
taxpayer of energy property (as defined in section 48(a)(3)) that has a 
maximum net output of not greater than 5 MW (as measured in alternating 
current), amounts paid or incurred by the taxpayer for qualified 
interconnection property that is required to accommodate the 
interconnection are included in the basis of a related energy property. 
Additionally, proposed Sec.  1.48-14(g)(3) would provide that the 
maximum net output of an energy property is measured only by nameplate 
generating capacity of the unit of energy property (or, in the case of 
energy storage technology, the nameplate capacity of such energy 
storage technology) at the time the energy property is placed in 
service.
2. Costs Included in Basis of Related Energy Property
    Proposed Sec.  1.48-14(g)(1) would provide that only amounts paid 
or incurred by a taxpayer for property that is constructed, 
reconstructed, or erected by the taxpayer, or for which the cost with 
respect to the construction, reconstruction, or erection of such 
property is paid or incurred by such taxpayer, will be included in the 
basis of a related energy property. 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. 
Proposed Sec.  1.48-14(g)(6) would adopt this rule. 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 Treasury Department and the IRS are aware of common situations 
where 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 energy property 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 energy property. 
Subsequently, a different taxpayer may, at a later date, place in 
service energy property 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 not be known at the time the first taxpayer interconnects 
to the utility's transmission system.
    The Treasury and the IRS request comment on whether such payment, 
credit, or service received by the first taxpayer, as the 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 48 
credit. The Treasury and the IRS also request 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 energy property. The Treasury and 
IRS request 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 and the IRS also 
request 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 section 3.02(1)(b)(ii) of Notice 2022-49, the Treasury 
Department and the IRS requested comments concerning what type of 
documentation, in addition to interconnection agreements and cost 
certification reports, is readily available for a taxpayer to 
demonstrate that they have paid or incurred interconnection costs. 
Taxpayers must retain

[[Page 82208]]

documentation in compliance with section 6001 of the Code. The proposed 
regulations do not provide any specific type of required documentation, 
and any documentation that satisfies section 6001 will suffice to 
substantiate that a taxpayer has paid or incurred qualified 
interconnection costs. Commenters to Notice 2022-49 provided feedback 
on the documentation that taxpayers may use to substantiate costs paid 
or incurred for qualified interconnection property.
    Qualified interconnection property is either constructed, 
reconstructed, or erected by the taxpayer, or the taxpayer pays or 
incurs the cost with respect to the construction, reconstruction, or 
erection of such property; and the original use of which, pursuant to 
an interconnection agreement, commences with a utility. Therefore, in 
some cases, taxpayers will have the necessary information and 
documentation on these costs. In other cases, the taxpayers will need 
to receive this information from the utility, which, the Treasury 
Department and the IRS understand, will be a common scenario. For 
situations in which property is constructed, reconstructed, or erected 
by a party other than the taxpayer, final information with conclusive 
details such as a true-up report with the actual costs, final invoices, 
proof of payment or reimbursement, and permission to operate 
documentation or any other final project accounting documentation 
should be maintained. Other examples of cost documentation records 
include, but are not limited to, the interconnection agreement, 
interconnection study, signed customer contracts, and cost 
certification reports.
3. Five-Megawatt Limitation
    Under section 48(a)(8)(A), energy property includes amounts paid or 
incurred by the taxpayer for qualified interconnection property in 
connection with the installation of energy property only if it has a 
maximum net output of not greater than 5 MW (as measured in alternating 
current). The addition of amounts paid or incurred by the taxpayer for 
qualified interconnection property in section 48(a)(8)(A) is tied to 
the installation of ``energy property.'' The statute clearly ties the 5 
MW limitation to the energy property; therefore, as long as an energy 
property is 5 MW or less, the statute is satisfied. Additionally, 
measurement at the level of the energy property provides certainty for 
taxpayers and the IRS because it is measured by the energy property's 
maximum net output when it is placed in service. Therefore, proposed 
Sec.  1.48-14(g)(3) would provide that the Five-Megawatt Limitation 
must be measured at the level of the energy property. Proposed Sec.  
1.48-14(g)(7) also would provide examples illustrating the application 
of this rule.
    In accordance with proposed Sec.  1.48-14(g)(3), if an energy 
project comprised of multiple energy properties has a combined 
nameplate capacity in excess of 5 MW, each of the energy properties 
would nonetheless be eligible to include amounts paid or incurred by 
the taxpayer for qualified interconnection property if each energy 
property satisfies the Five-Megawatt Limitation. The Treasury 
Department and the IRS request comments regarding the application of 
the Five-Megawatt Limitation to a single energy property, including 
whether the definition of an energy property is sufficiently clear for 
this purpose. In addition, the Treasury Department and the IRS request 
comments regarding the circumstances under which multiple energy 
properties each with a nameplate capacity of less than 5 MW would 
utilize common power conditioning equipment for economic or regulatory 
reasons and/or common interconnection agreements, or would instead 
utilize separate power conditioning equipment and/or interconnection 
agreements.
4. Non-Application to Certain Types of Energy Properties
    The definition of qualified interconnection property specifically 
excludes interconnection property installed with respect to an energy 
project that is a microgrid controller. Additionally, taxpayers may not 
include the costs of qualified interconnection property in the basis of 
electrochromic glass property and fiber optic solar energy property 
because these types of energy property do not require additions, 
modifications, or upgrades to a transmission or distribution system. 
Similarly, in the case of energy properties that generate thermal 
energy, such as certain geothermal property and qualified biogas 
property, this provision is inapplicable.

Effect on Other Documents

    Notice 2009-52 will be obsoleted upon publication of the final 
regulations in the Federal Register. Notice 2009-52, in relevant part, 
provides procedures for taxpayers to make an irrevocable election under 
section 48(a)(5) to treat qualified property that is part of a 
qualified investment credit facility as energy property eligible for a 
section 48 credit in lieu of a section 45 credit.

Proposed Applicability Dates

    Except for the provisions of proposed Sec. Sec.  1.48-13 and 
1.6418-5(f), these regulations generally are proposed to apply with 
respect to property that is placed in service after December 31, 2022, 
and during a taxable year beginning after the date final regulations 
are published in the Federal Register. Proposed Sec.  1.6418-5(f) is 
proposed to apply to taxable years ending on or after the date final 
regulations are published in the Federal Register. A taxpayer may rely 
on proposed Sec. Sec.  1.48-9, 1.48-14, and 1.6418-5(f) with respect to 
property that is placed in service after December 31, 2022, and during 
a taxable year beginning on or before the date final regulations are 
published in the Federal Register, provided the taxpayer and all 
related persons (within the meaning of sections 267(b) and 707(b) of 
the Code) apply proposed Sec. Sec.  1.48-9 and 1.48-14 in their 
entirety and in a consistent manner.
    Proposed Sec.  1.48-13 is proposed to apply to projects placed in 
service in taxable years ending after the date final regulations are 
published in the Federal Register, and the construction of which begins 
after the date final regulations are published in the Federal Register. 
However, proposed Sec.  1.48-13(d) is proposed to apply to energy 
projects the construction of which begins after November 22, 2023. 
Taxpayers may rely on Sec.  1.48-13 with respect to construction of a 
property or project beginning on or after January 29, 2023, and on or 
before the date these regulations are published as final regulations in 
the Federal Register, provided, that beginning after the date that is 
60 days after August 29, 2023, taxpayers follow proposed Sec.  1.48-13 
in its entirety and in a consistent manner.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
requires that a Federal agency obtain the approval of Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is

[[Page 82209]]

mandatory, voluntary, or required to obtain or retain a benefit. A 
Federal agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The collections of information in these proposed regulations 
contain reporting and recordkeeping requirements that are required to 
verify the eligibility of the property for the credit. These 
collections of information would generally be used by the IRS for tax 
compliance purposes and by taxpayers to facilitate proper reporting and 
compliance.
    The reporting requirement mentioned within this proposed 
regulations with respect to section 48 are in proposed Sec.  1.48-
14(f)(6), which provides the time and manner for a taxpayer to make a 
section 48(a)(5)(C) an election to have qualified investment credit 
facility property that was placed in service after December 31, 2008, 
treated as a qualified investment credit facility for purposes of 
claiming the section 48 credit. These requirements are considered 
general tax records under Sec.  1.6001-1.
    A taxpayer must make a section 48(a)(5)(C) election on a completed 
Form 3468 (Investment Credit) (or successor forms, or pursuant to 
instructions and other guidance) with the taxpayer's timely filed 
return (including extensions) for the taxable year in which the energy 
property is placed in service. The taxpayer must make a separate 
section 48(a)(5)(C) election for each qualified facility that is to be 
treated as a qualified investment credit facility. These collections 
are included in Notice 2009-52, 2009-1 C.B. 1094, which is already 
approved under OMB Control Number 1545-2145 for all filers. Also, the 
election selection is included on, Form 3468, which is already approved 
in OMB Control Numbers 1545-0155 for trust and estate filers, 1545-0074 
for individual filers, and 1545-0123 for business filers. This proposed 
regulation is not changing the collection requirements already approved 
by OMB.
    These proposed regulations would also include reporting 
requirements, in addition to the general reporting requirements set 
forth in in Sec.  1.45-12 of the August Proposed Regulations, for 
taxpayers that claim an increased credit amount under section 
48(a)(9)(B)(iii). These proposed regulations would require taxpayers to 
verify compliance with the Prevailing Wage Requirements by providing 
information that includes the aggregate information detailed in Sec.  
1.45-12 of the August Proposed Regulations during the five-year 
recapture period after an energy project is placed in service. The 
Secretary may issue forms and instructions in future guidance for the 
purpose of meeting these reporting requirements. As set forth in the 
preamble to the August Proposed Regulations, these reporting 
requirements will be covered under OMB control numbers 1545-0074 for 
individuals/sole proprietors and 1545-0123 for business entities. The 
IRS has solicited public comments on these requirements and the 
associated burdens for trusts and estates and has sought OMB approval 
under a new OMB control number (1545-NEW) for trust and estate filers. 
This proposed regulation is not changing or creating new collection 
requirements not already approved by, or will be approved by, OMB for 
the Sec.  1.45-12.
    These proposed regulations also describe recapture procedures as 
detailed in proposed Sec.  1.6418-5. The reporting of a section 
48(a)(10)(C) recapture event will still be required to be reported 
using Form 4255, Recapture of Investment Credit. This form is approved 
under OMB control numbers 1545-0074 for individuals, 1545-0123 for 
business entities, and 1545-0166 for trust and estate filers. The 
proposed regulation is not changing or creating new collection 
requirements not already approved by OMB.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a proposal is not likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule.
    The Treasury Department and the IRS have not determined whether the 
proposed rule, when finalized, will likely have a significant economic 
impact on a substantial number of small entities. This determination 
requires further study. However, because there is a possibility of 
significant economic impact on a substantial number of small entities, 
an IRFA is provided in these proposed regulations. The Treasury 
Department and the IRS invite comments on both the number of entities 
affected and the economic impact on small entities.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel of Advocacy of the Small Business 
Administration for comment on its impact on small business.

A. Need for and Objectives of the Rule

    The proposed regulations will provide greater clarity to taxpayers 
for purposes of claiming the section 48 credit for energy property. The 
proposed rule is expected to encourage taxpayers to invest in 
developing new energy properties, including qualified facilities 
otherwise eligible for the section 45 credit for which a taxpayer makes 
a section 48(a)(5)(C) election. Thus, the Treasury Department and the 
IRS intend and expect that the proposed rule will deliver benefits 
across the economy that will beneficially impact various industries.

B. Affected Small Entities

    The Small Business Administration estimated in its 2018 Small 
Business Profile that 99.9 percent of United States businesses meet its 
definition of a small business. The applicability of these proposed 
regulations does not depend on the size of the business, as defined by 
the Small Business Administration. As described more fully in the 
preamble to these proposed regulations and in this IRFA, these rules 
may affect a variety of different businesses across several different 
industries.
    The section 48 credit incentivizes the development of energy 
property. Because the potential credit claimants can vary widely, it is 
difficult to estimate at this time the impact of these proposed 
regulations, if any, on small businesses.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses through comments on this 
proposed rule and again when taxpayers start to claim the section 48 
credit using the guidance and procedures provided in these proposed 
regulations.

C. Impact of the Rule

    The proposed regulations will allow taxpayers to plan investments 
and transactions based on the ability to claim the section 48 credit. 
The increased use of the section 48 credit will incentivize the 
development of technologies for energy generation and storage. The use 
of the section 48 credit may also lead to additional investment in 
electrical grid infrastructure to transport electricity.

[[Page 82210]]

    Because the statutory changes that are reflected in the proposed 
rules have already been accounted for by Form 3468, the recordkeeping 
and reporting requirements should not increase for taxpayers that 
already claim the section 48 credit. The Form 3468 already provides the 
procedures for taxpayers to make a section 48(a)(5)(C) election. To 
make the election, a taxpayer must claim the energy credit with respect 
to a qualified investment credit facility property on a completed Form 
3468 (Investment Credit) (or successor forms, or pursuant to 
instructions and other guidance) and file such form with the taxpayer's 
timely filed return (including extensions) for the taxable year in 
which the property is placed in service. Although the Treasury 
Department and the IRS do not have sufficient data to precisely 
determine the likely extent of the increased costs of compliance, the 
estimated burden of complying with the recordkeeping and reporting 
requirements are described in the Paperwork Reduction Act section of 
the preamble.

D. Duplicative, Overlapping, or Conflicting Federal Rules

    The proposed rule would not duplicate, overlap, or conflict with 
any relevant Federal rules. As discussed above, the proposed rule would 
merely provide procedures and definitions to allow taxpayers to claim 
the section 48 credit.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandate Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by State, local, or Tribal governments or by the 
private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial, direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

VI. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has Tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian Tribal governments, and is not required by 
statute, or preempts Tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. This proposed rule does not have substantial direct effects on 
one or more Federally recognized Indian Tribes and does not impose 
substantial direct compliance costs on Indian Tribal governments within 
the meaning of the Executive order.

Statement of Availability of IRS Documents

    IRS notices and other guidance cited in this preamble are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any comments 
regarding the notice of proposed rulemaking and partial withdrawal of 
notice of proposed rulemaking that are submitted timely to the IRS in 
the preamble under the ADDRESSES section. The Treasury Department and 
the IRS request comments on all aspects of the proposed regulations. 
All comments submitted will be made available at http://www.regulations.gov or upon request for public inspection and copying.
    A public hearing has been scheduled for February 20, 2024, at 10 
a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 
Constitution Ave. NW, Washington, DC. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. Participants may 
alternatively attend the public hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the public hearing. 
Persons who wish to present oral comments at the public hearing must 
submit an outline of the topics to be discussed and the time to be 
devoted to each topic by January 22, 2024. A period of 10 minutes will 
be allotted to each person for making comments. An agenda showing the 
scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the public hearing. If no outline of the topics to be 
discussed at the public hearing is received by January 22, 2024, the 
public hearing will be cancelled. If the public hearing is cancelled, a 
notice of cancellation of the public hearing will be published in the 
Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#0b7b7e69676268636e6a7962656c784b627978256c647d"><span class="__cf_email__" data-cfemail="b3c3c6d1dfdad0dbd6d2c1daddd4c0f3dac1c09dd4dcc5">[email protected]</span></a> to have your name added 
to the building access list. The subject line of the email must contain 
the regulation number REG-132569-17 and the language TESTIFY In Person. 
For example, the subject line may say: Request to TESTIFY In Person at 
Hearing for regulation number REG-132569-17.
    Individuals who want to testify by telephone at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#c1b1b4a3ada8a2a9a4a0b3a8afa6b281a8b3b2efa6aeb7"><span class="__cf_email__" data-cfemail="0a7a7f68666369626f6b7863646d794a637879246d657c">[email protected]</span></a> to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-132569-17 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-132569-17.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#a7d7d2c5cbcec4cfc2c6d5cec9c0d4e7ced5d489c0c8d1"><span class="__cf_email__" data-cfemail="9bebeef9f7f2f8f3fefae9f2f5fce8dbf2e9e8b5fcf4ed">[email protected]</span></a> to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-132569-17 and the language 
ATTEND In Person. For example, the subject line may say: Request to 
ATTEND Hearing in Person for REG-132569-17. Requests to attend the 
public hearing must be received by 5:00 p.m. on February 15, 2024.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
<a href="/cdn-cgi/l/email-protection#5e2e2b3c32373d363b3f2c3730392d1e372c2d70393128"><span class="__cf_email__" data-cfemail="a1d1d4c3cdc8c2c9c4c0d3c8cfc6d2e1c8d3d28fc6ced7">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by at least 5:00 p.m. on February 14, 2024.

Drafting Information

    The principal authors of these proposed rules are Martha M. Garcia

[[Page 82211]]

and Boris Kukso of the Office of Associate Chief Counsel (Passthroughs 
& Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Partial Withdrawal of Notice of Proposed Rulemaking

    Under the authority of 26 U.S.C. 7805, proposed Sec.  1.48-13 
contained in the notice of proposed rulemaking (REG-100908-23) that was 
published in the Federal Register on August 30, 2023 (88 FR 60018), is 
withdrawn.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by:
0
a. Revising the entry for Sec.  1.48-9; and
0
b. Adding entries in numerical order for Sec. Sec.  1.48-13, 1.48-14, 
and 1.6418-5.
    The revision and additions read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *

    Section 1.48-9 also issued under 26 U.S.C. 48(a)(3)(D)(i) and 
(16). * * *
    Section 1.48-13 also issued under 26 U.S.C. 48(a)(10)(C) and 
(16). * * *
    Section 1.48-14 also issued under 26 U.S.C. 48(a)(16). * * *
* * * * *
    Section 1.6418-5 also issued under 26 U.S.C. 48(a)(10)(C) and 
6418(g) and (h).
* * * * *
0
Par. 2. Revise Sec.  1.48-9 to read as follows:


Sec.  1.48-9  Definition of energy property.

    (a) In general. For purposes of the energy credit determined under 
section 48 of the Internal Revenue Code (Code), the term energy 
property means property that, taking into account the definition of the 
term unit of energy property (defined in paragraph (f)(2)(i) of this 
section) and of other terms defined in paragraph (b) and other 
provisions of this section, meets the requirements of paragraph (c) of 
this section and is of a type of energy property set forth in paragraph 
(e) of this section. Paragraph (d) of this section provides rules for 
property excluded from energy property. Paragraph (f) of this section 
provides rules for components included in an energy property. Paragraph 
(g) of this section provides the applicability date for this section.
    (b) Definitions related to requirements for energy property. For 
purposes of section 48 of the Code, this section, Sec. Sec.  1.48-13 
and 1.48-14, and any provision of the Code or this chapter that 
expressly refers to any of the foregoing, the following definitions 
apply:
    (1) Construction, reconstruction, or erection of energy property. 
The term construction, reconstruction, or erection of energy property 
means work performed to construct, reconstruct, or erect energy 
property either by the taxpayer or for the taxpayer in accordance with 
the taxpayer's specifications.
    (2) Acquisition of energy property. The term acquisition of energy 
property means a transaction by which a taxpayer obtains rights and 
obligations with respect to energy property, including--
    (i) Title to the energy property under the law of the jurisdiction 
in which the energy property is placed in service, unless the property 
is possessed or controlled by the taxpayer as a lessee, and
    (ii) Physical possession or control of the energy property.
    (3) Original use of energy property--(i) In general. The term 
original use of energy property means the first use to which a unit of 
energy property is put, whether or not such use is by the taxpayer.
    (ii) Retrofitted units of energy property. A retrofitted unit of 
energy property acquired by the taxpayer will not be treated as being 
put to original use by the taxpayer unless the rules in Sec.  1.48-
14(a) regarding retrofitted energy property (80/20 Rule) or paragraph 
(e)(10)(v) of this section regarding modifications of certain energy 
storage technology apply. The question of whether a unit of energy 
property meets the 80/20 Rule or is modified (as described in paragraph 
(e)(10)(v) of this section) is a facts and circumstances determination.
    (4) Allowable--(i) In general. For purposes of applying paragraph 
(c)(1)(ii) of this section, depreciation (or amortization in lieu of 
depreciation) is allowable with respect to energy property if such 
property is of a character subject to the allowance for depreciation 
under section 167 of the Code and the basis or cost of such property is 
recovered using a method of depreciation (for example, the straight 
line method), which includes any additional first year depreciation 
deduction method of depreciation (for example, under section 168(k) of 
the Code). Further, if an Internal Revenue Service adjustment with 
respect to the Federal income tax or information return for such 
taxable year requires the basis or cost of such energy property to be 
recovered using a method of depreciation, depreciation is allowable to 
the taxpayer with respect to energy property.
    (ii) Exclusions from allowable. For purposes of paragraph (b)(4)(i) 
of this section, depreciation is not allowable with respect to energy 
property if the basis or cost of such property is not recovered through 
a method of depreciation but, instead, such basis or cost is recovered 
through a deduction of the full basis or cost of the energy property in 
one taxable year (for example, under section 179 of the Code).
    (5) Placed in service--(i) In general. Energy property is 
considered placed in service in the earlier of:
    (A) The taxable year in which, under the taxpayer's depreciation 
practice, the period for depreciation with respect to such energy 
property begins; or
    (B) The taxable year in which the energy property is placed in a 
condition or state of readiness and availability for a specifically 
assigned function, whether in a trade or business or in the production 
of income. Energy property in a condition or state of readiness and 
availability for a specifically assigned function includes, but is not 
limited to, components that are acquired and set aside during the 
taxable year for use as replacements for a particular energy property 
(or energy properties) in order to avoid operational time loss and 
equipment that is acquired for a specifically assigned function and is 
operational but is undergoing testing to eliminate any defects. 
However, components acquired to be used in the construction of an 
energy property will not be considered in a condition or state of 
readiness and availability for a specifically assigned function.
    (ii) Energy property subject to Sec.  1.48-4 election to treat 
lessee as purchaser. Notwithstanding paragraph (b)(5)(i) of this 
section, energy property with respect to which an election is made 
under Sec.  1.48-4 to treat the lessee as having purchased such energy 
property is considered placed in service by the lessor in the taxable 
year in which possession is transferred to such lessee.
    (6) Unit of energy property. The term unit of energy property is 
defined in paragraph (f)(2)(i) of this section. No provision of this 
section or Sec.  1.48-13 or Sec.  1.48-14 uses the term unit in respect 
of energy property with any meaning other than that provided in 
paragraph (f)(2)(i) of this section.

[[Page 82212]]

    (7) Claim. With respect to a section 48 credit determined with 
respect to energy property of a taxpayer, the term claim means filing a 
completing Form 3468, Investment Credit, or any successor form(s), with 
the taxpayer's timely filed (including extensions) Federal income tax 
return for the taxable year in which the energy property is placed in 
service, and includes the making of an election under section 6417 or 
6418 of the Code and corresponding regulations with respect to such 
section 48 credit and made on the taxpayer's Federal income tax return 
or annual information return.
    (c) Requirements for energy property--(1) In general. Energy 
property must satisfy each of the requirements of paragraphs (c)(1)(i) 
through (v) of this section:
    (i) The taxpayer constructs, reconstructs, or erects the property, 
or, if the original use of the property commences with the taxpayer, 
acquires the property;
    (ii) Depreciation (or amortization in lieu of depreciation) is 
allowable with respect to the property;
    (iii) The property meets the performance and quality standards as 
provided in paragraph (c)(2) of this section;
    (iv) The construction of the property begins before the date 
provided in section 48 of the Code (if any such date is provided); and
    (v) The property is placed in service by the taxpayer by the date 
provided in section 48 (if any such date is provided).
    (2) Performance and quality standards--(i) In general. Energy 
property must meet performance and quality standards, if any, which 
have been prescribed by the Secretary of the Treasury or her delegate 
(after consultation with the Secretary of Energy) and are in effect at 
the time of acquisition of the energy property.
    (ii) Special rules for performance and quality standards--(A) Small 
wind energy property. Small wind energy property must meet the 
performance and quality standards in effect at the time of acquisition 
of the small wind turbine set forth in the American Wind Energy 
Association Small Wind Turbine Performance and Safety Standard 9.1-
2009, or subsequent revisions (AWEA); International Electrotechnical 
Commission 61400-1, 61400-2, 61400-11, 61400-12, or subsequent 
revisions (IEC); or the ANSI/ACP 101-1-2021, the Small Wind Turbine 
Standard, or subsequent revisions (ACP). The certification requirements 
applicable to such performance and quality standards are provided in 
guidance published in the Internal Revenue Bulletin. See Sec.  601.601 
of this chapter.
    (B) Electrochromic glass property. To be eligible for the section 
48 credit, electrochromic windows must be rated in accordance with the 
National Fenestration Rating Council (NFRC) and secondary glazing 
systems must be rated in accordance with the Attachments Energy Rating 
Council (AERC) Rating and Certification Process, or subsequent 
revisions. See paragraph (e)(2)(ii) of this section for the definition 
of electrochromic glass property.
    (iii) Time of acquisition. For purposes of applying performance and 
quality standards, the time of acquisition is the date the taxpayer 
enters into a binding contract (as defined in paragraph (c)(2)(iv) of 
this section) to acquire the property, or, in the case of property 
constructed, reconstructed, or erected by the taxpayer, the earlier of 
the date that--
    (A) The taxpayer begins construction, reconstruction, or erection 
of the property, or
    (B) The taxpayer and another person enter into a binding contract 
(as defined in paragraph (c)(2)(iv) of this section) requiring the 
other person to construct, reconstruct, or erect property and to place 
the property in service for an agreed upon use.
    (iv) Binding contract. For purposes of this paragraph (c)(2), a 
contract is binding only if it is enforceable under State law against 
the taxpayer or a predecessor and does not limit damages to a specified 
amount (for example, by use of a liquidated damages provision). For 
this purpose, a contractual provision that limits damages to an amount 
equal to at least five percent of the total contract price will not be 
treated as limiting damages to a specified amount. For additional 
guidance regarding the definition of a binding contract, see Sec.  
1.168(k)-2(b)(5)(iii)(A).
    (d) Property that is not energy property--(1) Interaction with 
section 45. Energy property does not include any property that is part 
of a qualified facility the production from which is allowed as a 
credit determined under section 45 of the Code (section 45 credit) for 
the taxable year or any prior taxable year. However, see paragraph 
(f)(3) of this section for rules regarding property that is an integral 
part of an energy property that is also used by a qualified facility. 
See Sec.  1.48-14(f)(1) for rules regarding making an election under 
section 48(a)(5) of the Code to treat a qualified facility as an energy 
property.
    (2) Other property. Energy property also does not include power 
purchase agreements, goodwill, going concern value, or renewable energy 
certificates.
    (e) Types of energy property. The types of energy property eligible 
for a section 48 credit are:
    (1) Solar energy property--(i) In general. Solar energy property is 
equipment that uses solar energy to generate electricity, to heat or 
cool (or provide hot water for use in) a structure, or to provide solar 
process heat, excepting property used to generate energy for the 
purposes of heating a swimming pool. Solar energy property includes 
solar electric generation equipment (as defined in paragraph (e)(1)(ii) 
of this section), solar process heat equipment (as defined in paragraph 
(e)(1)(iii) of this section), and equipment that uses solar energy to 
heat or cool a structure or provide hot water for use in a structure, 
and parts related to the functioning of all such equipment.
    (ii) Solar electric generation equipment. Solar electric generation 
equipment is equipment that converts sunlight into electricity through 
the use of devices such as solar cells or other collectors.
    (iii) Solar process heat equipment. Solar process heat equipment is 
equipment that uses solar energy to generate steam at high temperatures 
for use in industrial or commercial processes.
    (2) Fiber-optic solar energy property and electrochromic glass 
property--(i) Fiber-optic solar energy property. Fiber-optic solar 
energy property is equipment that uses solar energy to illuminate the 
inside of a structure using fiber-optic distributed sunlight.
    (ii) Electrochromic glass property. Electrochromic glass energy 
property uses electricity to change its light transmittance properties 
(both visible and near infrared light) in order to heat or cool a 
structure. For purposes of section 48, windows, including secondary 
windows (also referred to as secondary glazings), that incorporate 
electrochromic glass are treated as electrochromic glass property.
    (3) Geothermal energy property--(i) In general. Geothermal energy 
property is equipment used to produce, distribute, or use energy 
derived from a geothermal deposit (within the meaning of section 
613(e)(2) of the Code), but only, in the case of electricity generated 
by geothermal power, up to (but not including) the electrical 
transmission stage. Geothermal equipment includes production equipment 
(as defined in paragraph (e)(3)(ii) of this section) and distribution 
equipment (as defined in paragraph (e)(3)(iii) of this section).
    (ii) Production equipment. For purposes of paragraph (e)(3)(i) of 
this section, production equipment is equipment necessary to bring

[[Page 82213]]

geothermal energy from the subterranean deposit to the surface, 
including well-head and downhole equipment (such as screening or 
slotting liners, tubing, downhole pumps, and associated equipment). 
Production, injection, and monitoring wells required for production of 
the geothermal deposit qualify as production equipment. If geothermal 
energy is used to generate electricity, production equipment also 
includes the property necessary to produce electricity. Production 
equipment does not include equipment used for exploration and 
development of geothermal deposits.
    (iii) Distribution equipment. For purposes of paragraph (e)(3)(i) 
of this section, distribution equipment is equipment that transports 
geothermal energy from a geothermal deposit to the site of ultimate 
use. If geothermal energy is used to generate electricity, distribution 
equipment includes equipment that transports geothermal fluids between 
the geothermal deposit and the power plant. Distribution equipment also 
includes components of a building's heating and/or cooling system, such 
as pipes and ductwork that distribute within a building the energy 
derived from the geothermal deposit.
    (4) Qualified fuel cell property. Qualified fuel cell property is a 
fuel cell power plant that has a nameplate capacity of at least 0.5 
kilowatts (kW) (1 kW in the case of a fuel cell power plant with a 
linear generator assembly) of electricity using an electrochemical or 
electromechanical process, and an electricity-only generation 
efficiency greater than 30 percent. For this purpose, electricity-only 
generation efficiency may be calculated by dividing the heat rate of 
the fuel cell (for example, kilowatt-hours (kWh) electricity produced 
per kilogram (kg) of fuel consumed) by the higher heating value of the 
fuel (for example, kWh per kg). A fuel cell power plant is an 
integrated system comprised of a fuel cell stack assembly, or linear 
generator assembly, and associated balance of plant components that 
converts a fuel into electricity using electrochemical or 
electromechanical means. A linear generator assembly does not include 
any assembly that contains rotating parts.
    (5) Qualified microturbine property. Qualified microturbine 
property is a stationary microturbine power plant that has a nameplate 
capacity of less than 2,000 kW and an electricity-only generation 
efficiency of not less than 26 percent at International Standard 
Organization conditions. A stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a combustor, a 
recuperator or regenerator, a generator or alternator, and associated 
balance of plant components that converts a fuel into electricity and 
thermal energy. A stationary microturbine power plant also includes all 
secondary components located between the existing infrastructure for 
fuel delivery and the existing infrastructure for power distribution, 
including equipment and controls for meeting relevant power standards, 
such as voltage, frequency, and power factors.
    (6) Combined heat and power system (CHP) property--(i) In general. 
CHP property is property comprising a system that uses the same energy 
source for the simultaneous or sequential generation of electrical 
power, mechanical shaft power, or both, in combination with the 
generation of steam or other forms of useful thermal energy (including 
heating and cooling applications). CHP property must produce at least 
20 percent of its total useful energy in the form of thermal energy 
that is not used to produce electrical or mechanical power (or 
combination thereof), and at least 20 percent of its total useful 
energy in the form of electrical or mechanical power (or combination 
thereof). The energy efficiency percentage of CHP property must exceed 
60 percent (except in the case of CHP systems that use biomass within 
the meaning of section 45 of the Code). CHP property does not include 
any property comprising a system if such system has a capacity in 
excess of 50 MW or a mechanical energy capacity in excess of 67,000 
horsepower or an equivalent combination of electrical and mechanical 
energy capacities.
    (ii) Components excluded. CHP property does not include property 
used to transport the energy source to the generating facility or to 
distribute energy produced by the facility.
    (7) Qualified small wind energy property. Qualified small wind 
energy property is property that uses a qualifying small wind turbine 
to generate electricity. A qualifying small wind turbine means a wind 
turbine that has a nameplate capacity of not more than 100 kW.
    (8) Geothermal heat pump equipment. Geothermal heat pump equipment 
is equipment that uses the ground, ground water, or other underground 
fluids as a thermal energy source to heat a structure or as a thermal 
energy sink to cool a structure.
    (9) Waste energy recovery property (WERP)--(i) In general. WERP is 
property that generates electricity solely from heat from buildings or 
equipment if the primary purpose of such building or equipment is not 
the generation of electricity. Examples of buildings or equipment the 
primary purpose of which is not the generation of electricity include, 
but are not limited to, manufacturing plants, medical care facilities, 
facilities on college campuses, pipeline compressor stations, and 
associated equipment. WERP does not include any property that has a 
capacity in excess of 50 MW.
    (ii) Coordination with CHP property. Any WERP that is part of a 
system that is a CHP property is not treated as WERP for purposes of 
section 48 of the Code unless the taxpayer elects to not treat such 
system as a CHP property for purposes of section 48.
    (10) Energy storage technology--(i) In general. Energy storage 
technology includes electrical energy storage property described in 
paragraph (e)(10)(ii) of this section, thermal energy storage property 
described in paragraph (e)(10)(iii) of this section, and hydrogen 
energy storage property described in paragraph (e)(10)(iv) of this 
section.
    (ii) Electrical energy storage property. Electrical 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 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 flow, sodium 
sulfur, and lead-acid); ultracapacitors; physical storage such as 
pumped storage hydropower, compressed air storage, flywheels; and 
reversible fuel cells.
    (iii) Thermal energy storage property. Thermal energy storage 
property is 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. It does not include a swimming pool, CHP property, 
or a building or its structural components. For example, thermal energy 
storage includes, but is not limited to, thermal ice storage systems 
that use electricity to run a refrigeration cycle to produce ice

[[Page 82214]]

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.
    (iv) Hydrogen energy storage property. 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. 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 such as fertilizer. For 
example, hydrogen energy storage property includes, but is not limited 
to, a hydrogen compressor and associated storage tank and an 
underground storage facility and associated compressors.
    (v) Modifications of energy storage energy property. With respect 
to electrical energy storage property and hydrogen energy storage 
property placed in service after December 31, 2022, energy storage 
technology that is modified as set forth in this paragraph (e)(10)(v) 
is treated as electrical energy storage property described in paragraph 
(e)(10)(ii) of this section or hydrogen energy storage property 
described in paragraph (e)(10)(iv) of this section, except that the 
basis of any existing property prior to such modification is not taken 
into account for purposes of this section and section 48. This 
paragraph (e)(10)(v) applies to any electrical energy storage property 
and hydrogen energy storage property that either:
    (A) Was placed in service before August 16, 2022, and would be 
described in section 48(c)(6)(A)(i) of the Code, except that such 
property had a capacity of less than 5 kWh and is modified in a manner 
that such property (after such modification) has a nameplate capacity 
(after such modification) of not less than 5 kWh; or
    (B) Is described in section 48(c)(6)(A)(i) of the Code and is 
modified in a manner that such property (after such modification) has 
an increase in nameplate capacity of not less than 5 kWh.
    (11) Qualified biogas property--(i) In general. Qualified biogas 
property is property comprising a system that converts biomass (as 
defined in section 45K(c)(3) of the Code, as in effect on August 16, 
2022) into a gas that consists of not less than 52 percent methane by 
volume (tested at the point described in paragraph (e)(11)(ii) of this 
section), or is concentrated by such system into a gas that consists of 
not less than 52 percent methane (tested at the point described in 
paragraph (e)(11)(ii) of this section), and captures such gas for sale 
or productive use and not for disposal via combustion. Qualified biogas 
property also includes any property that is part of such system that 
cleans or conditions such gas. For example, qualified biogas property 
includes, but is not limited to, a waste feedstock collection system, a 
landfill gas collection system, mixing or pumping equipment, and an 
anaerobic digester. However, gas upgrading equipment necessary to 
concentrate the gas into the appropriate mixture for injection into a 
pipeline through removal of other gases such as carbon dioxide, 
nitrogen, or oxygen is not included in qualified biogas property.
    (ii) Methane content requirement. The methane content requirement 
described in section 48(c)(7)(A)(i) of the Code and paragraph 
(e)(11)(i) of this section is measured at the point at which gas exits 
the biogas production system, which may include an anerobic digester, 
landfill gas collection system, or thermal gasification equipment. This 
is the point at which a taxpayer generally must determine whether it 
will convert the biogas to fuel for sale or use it directly to generate 
heat or to fuel an electricity generation unit.
    (12) Microgrid controllers--(i) In general. A microgrid controller 
is equipment that is part of a qualified microgrid and is designed and 
used to monitor and control the energy resources and loads on such 
microgrid. A qualified microgrid is an electrical system that includes 
equipment that is capable of generating not less than 4 kW and not 
greater than 20 MW of electricity; is capable of operating in 
connection with the electrical grid and as a single controllable entity 
with respect to such electrical grid, and independently (and 
disconnected) from such electrical grid; and is not part of a bulk-
power system (as defined in section 215 of the Federal Power Act (16 
U.S.C. 824o)).
    (ii) Capable of operating in connection with the electrical grid. 
For purposes of this paragraph, a qualified microgrid includes an 
electrical system that is capable of operating in connection with the 
larger electrical grid, regardless of whether a connection to the 
larger electrical grid exists.
    (13) Other property included in section 48. Any other property 
specified by section 48 as energy property is energy property for 
purposes of this section and Sec. Sec.  1.48-13 and Sec.  1.48-14.
    (f) Property included in energy property--(1) In general. An energy 
property includes a unit of energy property (as defined in paragraph 
(f)(2)(i) of this section) that meets the requirements of paragraph (c) 
of this section, that is not excluded from energy property as provided 
in paragraph (d) of this section, and is of a type of energy property 
included in paragraph (e) of this section. Property owned by the 
taxpayer that is an integral part of an energy property (as defined in 
paragraph (f)(3) of this section) is treated as energy property. Energy 
property does not include any electrical transmission equipment, such 
as transmission lines and towers, or any equipment beyond the 
electrical transmission stage. Energy property also generally does not 
include equipment that is an addition or modification to an existing 
energy property. However, see Sec.  1.48-14(a) for rules regarding 
retrofitted energy property (80/20 Rule) and paragraph (e)(10)(v) of 
this section for rules regarding modifications of certain types of 
energy storage technology.
    (2) Unit of energy property--(i) Definition. The term unit of 
energy property means all functionally interdependent components of 
property (as defined in paragraph (f)(2)(ii) of this section) owned by 
the taxpayer that are operated together and that can operate apart from 
other energy properties within a larger energy project (as defined in 
Sec.  1.48-13(d)). For rooftop solar energy property, all components of 
property that are installed on a single rooftop are considered a single 
unit of energy property. See Sec.  1.48-13(d) for rules regarding when 
multiple energy properties will be treated as an energy project for 
certain purposes.
    (ii) Functionally interdependent--(A) In general. Except as 
provided in paragraph (f)(3)(ii)(B) of this section, with respect to 
components of a unit of energy property, the term functionally 
interdependent means that the placing in service of each component is 
dependent upon the placing in service of each of the other components 
in order to generate or store electricity, thermal energy, or hydrogen 
as provided by section 48(c) of the Code and as described in paragraph 
(e) of this section.
    (B) Components of certain energy property. In the case of solar 
process heat equipment, fiber-optic solar energy property, 
electrochromic glass property,

[[Page 82215]]

geothermal heat pump equipment, qualified biogas property, and 
microgrid controllers, with respect to components of such property, the 
term functionally interdependent means that the placing in service of 
each component is dependent upon the placing in service of each of the 
other components in order to perform the intended function of the 
energy property as provided by section 48(c) of the Code and as 
described in paragraph (e) of this section.
    (3) Integral part--(i) In general. For purposes of the section 48 
credit, property owned by a taxpayer is an integral part of an energy 
property owned by the same taxpayer if it is used directly in the 
intended function of the energy property as provided by section 48(c) 
of the Code and as described in paragraph (e) of this section and is 
essential to the completeness of the intended function. Property that 
is an integral part of an energy property is energy property. A 
taxpayer may not claim the section 48 credit for any property that is 
an integral part of the taxpayer's energy property that is not owned by 
the taxpayer. Multiple energy properties (whether owned by one or more 
taxpayers) may include shared property that may be considered an 
integral part of each energy property so long as the cost basis for the 
shared property is properly allocated to each energy property. The 
total cost basis of such shared property divided among the energy 
properties may not exceed 100 percent of the cost of such shared 
property. In addition, property that is shared by a qualified facility 
(as defined in section 45(d) of the Code) and an energy property that 
is an integral part of the energy property will not be considered 
property that is not energy property under paragraph (d) of this 
section.
    (ii) Power conditioning and transfer equipment. Property that is an 
integral part of energy property includes power conditioning equipment 
and transfer equipment used to perform the intended function of the 
energy property as provided by section 48(c) and as described in 
paragraph (e) of this section. Power conditioning equipment includes, 
but is not limited to, transformers, inverters, and converters, which 
modify the characteristics of electricity or thermal energy into a form 
suitable for use or transmission or distribution. Parts related to the 
functioning or protection of power conditioning equipment are also 
treated as power conditioning equipment and include, but are not 
limited to, switches, circuit breakers, arrestors, and hardware and 
software used to monitor, operate, and protect power conditioning 
equipment. Transfer equipment includes equipment that permits the 
aggregation of energy generated by components of energy properties and 
equipment that alters voltage in order to permit transfer to a 
transmission or distribution line. Transfer equipment does not include 
transmission or distribution lines. Examples of transfer equipment 
include, but are not limited to, wires, cables, and combiner boxes that 
conduct electricity. Parts related to the functioning or protection of 
transfer equipment are also treated as transfer equipment and may 
include items such as current transformers used for metering, 
electrical interrupters (such as circuit breakers, fuses, and other 
switches), and hardware and software used to monitor, operate, and 
protect transfer equipment. Power conditioning equipment and transfer 
equipment that are integral to an energy property may be integral to 
another energy property or used by a qualified facility (as defined in 
section 45(d) of the Code), so long as the total cost basis of the 
integral property is properly allocated across the energy property and 
qualified facility that share such property.
    (iii) Roads. Roads that are an integral part of an energy property 
are integral to the activity performed by the energy property such as 
onsite roads that are used for equipment to operate and maintain the 
energy property. Roads primarily for access to the site, or roads used 
primarily for employee or visitor vehicles, are not integral to the 
activity performed by an energy property.
    (iv) Fences. Fencing is not an integral part of an energy property 
because it is not integral to the activity performed by the energy 
property.
    (v) Buildings. Generally, buildings are not integral parts of an 
energy property because they are not integral to the activity of the 
energy property. However, the following structures are not treated as 
buildings for this purpose:
    (A) A structure that is essentially an item of machinery or 
equipment; and
    (B) A structure that houses property that is integral to the 
activity of an energy property if the use of the structure is so 
closely related to the use of the housed energy property that the 
structure clearly can be expected to be replaced when the energy 
property it initially houses is replaced.
    (4) Location of energy property. Any property that meets the 
requirements of paragraphs (f)(2) and (3) of this section is part of an 
energy property regardless of where such property is located.
    (5) Examples. This paragraph provides examples illustrating 
property included in energy property.
    (i) Example 1. Solar energy property. X constructs a solar energy 
property (Property) comprised of 500 separate solar panels. The solar 
panels are connected by wires, cables, and combiner boxes. Generated 
electricity is conditioned for subsequent use through an inverter and 
eventually carried to a substation that houses a transformer where the 
electricity is stepped up to electrical grid voltage before being 
transmitted to the electrical grid through an intertie. All components 
of the Property, up to and including the transformer are either 
functionally interdependent components of the Property or are integral 
parts of the Property. Therefore, the Property is an energy property 
for purposes of the section 48 credit. When X places the Property in 
service, the cost of the components up to and including the transformer 
is included in the basis of the Property for purposes of computing the 
section 48 credit.
    (ii) Example 2. Co-located energy properties. Assume the same facts 
as in Example 1, except that Y constructs a wind energy property (Wind 
Property) near X's solar energy property (Solar Property). X's Solar 
Property and Y's Wind Property each connect to a substation that houses 
a transformer where the electricity is stepped up to electrical grid 
voltage before being transmitted to the electrical grid through the 
intertie. X and Y each pay 50% of the cost of the transformer and 
related power conditioning equipment housed therein. X's Solar Property 
and Y's Wind Property are separate energy properties. When X and Y 
place their respective energy properties in service, the cost of the 
components up to and including 50% of the cost of the transformer and 
related power conditioning equipment is included in X's and Y's basis 
in their respective energy properties for purposes of computing the 
section 48 credit.
    (iii) Example 3. Qualified offshore wind facility. Z constructs a 
qualified offshore wind facility (Offshore Wind Facility) comprised of 
150 turbines for which Z makes a valid election under section 48(a)(5) 
of the Code to claim the section 48 credit in lieu of the section 45 
credit. The alternating current electricity generated by the individual 
wind turbines will be carried by inter-array cables to an offshore 
substation where a transformer will step up the voltage of the 
electricity and a converter will convert it to direct current so it may 
be transported by subsea export cables to an onshore substation 
adjacent to the point of interconnection with the electrical grid. When 
the electricity reaches the onshore substation, it will

[[Page 82216]]

flow into another converter where it will be converted back to 
alternating current, and then through a transformer and associated 
switchgear where it will be converted to electrical grid voltage and 
where the Offshore Wind Facility can be electrically isolated from the 
grid. The electricity will then pass through an intertie that will take 
the electricity from the substation to the point of interconnection 
with the electrical grid. All components of the Offshore Wind Facility, 
up to and including the transformer and switchgear housed in the 
onshore substation, are either functionally interdependent components 
of an energy property or integral parts of an energy property. 
Therefore, the Offshore Wind Facility is an energy property, and when Z 
places the Offshore Wind Facility in service, the cost of the 
components up to and including the transformer and switchgear housed in 
the onshore substation are included in the basis of the Offshore Wind 
Facility for purposes of computing the section 48 credit.
    (iv) Example 4. Co-located energy property and qualified facility. 
X constructs a wind facility (Wind Facility) that is co-located with an 
energy storage technology (Energy Storage). The Wind Facility and 
Energy Storage share power conditioning and transfer equipment. X 
assigns 50% of the cost of the shared power conditioning and transfer 
equipment to the Wind Facility and 50% of the cost to the Energy 
Storage. The power conditioning and transfer equipment are integral 
parts of the Energy Storage, and are therefore, considered energy 
property. Therefore, X will include 50% of the cost of the power 
conditioning and transfer equipment when determining the section 48 
credit for the Energy Storage. Because the shared power conditioning 
and transfer equipment are not considered part of the Wind Facility, if 
the Wind Facility otherwise satisfies the requirements of the section 
45 credit, X can claim the section 45 credit for the Wind Facility.
    (g) Applicability date. This section applies with respect to 
property placed in service after December 31, 2022, and during a 
taxable year beginning after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Section 1.48-13 is added to read as follows:


Sec.  1.48-13   Rules relating to the increased credit amount for 
prevailing wage and apprenticeship.

    (a) In general. If a qualified energy project satisfies the 
requirements in paragraph (b) of this section, the amount of the energy 
credit determined under section 48(a) of the Internal Revenue Code 
(Code), after the application of sections 48(a)(1) through (8), and 
48(a)(15), is equal to the credit determined under section 48(a) 
(section 48 credit) multiplied by five.
    (b) Requirements. A qualified energy project satisfies the 
requirements of this paragraph (b) if it is one of the following--
    (1) A project with a maximum net output of less than one megawatt 
(MW) of electrical (as measured in alternating current) or thermal 
energy determined based on the nameplate capacity as provided in 
paragraph (e) of this section (One-Megawatt Exception);
    (2) A project the construction of which began prior to January 29, 
2023; or
    (3) A project that meets the prevailing wage requirements of 
section 48(a)(10)(A) of the Code, Sec.  1.45-7(b)-(d), and paragraph 
(c) of this section, the apprenticeship requirements of section 
45(b)(8) of the Code and Sec.  1.45-8, and the recordkeeping and 
reporting requirements of Sec.  1.45-12.
    (c) Special rule applicable to general prevailing wage 
requirements--(1) In general. In addition to satisfying the prevailing 
wage requirements under Sec.  1.45-7(b) through (d), a taxpayer must 
ensure that any laborers and mechanics employed (within the meaning of 
Sec.  1.45-7) by the taxpayer or any contractor or subcontractor in the 
construction of such energy project, and for the five-year period 
beginning on the date such project is placed in service, the alteration 
or repair of such project, are paid wages at rates not less than the 
prevailing rates for construction, alteration, or repair of a similar 
character in the locality in which such project is located as most 
recently determined by the Secretary of Labor, in accordance with 40 
U.S.C. chapter 31, subchapter IV. Subject to section 48(a)(10)(C) of 
the Code and this paragraph (c), for purposes of determining the 
increased credit amount under section 48(a)(9)(B)(iii) of the Code, the 
taxpayer is deemed to satisfy the prevailing wage requirements of 
section 48(a)(10)(A)(ii) of the Code at the time such project is placed 
in service.
    (2) Exception. For purposes of satisfying the prevailing wage 
requirements of paragraph (b)(3) of this section, Sec.  1.45-7(a) does 
not apply.
    (3) Recapture--(i) In general. The increased credit amount under 
paragraph (b)(3) of this section is subject to recapture for any 
project that does not satisfy the prevailing wage requirements in Sec.  
1.45-7(b) through (d) and paragraph (c)(1) of this section for any 
period with respect to an alteration or repair of such project during 
the five-year period beginning on the date such project is originally 
placed in service (five-year recapture period) (but that does not cease 
to be investment credit property within the meaning of section 50(a) of 
the Code).
    (ii) Recapture event--(A) In general. Any failure to satisfy the 
prevailing wage requirements in Sec.  1.45-7(b) through (d) and 
paragraph (c)(1) of this section for any period with respect to the 
alteration or repair of any project during the five-year recapture 
period is a recapture event. Any failure to satisfy the prevailing wage 
requirements in Sec.  1.45-7(b) through (d) and paragraph (c)(1) of 
this section for any period remain subject to the correction and 
penalty provisions in Sec.  1.45-7(c), including the waiver provisions 
in Sec.  1.45-7(c)(6). Subject to Sec.  1.45-7(c)(5) and (6), if the 
correction and penalty payments described in Sec.  1.45-7(c) are not 
made by the taxpayer on or before the date that is 180 days after the 
date of a final determination by the IRS (as defined in Sec.  1.45-
7(c)(4)(ii)), the cure provision in Sec.  1.45-7(c) does not apply and 
the increased credit amount is subject to recapture.
    (B) Yearly determination. A determination of whether a recapture 
event has occurred under paragraph (c)(3)(ii) of this section must be 
made for each taxable year (or portion thereof) occurring within the 
five-year recapture period, beginning with the taxable year ending 
after the date the energy project is placed in service. Thus, for each 
taxable year beginning or ending within the five-year recapture period, 
the taxpayer must determine whether the prevailing wage requirements of 
section 48(a)(10)(A) of the Code, Sec.  1.45-7(b)-(d), and paragraph 
(c)(1) of this section are satisfied for the recapture year(s) 
occurring during each taxable year.
    (C) Carrybacks and carryforward adjusted. In the case of any 
recapture event described in paragraph (c)(3)(ii)(A) of this section, 
the carrybacks and carryforwards under section 39 must be adjusted by 
reason of such recapture event.
    (iii) Correction and penalty payments not required if taxpayer is 
subject to recapture under section 48(a)(10)(C) of the Code. If the IRS 
determines that a taxpayer that claimed the increased credit amount 
under section 48(a)(9)(B)(iii) of the Code or transferred a specified 
credit portion under section 6418 of the Code that includes the 
increased credit amount under section 48(a)(9)(B)(iii) failed to 
satisfy the prevailing wage requirements in Sec.  1.45-

[[Page 82217]]

7(b) through (d) and paragraph (c)(1) of this section for any period 
with respect to the alteration or repair of any project during the 
five-year recapture period and the taxpayer does not make the 
correction and penalty payments provided in Sec.  1.45-7(c), then no 
penalty is assessed under Sec.  1.45-7, and the increased credit amount 
is subject to recapture. Taxpayers whose increased credit amount is 
subject to recapture under this section may still be entitled to the 
base amount of the energy credit under section 48(a) of the Code if 
such taxpayers meet the requirements to claim the credit.
    (4) Recapture amount--(i) In general. If a recapture event has 
occurred as described in paragraph (c)(3)(ii) of this section and the 
taxpayer fails to make the correction and penalty payments described in 
Sec.  1.45-7(c)(1) within 180 days after the date of a final 
determination by the IRS, the tax under chapter 1 of the Code for the 
taxable year in which the recapture event occurs is increased by the 
applicable recapture percentage multiplied by the increased credit 
amount that was claimed by the taxpayer under paragraph (b)(3) of this 
section.
    (ii) Applicable recapture percentage. If the recapture event 
occurs:
    (A) Within one full year after the property is placed in service, 
the recapture percentage is 100;
    (B) Within one full year after the close of the period described in 
paragraph (c)(4)(ii)(A) of this section, the recapture percentage is 
80;
    (C) Within one full year after the close of the period described in 
paragraph (c)(4)(ii)(B) of this section, the recapture percentage is 
60;
    (D) Within one full year after the close of the period described in 
paragraph (c)(4)(ii)(C) of this section, the recapture percentage is 
40;
    (E) Within one full year after the close of the period described in 
paragraph (c)(4)(ii)(D) of this section, the recapture percentage is 
20.
    (5) Recapture period. The five-year recapture period begins on the 
date the project is placed in service and ends on the date that is five 
full years after the placed-in-service date. Each 365-day period (366-
day period in case of a leap year) within the five-year recapture 
period is a separate recapture year for recapture purposes.
    (6) Increase in tax for recapture. The increase in tax under 
chapter 1 of the Code for the recapture of an increased credit amount 
claimed under paragraph (b)(3) occurs in the year of the recapture 
event.
    (7) Annual prevailing wage compliance report. In addition to the 
general reporting requirements in Sec.  1.45-12, a taxpayer that has 
claimed an increased credit amount under paragraph (b)(3) of this 
section or transferred a specified credit portion under section 6418 of 
the Code that includes an increased credit amount under paragraph 
(b)(3) of this section is required to provide to the IRS, information 
on the payment of prevailing wages with respect to any alteration or 
repair of the project during the recapture period at the time and in 
the form and manner prescribed in IRS forms or instructions or in 
publications or guidance published in the Internal Revenue Bulletin. 
See Sec.  601.601 of this chapter.
    (8) Transferred specified credit portions. In the case of a 
transferred specified credit portion under section 6418, to which 
recapture of an increased credit amount under this paragraph (c) 
applies, the eligible taxpayer is required to notify the transferee 
taxpayer of the recapture event in accordance with the provisions of 
Sec.  1.6418-5(f)(2) and the transferee taxpayer is responsible for any 
amount of increase in tax under section 48(a)(10)(C) of the Code and 
this paragraph (c) in accordance with the provisions of Sec.  1.6418-
5(f)(3).
    (9) Coordination with recapture rules under section 50(a). If any 
increased credit amount was recaptured with respect to investment 
credit property in a prior year under section 48(a)(10)(C) of the Code 
and this paragraph (c), then, such increased credit amount is not 
included in determining the aggregate decrease in the credits allowed 
under section 38 of the Code for all prior taxable years which would 
have resulted solely from reducing to zero the credit determined under 
subparts D and E of part IV of subchapter A of chapter 1 of the Code 
(that is, sections 38-50 of the Code) with respect to the property.
    (d) Energy project defined--(1) In general. For purposes of the 
increased credit amount provided by section 48(a)(9) of the Code and 
paragraphs (b) and (c) of this section, the domestic content bonus 
credit amount provided by section 48(a)(12) of the Code, and the 
increase in credit rate for energy communities provided in section 
48(a)(14) of the Code, the term energy project means one or more energy 
properties (multiple energy properties) that are operated as part of a 
single energy project. Multiple energy properties will be treated as 
one energy project if, at any point during the construction of the 
multiple energy properties, they are owned by a single taxpayer 
(subject to the related taxpayer rule provided in paragraph (d)(2) of 
this section) and any two or more of the following factors are present:
    (i) The energy properties are constructed on contiguous pieces of 
land;
    (ii) The energy properties are described in a common power 
purchase, thermal energy, or other off-take agreement or agreements;
    (iii) The energy properties have a common intertie;
    (iv) The energy properties share a common substation, or thermal 
energy off-take point;
    (v) The energy properties are described in one or more common 
environmental or other regulatory permits;
    (vi) The energy properties are constructed pursuant to a single 
master construction contract; or
    (vii) The construction of the energy properties are financed 
pursuant to the same loan agreement.
    (2) Related taxpayers--(i) Definition. For purposes of this 
section, the term related taxpayers means members of a group of trades 
or businesses that are under common control (as defined in Sec.  1.52-
1(b)).
    (ii) Related taxpayer rule. For purposes of this section, related 
taxpayers are treated as one taxpayer in determining whether multiple 
energy properties are treated as an energy project with respect to 
which a section 48 credit may be determined.
    (3) Consistent treatment as an energy project. If multiple energy 
properties are treated as a single energy project for beginning of 
construction purposes with respect to the section 48 credit, the 
multiple energy properties will also be treated as a single energy 
project for purposes of the prevailing wage and apprenticeship 
requirements, the domestic content bonus credit amount, and the 
increase in section 48 credit rate for energy communities.
    (e) Nameplate capacity for purposes of the One-Megawatt Exception. 
For purposes of paragraph (b)(1) of this section, the determination of 
whether an energy project has a maximum net output of less than 1 MW of 
electrical (as measured in alternating current) or thermal energy is 
determined based on the nameplate capacity. Where applicable, taxpayers 
should use the International Standard Organization (ISO) conditions to 
measure the maximum electrical generating output or usable energy 
capacity of an energy project. Paragraphs (e)(1) through (5) of this 
section provide rules for applying the One-Megawatt Exception (as 
provided in paragraph (b)(1) of this section) to different types of 
energy properties. Because electrochromic glass

[[Page 82218]]

property (as defined in Sec.  1.48-9(e)(2)(ii)), fiber-optic solar 
energy property (as defined in Sec.  1.48-9(e)(2)(i)), and microgrid 
controllers (as defined in Sec.  1.48-9(e)(12)) do not generate 
electricity or thermal energy, these energy properties are not eligible 
for the One-Megawatt Exception.
    (1) Electrical generating energy property. In the case of an 
electrical generating energy property, the maximum electrical 
generating output in MW that the unit of energy property is capable of 
producing on a steady state basis and during continuous operation under 
standard conditions, as measured by the manufacturer and consistent 
with the definition of nameplate capacity provided in 40 CFR 96.202.
    (2) Electrical energy storage property. In the case of electrical 
energy storage property (as defined in Sec.  1.48-9(e)(10)(ii)), the 
storage device's maximum net output.
    (3) Thermal energy storage property and other property generating 
thermal energy. In the case of thermal energy storage property (as 
defined in Sec.  1.48-9(e)(10)(iii)) and other energy property that 
generates thermal energy for productive use (for example, direct 
geothermal use, geothermal heat pumps, solar process heating), a 
taxpayer must use the equivalent of 3.4 million British Thermal Units 
per hour (mmBtu/hour) for heating and 284 tons for cooling can be used 
to determine if the thermal storage property satisfies the One-Megawatt 
Exception (Btu per hour/3,412,140 = MW). For projects delivering 
thermal energy to a building or buildings, this can be assessed as 
either the aggregate maximum thermal output of all individual heating 
or cooling elements within the building or buildings, or as the maximum 
thermal output that the entire project is capable of delivering to a 
building or buildings at any given moment.
    (4) Hydrogen energy storage property and specified clean hydrogen 
production facilities. A hydrogen energy storage property (as defined 
in Sec.  1.48-9(e)(10)(iv)) or a specified clean hydrogen production 
facility (as defined in section 48(a)(15)(C) of the Code) must have a 
maximum net output of less than 3.4 mmBtu/hour of hydrogen or 
equivalently 10,500 standard cubic feet (scf) per hour of hydrogen to 
satisfy the One-Megawatt Exception.
    (5) Qualified biogas property. In the case of qualified biogas 
property, 3.4 mmBtu/hour can be used as equivalent to the One-Megawatt 
Exception. Taxpayers may convert the maximum net output of 3.4 mmBtu/
hour into an equivalent maximum net volume flow in scf per hour using 
the appropriate high heat value conversion factors found in the EPA 
GHGRR at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, 
taxpayers may calculate their own equivalent volumetric flow if the 
heat content of the gas is known.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to projects 
placed in service in taxable years ending on or after the date final 
regulations are published in the Federal Register, and the construction 
of which begins after the date final regulations are published in the 
Federal Register.
    (2) Exception. Paragraph (d) of this section applies to energy 
projects the construction of which begins after November 22, 2023.
0
Par. 4. Section 1.48-14 is added to read as follows:


Sec.  1.48-14  Rules applicable to energy property.

    (a) Retrofitted energy property--(1) In general. For purposes of 
section 48(a)(3)(B)(ii), (a)(5)(D)(iv), and (a)(8)(B)(iii) of the 
Internal Revenue Code (Code), a retrofitted energy property may be 
originally placed in service even though it contains some used 
components of the unit of energy property only if the fair market value 
of the used components of the unit of energy property is not more than 
20 percent of the total value of the unit of energy property taking 
into account the cost of the new components of property plus the value 
of the used components of the unit of energy property (80/20 Rule). 
Only expenditures paid or incurred that relate to the new components of 
the unit of energy property are taken into account for purposes of 
computing the energy credit determined under section 48 (section 48 
credit) with respect to the unit of energy property. The cost of new 
components of the unit of energy property includes all costs properly 
included in the depreciable basis of the new components. If the 
taxpayer satisfies the 80/20 Rule with regard to the unit of energy 
property and the taxpayer pays or incurs new costs for property that is 
an integral part of the energy property (as defined in Sec.  1.48-
9(f)(3)(i)), the taxpayer may include the new costs paid or incurred 
for property that is an integral part of the energy property (as 
defined in Sec.  1.48-9(f)(3)(i)) in the basis of the energy property 
for purpose of the section 48 energy credit. Further, in the case of an 
energy project (as defined in Sec.  1.48-13(d)), the 80/20 Rule is 
applied to each unit of energy property comprising an energy project.
    (2) Excluded costs. Costs incurred for new components of property 
added to used components of a unit of energy property may not be taken 
into account for purposes of the section 48 credit unless the taxpayer 
satisfies the 80/20 Rule (as provided in paragraph (a)(1) of this 
section) by placing into service a unit of energy property for which 
the fair market value of the used components of property is not more 
than 20 percent of the total value of the unit of energy property 
taking into account the cost of the new components of property plus the 
value of the used components of property.
    (3) Examples. This paragraph (a)(3) provides examples illustrating 
the provisions of this paragraph (a):
    (i) Example 1. Retrofitted solar energy property that satisfies the 
80/20 Rule. Z owns an existing solar energy property for which the 
section 48 credit has been claimed and the recapture period for the 
section 48 credit has elapsed. Z replaces used components of the solar 
energy property with new components of property at a cost of $1.4 
million. The retrofitted solar energy property constitutes a unit of 
energy property. The fair market value of the remaining original 
components of the retrofitted solar energy property is $100,000, which 
is not more than 20% of the retrofitted solar energy property's total 
value of $1.5 million (the cost of the new components ($1.4 million) + 
the value of the remaining original components ($100,000)). The value 
of the old components of the retrofitted solar energy property is 
$100,000/$1.5 million (7% of the value of total value of the 
retrofitted solar energy property), thus the retrofitted solar energy 
property will be considered newly placed in service for purposes of 
section 48, and Z will be able to claim a section 48 credit based on 
the cost of the new components ($1.4 million).
    (ii) Example 2. Capital improvements to an existing energy property 
that do not satisfy the 80/20 Rule. X owns an existing unit of energy 
property for which the section 48 credit has been claimed and the 
recapture period for the section 48 credit has elapsed. The fair market 
value of the unit of energy property is $1 million. During the tax 
year, X makes capital improvements to the unit of energy property. The 
expenditures for such capital improvements total $300,000. X may not 
claim a section 48 credit for the $300,000 spent on capital 
improvements during the tax year because the capital improvements did 
not satisfy the 80/20 Rule.
    (b) Dual use property--(1) Definition. For purposes of section 48, 
the term dual use property means property that uses energy derived from 
both a

[[Page 82219]]

qualifying source (that is, from an energy property defined in Sec.  
1.48-9(a) (including a qualified facility for which an election has 
been made as provided by paragraph (f)(1) of this section)) and from a 
non-qualifying source (that is, sources other than an energy property 
defined in Sec.  1.48-9(a) (including a qualified facility for which an 
election has been made as provided by paragraph (f)(1) of this 
section)).
    (2) Qualification as energy property--(i) In general. If dual use 
property meets each of the requirements of this paragraph (b), it will 
qualify as energy property if its use of energy from non-qualifying 
sources does not exceed 50 percent of its total energy input (as 
determined under the rules of paragraph (b)(2)(ii) of this section) 
during an annual measuring period (as defined in paragraph (b)(2)(iii) 
of this section). If the energy used from qualifying sources is between 
50 percent and 100 percent, only a proportionate amount of the eligible 
basis of the energy property will be taken into account in computing 
the amount of the section 48 credit (for example, if 80 percent of the 
energy used by a dual use property is from qualifying sources, 80 
percent of the basis of the dual use property will be taken into 
account in computing the amount of the section 48 credit).
    (ii) Aggregation of energy inputs. The measurement of energy use 
required for purposes of paragraph (b)(2)(i) of this section may be 
made by comparing, on the basis of British thermal units (Btus), energy 
input to dual use property from all qualifying sources with energy 
input from all non-qualifying sources. The Commissioner may also accept 
any other method that accurately establishes the relative annual use of 
energy derived from all qualifying sources and of energy input from all 
non-qualifying sources by dual use property.
    (iii) Annual measuring period. For purposes of paragraph (b)(2)(i) 
of this section, the term annual measuring period means with respect to 
an item of dual use property the 365-day period (366-day period in case 
of a leap year) beginning with the day the dual use property is placed 
in service or a 365-day period (366-day period in case of a leap year) 
beginning the day after the last day of the immediately preceding 
annual measuring period.
    (iv) Recapture. If, for a taxable year (within the recapture period 
specified in section 50(a) of the Code) subsequent to the taxable year 
that a dual use property was placed in service, the equipment's use of 
energy from all qualifying sources is reduced below 50 percent of its 
total energy input (as determined under the rules of paragraph 
(b)(2)(i) of this section), then recapture of the section 48 credit is 
required under section 50(a).
    (c) Energy property eligible for multiple Federal income tax 
credits--(1) In general. For purposes of this section, the basis of 
energy property may be eligible for calculating both the section 48 
credit and another Federal income tax credit, subject to the limitation 
provided in paragraph (c)(2) of this section.
    (2) Limitation. A taxpayer that owns energy property that is 
eligible for both the section 48 credit and another Federal income tax 
credit is eligible for the section 48 credit only to the extent the 
other Federal income tax credit was not claimed with respect to the 
taxpayer's eligible basis in the energy property. Except as provided in 
paragraph (f)(2) of this section, in no event may a taxpayer claim both 
a section 48 credit and another Federal income tax credit with respect 
to the same eligible basis in an energy property. See paragraph (e) of 
this section for special rules regarding ownership of energy property.
    (d) Incremental cost--(1) In general. For purposes of this section, 
only the incremental cost of energy property is included in the 
eligible basis of the energy property. The term incremental cost means 
the excess of the total cost of energy property over the amount that 
would have been expended for the energy property if the energy property 
were not used for a qualifying purpose.
    (2) Example. A installs solar energy property above the surface of 
an existing roof of a building that A owns. The solar energy property 
uses bifacial panels that convert to energy the light that strikes both 
the front and back of the panels if installed over a highly reflective 
surface that is affixed to a roof (reflective roof). The cost of the 
reflective roof is $15,000 whereas the cost of a standard roof for the 
building would be $10,000. The reflective roof does not include the 
portions of the existing roof that will be replaced, and any features 
of the roof not directly related to establishing, improving, and 
maintaining the efficiency of the reflective roof. Accordingly, the 
reflective roof, if installed in connection with the solar energy 
property, constitutes energy property under section 48. The incremental 
cost of the reflective roof is $5,000, and that amount is A's eligible 
basis in the solar energy property for purposes of the section 48 
credit.
    (e) Special rules concerning ownership--(1) Eligible basis. For 
purposes of this section, a taxpayer that owns an energy property is 
eligible for the section 48 credit only to the extent of the taxpayer's 
eligible basis in the energy property. In the case of multiple 
taxpayers holding direct ownership in an energy property, each taxpayer 
determines its eligible basis based on its fractional ownership 
interest in the energy property.
    (2) Multiple owners. A taxpayer must directly own at least a 
fractional interest in the entire unit of energy property for a section 
48 credit to be determined with respect to such taxpayer's interest. No 
section 48 credit may be determined with respect to a taxpayer's 
ownership of one or more separate components of an energy property if 
the components do not constitute a unit of energy property. However, 
the use of property owned by one taxpayer that is an integral part of 
an energy property owned by a second taxpayer will not prevent a 
section 48 credit from being determined with respect to the second 
taxpayer's energy property.
    (3) Related taxpayers--(i) Definition. For purposes of this 
section, the term related taxpayers means members of a group of trades 
or businesses that are under common control (as defined in Sec.  1.52-
1(b)).
    (ii) Related taxpayer rule. For purposes of this section, related 
taxpayers are treated as one taxpayer in determining whether a taxpayer 
has made an investment in an energy property with respect to which a 
section 48 credit may be determined.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (e). In each example, X and Y are unrelated taxpayers.
    (i) Example 1. Fractional ownership required to satisfy section 48. 
X and Y own fractional ownership interests in a geothermal heat pump 
equipment that is a unit of energy property. Because X and Y each own a 
fractional ownership interest in a unit of energy property, a section 
48 credit may be determined with respect to X's and Y's fractional 
ownership interests in the unit of energy property.
    (ii) Example 2. Ownership of separate components. X and Y own 
separate components of a geothermal heat pump equipment, which taken 
together is a unit of energy property. X owns the coils in the ground 
and Y owns the heat pump. No section 48 credit may be determined with 
respect to either X or Y because each owns a separate component of 
energy property that does not constitute a unit of energy property as 
defined in Sec.  1.48-9(f)(2).
    (iii) Example 3. Shared ownership of property that is an integral 
part of separate energy properties. X owns a wind energy property that 
is a unit of energy property and Y owns a solar energy property that is 
a unit of energy

[[Page 82220]]

property that are co-located. Both X's wind energy property and Y's 
solar energy property connect to a substation that houses a step-up 
transformer where the electricity is stepped up to electrical grid 
voltage before being transmitted to the electrical grid through an 
intertie. X and Y each own a 50% fractional ownership interest in the 
step-up transformer. The step-up transformer is an integral part of 
both the wind energy property and the solar energy property (as defined 
in Sec.  1.48-9(f)(3)(i). As a result, X and Y may both compute a 
section 48 credit for their respective energy properties by including 
50% of the costs of the step-up transformer.
    (iv) Example 4. Separate ownership of property that is an integral 
part of separate energy property. X owns a wind energy property that is 
a unit of energy property and property that is an integral part of the 
wind energy property, specifically a transformer where the electricity 
is stepped up to electrical grid voltage before being transmitted to 
the electrical grid through an intertie. Y owns a solar energy property 
that is a unit of energy property that connects to X's transformer. 
Because Y does not hold an ownership interest in the transformer, Y may 
compute its section 48 credit for its solar energy property but it will 
not include any costs relating to the transformer.
    (f) Coordination with other Code provisions. Paragraphs (f)(1) 
through (7) of this section provide rules applicable to the election 
under section 48(a)(5)(C) to treat certain facilities as energy 
property eligible for a section 48 credit in lieu of a renewable 
electricity production credit under section 45 of the Code (section 45 
credit). Paragraph (f)(8) of this section provides a coordination rule 
for property with respect to which both a section 48 credit and a low-
income housing credit under section 42 of the Code (section 42 credit) 
may be determined.
    (1) Election to treat qualified facilities as energy property. If a 
taxpayer makes an election under section 48(a)(5)(C) of the Code 
(pursuant to the requirements in paragraph (f)(6) of this section) to 
treat qualified property (as defined in paragraph (f)(2) of this 
section) that is part of a qualified investment credit facility (as 
defined in paragraph (f)(4) of this section) as energy property with 
respect to which a section 48 credit may be determined, such property 
will be treated as energy property for purposes of section 48. No 
section 45 credit may be determined with respect to any such qualified 
investment credit facility and the requirements of section 45 are not 
imposed on a qualified investment credit facility. No credit under 
sections 45Q or 45V of the Code may be determined with respect to 
either any carbon capture equipment included in a qualified investment 
credit facility or any specified clean hydrogen production facility.
    (2) Qualified property. For purposes of this paragraph (f), the 
term qualified property means property that meets each of the 
requirements of paragraphs (f)(2)(i) through (iii) of this section:
    (i) The property is tangible personal property (as defined in 
paragraph (f)(3)(i) of this section) or other tangible property (not 
including a building or its structural components) (as defined in 
paragraph (f)(3)(ii) of this section), but only if such other tangible 
property is used as an integral part (as defined paragraph (f)(3)(iii) 
of this section) of the qualified investment credit facility (as 
defined in paragraph (f)(4) of this section).
    (ii) Depreciation (or amortization in lieu of depreciation) is 
allowable (as defined in Sec.  1.48-9(b)(4)) with respect to the 
property.
    (iii) The taxpayer constructs, reconstructs, or erects the property 
(as defined in Sec.  1.48-9(b)(1)) or acquires the property (as defined 
in Sec.  1.48-9(b)(2)) if the original use of the property (as defined 
in Sec.  1.48-9(b)(3)) commences with the taxpayer.
    (3) Definitions related to requirements for qualified property. For 
purposes of section 48 of the Code and this paragraph (f), the 
definitions of this paragraph (f)(3) apply:
    (i) Tangible personal property. The term tangible personal property 
means any tangible property except land and improvements thereto, such 
as buildings or other inherently permanent structures (including items 
that are structural components of such buildings or structures). 
Tangible personal property includes all property (other than structural 
components) that is contained in or attached to a building. Further, 
all property that is in the nature of machinery (other than structural 
components of a building or other inherently permanent structure) is 
considered tangible personal property even though located outside a 
building. Local law is not controlling for purposes of determining 
whether property is or is not tangible property or tangible personal 
property. Thus, tangible property may be personal property for purposes 
of the energy credit even though under local law the property is 
considered to be a fixture and therefore real property.
    (ii) Other tangible property. The term other tangible property 
means tangible property other than tangible personal property (not 
including a building and its structural components), that is used as an 
integral part of furnishing electrical energy by a person engaged in a 
trade or business of furnishing any such service.
    (iii) Integral part--(A) In general. Property owned by a taxpayer 
is an integral part of a qualified investment credit facility owned by 
the same taxpayer if it is used directly in the intended function of 
the qualified investment credit facility and is essential to the 
completeness of the intended function of the qualified investment 
credit facility. A taxpayer may not claim the section 48 credit for any 
property that is an integral part of the taxpayer's qualified 
investment credit facility that is not owned by the taxpayer.
    (B) Power conditioning and transfer equipment. Property that is an 
integral part of a qualified investment credit facility includes power 
conditioning equipment and transfer equipment used to perform the 
intended function of the qualified investment credit facility. Power 
conditioning equipment includes, but is not limited to, transformers, 
inverters, and converters, which modify the characteristics of 
electricity or thermal energy into a form suitable for use or 
transmission or distribution. Parts related to the functioning or 
protection of power conditioning equipment are also treated as power 
conditioning equipment and include, but are not limited to, switches, 
circuit breakers, arrestors, and hardware and software used to monitor, 
operate, and protect power conditioning equipment. Transfer equipment 
includes equipment that permits the aggregation of energy generated by 
components of energy properties and equipment that alters voltage in 
order to permit transfer to a transmission or distribution line. 
Transfer equipment does not include transmission or distribution lines. 
Examples of transfer equipment include, but are not limited to, wires, 
cables, and combiner boxes that conduct electricity. Parts related to 
the functioning or protection of transfer equipment are also treated as 
transfer equipment and may include items such as current transformers 
used for metering, electrical interrupters (such as circuit breakers, 
fuses, and other switches), and hardware and software used to monitor, 
operate, and protect transfer equipment.
    (C) Roads. Roads that are an integral part of a qualified 
investment credit facility are integral to the activity performed by 
the qualified investment credit facility; these include onsite roads 
that are used for equipment to

[[Page 82221]]

operate and maintain the qualified investment credit facility. Roads 
primarily for access to the site, or roads used primarily for employee 
or visitor vehicles, are not integral to the activity performed by a 
qualified investment credit facility.
    (D) Fences. Fencing is not an integral part of an energy property 
because it is not integral to the activity performed by the energy 
property.
    (E) Buildings. Generally, buildings are not integral parts of a 
qualified investment credit facility because they are not integral to 
the activity of the qualified investment credit facility. However, the 
following structures are not treated as buildings for this purpose:
    (1) A structure that is essentially an item of machinery or 
equipment.
    (2) A structure that houses property that is integral to the 
activity of a qualified investment credit facility if the use of the 
structure is so closely related to the use of the housed qualified 
investment credit facility that the structure clearly can be expected 
to be replaced when the qualified investment credit facility it 
initially houses is replaced.
    (4) Qualified investment credit facility. The term qualified 
investment credit facility means any facility--
    (i) That is a qualified facility (within the meaning of section 45) 
described in section 45(d)(1) through (4), (6), (7), (9) or (11) of the 
Code;
    (ii) That meets the placed in service and beginning of construction 
requirements (if any) provided in section 48 of the Code;
    (iii) With respect to which no credit has been allowed under 
section 45 of the Code; and
    (iv) For which the taxpayer makes an irrevocable election under 
section 48(a)(5) of the Code and paragraph (f)(1) of this section.
    (5) Intangibles excluded. Intangible property is not qualified 
property for purposes of section 48(a)(5)(D) of the Code and paragraph 
(f) of this section.
    (6) Time and manner of making election--(i) In general. To make an 
election under section 48(a)(5) of the Code and paragraph (f)(1) of 
this section to treat a qualified facility as a qualified investment 
credit facility, a taxpayer must claim the section 48 credit with 
respect to such qualified investment credit facility on a completed 
Form 3468, Investment Credit, or any successor form(s), and file such 
form with the taxpayer's timely filed (including extensions) Federal 
income tax return for the taxable year in which the qualified 
investment credit facility is placed in service. The taxpayer must also 
attach a statement to its Form 3468, or any successor forms(s), filed 
with its timely filed Federal income tax return (including extensions) 
that includes all of the information required by the instructions to 
Form 3468, or any successor form(s) for each qualified investment 
credit facility subject to an election under section 48(a)(5) and 
paragraph (f)(1) of this section. A separate election must be made for 
each qualified facility that meets the requirements provided in 
paragraph (f)(2) of this section to be treated as a qualified 
investment credit facility. If any taxpayer owning an interest in a 
qualified facility makes an election with respect to such qualified 
facility, that election is binding on all taxpayers that directly or 
indirectly own an interest in the qualified facility.
    (ii) Special rule for partnerships and S corporations. In the case 
of a qualified facility owned by a partnership or an S corporation, the 
election under paragraph (f)(1) of this section is made by the 
partnership or S corporation and is binding on all ultimate section 48 
credit claimants (as defined in Sec.  1.50-1(b)(3)(ii)). The 
partnership or S corporation must file a Form 3468, or any successor 
forms(s), with its timely filed partnership or S corporation return 
(including extensions) with respect to Federal income tax for the 
taxable year in which the qualified investment credit facility is 
placed in service to indicate that it is making the election and attach 
a statement that includes all of the information required by the 
instructions to Form 3468, or any successor form(s) for each qualified 
facility subject to the election. The ultimate credit claimants must 
claim the section 48 credit on a completed Form 3468, or any successor 
form(s), and file such form with a timely filed (including extensions) 
Federal income tax return for the taxable year that ends with or within 
the taxable year in which the partnership or S corporation made the 
election. The partnership or S corporation making the election must 
provide the ultimate credit claimants with the necessary information to 
complete Form 3468, or any successor form(s), to claim the energy 
credit.
    (7) Election irrevocable. The election under section 48(a)(5) of 
the Code and paragraph (f)(1) of this section to treat a qualified 
facility as an energy property is irrevocable.
    (8) Coordination rule for sections 42 and 48 credits. As provided 
under section 50(c)(3)(C) of the Code, in the case of a taxpayer 
determining eligible basis for purposes of calculating a section 42 
credit, a taxpayer is not required to reduce its basis in an energy 
property by the amount of the section 48 credit determined with respect 
to the property. The basis of an energy property may be used to 
determine a section 48 credit and may also be included in eligible 
basis when determining a section 42 credit. See paragraph (e) of this 
section for special rules regarding ownership of energy property.
    (g) Rules for certain lower-output energy properties to include 
qualified interconnection costs in the basis of associated energy 
property--(1) In general. For purposes of determining the section 48 
credit, energy property includes amounts paid or incurred by the 
taxpayer for qualified interconnection property (as defined in 
paragraph (g)(2) of this section), in connection with the installation 
of energy property (as defined in Sec.  1.48-9(a)) that has a maximum 
net output of not greater than 5 MW (as measured in alternating 
current) (as described in paragraph (g)(3) of this section). The 
qualified interconnection property must provide for the transmission or 
distribution of the electricity produced or stored by such energy 
property and must be properly chargeable to the capital account of the 
taxpayer as reduced by paragraph (g)(6) of this section.
    (2) Qualified interconnection property. The term qualified 
interconnection property means, 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; is either constructed, 
reconstructed, or erected by the taxpayer, (as defined in Sec.  1.48-
9(b)(1)), or for which the cost with respect to the construction, 
reconstruction, or erection of such property is paid or incurred by 
such taxpayer; and the original use (as defined in Sec.  1.48-9(b)(3)), 
of which, pursuant to an interconnection agreement (as defined in 
paragraph (g)(4) of this section), commences with a utility (as defined 
in paragraph (g)(5) of this section). Qualified interconnection 
property is not part of an energy property. As a result, qualified 
interconnection property is not taken into account in determining 
whether an energy property satisfies the requirements for the domestic 
content bonus credit amount referenced in section 48(a)(12) of the Code 
and the increase in credit rate for energy communities provided in 
section 48(a)(14) of the Code.

[[Page 82222]]

    (3) Five-Megawatt Limitation--(i) In general. The Five-Megawatt 
Limitation is measured at the level of the energy property in 
accordance with section 48(a)(8)(A) of the Code. The maximum net output 
of an energy property is measured only by nameplate generating capacity 
of the unit of energy property at the time the energy property is 
placed in service.
    (ii) Nameplate capacity for purposes of the Five-Megawatt 
Limitation. The determination of whether an energy property has a 
maximum net output of not greater than 5 MW (as measured in alternating 
current) is based on the nameplate capacity for purposes of paragraph 
(g)(1) of this section. Where applicable, taxpayers should use the 
International Standard Organization (ISO) conditions to measure the 
maximum electrical generating output or usable energy capacity of an 
energy property. Paragraphs (g)(3)(i)(A) and (B) of this section, 
provide rules for applying the Five-Megawatt Limitation (as provided in 
paragraph (g)(1) of this section) to electrical generating energy 
property and electrical energy storage property, respectively.
    (A) Electrical generating energy property. In the case of an 
electrical generating energy property, the maximum electrical 
generating output in MW that the unit of energy property is capable of 
producing on a steady state basis and during continuous operation under 
standard conditions, as measured by the manufacturer and consistent 
with the definition of nameplate capacity provided in 40 CFR 96.202.
    (B) Electrical energy storage property. In the case of electrical 
energy storage property (as defined in Sec.  1.48-9(e)(10)(ii)), the 
storage device's maximum net output is its nameplate capacity.
    (4) Interconnection agreement. The term interconnection agreement 
means an agreement with a utility for the purposes of interconnecting 
the energy property owned by such taxpayer to the transmission or 
distribution system of the utility.
    (5) Utility. For purposes of section 48(a)(8) of the Code and this 
paragraph (g), the term utility means the owner or operator of an 
electrical transmission or distribution system that is subject to the 
regulatory authority of a State or political subdivision thereof, any 
agency or instrumentality of the United States, a public service or 
public utility commission or other similar body of any State or 
political subdivision thereof, or the governing or ratemaking body of 
an electric cooperative.
    (6) Reduction to amounts chargeable to capital account. In the case 
of expenses paid or incurred for qualified interconnection property as 
defined in paragraph (g)(2) of this section, amounts otherwise 
chargeable to capital account with respect to such expenses must be 
reduced under rules similar to the rules of section 50(c) of the Code. 
In addition, the taxpayer must pay or incur the interconnection 
property costs; therefore, any reimbursement, including by a utility, 
must be accounted for by reducing taxpayers' expenditure when 
determining eligible costs.
    (7) Examples. This subparagraph provides examples illustrating the 
application of the Five-Megawatt Limitation provided in this paragraph 
(g).
    (i) Example 1. Application of Five-Megawatt Limitation to an 
interconnection agreement for energy properties owned by separate 
taxpayers. X places in service a solar energy property (Solar Property) 
with a maximum net output of 5 MW (as measured in alternating current). 
Y places in service a qualified wind facility (Wind Facility), for 
which Y has made a valid election under section 48(a)(5) of the Code to 
elect the section 48 credit in lieu of the section 45 credit, with a 
maximum net output of 5 MW (as measured in alternating current). The 
Solar Property and the Wind Facility are separate units of energy 
property installed on contiguous pieces of land and connect to the grid 
through a common intertie. As part of the development of the Solar 
Property and Wind Facility, interconnection costs are required by the 
utility to modify and upgrade the transmission system at or beyond the 
common intertie to the utility's transmission system to accommodate 
such interconnection. X and Y are party to the same interconnection 
agreement with the utility that allows for a maximum output of 10 MW 
(as measured in alternating current). The interconnection agreement 
provides the total cost of the qualified interconnection property. X 
and Y may include the costs paid or incurred by X and Y, respectively, 
for qualified interconnection property subject to the terms of the 
interconnection agreement, when calculating their respective section 48 
credits for the Solar Property and the Wind Facility because each has a 
maximum net output of not greater than 5 MW.
    (ii) Example 2. Application of Five-Megawatt Limitation to an 
interconnection agreement for a single energy property. X develops 
three solar energy properties located in close proximity. The three 
solar energy properties are not considered an energy project pursuant 
to the definition in Sec.  1.48-13(d). Each of the solar energy 
properties is a unit of energy property and has a maximum net output of 
4 MW (as measured in alternating current). Electricity that is suitable 
for use or transmission (and is not further conditioned) from the three 
solar energy properties feeds into a single gen-tie line and a common 
intertie. X is party to a separate interconnection agreement with the 
utility for each solar energy property and each interconnection 
agreement allows for a maximum output of 4 MW (as measured in 
alternating current). X may include the costs it paid or incurred for 
qualified interconnection property for each solar energy property when 
calculating its section 48 credit for each of the three solar energy 
properties, subject to the terms of each interconnection agreement, 
because each of the solar energy properties has a maximum net output of 
not greater than 5 MW.
    (iii) Example 3. Application of Five-Megawatt Limitation to a 
single interconnection agreement for multiple energy properties. The 
facts are the same as Example 2, except that X is party to one 
interconnection agreement with the utility with respect to the three 
solar energy properties and the interconnection agreement allows for a 
maximum output of 12 MW (as measured in alternating current). With 
respect to each of the three solar energy properties, X may include the 
costs it paid or incurred for qualified interconnection property for 
each solar energy property when calculating its section 48 credit for 
each of the three solar energy properties, subject to the terms of the 
interconnection agreement, because each of the solar energy properties 
has a maximum net output of not greater than 5 MW.
    (iv) Example 4. Application of Five-Megawatt Limitation to an 
Energy Project. The facts are the same as Example 3, except that the 
three solar energy properties are also subject to a common power 
purchase agreement and as a result, are considered an energy project 
(as defined in Sec.  1.48-13(d)). With respect to each of the three 
solar energy properties, X may include the costs it paid or incurred 
for qualified interconnection property when calculating its section 48 
credit for each of the three solar energy properties, subject to the 
terms of the interconnection agreement, because each of the solar 
energy properties has a maximum net output of no greater than 5 MW.
    (h) Cross references. (1) For rules regarding the coordination of 
the section

[[Page 82223]]

42 credit and section 48 credit, see section 50(c)(3) of the Code.
    (2) For rules regarding the denial of double benefit for qualified 
biogas property, see section 45(e) of the Code.
    (3) To determine applicable recapture rules, see section 50(a) of 
the Code.
    (4) For rules regarding the credit eligibility of property used 
outside the United States, see section 50(b)(1) of the Code.
    (5) For rules regarding the credit eligibility of property used by 
certain tax-exempt organizations, see section 50(b)(3) of the Code. See 
section 6417(d)(2) of the Code for an exception to this rule in the 
case of an applicable entity making an elective payment election.
    (6) For application of the normalization rules to the section 48 
credit when taken by certain regulated companies, including rules 
regarding the election not to apply the normalization rules to energy 
storage technology (as defined in section 48(c)(6) of the Code), see 
section 50(d)(2) of the Code.
    (i) Applicability date. This section applies with respect to 
property placed in service after December 31, 2022, and during a 
taxable year beginning after [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 5. Section 1.6418-5, as proposed to be added at 88 FR 40496, June 
21, 2023, is amended by:
0
1. Redesignating paragraphs (f) through (h) as paragraphs (g) through 
(i).
0
2. Adding new paragraph (f).
    The addition reads as follows:


Sec.  1.6418-5  Special rules.

* * * * *
    (f) Notification and impact of recapture under section 48(a)(10)(C) 
of the Code--(1) In general. In the case of any election under Sec.  
1.6418-2 or Sec.  1.6418-3 with respect to any specified credit portion 
described in Sec.  1.6418-1(c)(2)(iii), if, during any taxable year, 
there is recapture under section 48(a)(10)(C) of the Code and Sec.  
1.48-13(c)(3) of any increased credit amount under section 
48(a)(9)(B)(iii) before the close of the recapture period (as described 
in Sec.  1.48-13(c)(3)(E)), such eligible taxpayer and the transferee 
taxpayer must follow the notification process in paragraph (f)(2) of 
this section with recapture impacting the transferee taxpayer as 
described in paragraph (f)(3) of this section.
    (2) Notification requirements. The notification requirements for 
the eligible taxpayer are the same as for an eligible taxpayer that 
must report a recapture event as described in paragraph (d)(2)(i) of 
this section, except that the recapture amount that must be computed is 
defined in Sec.  1.48-13(c)(3)(D).
    (3) Impact of recapture. The transferee taxpayer is responsible for 
any amount of tax increase under section 48(a)(10)(C) of the Code and 
Sec.  1.48-13(c)(3) upon the occurrence of a recapture event under 
Sec.  1.48-13(c)(3)(B).
    (4) Applicability date. This section applies to taxable years 
ending on or after [DATE OF PUBLICATION OF FINAL RULE].
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-25539 Filed 11-17-23; 8:45 am]
BILLING CODE 4830-01-P


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