`[Federal Register Volume 89, Number 239 (Thursday, December 12, 2024)]
[Rules and Regulations]
[Pages 100598-100660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28190]



[[Page 100597]]

Vol. 89

Thursday,

No. 239

December 12, 2024

Part II





 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; Final Rule

  Federal Register / Vol. 89 , No. 239 / Thursday, December 12, 2024 / 
Rules and Regulations  

[[Page 100598]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10015]
RIN 1545-BO40


Definition of Energy Property and Rules Applicable to the Energy 
Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document sets forth final rules relating to the energy 
credit, including rules for determining whether investments in energy 
property are eligible for the energy credit and for implementing 
certain amendments made by the Inflation Reduction Act of 2022. The 
final regulations impact taxpayers who invest in energy property 
eligible for the energy credit.

DATES: 
    Effective date: These regulations are effective on December 12, 
2024.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.48-9(g), 1.48-13(f), 1.48-14(j), and 1.6418-5(j).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, the IRS 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries) at (202) 317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Authority

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 48 and 6418 of the Internal Revenue Code 
(Code) issued by the Secretary of the Treasury or her delegate 
(Secretary) pursuant to the authority granted under sections 45(b)(12), 
48(a)(3)(D), and (a)(16), 6418(g) and (h), and 7805(a) of the Code 
(final regulations).
    Section 48(a)(3)(D) provides a specific delegation of authority for 
the Secretary to prescribe by regulations performance and quality 
standards for energy property after consulting with the Secretary of 
Energy.
    Sections 45(b)(12) and 48(a)(16) provide specific delegations of 
authority with respect to the requirements of section 45(b), including 
the prevailing wage and apprenticeship (PWA) requirements of section 
45(b)(7) and (8), as incorporated by section 48(a)(10) and (11), with 
each stating, ``[t]he Secretary shall issue such regulations or other 
guidance as the Secretary determines necessary to carry out the 
purposes of this subsection, including regulations or other guidance 
which provides for requirements for recordkeeping or information 
reporting for purposes of administering the requirements of this 
subsection.'' Section 48(a)(10)(C) grants authority for the Secretary 
to provide, by regulations or other guidance, for recapturing the 
benefit of any increase in the credit allowed under section 48(a) 
allowed to an energy project that initially satisfies the PWA 
requirements if such energy project should later fail to satisfy such 
requirements during the recapture period by applying rules similar to 
the rules of section 50(a) of the Code. Section 48(a)(16) provides a 
general grant of regulatory authority for section 48(a), by stating: 
``The Secretary shall issue such regulations or other guidance as the 
Secretary determines necessary to carry out the purposes of this 
subsection, including regulations or other guidance which provides for 
requirements for recordkeeping or information reporting for purposes of 
administering the requirements of this subsection.''
    Section 6418(g) provides several specific delegations of authority 
to the Secretary with regard to enforcing requirements for valid 
transfers of certain Federal income tax credits under section 6418 and 
recapturing excessive credit transfers. Section 6418(h) provides a 
specific delegation of authority with respect to the transfer of 
credits under section 6418, stating, in part, that ``[t]he Secretary 
shall issue such regulations or other guidance as may be necessary to 
carry out the purposes of this section.''
    Finally, section 7805(a) authorizes the Secretary to ``prescribe 
all needful rules and regulations for the enforcement of [the Code], 
including all rules and regulations as may be necessary by reason of 
any alteration of law in relation to internal revenue.''

Background

I. Overview

    Section 38 of the Code 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 of the Code, which includes the energy credit 
determined under section 48 (section 48 credit). See sections 38(b)(1) 
and 46(2). Section 48(a)(1) generally provides that the section 48 
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 depends upon 
meeting certain deadlines for beginning construction of the energy 
property or for placing the energy property in service.
    Section 48 originally was enacted by section 2 of the Revenue Act 
of 1962, Public Law 87-834, 76 Stat. 960, 963 (October 16, 1962), 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 amounts paid for qualified 
interconnection property in connection with the installation of 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 Income Tax Regulations at Sec.  1.48-9 in effect prior to 
December 12, 2024 (former Sec.  1.48-9), which provide definitions and 
rules for determining whether property is energy property eligible for 
the section 48 credit, originally 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. 
Thus, former Sec.  1.48-9 has not been updated since 1987, which is 
before many of the current types of energy property became eligible for 
the section 48 credit.

II. Prior Guidance

    Prior to proposing the amendments to the regulations under section 
48 being finalized by this treasury decision, the Department of the 
Treasury (Treasury Department) and the IRS twice requested comments on 
issues to be addressed in these regulations. On October 26, 2015, the 
Treasury Department and the IRS published Notice 2015-70, 2015-43 
I.R.B. 604, requesting 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, requesting general as well as 
specific

[[Page 100599]]

comments on issues arising under section 48, among other sections, that 
were amended or added by the IRA.
    On August 30, 2023, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-100908-23) in the Federal Register 
(88 FR 60018), corrected in 88 FR 73807 (Oct. 27, 2023), corrected in 
89 FR 25550 (April 11, 2024), proposing rules regarding the increased 
credit amounts available for taxpayers satisfying PWA requirements 
established by the IRA (PWA Proposed Regulations). Comments were 
requested and a public hearing was held November 21, 2023.
    On November 22, 2023, after consideration of all the comments 
submitted in response to Notice 2015-70 and Notice 2022-49, and after 
consultation with the Department of Energy (DOE), the Treasury 
Department and the IRS published a notice of proposed rulemaking and a 
notice of public hearing (REG-132569-17) in the Federal Register (88 FR 
82188), corrected in 89 FR 2182 (January 12, 2024), proposing rules 
that would provide guidance under section 48 (Proposed Regulations). On 
February 22, 2024, the Treasury Department and the IRS published a 
second correction to the Proposed Regulations in the Federal Register 
(89 FR 13293) that re-opened the comment period through March 25, 2024 
(Correction). The Proposed Regulations withdrew certain portions of the 
PWA Proposed Regulations and re-proposed regulations that would provide 
additional guidance on the PWA 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 PWA requirements.
    Although the Proposed Regulations withdrew certain portions of the 
PWA Proposed Regulations, the Explanation of Provisions section in the 
preamble to the PWA Proposed Regulations generally remained relevant. 
Therefore, to the extent consistent with the preamble to the Proposed 
Regulations, the Explanation of Provisions section of the PWA Proposed 
Regulations was incorporated in the preamble to the Proposed 
Regulations.
    The preamble to the Proposed Regulations did not address written 
comments that were submitted in response to the PWA Proposed 
Regulations. Any comments received in response to the Proposed 
Regulations, including comments on the re-proposed regulations 
addressing the PWA requirements specific to section 48, are addressed 
in the Summary of Comments and Explanation of Revisions section of this 
preamble. The Proposed Regulations did not extend the comment period or 
affect the scheduled hearing for the PWA Proposed Regulations. The PWA 
Proposed Regulations, other than the portions that were withdrawn, were 
adopted as final regulations by Treasury Decision (T.D. 9998), which 
was published in the Federal Register (89 FR 53184) on June 25, 2024 
(PWA Final Regulations).
    On June 21, 2023, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-101610-23) in the Federal Register 
(88 FR 40496) proposing rules concerning the election under section 
6418 to transfer certain Federal income tax credits, including the 
section 48 credit (6418 Proposed Regulations). Proposed Sec.  1.6418-5 
of the 6418 Proposed Regulations included proposed rules addressing 
notification requirements and the impact of the credit recapture rules 
under sections 50(a), 49(b), and 45Q(f)(4) on the transfer of Federal 
income tax credits. Comments were requested and a public hearing on the 
6418 Proposed Regulations was held on August 23, 2023.
    The Proposed Regulations would supplement the 6418 Proposed 
Regulations by adding provisions to proposed Sec.  1.6418-5 addressing 
notification requirements and the impact of the recapture rules for 
failing to satisfy the PWA requirements under section 48(a)(10) if an 
election under Sec.  1.6418-2 or Sec.  1.6418-3 has been made. The 
preamble to the Proposed Regulations did not address written comments 
that were submitted in response to the regulations proposed in the 6418 
Proposed Regulations. Any comments received in response to the Proposed 
Regulations, including the additions to proposed Sec.  1.6418-5 
described in the Proposed Regulations, are addressed in the Summary of 
Comments and Explanation of Revisions section of this preamble. The 
Proposed Regulations did not otherwise extend the comment period for 
the 6418 Proposed Regulations. On April 30, 2024, a Treasury Decision 
(T.D. 9993) adopting the 6418 Proposed Regulations as final regulations 
(6418 Final Regulations) was published in the Federal Register (89 FR 
34770). The 6418 Final Regulations did not finalize the portion of 
proposed Sec.  1.6418-5 that was included in the Proposed Regulations.

Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS received 350 written comments 
in response to the Proposed Regulations. The comments are available for 
public inspection at https://www.regulations.gov or upon request. After 
full consideration of the comments received in response to the Proposed 
Regulations, these final regulations adopt the Proposed Regulations 
with modifications as described in this Summary of Comments and 
Explanation of Revisions.
    Comments addressing the requirements for energy property are 
described in part I of this Summary of Comments and Explanation of 
Revisions. Comments addressing the PWA requirements are described in 
part II of this Summary of Comments and Explanation of Revisions. 
Comments addressing rules applicable to energy property are described 
in part III of this Summary of Comments and Explanation of Revisions.
    Comments summarizing the statute or the Proposed Regulations, 
recommending statutory revisions, or addressing issues that are outside 
the scope of this rulemaking (such as revising other Federal 
regulations and recommending changes to IRS forms) generally are not 
addressed in this Summary of Comments and Explanation of Revisions or 
adopted in these final regulations. In addition to modifications 
described in this Summary of Comments and Explanation of Revisions, the 
final regulations also include non-substantive grammatical or stylistic 
changes to the Proposed Regulations. Unless otherwise indicated in this 
Summary of Comments and Explanation of Revisions, provisions of the 
Proposed Regulations with respect to which no comments were received 
are adopted without substantive change.

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(a)(3) and (c).
    Section 48(a)(3)(B) through (D) provide general requirements for 
all types of energy property. Section 48(a)(3)(B) limits energy 
property to property that is constructed, reconstructed, or erected by 
the taxpayer or that 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

[[Page 100600]]

quality standards that have been prescribed by the 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, if the 
statutory text of 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.

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 related to ``section 38 property'' remain 
generally applicable to the section 48 credit.
    Sections 1.48-1 and 1.48-2 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 
related to requirements for energy property, some of which would be 
adopted under proposed Sec.  1.48-9.
1. 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. Former Sec.  1.48-9(m)(1) provided 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.'' Generally, 
proposed Sec.  1.48-9(c)(2)(i) would adopt this rule for performance 
and quality standards for energy property from former Sec.  1.48-
9(m)(1) by providing that energy property must meet performance and 
quality standards, if any, which have been prescribed by the Secretary 
(after consultation with the Secretary of Energy) and are in effect at 
the time of acquisition of the energy property. The final regulations 
adopt this rule as proposed.
2. Performance and Quality Standards for Electrochromic Glass Property
    Proposed Sec.  1.48-9(c)(2)(ii)(B) would provide rules for 
performance and quality standards for electrochromic glass property by 
stating that 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.
    A few commenters addressed the performance and quality standards 
for electrochromic glass provided in the Proposed Regulations. 
Generally, these commenters suggested methods to satisfy the NFRC 
rating requirement and were particularly interested in a simulation-
based process. For example, a commenter advocated for a process that 
emphasizes simulation-based validation to expedite compliance and 
reduce barriers to implementation, particularly given the lengthy 
delays associated with physical testing. This commenter stated that 
simulations, supported by advanced and reliable modeling software, have 
become a standard practice within the industry. Another commenter also 
emphasized the need to use simulations to satisfy the NFRC rating 
requirement.
    In response to these comments, the Treasury Department and the IRS 
consulted with the DOE and learned that the existing NRFC and the AERC 
ratings systems incorporate simulation methodologies that should 
address the commenters' concerns. Accordingly, the final regulations 
adopt this rule as proposed.
3. Placed in Service
a. General Rules
    Section 48(a) provides that the section 48 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 purposes of the section 48 credit. Under Sec.  1.46-3(d)(1) 
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 proposed to adopt the general 
rules of Sec.  1.46-3(d)(1) for determining when a taxpayer has placed 
an energy property in service. However, 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. 
Accordingly, proposed Sec.  1.48-9(b)(5)(i) would provide that the 
taxable year in which energy property is placed in service is the 
earlier of the taxable year in which, under the taxpayer's depreciation 
practice, 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.
    A commenter requested that the final regulations provide a 
different placed in service rule for energy storage technology. Because 
energy storage technology may charge and discharge prior to commercial 
readiness, the commenter suggested that energy storage technology 
should be treated as placed in service when: (i) such property has all 
licenses, permits, and approvals required to store and dispatch power; 
(ii) pre-operational testing is complete; (iii) the taxpayer has title 
to the property; and (iv) the property is available to store and 
discharge power on a regular, commercial basis.
    Proposed Sec.  1.48-9(b)(5) would adopt the general placed in 
service rules of Sec.  1.46-3(d)(1), which have applied to the section 
48 credit since its enactment, with a modification to reflect the 
requirement that the property be eligible for depreciation or 
amortization. Until the IRA amended section 48, energy storage property 
(referred to as ``energy storage technology'' after the IRA amendments)

[[Page 100601]]

was considered a component of energy property. Without providing 
specific indicia that an energy property is placed in service, the rule 
provided at proposed Sec.  1.48-9(b)(5) would provide general 
principles for a taxpayer to determine when an energy property has been 
placed in service that are broadly applicable to all types of energy 
property, well-understood, and widely relied upon by industry. The 
general principles provided by the final rule are sufficiently broad to 
address the commenter's concerns. Therefore, the final regulations do 
not adopt these comments and instead adopt the placed in service rules 
as proposed.
b. Lease-Passthrough Election
    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. 
Several commenters provided comments relating to the rule for leased 
property in the context of qualified biogas property.
    A commenter requested clarification on the application of the lease 
passthrough election under Sec.  1.48-4 to treat a lessee as having 
purchased such energy property from the lessor with respect to any 
property comprising a qualified biogas property, including both 
component properties considered functionally interdependent as a single 
unit of energy property and property treated as an integral part of 
energy property. This commenter asked for illustrative examples of the 
application of the lease passthrough election in the context of a 
renewable natural gas (RNG) qualified biogas property if the equipment 
comprising the qualifying biogas production property, including 
equipment treated as an integral part of the qualifying biogas 
property, is owned by multiple taxpayers.
    Another commenter suggested allowing a single taxpayer to 
consolidate deemed ownership of an entire qualified biogas property to 
permit a more efficient use and/or transfer of the section 48 credit 
under the section 6418 credit transfer rules by relying on existing 
lease passthrough rules that apply to energy property. The commenter 
asserted that this would permit greater qualified investment and use of 
the section 48 credit if, for regulatory or environmental permitting 
reasons, some portion of the section 48 credit-eligible qualified 
biogas property simply cannot be owned by a single or related 
taxpayers. The commenter acknowledged that under the 6418 Proposed 
Regulations, the transfer of the tax credits to a lessee under a lease 
passthrough election will preclude further transfers under section 
6418.
    Guidance on eligibility for the lease passthrough election is 
beyond the scope of the Proposed Regulations because proposed Sec.  
1.48-9(b)(5)(ii) merely proposed a rule for determining when property 
with respect to which a lease passthrough election is made under Sec.  
1.48-4 is placed in service. Guidance on eligibility for the lease 
passthrough election is addressed elsewhere, such as in Sec.  1.48-4 
and the 6418 Final Regulations. Accordingly, these final regulations do 
not adopt these comments.
4. Acquisition of Energy Property
    Proposed Sec.  1.48-9(b)(2) would provide 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. This definition was intended to require 
that the taxpayer establish tax ownership of the energy property for 
Federal income tax purposes. The final regulations modify the 
definition in proposed Sec.  1.48-9(b)(2) to make this requirement 
explicit.

B. Types of Energy Property

    Proposed Sec.  1.48-9(e) would expand the definitions of energy 
property provided in former Sec.  1.48-9 to account for new 
technologies that were added by amendments to section 48, including by 
the IRA. Generally, the definitions of the types of energy property 
provided in the Proposed Regulations incorporate the definitions 
provided in section 48(a)(3) and (c) but do not provide specific 
beginning of construction or placed in service deadlines. Taxpayers 
should refer to the current definitions of energy property provided by 
section 48 for specific requirements applicable to each type of energy 
property. The definitions of the types of energy property provided in 
proposed Sec.  1.48-9(e) were developed by the Treasury Department and 
the IRS in consultation with the DOE.
    Some commenters requested clarification concerning whether a 
particular type of technology would fall into one of the categories of 
energy property. For example, a commenter requested guidance concerning 
what type of energy property would include sewage energy recovery 
property and provided three options: geothermal heat pump (GHP) 
property by reference to ``underground fluids,'' energy storage 
technology, or waste energy recovery property (WERP). A definitive 
response to such comments would require the Treasury Department and the 
IRS to conduct a complete factual analysis of the property in question, 
which may include information that was not provided by the commenters. 
Because more information is needed to make the determinations requested 
by the commenters, these final regulations do not address the requested 
clarifications concerning the categorization of specific technologies.
1. 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, among other 
requirements, 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 amount of the section 48 
credit with respect to 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. This fraction is 
equal to the applicable capacity limit divided by the capacity of the 
CHP property. However, CHP

[[Page 100602]]

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 (i) the numerator of which is the 
total useful electrical, thermal, and mechanical power produced by the 
system at normal operating rates, and expected to be consumed in its 
normal application, and (ii) the denominator of which is the lower 
heating value of the fuel sources for the system. 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 
an 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 that only 
achieves 30-percent efficiency, would be permitted to claim a credit 
equal to one-half of the otherwise allowable credit.
    Proposed Sec.  1.48-9(e)(6)(i) would provide generally that 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). Proposed Sec.  1.48-9(e)(6)(i) would 
also provide that 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). Further, proposed Sec.  
1.48-9(e)(6)(i) would provide that 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). Proposed Sec.  
1.48-9(e)(6)(i) would also provide that 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. 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.
    A commenter requested that the final regulations clarify whether a 
CHP property would be eligible for the section 48 credit, assuming all 
other criteria are met, if the fuel source is exclusively non-renewable 
natural gas. There is no requirement that a CHP property use a specific 
fuel or feedstock. The Treasury Department and the IRS emphasize that 
all CHP property must meet the requirements of section 48(c)(3) and 
those provided in proposed Sec.  1.48-9(e)(6)(i), which the final 
regulations adopt as proposed.
2. Geothermal Heat Pump Property
    Section 48(a)(3)(A)(vii) provides, in part, that energy property 
includes 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 (geothermal heat pump or GHP property). Proposed Sec.  1.48-
9(e)(8) would adopt the statutory definition of GHP property 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. Accordingly, proposed Sec.  1.48-
9(e)(8) would provide that GHP property 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.
    Several commenters requested revisions to the definition of GHP 
property to include recovered heat as a thermal energy source. For 
example, representative of these comments, a commenter requested 
clarification that equipment used to circulate recovered heat qualifies 
as GHP property. This commenter asserted that the same GHP property 
that uses a ground heat exchanger as a source or sink can be designed 
to operate in a heat recovery mode, simply recycling heat around a 
building if the potential exists. Another commenter noted that the use 
of GHP property in heat recovery mode should be considered a qualified 
energy source for purposes of the calculation to determine whether the 
GHP property qualifies as dual use property.
    As defined in proposed Sec.  1.48-14(b)(1), the term ``dual use 
property'' would mean property that uses energy derived from both a 
qualifying source (that is, from an energy property including a 
qualified facility for which a section 48(a)(5) election has been made) 
and from a non-qualifying source (that is, sources other than an energy 
property including a qualified facility for which a section 48(a)(5) 
election has been made). As proposed Sec.  1.48-14(b)(2) would further 
provide, if dual use property uses energy derived from both a 
qualifying source and a non-qualifying source 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 during an annual measuring 
period (Dual Use Rule). Further, if the energy used from qualifying 
sources is between 50 percent and 100 percent, only a proportionate 
amount of the 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.
    The Treasury Department and the IRS decline to adopt these 
suggested revisions because they would conflict with the statutory 
definition of GHP property. Section 48(a)(3)(A)(vii) specifically 
provides that GHP property includes equipment that uses the ground or 
ground water as a thermal energy source. While the Proposed Regulations 
would provide that underground fluids may be included, this is a 
clarification that underground fluids other than water may offer 
another medium that contains thermal energy from the ground or ground 
water. The statute does not include any other thermal energy sources. 
For further discussion of the Dual Use Rule see part III.B. of this 
Summary of Comments and Explanation of Revisions.
    Additionally, a few commenters suggested expanding the definition 
to allow GHP property to be used to heat domestic hot water in addition 
to a structure. For example, a commenter requested that the final rule 
clarify that domestic hot water generation by GHP property is included 
in the definition of GHP property. Another commenter asserted that GHP 
property eligible for the section 48 credit should also be permitted to 
provide hot water generation because it would be counterintuitive if 
heating hot water for space conditioning is included in the

[[Page 100603]]

definitions, but heating of domestic hot water is not. The statute 
requires GHP property heat a structure or cool a structure; therefore, 
the suggestion to expand the definition is not authorized by the 
statute. The Treasury Department and the IRS decline to adopt these 
suggested revisions. The final regulations adopt this rule as proposed.
    A commenter mentioned that the energy property definition in 
proposed Sec.  1.48-9(e)(3) concerning geothermal energy property 
includes clarifying language on the scope of included property, 
specifically addressing production and distribution equipment. The 
commenter recommended including similar language for GHP property 
described in section 48(a)(3)(A)(vii). The Treasury Department and the 
IRS declined to adopt this suggestion in the Proposed Regulations, and 
explained in the preamble to the Proposed Regulations that, 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 GHP property, such equipment may be integral to the 
function of the GHP property to heat or cool a structure. Thus, energy 
distribution equipment may be considered GHP property for the reasons 
stated in the preamble to the Proposed Regulations.
3. Waste Energy Recovery Property
    Section 48(a)(3)(A)(viii) provides that energy property includes 
waste energy recovery property (WERP). Section 48(c)(5) 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)(C)) and 
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)(i) would provide that 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. Proposed Sec.  1.48-9(e)(9)(i) would also 
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. 
Further, proposed Sec.  1.48-9(e)(9)(i) would provide that WERP does 
not include any property that has a capacity in excess of 50 MW. 
Proposed Sec.  1.48-9(e)(9)(ii) would provide that any WERP that is 
part of a system that is a CHP property is not treated as WERP for 
purposes of section 48 unless the taxpayer elects to not treat such 
system as a CHP property for purposes of section 48.
    Several commenters requested that specific technologies, including 
``pressure reduction'' equipment or ``pressure letdown'' equipment, 
sometimes referred to as ``turboexpanders,'' which generally allow high 
pressure gas to expand and produce heat, be added to the examples of 
WERP that would be provided in proposed Sec.  1.48-9(e)(9)(i). Another 
commenter requested that ``pressure reduction'' equipment be included 
as an example of WERP because pipeline transmissions (regardless of 
geographic distance) require high pressure, but at pressure letdown 
stations and within industrial facilities where the pressure is 
reduced, pressure reduction affords an opportunity for energy 
collection. A commenter requested that district energy systems paired 
with WERP be added to the examples of WERP, while another commenter 
suggested adding carbon dioxide power system technology to the examples 
of WERP.
    In response to these requests, the Treasury Department and the IRS 
highlight that proposed Sec.  1.48-9(e)(9) would provide non-exhaustive 
examples of buildings and facilities at which WERP may function rather 
than examples of technology that may qualify as WERP. This approach 
provides a function-oriented approach to determine whether a technology 
is WERP that is broad enough to encompass nascent technologies without 
rendering the regulations quickly obsolete. Therefore, the final 
regulations do not adopt the requested revisions to the definition of 
WERP, and the final regulations adopt this rule as proposed.
4. Energy Storage Technology
    Section 48(a)(3)(A)(ix), which was added by the IRA, provides 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 kilowatt-hours (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 
the section 48 credit.
    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 CHP property, or a building or its 
structural components.
    Commenters requested clarifications regarding the treatment of 
energy storage technology co-located with, an integral part of, or 
shared with a facility that is otherwise eligible for certain Federal 
tax credits. For example, a commenter requested clarification 
concerning boundaries between energy storage technology eligible for 
the section 48 credit and qualified clean hydrogen production 
facilities eligible for the credit under section 45V. Another commenter 
requested confirmation that energy storage technology, including a 
hydrogen energy storage property, separately qualifies for the section 
48 credit regardless of whether it is part of a facility for which a 
credit under section 45, 45V, or 48 is or has been allowed. A commenter 
also requested confirmation that energy storage technology will be 
treated as separate property for section 48 and other Code

[[Page 100604]]

provisions. The Treasury Department and the IRS confirm that energy 
storage technology is eligible for the section 48 credit if it 
satisfies the requirements of section 48 even if the energy storage 
technology is co-located with or shared by a facility that is otherwise 
eligible for the section 45, 45V, or 48 credits.
a. Hydrogen Energy Storage Property
    Proposed Sec.  1.48-9(e)(10)(iv) would provide that hydrogen energy 
storage property is property (other than property primarily used in the 
transportation of goods or individuals and not for the production of 
electricity) that stores hydrogen and has a nameplate capacity of not 
less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard 
cubic feet (scf) of hydrogen. Proposed Sec.  1.48-9(e)(10)(iv) would 
also require hydrogen energy storage property to store hydrogen that is 
solely used for the production of energy and not for other purposes 
such as for the production of end products such as fertilizer. Proposed 
Sec.  1.48-9(e)(10)(iv) would also provide a non-exhaustive list of 
components of hydrogen energy storage property that would include, but 
would not be limited to, a hydrogen compressor and associated storage 
tank and an underground storage facility and associated compressors.
    In the preamble to the Proposed Regulations, the Treasury 
Department and the IRS requested 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 that is solely used for the production of 
energy.
    A commenter particularly endorsed the approach taken in the 
Proposed Regulations by providing that the nameplate capacity 
requirement for hydrogen is 0.127 kilograms for 5 kWh. The commenter 
suggested this rule be retained in the final regulations.
    Generally, commenters disagreed with the requirement that hydrogen 
energy storage property must store hydrogen that is solely used for the 
production of energy and not for other purposes, which the commenters 
referred to as the ``end use requirement.'' For example, a commenter 
stated that the final regulations should be revised to align with the 
statutory language and asserted that the end use requirement is not in 
accord with legislative intent, would cause delays, is unworkable, and 
misaligns with the Biden Administration's U.S. National Clean Hydrogen 
Strategy and Roadmap. Some commenters asserted that the end use 
requirement is simply unworkable due to lack of tracing mechanisms once 
hydrogen enters the stream of commerce.
    Multiple commenters also asserted that imposing an end use 
requirement on hydrogen energy storage property is unsupported by the 
statute and would be impossible to administer. Commenters expressed 
concerns that the end use requirement would render the credit useless, 
impact markets inappropriately, and lead to confusion. Commenters also 
asserted that section 48(c)(6)(A)(i) requires only that hydrogen energy 
storage property ``store energy'' and does not require that it actually 
be used for the production of energy. Another commenter noted that 
because hydrogen is a form of energy, that hydrogen storage is per se 
energy use.
    With respect to administrability, commenters explained the 
difficulties of both requiring exclusive energy use and obtaining the 
information to make this determination. For example, a commenter stated 
that it is too difficult for the storage owner to predict how hydrogen 
will be used and another asserted that requiring stored hydrogen to be 
used solely for the production of energy would, in cases of bulk 
storage, be nearly impossible. Another commenter likewise stated that 
taxpayers do not have full control of, or even information regarding, 
the use of hydrogen once it leaves their storage facilities and will be 
unable to have the certainty needed regarding end use to obtain project 
financing. This commenter, along with others, also noted the 
significant burden of documenting the end use of the stored hydrogen. 
This commenter explained that currently there are no recordkeeping or 
documentation precedents available for a taxpayer to efficiently 
demonstrate the end-use of hydrogen, a fungible molecule, stored in a 
taxpayer's hydrogen energy storage property. The commenter asserted 
that because there is no available documentation pathway for tracking 
hydrogen molecules through to their end use, it would be both 
impractical and prohibitively costly for a taxpayer to develop and 
implement such recordkeeping practices. Another commenter requested 
that the end use requirement conclude with the recapture period.
    Lastly, commenters explained how the end use requirement would 
limit the usefulness of the credit. For example, a commenter asserted 
that the end use requirement would render the section 48 credit largely 
useless as a means of encouraging the development of the large-scale 
hydrogen storage capability that will be essential to the establishment 
of a robust hydrogen ecosystem in the United States. Additionally, a 
commenter stated that an end use requirement would cause several 
problems, including deterring the provision of hydrogen storage 
services to a significant portion of the hydrogen market sector (for 
example, for ammonia production). This commenter also requested 
clarification regarding the appropriate treatment in a case in which 
hydrogen is another step removed from ammonia production with 
electricity production as an interim step. Generally, under the 
Proposed Regulations, this scenario satisfies the end use requirement.
    A commenter noted that the end use requirement would lead to a risk 
of creating two separate markets for hydrogen: those that are able to 
use the section 48 credit and those that are not. Emphasizing the same 
points, another commenter stated that restricting the end-use of the 
clean hydrogen to ``energy'' may materially impact the ability of 
producers to secure offtake agreements and/or restrict the usage of 
hydrogen storage and transportation networks to only certain types of 
hydrogen end-uses.
    Another commenter noted that energy storage technology neutrality 
is very important. This commenter stated that it believes that the 
``energy only'' end use requirement would make hydrogen storage a 
second (or even third) class technology if compared to battery energy 
storage for purposes of the section 48 credit. The commenter added that 
one way of reading the positioning of hydrogen and battery storage 
within the same statutory provision is that this reflects the intent of 
Congress to not favor one form of energy storage over the other. This 
commenter further asserts that the absence of an end use requirement 
imposed on battery storage property indicates that no such requirement 
should be imposed on hydrogen energy storage property.
    While the majority of commenters objected to including the end use 
requirement, several commenters provided suggestions if the end use 
requirement is adopted. Several of these commenters suggested the use 
of an allocation rule similar to the Dual Use Rule under proposed Sec.  
1.48-14(b)(2) and discussed in part III.B. of this Summary of Comments 
and Explanation of Revisions. A commenter suggested revising the 
Proposed Regulations to

[[Page 100605]]

require a reasonable allocation between qualifying energy uses and 
nonqualifying non-energy uses of stored hydrogen similar to the 
requirements found in the Dual Use Rule. Another commenter stated that 
the final regulations should provide flexibility and permit any 
reasonable method to establish the annual use of the stored hydrogen 
similar to proposed Sec.  1.48-14(b)(2)(ii). A commenter proposed that 
the final regulations provide a Dual Use safe harbor for a portion of a 
hydrogen energy storage property.
    Alternatively, several commenters suggested linking the end use 
requirement to the rules for the credit for production of clean 
hydrogen under section 45V of the Code. These commenters proposed that 
hydrogen energy storage be eligible for the section 48 credit 
regardless of end use, if the hydrogen stored is at least 50 percent 
qualified clean hydrogen under section 45V(c)(2).
    Commenters also requested clarifications regarding what would be 
considered energy use for purposes of applying the end use requirement. 
For example, a commenter requested a clarification that the definition 
of energy use is inclusive of an application in which hydrogen is fully 
consumed in the manufacturing of a downstream molecule, which is in 
turn clearly used in an energy application for which hydrogen would be 
qualified if used directly. Another commenter noted that the examples 
provided in the preamble to the Proposed Regulations are too narrow and 
should be expanded to reflect various uses of hydrogen as energy, 
including ammonia as a feedstock for fuel. A commenter asked for 
clarification that storage of hydrogen that is solely used as energy 
includes hydrogen used as energy for mobility purposes. Finally, a 
commenter requested that the final regulations allow for the storage of 
hydrogen whose end use is fertilizer for food production, because 
prohibiting hydrogen storage used in this way may encourage the 
parallel development of hydrogen storage and transportation 
infrastructure that could otherwise be shared.
    Several commenters also requested clarification regarding 
substantiation of the end use requirement. A commenter suggested that 
taxpayers be permitted to rely on the use described in commercial sales 
contracts without the need to track the ultimate end use of hydrogen by 
third-party users. Another commenter asked that taxpayers be required 
only to maintain documentation, such as an agreement between the two 
parties or a certification, that the immediate purchaser of the stored 
hydrogen intends to use it for energy. This commenter stated that 
tracking use past the point of immediate purchaser to the end use of 
the molecule is impossible and as a result may make the credit 
unavailable to a variety of hydrogen storage projects. Another 
commenter noted that operators of clean hydrogen transport and storage 
systems will need to know what sort of assurances are needed from off-
takers at the limits of their system to satisfy credit eligibility and 
ensure limited recapture risk.
    Several commenters suggested that the final regulations provide a 
method for a taxpayer to demonstrate that a hydrogen energy storage 
property was used to store hydrogen solely used for the production of 
energy. A commenter recommended that taxpayers be able to meet this 
requirement through (i) an affirmative attestation of intent by the 
taxpayer that owns the storage property and (ii) a five-year lookback 
process, with reasonable threshold tests, to determine whether a 
recapture has occurred and what percentage of the credit should be 
recaptured. Another commenter recommended that the final regulations 
create a rebuttable presumption of energy use allowing taxpayers to 
demonstrate energy end use requirements under the relevant facts and 
circumstances.
    The Proposed Regulations would require that the hydrogen energy 
storage property store hydrogen solely use for the production of energy 
and not for other purposes such as for the production of end products 
such as fertilizer. After consideration of comments received, the 
Treasury Department and the IRS agree that section 48(c)(6)(A)(i) does 
not require that hydrogen energy storage property store hydrogen that 
will be used for the production of energy. The Treasury Department and 
the IRS also understand commenters' concerns regarding the 
administrative challenges the end use requirement presents for 
taxpayers and agree that the final regulations require modification. 
Accordingly, the final regulations do not adopt the requirement that 
hydrogen energy storage property store hydrogen that is solely used for 
the production of energy and not for other purposes such as for the 
production of end products such as fertilizer.
    Some commenters asserted that the preamble to the Proposed 
Regulations indicated that hydrogen energy storage property is not 
limited to hydrogen. Since hydrogen may be stored within ammonia or 
methanol, commenters requested that the final regulations state that 
hydrogen storage property that stores hydrogen in the form of ammonia, 
methanol, or another stable medium qualifies as energy storage 
technology if such product is produced directly from hydrogen and 
subject to any use limitation provided in the regulations. Another 
commenter requested that the final regulations clarify that equipment 
used to process hydrogen into ammonia, methanol, and other carriers, as 
well as storage for such hydrogen carriers, is hydrogen energy storage 
property.
    The Treasury Department and the IRS decline to adopt the comments 
requesting that the final regulations provide that chemical storage, 
that is, equipment used to store hydrogen carriers (such as ammonia and 
methanol), is hydrogen energy storage property. Section 48(c)(6)(A)(i) 
specifically references only hydrogen, not compounds containing 
hydrogen. While most vessels designed for hydrogen storage (both above 
and below ground) may be capable of storing other gases, they are 
usually dedicated to a single gas (and not repurposed) to avoid 
contamination and mixing of gases.
    Many commenters also provided feedback on the non-exhaustive list 
of components of property that may be considered part of hydrogen 
energy storage property as would be provided in proposed Sec.  1.48-
9(e)(10)(iv). A commenter endorsed the inclusion of ``compressor and 
storage tank'' as a component of hydrogen energy storage property. 
Several commenters requested that additional components of property be 
added to this list, some by asserting that the components should be 
eligible under rules for functionally interdependent or integral 
property. Other commenters requested that the final regulations expand 
the examples of integral and functionally interdependent equipment to 
be more inclusive of existing and future hydrogen energy storage 
property technologies.
    Specifically, commenters requested that hydrogen energy storage 
property include hydrogen liquefaction and related equipment, equipment 
required to operate underground hydrogen storage property, as well as 
dedicated hydrogen distribution equipment such as pipelines located on 
the storage side of custody meters, hydrogen trailers (for example, 
cryogenic liquid tankers, or cylinders hauled by modules or chassis) 
and railcars. Another commenter proposed that the final regulations 
treat hydrogen liquefaction equipment and related equipment in the same 
manner as power conditioning and transfer equipment may be treated with 
respect to certain energy property that generates electricity.

[[Page 100606]]

    The Treasury Department and IRS agree that additional clarity on 
the definition of hydrogen energy storage property is warranted. The 
Treasury Department and IRS understand that hydrogen liquefaction 
equipment may prepare hydrogen for storage in the hydrogen energy 
storage property, making such property an integral part of hydrogen 
energy storage property.
    Section 48(c)(6)(A)(i) provides that energy storage technology does 
not include property primarily used in the transportation of goods or 
individuals and not for the production of electricity. Pipelines, 
trailers, and railcars are property primarily used in the 
transportation of goods or individuals not for the production of 
electricity. However, hydrogen energy storage property may have 
gathering and distribution lines to transport hydrogen within the 
hydrogen energy storage property, making such property an integral part 
of the hydrogen energy storage property. Therefore, the gathering and 
distribution lines used within a hydrogen energy storage property are 
not pipelines used to transport hydrogen outside of the hydrogen energy 
storage property. The final regulations provide that property that is 
an integral part of hydrogen energy storage property includes, but is 
not limited to, hydrogen liquefaction equipment and gathering and 
distribution lines within a hydrogen energy storage property.
    Several commenters requested clarification regarding the costs 
included in hydrogen energy storage property. In the context of salt 
caverns, a commenter asserted that the final regulations should confirm 
that eligible costs for a salt cavern include not only the costs to 
acquire and construct the eligible property but also all direct and 
indirect costs associated with the development and construction of the 
salt cavern and referenced rules under section 263A of the Code. 
Another commenter requested clarification regarding what equipment from 
an operational storage facility would be includible in basis for 
purposes of the section 48 credit. A commenter requested that power-to-
gas methanation facility qualify as hydrogen energy storage.
    As stated for other energy properties, the Treasury Department and 
the IRS emphasize that the rule for determining what constitutes a unit 
of energy property is function-based. Because more information is 
needed to make the determinations requested by the commenters, the 
final regulations do not adopt these comments.
b. Electrical Energy Storage Property
    Proposed Sec.  1.48-9(e)(10)(ii) would provide that 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.
    Multiple commenters requested clarification concerning specific 
technologies that may be electrical energy storage property. A 
commenter requested that the definition be expanded to include 
compressed fluid storage in addition to compressed air storage so as to 
include liquid and gas applications. Because these applications 
generally are used by pipelines, which are property primarily used in 
the transportation of goods or individuals and not for the production 
of electricity, the Treasury Department and the IRS decline to adopt 
these revisions.
    Multiple commenters requested that load controllers be described as 
an integral part of electrical energy storage technology while other 
commenters requested that bidirectional chargers be eligible as energy 
storage technology. Another commenter requested that the final 
regulations explicitly include thermal batteries capable of storing 
energy for conversion to electricity in its non-exhaustive list of 
eligible ``electrical energy storage property'' due to confusion 
related to thermal energy storage (TES) being a separate category.
    As has been noted previously, the Proposed Regulations are intended 
to provide a function-oriented method to determine whether a technology 
is energy storage technology that is broad enough to encompass nascent 
technologies without rendering the regulations quickly obsolete. It is 
impossible to enumerate every single technology that may be eligible 
for the section 48 credit given the ever-changing nature of the 
industry and technological development. Although these regulations do 
not list all technologies that may qualify for the section 48 credit, 
the Proposed Regulations provide adequate guidance and examples to 
illustrate the application of the rules for taxpayers to analyze a 
particular technology. The Treasury Department and the IRS, therefore, 
do not adopt commenters' requests concerning specific technologies.
    Multiple commenters questioned what primarily used in the 
transportation in section 48(c)(6)(A)(i) means in the case of 
electrical energy storage property. A commenter explained that pipeline 
systems can be multi-tasked with a section of the pipe to act as energy 
storage and requested that the phrase ``primarily used in the 
transportation of goods'' specifically exclude equipment that is mobile 
but include stationary property such as pipelines. Another commenter 
requested a bright line rule for technologies that are not primarily 
used in transportation of goods or individuals to qualify for the 
section 48 credit. This commenter suggested that property, including 
school buses, that receives, stores, and delivers energy for conversion 
to electricity and that is used less than 35 percent of the hours in a 
calendar year for transporting goods or individuals is not primarily 
used for transportation. In response to these commenters, the Treasury 
Department and the IRS note that pipelines and school buses are both 
primarily used in transportation. In addition, there are other IRA tax 
incentives intended to benefit some technologies for which commenters 
seek section 48 credit eligibility. For instance, section 45W provides 
a tax credit for electric school buses. Furthermore, a notice of 
proposed rulemaking (REG-118269-23) published in the Federal Register 
(89 FR 76759) on September 19, 2024, regarding the section 30C 
alternative fuel vehicle refueling property credit (30C Proposed 
Regulations) proposed a definition for property primarily used in the 
transportation of goods or individuals and not for the production of 
electricity for purposes of sections 48 and 48E. In particular, 
proposed Sec.  1.48-9(e)(10)(vi) of the 30C Proposed Regulations would 
provide that energy storage property is primarily used in the 
transportation of goods or individuals and not for the production of 
electricity, and therefore is not energy storage technology eligible 
for the section 48 credit, if a credit is claimed under section 30C for 
such property. Accordingly, comments regarding this proposed definition 
will be addressed when the 30C Proposed Regulations are finalized.
    In the context of a pumped storage hydropower facility, a commenter 
suggested that the scope of eligible

[[Page 100607]]

electrical energy storage technology be defined to include all property 
necessary to receive, store, and deliver energy for conversion to 
electricity, consistent with the definition in section 48(c)(6)(A)(i), 
and include all tangible personal property and other tangible property 
up to and including the step-up transformer at the substation prior to 
transmission to the grid. This commenter also suggested that an example 
be included to illustrate these concepts. Another commenter stated that 
the final regulations should confirm that the term ``energy storage 
technology'' includes all the qualified property up to and including 
the step-up transformer at the substation prior to transmission to the 
grid, and that this property would include the two reservoirs, the 
powerhouse (including the generators, turbines, and associated 
electrical equipment), the piping and pumps, the tunnel, substation 
equipment, and other integral property.
    A definitive response to such comments would require the Treasury 
Department and the IRS to conduct a complete factual analysis of the 
property in question, which may include information beyond that which 
was provided by the commenters. Because more information is needed to 
make the determinations requested by the commenters, the requested 
clarifications are not addressed in these final regulations.
c. Thermal Energy Storage Property
    Proposed Sec.  1.48-9(e)(10)(iii) would provide that 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. The Proposed Regulations 
included a non-exhaustive list of examples of thermal energy storage 
property.
    Commenters requested clarifications on what constitutes thermal 
energy storage property. A commenter requested clarification that 
thermal energy storage property includes all air-source heat pumps, 
electric boilers, and hot water heat pumps, but does not include 
fossil-fuel-powered water boilers. The commenter also requested that 
the final regulations clarify that ground and air source heat pumps 
qualify as energy storage technology and suggested that thermal energy 
stored in one medium may be transferred and stored in a second medium 
for subsequent use. The commenter also requested that the use of the 
term ``subsequent'' in the definition of thermal energy storage 
property under section 48(c)(6)(C)(i)(II) not require a specific 
interval of time between storage and use for a process to qualify. 
Another commenter stated that the point at which the scope of thermal 
energy storage property ends is unclear and requested clarification 
regarding whether ``equipment'' extends to the thermal energy source 
for thermal energy storage property. This commenter also requested 
clarity on whether the thermal energy source equipment (for example, 
chiller, heat pump, or furnace) may be used for multiple purposes or if 
the thermal energy source equipment must be dedicated to the thermal 
energy storage property. Another commenter asked whether equipment that 
uses thermal energy to heat or cool a structure is also thermal energy 
storage property. Some commenters endorsed the proposed examples of 
thermal energy storage property, while other commenters requested 
additions, such as including ``chilled water'' to ice and electric 
boilers that use electricity to heat water and later use this stored 
energy to heat a building through the HVAC system.
    The Treasury Department and IRS agree that the definition of 
thermal energy storage property requires clarification. Thermal energy 
storage property is defined, in part, as a system which ``removes heat 
from, or adds heat to, a storage medium for subsequent use.'' The 
Treasury Department and IRS, in consultation with DOE, understand the 
phrase ``adds heat to'' as including equipment that is involved in 
adding, or transferring, already-existing heat from one medium to the 
storage medium, but not equipment involved in transforming other forms 
of energy into heat in the first instance. Equipment that just adds (or 
removes) heat includes technologies, like heat pumps, that draw heat 
from the ambient air or other stores of heat, and add that heat to a 
storage medium. By contrast, equipment that transforms other forms of 
energy into heat in the first instance, for example through combustion 
or electric resistance, is not property that ``removes heat from, or 
adds heat to'' a storage medium and is therefore not an eligible 
component of a thermal energy storage property. For example, a 
conventional gas boiler with an integrated storage tank would not 
generally be thermal energy storage property. While the gas boiler 
elements would not be part of such property, the integrated storage 
tank, however, may be thermal energy storage property if it otherwise 
meets the thermal energy storage property definition. Further, an air-
to-water heat pump with a thermal storage tank, for example, would 
generally be thermal energy storage property provided that it otherwise 
meets the thermal energy storage definition. This could be the case 
even if the heat pump also serves a purpose in the connected HVAC 
system's real-time heating or cooling of a building. In that case, the 
thermal storage tank would be thermal energy storage property and the 
heat pump may also qualify as part of that eligible property to the 
extent the taxpayer's costs exceed the cost of an HVAC system without 
thermal storage capacity that would meet the same functional heating or 
cooling needs as the heat pump system with a storage medium, other than 
time shifting of heating or cooling.
    The Proposed Regulations included an example of electric furnaces 
that use electricity to heat bricks to high temperatures and later use 
this stored energy to heat a building through the HVAC system. The 
Treasury Department and IRS acknowledge that this example needs to be 
refined to more precisely delineate the scope of eligible thermal 
energy storage property. Whereas the heated bricks and equipment that 
adds heat generated by the furnace to those bricks, or removes heat 
from the bricks, is eligible thermal energy storage property, the 
electric furnace equipment that transforms energy into the thermal 
energy in the first instance is not. The final regulations clarify that 
thermal energy storage property does not include property that 
transforms other forms of energy into heat in the first instance and 
this example has been revised accordingly in the final regulations.
    With respect to the requirement for subsequent use, the Treasury 
Department and IRS also agree that additional clarity is warranted. The 
statute requires that thermal energy storage property must be able to 
perform certain functions, not simply performing heat transfer. Any 
heat transfer may take some amount of time and heat does not 
immediately dissipate even if no effort is made to store it. While some 
may assert that such heat transfer is subsequent use, the Treasury 
Department and IRS disagree. A plain reading of the statute indicates 
that

[[Page 100608]]

thermal energy storage property does not include property that simply 
engages in heat transfer. The thermal energy storage property must be 
able to store the heat. The Treasury Department and IRS, in 
consultation with DOE, find that a minimum time interval for subsequent 
use provides certainty for taxpayers and sound tax administration. 
Accordingly, the final regulations clarify that property that ``removes 
heat from, or adds heat to, a storage medium for subsequent use'' is 
property that is designed with the particular purpose of substantially 
altering the time profile of when heat added to or removed from the 
thermal storage medium can be used to heat or cool the interior of a 
residential or commercial building. The final regulations also provide 
a safe harbor for thermal energy storage property. If the thermal 
energy storage property can store energy that is sufficient to provide 
heating or cooling of the interior of a residential or commercial 
building for the minimum of one hour, it is deemed to have the purpose 
of substantially altering the time profile of when heat added to or 
removed from the thermal storage medium can be used to heat or cool the 
interior of a residential or commercial building.
    The Treasury Department and IRS have revised the definition of 
thermal energy storage property and the examples in the final 
regulations to illustrate what constitutes thermal energy storage 
property. These final regulations also add that thermal energy storage 
property may store thermal energy in an artificial pit, an aqueous 
solution, or a solid-liquid phase change material, in addition to the 
underground tank or a borehole field already included in the proposed 
regulation, in order to be extracted for later use for heating and/or 
cooling. The final regulations clarify that a heat pump system that 
transfers heat into and out of a storage medium is thermal energy 
storage property. However, consistent with Sec.  1.48-14(d), if thermal 
energy storage property, such as a heat pump system, includes 
equipment, such as a heat pump, that also serves a purpose in an HVAC 
system that is installed in connection with the thermal energy storage 
property, the taxpayer's basis in the thermal energy storage property 
includes the total cost of the thermal energy storage property and HVAC 
system less the cost of an HVAC system without thermal storage capacity 
that would meet the same functional heating or cooling needs as the 
heat pump system with a storage medium, other than time shifting 
heating or cooling.
    Commenters also requested clarifications regarding whether specific 
components may be part of thermal energy storage. A commenter requested 
that pipes to distribute stored thermal energy to and within buildings 
(including for multiple residential or commercial buildings such as 
through a district heating system) and equipment in building heating 
and/or cooling systems--such as coils, radiators, and other end-use 
equipment--necessary to convey stored thermal energy to building space 
or domestic hot water supply be included in thermal energy storage 
property.
    With respect to the request to include pipes and equipment in 
building heating and/or cooling systems, the statutory definition of 
thermal energy storage property provides, in part, that it is directly 
connected to an HVAC system, not that it is an HVAC system. The 
Proposed Regulations would provide a function-oriented method to 
evaluate whether property is a functionally interdependent or an 
integral part of thermal energy storage property. With respect to the 
request to include equipment necessary to convey domestic hot water 
supply, the statutory definition further provides, in part, that 
thermal energy storage property provides energy for the heating or 
cooling of the interior of a residential or commercial building. The 
statute does not provide for stored energy for domestic hot water 
supply for consumptive use. Therefore, property that provides energy 
for domestic hot water supply exclusively for consumptive use and not 
for heating or cooling of the interior of such a building is not 
eligible under the statute. The final regulations do not adopt these 
comments.
    Another commenter requested clarification that if property that 
would otherwise qualify as thermal energy storage property is connected 
to a district heating system that provides energy for the heating or 
cooling of multiple buildings, it would nonetheless be considered 
``directly connected to a heating, ventilation, or air conditioning 
system''. Proposed Sec.  1.48-9(e)(10)(iii) would not preclude thermal 
energy storage technology property that is directly connected to more 
than one HVAC system from being a thermal energy storage property. The 
final regulations do not modify the example.
    Commenters also requested modification of the definition of thermal 
energy storage property in proposed Sec.  1.48-9(e)(10)(iii). A 
commenter suggested adding ``refrigeration'' to ``is directly connected 
to a heating, ventilation, or air conditioning system'' because 
industrial refrigeration systems are considered part of the HVAC system 
in construction. This commenter also joined another in recommending 
adding ``industrial'' to ``for use in heating a residential or 
commercial building'' to prevent restricting the use of thermal energy 
storage in industrial sites and to eliminate confusion regarding 
commercial and industrial building types. To maintain consistency with 
the statutory text, the final regulations maintain the wording set 
forth in section 48(c)(6)(C)(i)(I) and (III) as is.
    Commenters also expressed concerns that the language ``directly 
connected to . . .'' in proposed Sec.  1.48-9(e)(10)(iii) might exclude 
thermal energy storage property that directly functions as a heating 
system itself without connecting to an HVAC system. A commenter 
suggested providing guidance to clarify that thermal energy storage 
property that functions as a self-contained heating or cooling system 
is eligible thermal energy storage property under proposed Sec.  1.48-
9(e)(10)(iii). Section 48(c)(6)(C)(i)(I) requires that thermal energy 
storage property is directly connected to a heating, ventilation, or 
air conditioning system, but does not include the HVAC system itself as 
eligible thermal energy storage property. Therefore, these comments are 
not adopted because they would be inconsistent with the statute. 
However, elements of such a system could constitute eligible thermal 
energy storage property.
    Additionally, a commenter requested clarification that thermal 
energy storage property may be considered battery storage technology 
for the purpose of claiming the credit available to residential 
customers under section 25D(d)(6) of the Code. The Treasury Department 
and the IRS decline to address this request because it is outside of 
the scope of section 48 and, therefore, these final regulations.
d. Modifications of Energy Storage Property
    Proposed Sec.  1.48-9(e)(10)(v) would provide that 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 proposed Sec.  1.48-9(e)(10)(v) is 
treated as electrical energy storage property or hydrogen energy 
storage property, except that the basis of any existing property prior 
to such modification is not taken into account for purposes of the 
section 48 credit. Proposed Sec.  1.48-9(e)(10)(v) applies to any 
electrical energy storage property

[[Page 100609]]

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), 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) and is 
modified in a manner that such property (after such modification) has 
an increase in nameplate capacity of not less than 5 kWh.
    A commenter asked if the section 48 credit is available for 
repurposed batteries used to build energy storage systems. Whether a 
battery is repurposed and eligible for the section 48 credit requires a 
factual determination that is beyond the scope of these regulations. 
The 80/20 Rule provides general rules for taxpayers that include some 
used components when placing in service an energy property.
    Another commenter requested that the requirement that any modified 
energy storage property must increase the nameplate capacity of the 
energy storage property by 5 kWh or more be removed. Section 
48(c)(6)(B) sets forth the 5 kWh requirement for modifications to 
energy storage property so it cannot be removed. The final regulations 
do not adopt this comment.
    Multiple commenters requested clarification that the minimum 5 kWh 
capacity increase needed for modifications of energy storage under 
section 48(c)(6)(B) be the nameplate capacity not actual capacity 
(which may have decreased due to degradation). The commenters explained 
that focusing on nameplate capacity will provide greater certainty than 
measuring actual capacity. Another commenter explained that nameplate 
capacity should be tested at the time of purchase, rather than on the 
date of modification, especially due to non-degrading systems and 
storage augmentation. The commenter noted that if augmentations are 
implemented, the installed energy storage capacity of the energy 
storage technology is increased (original installation nameplate 
capacity plus the augmentation totaling the amount installed), but the 
nameplate capacity of the property and interconnection agreement 
remains unchanged.
    Section 48(c)(6)(B) provides that, for purposes of the modification 
rule, nameplate capacity is examined at the time of the modification 
and must result in a nameplate capacity increase from below 5 kWh to 
not less than 5 kWh (for energy storage property originally placed in 
service before enactment of the IRA) or by at least 5 kWh (for energy 
storage technology placed in service after the enactment of the IRA 
that is later modified). Consistent with the statute, the Proposed 
Regulations would not take into account actual capacity but instead use 
nameplate capacity. The only instance in which section 48(c)(6)(B) uses 
the term ``capacity'' alone, rather than ``nameplate capacity'', is 
nonetheless still a reference to nameplate capacity. Specifically, 
section 48(c)(6)(B)(i) refers to property that ``would be described in 
subparagraph (A)(i), except that such property has a capacity of less 
than 5 kilowatt hours''. The referenced section 48(c)(6)(A)(i) text 
makes clear that the 5 kWh capacity threshold is, in fact, a nameplate 
capacity threshold. Therefore, for the avoidance of doubt, the final 
regulations at Sec.  1.48-9(e)(10)(v)(A) clarify that the relevant pre-
modification capacity is the nameplate capacity. Therefore, other than 
the minor clarification noted above, these comments were not adopted in 
the final regulations.
    Additionally, a commenter requested clarification whether capacity 
must be added within the bounds of an existing electrical storage 
property enclosure, or whether the enclosure may be expanded or an 
additional enclosure added to accommodate the increased capacity. 
Another commenter requested clarification that adding new battery racks 
to an existing enclosure would be eligible for the section 48 credit if 
the nameplate capacity of the new battery rack is at least 5 kWh. The 
Proposed Regulations would provide no limitation on the physical space 
occupied by an energy storage technology and the final regulations 
retain this approach.
5. 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)(7) (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.
    Proposed Sec.  1.48-9(e)(11) would adopt the statutory definition 
of qualified biogas property. Proposed Sec.  1.48-9(f)(2)(i) 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). The Proposed Regulations adopted this 
approach because it provides a function-oriented method 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) would provide examples of functionally interdependent 
components of a 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.
    Proposed Sec.  1.48-9(e)(11)(i) would clarify that upgrading 
equipment is not a functionally interdependent component of qualified 
biogas property. The preamble to the Proposed Regulations stated that 
the upgrading equipment that is necessary to condition biogas into the 
appropriate mixture for injection into the pipeline 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. The 
preamble to the Proposed Regulations also stated that 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.
a. Correction and Cleaning and Conditioning Property
    The Correction published on February 22, 2024, stated that a 
correction was needed to clarify that gas upgrading equipment that is 
necessary to concentrate the gas from qualified biogas property into 
the appropriate mixture for injection into a pipeline through removal 
of other gases such as carbon dioxide, nitrogen, or oxygen, would be 
energy property if it is an integral part of an energy property as 
defined in proposed Sec.  1.48-9(f)(3). Accordingly, the Proposed 
Regulations

[[Page 100610]]

were corrected by revising the following sentence: ``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.'' to read as follows: ``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 a 
functionally interdependent component (as defined in paragraph 
(f)(2)(ii) of this section) of qualified biogas property.''
    The Proposed Regulations and Correction requested 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). The 
Treasury Department and the IRS received numerous comments regarding 
the components that should be included in qualified biogas property.
    Commenters universally supported the inclusion of upgrading 
equipment in qualified biogas property and some asserted that the 
Proposed Regulations' exclusion of upgrading equipment conflicts with 
analogous provisions in the Proposed Regulations that allow the 
inclusion of power conditioning and transfer equipment such as that 
allowed in offshore wind projects. Most commenters asserted that 
upgrading equipment should be considered functionally interdependent to 
qualified biogas property and therefore, eligible for the section 48 
credit. A commenter requested that biogas energy property include a 
definition of system for section 48(c)(7)(A) purposes that includes all 
integrated property.
    Commenters also expressed concern that the Proposed Regulations and 
the Correction unduly limit what would be included as qualified biogas 
property. For example, a commenter stated that property used to 
capture, clean, condition, upgrade, and perform ``chemical, mechanical, 
or thermochemical conversion'' are all necessary to convert biogas into 
usable products. Commenters explained that the Proposed Regulations 
would allow only biogas property with limited utility to qualify and 
would exclude a majority of costs related to biogas property. For 
example, a commenter stated that under the Proposed Regulations, 
property used to produce the raw biogas from the landfill, remove 
sulfur from the biogas, and remove the volatile organic compounds from 
the biogas would appear to qualify for the section 48 credit, whereas 
property used to remove carbon dioxide, nitrogen, and oxygen from 
biogas and to otherwise prepare the gas for injection into a natural 
gas pipeline would not qualify for the section 48 credit. The commenter 
asserted that the equipment used in these latter processes are 
essential components of a RNG system and comprise approximately 85 
percent of overall capital investment in an RNG project.
    A commenter asserted that the Proposed Regulations read the sale or 
productive use language out of the statute. Another commenter stated 
that the Proposed Regulations would limit eligibility for the section 
48 credit to essentially raw biogas (if it can meet the 52 percent 
methane threshold). According to the commenter, raw biogas generally 
cannot be used without some treatment due to the contaminants present 
in the gas stream and even if the raw biogas can be used, such use is 
typically through combustion (that is, burned on-site for electricity 
or as process energy), which is excluded under the statute. The 
commenter explained that, at best, the Proposed Regulations may allow 
some medium-BTU gas, which is biogas that received only limited 
treatment to remove certain contaminants, to be eligible for the 
section 48 credit. However, medium-BTU gas is not as valuable as RNG 
and is typically used locally.
    Generally, many commenters agreed that the utility of biogas is 
significantly limited without proper cleaning and conditioning. These 
commenters stated that, without upgrading, the extracted biogas faces 
considerable challenges for marketability because its high moisture 
content and corrosive properties make it difficult to safely store, 
compress, mix with other gases, transport, inject into the natural gas 
system, or market. Consequently, the non-upgraded biogas is of limited 
utility, such as on-site combustion to create process heat, generate 
electricity, or to be flared into the atmosphere. In contrast, a 
commenter described the marketable uses of upgraded RNG as including, 
but not limited to, advanced electricity generation in fuel cells, 
hydrogen production, advanced liquid fuels for aviation, and RNG for 
use in trucking, industrial processes, and space heating.
    Generally, commenters requested the final regulations correct the 
treatment of ``gas upgrading equipment'' in the Proposed Regulations to 
instead treat it as property that ``cleans and conditions'' gas, 
asserting that such treatment is consistent with the plain text of the 
statute and the intention of Congress. To support this position, a 
commenter asserted that the statute and legislative history do not 
contemplate any limitation on what property ``cleans or conditions'' 
gas. Several commenters cited certain congressional statements 
regarding the Agriculture Environmental Stewardship Act to support 
their reading of the definition of qualified biogas property added to 
section 48 by the IRA.
    Similarly, many commenters asserted there is a misunderstanding in 
the Proposed Regulations that the term ``upgrading'' is interchangeable 
with the phrase ``cleaning and conditioning.'' For example, a commenter 
stated that the exclusion of upgrading equipment appears contradictory 
to the statute, which expressly includes cleaning and conditioning 
property. This commenter noted that the Proposed Regulations 
misunderstand the ``upgrading'' process, which is an industry verbiage, 
but is essentially part of the ``cleaning and conditioning process'' 
necessary to process biogas to standards that support its productive 
use or sale. Another commenter stated that the DOE uses these terms 
interchangeably.
    Additionally, a few commenters stated that the Proposed Regulations 
incorrectly implemented the 52 percent measurement as a ceiling rather 
than a floor. For example, a commenter pointed to the preamble to the 
Proposed Regulations as mistakenly interpreting that the statute was 
enacted to incentivize taxpayers to produce 52 percent methane (and 
nothing greater). The commenter stated that this is contrary to the 
statute, to the relevant legislative history, and to an understanding 
of how the quantities of biogas that can be produced by RNG developers 
can be used.
    Several commenters also pointed to the reference to ``such gas'' in 
the statute to evidence that ``such gas'' refers to biogas not less 
than 52 percent methane and captured for sale or productive use. A 
commenter asserted that the reference to ``such gas'' provides a two-
prong test. According to the commenter, first the system must convert 
the biomass into a gas that is between 52 percent and 100 percent 
methane by volume and second the system must capture ``such gas for 
sale or productive use, and not for disposal via combustion''; thus, in 
the commenter's view, the reference to ``such gas'' is to gas described 
in the first prong.
    Another commenter stated that the reference to ``such gas'' 
includes biogas that is at least 52 percent methane by volume. The 
commenter concluded therefore, that the statute does not exclude from 
qualified biogas property

[[Page 100611]]

cleaning and conditioning equipment that is used to process biogas that 
is already 52 percent methane by volume.
    Another commenter stated that the statute uniquely and broadly 
defines the term ``cleaning and condition property'' not as the 
Proposed Regulations suggest, which limits its applicability to 
instances in which an otherwise ineligible property needs cleaning and 
conditioning to be eligible. Instead, the commenter noted that the 
Proposed Regulations' interpretation of section 48(c)(7)(B) ignores the 
reference to ``such gas,'' referring to the definition in section 
48(c)(7)(A), which clearly states ``any property which is part of such 
system which cleans or conditions such gas.'' The commenter asserted 
that the term ``such gas'' refers to biogas that is not less than 52 
percent methane and captured for sale or productive use, as 
confirmation that cleaning and conditioning equipment for gas that has 
already met the conditions set forth in section 48(c)(7)(A), is 
qualified biogas property.
    Commenters also objected to the exclusion of gas upgrading 
equipment provided in the Proposed Regulations because commenters 
assert that it could negatively impact investment and financing for 
biogas projects, especially those on small farms, agricultural 
projects, and municipal projects. A commenter, who works with smaller 
scale farms including dairy farms, asserted that the upgrading 
equipment is integral to the cleaning and conditioning process, and 
crucial for achieving energy output suitable for productive use or 
sale, especially for projects in rural and remote communities. The 
commenter concluded that the limitation on upgrading equipment provided 
in the Proposed Regulations will prevent projects from moving forward 
and disproportionately impact small agricultural projects.
    Several commenters asserted that the statute supports redefining 
the components of property that are considered functionally 
interdependent to a qualified biogas property. A commenter suggested 
redefining qualified biogas property as property that is placed in 
service to upgrade biogas for sale or a productive use beyond the point 
that such gas is typically vented or flared. This commenter explained 
that this definition properly places the focus on property used to 
convert an unproductive substance (such as landfill gas) into a 
productive substance (such as RNG).
    Another commenter agreed with the inclusion of the gas upgrading 
equipment as integral property but stated that the Correction is 
limited to technology specific to upgrading for pipeline injection and 
therefore, is out of line with the technology neutral definition in the 
statute. The commenter asserted that upgrading, processing, or 
reforming should be viewed without limitation to specific technology 
and that many biomass resources may not be close to natural gas 
pipelines or have other limitations on pipeline injection. The 
commenter further stated that the focus should be on the components 
required for property that captures such gas for sale or productive 
use. Therefore, if additional onsite steps are required to process raw 
biogas that meets the minimum 52 percent methane content threshold into 
a usable product, whatever the product may be, then the property 
necessary to take those steps should be considered qualified biogas 
property.
    The Treasury Department and the IRS agree with the commenters that 
the proposed rule addressing gas upgrading equipment is too 
restrictive. As commenters explained, upgrading equipment is used 
interchangeably with cleaning and conditioning equipment and such 
equipment may be needed to make the biogas suitable for sale or 
productive use. The Treasury Department and IRS also agree that 
specific upgrading equipment should not be identified for injection 
into a pipeline. Therefore, the final regulations provide more 
generally that gas upgrading equipment is cleaning and conditioning 
property.
    Commenters requested clarifications regarding what types of 
equipment are considered qualified biogas property, including as 
functionally interdependent components or as property integral to the 
qualified biogas property. For example, a commenter requested that a 
list of equipment be included as qualifying biogas property in the 
final regulations including gas removal equipment, pressure and 
temperature control equipment, moisture removal equipment, compression 
equipment, thermal oxidizer equipment, gas recycling equipment, and 
synthetic methane production equipment. Another commenter proposed 
revisions to the example in proposed Sec.  1.48-9(e)(11)(i) to include 
as qualified biogas property cleaning and conditioning equipment used 
to remove toxins or any other impurities from raw biogas or concentrate 
the gas into the appropriate mixture for sale or productive use through 
removal of other gases such as carbon dioxide, nitrogen, or oxygen. A 
commenter requested the inclusion of landfill municipal solid waste as 
a renewable resource to produce renewable natural gas as energy 
property because such a system may implement thermal gasification and 
other relevant technologies. Another commenter suggested that qualified 
biogas property should include the pipeline and compression equipment 
necessary to transport the gas from the production plant to the common 
carrier pipeline.
    Another commenter suggested that the Proposed Regulations be 
modified to specifically provide that the property comprising a biogas 
conversion/concentration and capture system, including any property 
that is part of such system and that cleans and conditions, is a single 
unit of energy property (collectively referred to as a RNG Production 
System). This commenter also suggested that the gas upgrading equipment 
necessary to concentrate the gas into the appropriate mixture for 
injection into a pipeline through the removal of other gases and 
impurities is a functionally interdependent component of the RNG 
Production System. This commenter also described a second type of 
property, a landfill gas collection system (LFG Collection System), and 
noted that the LFG Collection System is property that is an integral 
part of, but not functionally interdependent with, the RNG Production 
System because the placing in service of an LFG Collection System is 
not dependent upon placing in service the RNG Production System, but 
the LFG Collection System is used directly in and essential to the 
completeness of the intended function of the RNG Production System. 
While this commenter's focus was on landfills, the commenter noted the 
same analysis would apply to other collection systems such as anaerobic 
digesters operating at farms. Some commenters asserted that anaerobic 
digesters were functionally interdependent property, while others 
asserted that anaerobic digesters were integral property.
    After consultation with the DOE, the Treasury Department and IRS 
understand that the methane content of biogas in an anaerobic digester 
can vary between 44% and 68%. Thus, if biogas processed by an anaerobic 
digester consists of not less than 52% methane and all other statutory 
requirements are met, an anaerobic digester would be a unit of energy 
property. Commenters explained that although biogas exiting an 
anaerobic digester might not be put to productive use, the statute 
requires that qualified biogas property capture the gas ``for sale or 
productive use.'' To illustrate, if a taxpayer places in service

[[Page 100612]]

an anaerobic digester, which generates biogas meeting the not less than 
52% methane requirement, and sells the biogas to another taxpayer who 
in turn places in service cleaning and conditioning property to clean 
such biogas, each taxpayer has a qualified biogas property and may be 
eligible for the section 48 tax credit. On the other hand, if the 
biogas in the anaerobic digester does not meet the not less than 52% 
methane requirement, then such digester is not, by itself, a qualified 
biogas property. Nevertheless, the anaerobic digester still may be an 
integral part of other qualified biogas property, such as a system that 
cleans and conditions the biogas.
    The Treasury Department and the IRS intend that the final 
regulations provide a function-oriented approach to determining what 
property is considered energy property, including qualified biogas 
property. The Proposed Regulations provided examples of types of 
property that are included as qualified biogas property, which were 
intended to be illustrative but not exclusive. Therefore, the final 
regulations do not include additional examples of property that is 
included as qualified biogas property but do clarify that property that 
is an integral part of qualified biogas property includes, but is not 
limited to, a waste feedstock collection system, landfill gas 
collection system, and mixing and pumping equipment.

b. Flaring Allowance

    The preamble to the Proposed Regulations explained that a commenter 
to Notice 2022-49 stated that some properties that produce electricity 
from gas using a combustion process may flare waste or tail gas, 
including during commissioning or maintenance periods. This commenter 
recommended a de minimis exception. In response to this concern, the 
Proposed Regulations requested comments regarding whether such an 
exception is necessary and what should be considered de minimis for 
this purpose.
    All comments received in response to this request were in favor of 
an exception. Some comments pointed to the overarching purpose of the 
qualified biogas property and noted that nominal leakage should not 
prevent property from qualifying. For example, a commenter asserted 
that if the overarching purpose of the biogas is for sale or productive 
use, then the combustion of a de minimis portion should not prevent a 
property that produced such gas from being a qualified biogas property. 
Similarly, a commenter recommended allowing a de minimis exception for 
flare waste or tail gas so that otherwise eligible biomass systems will 
not be disqualified from the credit due to small amounts of leakage 
arising from normal business operations.
    Another commenter pointed to the benefit of hazard reduction 
associated with nominal flaring. This commenter stated that flaring in 
appropriate circumstances should not disqualify a facility, because 
``flares are often required as a safety and emissions hazard reducer to 
be used in case of emergency, accidental release, start-up and shut-
down procedures, and other rare occurrences.''
    The Treasury Department and the IRS understand commenters' concerns 
regarding whether flaring performed for commissioning, maintenance, 
safety, or other reasons may impact eligibility for the section 48 tax 
credit. Qualified biogas property is defined, in part, as capturing 
biogas ``for sale or productive use, and not for disposal via 
combustion.'' The Treasury Department and the IRS interpret this 
statutory requirement to not impact a qualified biogas property that 
combusts, or flares, some biogas under standard operating conditions, 
provided the primary purpose of the qualified biogas property is sale 
or productive use of biogas and any flaring complies with all relevant 
Federal, State, regional Tribal, and local laws and regulations. After 
consulting the DOE, the Treasury Department and the IRS understand that 
flare permits are specific to a given biogas facility design. 
Determining the amount of flaring appropriate for safety purposes is 
specific to each qualified biogas property and enforcing that limit is 
best left to relevant Federal, State, regional, local, and/or Tribal 
regulators. Flaring performed in accordance with applicable permits 
from relevant Federal, State, regional, local, and/or Tribal regulators 
should not jeopardize a qualified biogas property's eligibility for the 
section 48 credit. Accordingly, the final regulations at Sec.  1.48-
9(e)(11) provide that while a qualified biogas property generally may 
not capture biogas for disposal via combustion, combustion in the form 
of flaring will not disqualify a qualified biogas property, provided 
the primary purpose of the qualified biogas property is sale or 
productive use of biogas and any flaring complies with all relevant 
Federal, State, regional, Tribal, and local laws and regulations.

c. Point of Measurement

    Proposed Sec.  1.48-9(e)(11)(ii) would provide that the methane 
content requirement described in section 48(c)(7)(A)(i) and in the 
Proposed Regulations is measured at the point at which gas exits the 
biogas production system, which may include an anaerobic digester, 
landfill gas collection system, or thermal gasification equipment. This 
measurement point was described in the Proposed Regulations as 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.
    Several commenters requested clarification regarding the point of 
measurement for the methane content requirement. A commenter 
specifically requested clarification regarding the point at which the 
gas exits the biogas production system. Several commenters noted that 
the point of measurement provided in the Proposed Regulations was 
incorrect because it is too early in the process. These comments 
responded to the Proposed Regulations as well as the Correction. This 
sentiment generally is consistent with the commenters' view that biogas 
upgrading equipment should be considered eligible biogas property.
    One commenter stated that the Correction does not address the 
measurement point for the methane content requirement for purposes of 
determining whether the definition of ``qualified biogas property'' is 
met. The commenter asserted that the final rule must clarify that the 
52 percent methane content requirement is measured at the point at 
which the biogas is going to be sold or put to productive use, which 
would be after the biogas has been passed through the cleaning and 
conditioning and/or gas upgrading equipment. The commenter suggested 
that a change should be made regardless of whether gas upgrading 
equipment is considered ``integral'' or ``functionally 
interdependent.'' The commenter submitted another comment after the 
Correction was issued urging that the methane content of 52 percent 
should be measured at the point at which the gas is ready for sale or 
applicable productive use, that is, at the end of the cleaning and 
conditioning process. Several commenters supported these comments and 
incorporated them into their own comments.
    Another commenter similarly stated that the methane content should 
be measured at the end of the cleaning and conditioning process, which 
would be the point at which the biogas is going to be sold or put to a 
productive use, to ensure it consists of at least 52 percent methane. 
Many commenters have asserted that the 52 percent measurement is a 
floor (not a

[[Page 100613]]

ceiling).Therefore, even if the measurement point were to occur 
earlier, taxpayers that later upgrade the biogas could still satisfy 
the 52 percent requirement.
    The Treasury Department and the IRS agree that the point of 
measurement in the Proposed Regulations was too early in the biogas 
production process, which could potentially frustrate compliance with 
the ``sale or productive use'' requirement. Therefore, the final 
regulations adopt at Sec.  1.48-9(e)(11)(ii) the rule that the methane 
content requirement described in section 48(c)(7)(A)(i) and in the 
Proposed Regulations is measured at the point at which the biogas exits 
the qualified biogas property.
6. Microgrid Controllers
    Section 48(a)(3)(A)(xi) provides 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)).
    Proposed Sec.  1.48-9(e)(12)(i) would provide generally that 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)). Proposed Sec.  1.48-9(e)(12)(ii) would 
provide that for purposes of proposed Sec.  1.48-9(e)(12), 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.
    The preamble to the Proposed Regulations requested comments on 
whether the rules for functionally interdependent property as would be 
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. A few commenters 
advocated for the application of the functional interdependence 
standard to microgrid controllers. For example, one commenter stated 
that the functional interdependence standard is thoughtful, provides 
direct language applicable to the definition of microgrid controllers, 
and creates an easy and thorough way to identify the multi-faceted 
infrastructure that goes into microgrid controllers to generate and 
store energy.
    However, several commenters requested that particular components of 
property be listed specifically in the definition of microgrid 
controllers: optimization software, communications software, 
communications equipment, incoming service, cables, wiring, ethernet 
switches, computer hardware, load controllers, programmable logic 
controllers, meters and relays, building management systems, local 
human management interface screens, protective relays, breakers, 
routers, and other hardware necessary to monitor and control the energy 
resources and loads on a qualified microgrid.
    Additionally, two commenters specifically requested the inclusion 
of switchgear in the definition of microgrid controllers. One of the 
commenters explained that switchgear is the true backbone of the 
microgrid controls system. However, the commenter also pointed out that 
switchgear is an essential part of any building's electrical operations 
with or without a microgrid. This commenter also noted that because 
switchgear is a critical piece of a building's infrastructure, it is 
usually also owned by the building owner. The commenters generally 
suggested that if switchgear is owned by the building owner but paid 
for by the taxpayer that owns the microgrid controller, then the cost 
of the switchgear should be included in the basis of the taxpayer's 
section 48 credit for the microgrid controller similar to the inclusion 
of interconnection property costs in the credit basis of certain lower-
output energy properties.
    The two commenters also suggested that if switchgear is part of an 
existing building, and a microgrid controller is added in a case in 
which a taxpayer is applying the 80/20 Rule, then the switchgear should 
not be taken into account for purposes of the 80/20 Rule. For example, 
one of the commenters explained that switchgear in an existing building 
may be sufficient for connecting microgrid controls with relevant 
distributed energy resources and load resources either as is or with 
some additional pieces of equipment and because all microgrid control 
components will connect through the switchgear, it is critical that the 
integrated but standalone microgrid control equipment is not considered 
as retrofitting of the switchgear in existing buildings under the 80/20 
Rule. The other commenter likewise recommended that equipment 
integrated into switchgear to enable the installation of a microgrid 
controller should not be considered retrofitted equipment but a 
separate purchase of functionally interdependent energy property.
    The Treasury Department and the IRS consulted with the DOE and 
confirmed that while switchgear may be a necessary part of a microgrid, 
switchgear is neither functionally interdependent nor integral to a 
microgrid controller. Switchgear plays a vital role in ensuring the 
reliability and safety of microgrids by managing power distribution, 
providing protection, and maintaining system integrity. However, the 
microgrid controller is responsible for the overall management and 
optimization of a microgrid's energy resources and its interaction with 
the main grid. For example, in the building context, technically a fuse 
or circuit breaker could be considered a switchgear, in which case they 
would exist in buildings with or without microgrid control. As a 
result, switchgear is not part of the energy property defined as a 
``microgrid controller'' and is not taken into account for purposes of 
the 80/20 Rule. For further discussion of the 80/20 Rule see part 
III.A. of this Summary of Comments and Explanation of Revisions.
    After considering comments requesting that the final regulations 
add more examples of specific components eligible as part of a 
microgrid controller, the Treasury Department and the IRS decline to do 
so. The Treasury Department and the IRS have further considered the 
unit of energy property as applied to microgrid controllers and 
conclude that the proposed rule is clear.
    Commenters also requested clarification concerning what is included 
as a ``microgrid'' for purposes of section 48. Two commenters requested 
the adoption of language clarifying that an eligible microgrid includes 
an electrical system that is

[[Page 100614]]

capable of operating in connection with the larger electrical grid 
regardless of whether the microgrid is physically connected to the 
electrical grid. Another commenter noted that until it is clarified 
that single-family homes with systems greater than 4 kW are eligible 
``microgrids,'' tax equity investors likely will be reluctant to 
finance the installation of load controllers associated with rooftop 
solar, storage, and residential microgrid installations. Similarly, 
another commenter asserted that the term ``qualified microgrid'' 
applies both to microgrids as they are conventionally known, which 
could involve many households or businesses, and to ``nanogrids,'' 
which usually involve a single household. Regarding the request for 
clarification about a microgrid needing to be physically connected to 
the electrical grid, proposed Sec.  1.48-9(e)(12)(ii) already provides 
that 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. Regarding the other comments, proposed Sec.  1.48-9(e)(12)(i) 
adopts the statutory definition of 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. This 
definition encompasses a wide range of technologies. To the extent that 
such ``nanogrids'' used in single family homes meet the definition 
under the statute and proposed Sec.  1.48-9(e)(12)(i), it is 
unnecessary to change the definition to identify this certain 
technology. The proposed rule is adopted without change.

C. 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 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, 46 FR 7287-01, 
to provide additional guidance regarding the definition of energy 
property. 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 states that ``[a] number of comments 
cited specific legislative history to the effect that wind energy 
property includes 'transfer equipment.' '' 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. T.D. 7765 
adds transfer equipment, but not transmission lines, to the definition 
of wind energy property.
    Former 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 related to the functioning of those items. This provision 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.
    Former 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 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, guidance published 
in the Internal Revenue Bulletin 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 
components that 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 also 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 cites Revenue Ruling 94-31, 1994-1 C.B. 16, in stating 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 [for which section 38 property 
may function] 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.
    Notice 2018-59 also explains that property that is ``functionally 
interdependent'' to the generation of electricity is treated as a unit 
of energy property. Further, Notice 2018-59 provides that certain other 
property integral to the production of electricity is included in 
determining what costs to include in the basis of energy property and 
the date on which construction of the energy property 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, section 7.02(3) and (4) of Notice 2018-59 explain that 
fences are not integral to the production of

[[Page 100615]]

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 if 
the energy property it initially houses is replaced.
    One challenge in defining components that are included in energy 
property is determining the components that 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 DOE 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 guidance published in the Internal Revenue 
Bulletin issued previously by the Treasury Department and the IRS.
    Further, consistent with prior guidance, proposed Sec.  1.48-
9(f)(1) would provide the general rule that an energy property includes 
a unit of energy property that meets the requirements for energy 
property, is not excluded from energy property, and is of a type of 
energy property included in section 48(a)(3). Property owned by the 
taxpayer that is an integral part of an energy property 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. With the exception 
of the modification of energy storage technology (as provided in 
proposed Sec.  1.48-9(e)(10)(iii)) and the application of the 80/20 
Rule (as provided in proposed Sec.  1.48-14(a)(1)), energy property 
does not include equipment that is an addition or modification to an 
existing energy property.
1. Unit of Energy Property
    Proposed Sec.  1.48-9(f)(2)(i) would provide, in part, that the 
term unit of energy property means 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)). For rooftop solar energy 
property, all components of property that are installed on a single 
rooftop would also be considered a single unit of energy property under 
the Proposed Regulations.
    A commenter requested additional examples regarding the ``unit of 
energy property'' with respect to electrical energy storage and other 
energy property. For example, the commenter requested an example 
illustrating that an individual battery capable of operating on its own 
or with other batteries is a ``unit of energy property.'' The commenter 
asserted that this should be the clear result if such a battery can 
``operate apart from other energy properties,'' including, for example, 
a single storage container with multiple battery packs. The commenter 
noted that this is also consistent with prior guidance published in the 
Internal Revenue Bulletin regarding wind farms. The commenter asserted 
that if under this prior guidance, the addition of a new wind turbine 
is treated as the addition of a new unit of energy property, then the 
same rule should apply to batteries. A definitive response to such 
comments would require the Treasury Department and the IRS to conduct a 
complete factual analysis of the property in question, which may 
include information beyond that which was provided by the commenters. 
Because more information is needed to make the determinations requested 
by the commenters, the requested clarifications are not addressed in 
these final regulations.
    With respect to solar energy property, some commenters suggested 
that the Proposed Regulations did not clearly draw the line between the 
unit of energy property and property integral to the unit of energy 
property. For example, a commenter stated that the final regulations 
need to clarify that a unit of solar energy property includes all solar 
panels, racks, wires, cables, and equipment connected through a single 
inverter (rather than all property through the transformer). This 
commenter referred to Example 1 in proposed Sec.  1.48-9(f)(5)(i) and 
recommended adding an example (or modifying the existing example) to 
clarify the components in the unit of solar energy property. This 
commenter explained that this is necessary to comport with the 
definition of a unit of energy property as all functionally 
interdependent components, since each group of components connected 
through an inverter may be operated independently. Similarly, a 
commenter requested that the final regulations clarify that a solar 
project may have multiple units of energy property connected through a 
single inverter. Another commenter also requested a new or revised 
example to illustrate that for a larger-scale ground-mounted solar 
array, a ``unit of energy property'' is a single string or block of 
panels connected to each other and through a common inverter.
    As highlighted by commenters, solar energy property may be 
configured in different ways. The Treasury Department and IRS agree 
with commenters that clarity on how the definition of a unit of energy 
property is applied to solar energy property is warranted. Under the 
Proposed Regulations, a unit of energy property means 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)). In applying 
this definition to a solar energy property, the Treasury Department and 
IRS view the unit of energy property as all the solar panels that are 
connected to a common inverter, which would be considered an integral 
part of the energy property, or connected to a common electrical load, 
if a common inverter does not exist. Accordingly, a large, ground-
mounted solar energy property may be comprised of one or more units of 
energy property depending upon the number of inverters. The example in 
the final regulations is updated to reflect this. The final regulations 
adopt the definition of unit of energy property as proposed.
    For rooftop solar energy property, all components of property that 
are installed on a single rooftop would also be considered a single 
unit of energy property under the Proposed Regulations. The final 
regulations adopt this rule as proposed.
2. Functional Interdependence
    Proposed Sec.  1.48-9(f)(2)(ii)(A) would provide that except as 
provided in proposed Sec.  1.48-9(f)(2)(ii)(B), 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) and as described in proposed Sec.  1.48-
9(e).
    Proposed Sec.  1.48-9(f)(2)(ii)(B) would provide that in the case 
of solar process heat equipment, fiber-optic solar energy property, 
electrochromic glass property, GHP property, qualified biogas property,

[[Page 100616]]

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) and as described in 
proposed Sec.  1.48-9(e).
    Many commenters requested that taxpayers be permitted to claim a 
credit for a functionally interdependent piece of property without 
owning the entire unit of energy property. These comments addressing 
ownership are discussed in part III.D. of this Summary of Comments and 
Explanation of Revisions.
    Other commenters asserted that the statute does not require 
ownership of a unit of energy property; instead, the taxpayer must only 
own something that fits the relevant definition of ``energy property.'' 
These commenters stated that the proposed definitions of the unit of 
energy property based on ``functional interdependence'' and integral 
property have no basis in section 48. A commenter stated that section 
48 does not require or permit the Treasury Department or the IRS to 
discriminate between types of energy property, whether based on 
functionality, ownership, or otherwise. This commenter referred to the 
flush language at section 48(a)(3)(D): ``[energy property] shall not 
include any property which is part of a facility the production from 
which is allowed as a credit under section 45 for the taxable year or 
any prior taxable year.'' The commenter said this language clearly 
signals that Congress recognizes that property may be part of a 
facility, but that the term ``property'' represents something less than 
a facility. The commenter also referred to Technical Advice Memorandum 
8528001 (January 8, 1985) for the principle that components of property 
that may function together can also retain their separate identity for 
tax purposes. Lastly, the commenter stated that section 48 is focused 
on capitalized expenditures on items of property that are tangible 
personal property for Federal income tax purposes that are used in a 
trade or business. As a result, the commenter asserted that to define 
the types of property that qualify for the section 48 credit, taxpayers 
should focus on items of property that are integral to a process that 
Congress has chosen to incentivize, for example, the production of 
energy using certain inputs. This commenter requested the removal of 
the functional interdependence standard at proposed Sec.  1.48-9(f) and 
asserted that while this standard is needed for section 45 to determine 
a qualified facility and for beginning of construction purposes, this 
standard is not needed for purposes of section 48.
    Another commenter stated that the Proposed Regulations contradict 
the language and intent of the IRA by distinguishing between 
``functionally interdependent'' components and ``integral parts'' of 
energy property to determine the owner or owners of energy property who 
may claim the section 48 credit. The commenter noted that this 
distinction contravenes the plain text of section 48, which permits the 
section 48 credit to be claimed by the owner of energy property if the 
original use of that energy property began with such owner.
    The concept of a unit of energy property also is intertwined with 
the discussion of the 80/20 Rule in part III.A. of this Summary of 
Comments and Explanation of Revisions. In the context of the 80/20 
Rule, a few commenters also did not agree with this concept. For 
example, a commenter highlighted the statutory language and pointed out 
that certain definitions of energy property use the word ``equipment'' 
as opposed to ``system.'' A commenter explained that some energy 
properties are defined as equipment that serves a function, such as 
solar energy property defined in section 48(a)(3)(A)(i) and GHP 
property defined in section 48(a)(3)(A)(vii). This commenter contrasted 
those definitions with statutory definitions of other types of energy 
property as comprising a system, such as the definition of CHP property 
in section 48(c)(3), thermal energy storage property as defined in 
section 48(c)(6)(C)(i), and qualified biogas property as defined in 
section 48(c)(7). The commenter concluded that the ``unit of energy 
property'' concept as provided in proposed Sec.  1.48-9(f)(2)(i) is 
appropriate for energy properties defined as systems, but it should not 
be applied to energy properties defined as equipment.
    Another commenter made a similar point about misalignment of the 
``unit of energy property'' concept by focusing specifically on its 
application to geothermal energy property. The commenter stated that 
despite the statute defining ``energy property'' at the equipment 
level, ``equipment used to produce, distribute, or use energy derived 
from a geothermal deposit,'' the Proposed Regulations use the term 
``unit of energy property,'' a term defined more expansively, such that 
it could be interpreted to be equivalent to an entire facility in the 
case of geothermal energy property. By using the term ``unit of energy 
property,'' the commenter asserted that the Proposed Regulations give a 
misleading appearance that the rules comport with the statutory text of 
section 48 but define that term so that it is functionally equivalent 
to the term ``facility'' as applied in section 45.
    In the context of microgrid controllers, some commenters agreed 
with the application of the functional interdependence standard. A 
commenter stated that microgrids are highly customizable, and the 
functional interdependence standard as proposed would allow 
accommodation of the different engineering requirements of qualified 
microgrids to future-proof the definition and allow for technological 
advances. This commenter agreed that the functional interdependence 
standard is sufficiently flexible for microgrid controllers.
    The statute supports the Proposed Regulations' definition and use 
of the terms ``functionally interdependent'' and ``unit of energy 
property.'' Additionally, these concepts have been adopted in previous 
guidance published in the Internal Revenue Bulletin under section 48, 
particularly Notice 2018-59, which provides guidance regarding the 
beginning of construction rules for the section 48 credit.
    There are three key reasons for requiring an energy property to 
include all functionally interdependent components that are part of a 
unit of energy property. First, the statutory definition of each type 
of energy property as provided in section 48(a)(3) and (c) is included 
at proposed Sec.  1.48-9(e). The unit of energy property definition at 
Sec.  1.48-9(e)(2) aligns with these statutory definitions by 
encompassing the property required to generate electricity or perform 
the required function as described in the statute. If a taxpayer owns 
merely a component of property within a larger unit of energy property 
and is not required to place in service the entire unit of energy 
property, then in some cases there would be no certainty that the 
generation of electricity or other statutorily required function would 
be satisfied when the taxpayer claims the credit.
    Some commenters suggested that this uncertainty could be eliminated 
or reduced by a coordinated operating plan among separate taxpayers. 
However, section 48 provides a credit only if a taxpayer places in 
service ``energy property'' as defined by statute. It does not provide 
a credit for placing in service a mere component of energy property, 
regardless of whether it is subject to an operating plan. In addition, 
taxpayers claim the section 48 credit by

[[Page 100617]]

filing Form 3468, Investment Credit, with their Federal income tax 
return. The IRS has no authority to compel taxpayers to coordinate tax 
credit claims or share tax return information with other taxpayers. Any 
taxpayer claiming a section 48 credit must satisfy the statutory 
requirements, as described by Congress, for each type of energy 
property, and the functional interdependence standard provided in the 
Proposed Regulations would ensure that the statutory requirements are 
met.
    Second, focusing on the statutory language in section 48(a)(1), 
which 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,'' the definition of the unit of 
energy property using a functional interdependence standard is 
consistent with how the term ``placed in service'' has been interpreted 
by the courts and developed in various forms of guidance. Proposed 
Sec.  1.48-9(b)(5) largely incorporates the general rules provided by 
Sec.  1.46-3(d)(1) for determining when a taxpayer has placed a 
property in service for the section 48 credit. An energy property is 
considered ``placed in service'' in the earlier of the taxable year in 
which, under the taxpayer's depreciation practice, the depreciation of 
such energy 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.'' See Sec. Sec.  1.46-3(d)(1) and 
1.167(a)-11(e)(1)(i).
    To determine the taxable year in which depreciation begins, it is 
the energy property described in section 48(a)(3)(A) that must be 
depreciable. See section 48(a)(3)(C). As stated earlier, this energy 
property cannot be a mere component that would be depreciated in 
isolation from the rest of the components that would make up a unit of 
energy property. Treating individual components within a unit of energy 
property as an energy property would make it practically impossible to 
determine the taxable year in which the depreciation of components that 
comprise an energy property begins.
    The Tax Court has said that ``when an individual component that is 
designed to operate as a part of a larger system is incapable of 
contributing to the system in isolation, it is not regarded as placed 
in service until the entire system reaches a condition of readiness and 
availability for its specifically assigned function.'' Green Gas Del. 
Statutory Tr. v. Commissioner, 147 T.C. 1, 52 (2016), aff'd, 903 F.3d 
138 (D.C. Cir. 2018). The Tax Court further explained that components 
``are not to be considered placed in service separately from the system 
of which they are an essential part.'' Olsen v. Commissioner, T.C. Memo 
2021-41, aff'd 52 F.4th 889 (10th Cir. 2022). See also Sealy Power, 
Ltd. v. Commissioner, 46 F.3d 382, 390 (5th Cir. 1995), aff'g in part, 
rev'g in part on other grounds T.C. Memo. 1992-168; see Pub. Serv. Co. 
v. United States, 431 F.2d 980, 984 (10th Cir. 1970) (holding that 
individual components of a power plant could not be considered 
separately because no component ``would serve any useful purpose'' on 
its own). As demonstrated by these rulings, courts have long 
interpreted the placed in service requirement to apply to all of the 
functionally interdependent components of a unit of property that must 
be placed in service collectively.
    Lastly, in amending section 48 for taxable years after the 
enactment of the IRA, Congress did not contradict or displace these 
concepts, which had already been established in guidance published in 
the Internal Revenue Bulletin. In Notice 2018-59, 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). Further, 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 to generate electricity. Notice 
2018-59 relies upon the rationale provided in Revenue Ruling 94-31, 
1994-1 C.B. 16, 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.
3. Integral Part of an Energy Property
    Proposed Sec.  1.48-9(f)(3)(i) would provide that 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) and as described in proposed Sec.  1.48-9(e) 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 not owned by the taxpayer that 
is an integral part of the taxpayer's energy property. 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 an 
integral part of an energy property that is also shared by a qualified 
facility (as defined in section 45(d)) will not be considered property 
that is not energy property under proposed Sec.  1.48-9(d). This means 
that property that is also used by a qualified facility (as defined in 
section 45(d)) may still be energy property.
    Proposed Sec.  1.48-9(f)(3)(ii) would provide that 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 
proposed Sec.  1.48-9(e). 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 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

[[Page 100618]]

45(d)), so long as the total cost basis of the integral property is not 
exceeded for purposes of the section 48 credit claimed with respect to 
any energy property or qualified facility that share such property.
    Proposed Sec.  1.48-9(f)(3)(iii) would provide that 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.
    Proposed Sec.  1.48-9(f)(3)(iv) would provide that fencing is not 
an integral part of an energy property because it is not integral to 
the activity performed by the energy property. A commenter disagreed 
that fencing is not integral and asserted that concerns of national 
security dictate the fences, along with security systems and monitoring 
devices, be treated as integral to electricity generation. Fencing is 
not considered property integral to an energy property because it is 
not essential to the completeness of the intended function of an energy 
property, whether electricity generation or another specific function 
of energy property. This rule originally was provided in Notice 2018-59 
and was included in the Proposed Regulations. The proposed rule is 
adopted without change.
    For the various section 48 energy properties, commenters requested 
confirmation that certain property is an integral part of an energy 
property. A commenter requested clarification that an HVDC (high-
voltage direct current) power system is either a ``unit of energy 
property'' or a ``functionally interdependent component'' of an 
offshore wind facility. If the HVDC power system is used directly in 
the intended function of the energy property and is essential to the 
completeness of the intended function, then the HVDC power system would 
be an integral part to an energy property, and thus, treated as part of 
that energy property. However, because the generation or storage of 
electricity or thermal energy is not dependent upon the placing in 
service of an HVDC power system, it is not a functionally 
interdependent component of an energy property and not a separate 
``unit of energy property.'' Further, the Proposed Regulations included 
an offshore wind example, retained in these final regulations, that 
illustrates the application of the energy property rules and addresses 
this commenter's concern.
    Another commenter requested that the final regulations clarify that 
software that operates, monitors, or protects the project applies more 
broadly than power conditioning and transfer equipment and may be 
considered property integral to an energy property. The commenter 
asserted that certain types of software used as a part of energy 
management systems, battery management systems, and microgrid 
controllers should be considered property integral to an energy 
property. This commenter also requested that software that optimizes 
and automates integral parts also be eligible. Finally, this commenter 
believed that the final regulations should clarify that a taxpayer who 
owns an energy property can include software costs in the basis of the 
energy property to compute the section 48 credit. Another commenter 
stated that the definition of power conditioning equipment expressly 
includes software used to ``monitor, operate, and protect'' such 
equipment and requested this definition be modestly expanded. As 
discussed in this part I.B.6. of the Summary of Comments and 
Explanation of Revisions, software may be integral to different types 
of energy property, including microgrid controllers. Therefore, 
software that optimizes and automates may be integral if it meets the 
integral property rule in Sec.  1.48-9(f)(3). To the extent the 
commenter is asking whether software costs may be capitalized, that 
issue is beyond the scope of these regulations. The proposed rules are 
adopted without change.
    In the context of qualified biogas property, commenters requested 
additional examples of what components may be integral property. 
Specifically, a commenter asked for clarification that mobile trailers 
or containers used to transfer biogas are integral to biogas energy 
property. The final regulations do not adopt these comments, as these 
regulations are meant to apply to all energy properties and do not 
provide an exclusive list of components of property that may be 
included in energy property. The final regulations do provide certain 
examples of property that is an integral part of qualified biogas 
property including, but not limited to, a waste feedstock collection 
system, a landfill gas collection system, and mixing or pumping 
equipment.
    Additionally, a few commenters requested clarification regarding 
the determination of when construction begins in cases in which two or 
more energy properties share integral property. The commenters proposed 
that the beginning of construction on one energy property does not 
determine when construction begins on another energy property, even if 
they share property integral to both energy properties. The Treasury 
Department and the IRS have addressed the beginning of construction 
rules in several pieces of Internal Revenue Bulletin guidance. The 
Proposed Regulations do not address these rules and they are beyond the 
scope of the final regulations.
    In the context of solar energy property, a commenter requested that 
the Treasury Department and the IRS confirm that power conditioning 
equipment, including transformers, is not considered a component of a 
unit of energy property; rather, power conditioning equipment is an 
``integral part'' of energy property. This commenter noted that the 
example included in proposed Sec.  1.48-9(f)(5)(i) says this, but 
requested that the Treasury Department and the IRS clarify that the 
language in this example, ``[a]ll 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,'' 
means it is the transformer that is the ``integral part'' and the other 
solar components that are the functionally interdependent components of 
the property. This same commenter also requested that gen-tie lines be 
clarified as integral property. The final regulations, at Sec.  1.48-
9(f)(3)(ii), provide that power conditioning and transfer equipment is 
considered an integral part of an energy property and provide a 
nonexclusive list of types of property that are considered power 
conditioning equipment, including transformers, and transfer equipment.
    Another commenter requested confirmation that offshore generating 
assets and components of island-based hydropower facilities qualify for 
the section 48 credit. This commenter also requested that similar rules 
and examples as those provided in the Proposed Regulations for offshore 
wind facilities apply to marine and hydrokinetic energy property. As 
discussed in more detail in part III.F. of this Summary of Comments and 
Explanation of Revisions, offshore wind facilities and qualified 
hydropower facilities are both qualified facilities under section 45(d) 
for which a taxpayer may make an election to claim the section 48 
credit in lieu of the section 45 credit. Whether certain assets are 
included in an offshore wind facility or qualified hydropower facility 
as defined

[[Page 100619]]

in section 45(d) is beyond the scope of these final regulations.
4. Property Excluded From Energy Property
    Proposed Sec.  1.48-9(d)(2) would provide that energy property does 
not include power purchase agreements, goodwill, going concern value, 
or renewable energy certificates. A commenter requested additional 
clarification and examples of the potential bifurcation of tax basis 
between renewable energy certificates and an associated energy 
property. A definitive response to this comment would require the 
Treasury Department and the IRS to conduct a complete factual analysis 
of the renewable energy certificates and associated energy property, 
which may include information beyond that which was provided by the 
commenters. Because more information is needed to provide the 
clarification requested by the commenters, the requested clarification 
is not addressed in these final regulations. The final regulations 
adopt the rule as proposed.

II. Rules Relating to the Increased Credit Amount for Satisfying 
Certain Prevailing Wage and Apprenticeship Requirements and the Energy 
Project Rule

    Section 48(a)(9) provides for an increased credit amount for energy 
projects for taxpayers who satisfy certain requirements. Section 
48(a)(9)(A)(i) provides a general rule that in the case of any energy 
project that satisfies the requirements of section 48(a)(9)(B), the 
amount of the credit determined under section 48(a) (determined after 
the application of section 48(a)(1) through (8) and (15), and without 
regard to section 48(a)(9)(A)(i)) is equal to such amount multiplied by 
5.
    Section 48(a)(9)(A)(ii) provides that for purposes of section 
48(a), the term ``energy project'' means a project consisting of one or 
more energy properties that are part of a single project.
    Section 48(a)(9)(B) provides that a project meets the requirements 
of section 48(a)(9)(B) if it is one of the following: (i) a project 
with a maximum net output of less than 1 megawatt of electrical (as 
measured in alternating current) or thermal energy (One Megawatt 
Exception); (ii) a project the construction of which begins before the 
date that is 60 days after the Secretary publishes guidance with 
respect to the requirements of section 48(a)(10)(A) and (11) (BOC 
Exception); and (iii) a project that satisfies the requirements of 
section 48(a)(10)(A) and (11) (PWA requirements).
    Section 48(a)(10) provides rules with respect to the prevailing 
wage requirements (Prevailing Wage Requirements) under section 48, 
including the special recapture provision under section 48(a)(10)(C). 
Section 48(a)(10)(B) provides that rules similar to the correction and 
penalty procedures for a failure to satisfy the Prevailing Wage 
Requirements under section 45(b)(7)(B) apply, and those rules generally 
apply prior to a recapture event under section 48(a)(10)(C). Section 
48(a)(11) provides that rules similar to the rules of section 45(b)(8) 
apply with respect to the apprenticeship requirements (Apprenticeship 
Requirements).
    Under the BOC Exception in section 48(a)(9)(B)(ii), taxpayers may 
claim the amount of the increased credit without satisfying the PWA 
requirements if construction ``begins before the date that is 60 days 
after the Secretary publishes guidance with respect to the [PWA 
requirements].'' The Treasury Department and the IRS published Notice 
2022-61, 2022-52 I.R.B. 560, on November 30, 2022, providing initial 
guidance with respect to the PWA requirements and starting the 60-day 
period described in those sections. To qualify for the BOC Exception, a 
taxpayer must begin construction of a section 48 energy project before 
January 29, 2023. Unless the One Megawatt Exception applies, taxpayers 
who do not meet the BOC Exception under section 48 would need to 
satisfy the applicable PWA requirements to claim the increased amount 
of credit.

A. PWA Requirements

    Comments on the general PWA requirements (including comments that 
referenced section 48 but addressed the PWA requirements more 
generally) were addressed in the PWA Final Regulations. Comments 
received regarding the specific PWA requirements under section 48, the 
One Megawatt Exception under section 48, and the recapture rules 
contained in section 48(a)(10)(C) were not addressed in the PWA Final 
Regulations and are addressed in this Summary of Comments and 
Explanation of Revisions.
    To the extent consistent with this Summary of Comments and 
Explanation of Revisions section of these final regulations, the 
Summary of Comments and Explanation of Revisions section of the PWA 
Final Regulations is incorporated in these final regulations. 
Therefore, general comments addressed in the preamble to the PWA Final 
Regulations are not addressed again in this Summary of Comments and 
Explanation of Revisions.
    The PWA Final Regulations provide generally applicable rules on the 
PWA requirements. These final regulations generally adopt by cross-
reference those rules in the PWA Final Regulations promulgated under 
section 45(b)(7) and (8); specifically, in Sec.  1.45-7 (Prevailing 
Wage Requirements), Sec.  1.45-8 (Apprenticeship Requirements), and 
Sec.  1.45-12 (recordkeeping and reporting). Consistent with the PWA 
Final Regulations, the PWA requirements under section 48 apply with 
respect to the creditable portion of an energy project within the 
meaning of section 48(a)(9)(A) and these final regulations.
    As stated in the preamble to the PWA Final Regulations, the 
Treasury Department and the IRS have determined that given the 
complexity of the PWA requirements, the uncertainty regarding the 
potential retroactive effects of the PWA requirements, and the benefits 
to tax administration gained with consistency across the various Code 
sections containing PWA requirements, a transition rule is appropriate. 
The PWA Final Regulations provide that any work performed before 
January 29, 2023 (that is, the date that is 60 days after the 
publication of Notice 2022-61) is not subject to the PWA requirements, 
regardless of whether there is an applicable BOC Exception. This 
transition rule also applies for taxpayers that may initially satisfy 
the BOC Exception, but later fail to meet the BOC Exception (for 
example, by failing to meet certain continuity requirements). These 
taxpayers must satisfy the PWA requirements for construction, 
alteration, or repair (as applicable) that occurs on or after January 
29, 2023, but do not need to meet the PWA requirements for work that 
occurred prior to that date. For those reasons described in the 
preamble to the PWA Final Regulations, this transition rule also 
applies to the PWA requirements under section 48 and is adopted by 
reference into Sec. Sec.  1.45-7 and 1.45-8 in these final regulations.
    The PWA Final Regulations also provide a limited transition waiver 
for the penalty payment with respect to the correction and penalty 
procedures described in section 45(b)(7)(B) for a failure to satisfy 
the Prevailing Wage Requirements. The PWA Final Regulations provide 
that the penalty payment is waived with respect to a laborer or 
mechanic who performed work in the construction, alteration, or repair 
of a qualified facility on or after January 29, 2023, and prior to June 
25, 2024, if the taxpayer relied upon Notice

[[Page 100620]]

2022-61 or the PWA Proposed Regulations for determining when the 
obligation to pay prevailing wages began, provided the taxpayer makes 
the appropriate correction payments to the impacted workers within 180 
days of June 25, 2024. These final regulations clarify that this 
limited transition waiver applies to section 48 provided the taxpayer 
makes the appropriate correction payments to the impacted workers 
within 180 days of the publication of these final regulations.
    Similarly, these final regulations also allow taxpayers to use 
Notice 2022-61 for determining when construction begins for purposes of 
the applicable percentage of labor hours performed by qualified 
apprentices required under section 48(a)(11) (by reference to section 
45(b)(8)) in satisfying the Labor Hours Requirement described in Sec.  
1.45-8. These transition rules are explained further in the preamble to 
the PWA Final Regulations.
    The PWA Final Regulations provide special rules applicable to 
Indian Tribal governments. These final regulations also adopt by cross-
reference the special rules with respect to Indian Tribal governments 
under Sec.  1.45-7 for purposes of the Prevailing Wage Requirements.

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

    Section 48(a)(10)(C) authorizes the Secretary, by regulations or 
other guidance, to provide for recapturing the benefit of any increase 
in the credit allowed under section 48(a) by reason of section 
48(a)(10) with respect to any project that does not satisfy the 
requirements under section 48(a)(10)(A) (after application of section 
48(a)(10)(B)) for the period described in section 48(a)(10)(A)(ii) but 
that does not cease to be investment credit property within the meaning 
of section 50(a). The period and percentage of such recapture is to be 
determined under rules similar to the rules of section 50(a).
    Proposed Sec.  1.48-13(c)(9) provides a rule to coordinate the 
recapture of an increase credit amount in a prior taxable year with 
recapture under section 50(a) in a current taxable year. These final 
regulations do not adopt proposed Sec.  1.48-13(c)(9) because the 
proposed rule may have resulted in an inaccurate calculation of the 
amount of the ``aggregate decrease in credit allowed'' calculated under 
section 50(a). Section 50(a) and Sec. Sec.  1.47-1, 1.47-2, and 1.50-1 
provide rules governing recapture of the investment credit, including 
the section 48 credit.
    Proposed Sec.  1.48-13(c)(3)(i) would provide generally that the 
increased credit amount under proposed Sec.  1.48-13(b)(3) is subject 
to recapture for any project that does not satisfy the Prevailing Wage 
Requirements in Sec.  1.45-7(b) through (d) and proposed Sec.  1.48-
13(c)(1) 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)). Further, proposed Sec.  1.48-13(c)(7) would provide 
that, in addition to the general reporting requirements described in 
Sec.  1.45-12, a taxpayer that has claimed an increased credit amount 
under proposed Sec.  1.48-13(b)(3) or transferred a specified credit 
portion under section 6418 that includes an increased credit amount 
under proposed Sec.  1.48-13(b)(3) 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 five-year 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.
    Commenters requested more detail on the ``annual prevailing wage 
compliance report'' because the Proposed Regulations do not specify 
what information is required to be reported to the IRS. A commenter 
noted that the Proposed Regulations do not provide any applicable 
procedures if the IRS should disagree with the completeness of the 
information or provide detail on the scope of prevailing wages for an 
alteration or repair. The commenter further asserted that the guidance 
should avoid imposing any additional burdens on the taxpayer and 
creating any further uncertainty with respect to the already 
substantial compliance obligations created by the PWA Proposed 
Regulations.
    The details requested by these commenters were addressed in the PWA 
Final Regulations. The PWA Final Regulations provided definitions of 
terms, including what constitutes an alteration or repair, and detail 
on the required recordkeeping and reporting for the purposes of the PWA 
requirements. Further, as provided in the Proposed Regulations, 
information on the payment of prevailing wages with respect to any 
alteration or repair of the project during the five-year recapture 
period is to be provided in the form and manner as described in IRS 
instructions or in publications or guidance published in the Internal 
Revenue Bulletin. Accordingly, these comments are not addressed again 
in this Summary of Comments and Explanation of Revisions. These final 
regulations do clarify that if there is no alteration or repair that 
occurs during the relevant year during the five-year recapture period, 
then the taxpayer is deemed to satisfy the Prevailing Wage Requirements 
for that year.
    Proposed Sec.  1.6418-5(f) would provide rules addressing the 
notification requirements and the impact of recapture under section 
48(a)(10)(C). The final regulations update the rules in proposed Sec.  
1.6418-5(f) because the 6418 Final Regulations, which included updated 
recapture rules in Sec.  1.6418-5, were published after publication of 
proposed Sec.  1.6418-5(f). Thus, it is necessary to update Sec.  
1.6418-5(f), which was reserved in the 6418 Final Regulations, in these 
final regulations to ensure consistency with the updated recapture 
rules in the 6418 Final Regulations.

C. Definition of Energy Project

    Section 48(a)(9)(A)(ii) defines the term ``energy project'' as a 
project consisting of one or more energy properties that are part of a 
single project. Proposed Sec.  1.48-13(d)(1) would provide that, for 
purposes of the increased credit amount under section 48(a)(9) and 
proposed Sec.  1.48-13(b) and (c), the domestic content bonus credit 
amount under section 48(a)(12), and the increase in credit rate for 
energy communities provided in section 48(a)(14), the term ``energy 
project'' means one or more energy properties (multiple energy 
properties) that are operated as part of a single energy project. 
Proposed Sec.  1.48-13(d)(1) would provide that 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 proposed Sec.  1.48-13(d)(2)) 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;

[[Page 100621]]

    (vi) The energy properties are constructed pursuant to a single 
master construction contract; or
    (vii) The construction of the energy properties is financed 
pursuant to the same loan agreement.
    Proposed Sec.  1.48-13(d)(2) would define the term ``related 
taxpayers'' and provide a related taxpayer rule. Proposed Sec.  1.48-
13(d)(3) would require consistent treatment as an energy project.
1. Challenges for Project Structures
    The Treasury Department and the IRS received several comments 
regarding the energy project definition, and commenters raised concerns 
regarding the single project rule. Emblematic of commenters' views, a 
commenter summarized its concerns that the Proposed Regulations would 
expand the definition of a ``project'' by potentially grouping energy 
properties that would not commonly be considered as a single energy 
project if those energy properties were paid for under the same 
construction contract or financing agreement, even if the properties 
were operated separately. The commenter explained that the problems 
caused by the grouping of multiple energy properties as a single 
project are particularly acute for behind the meter solar facilities in 
different locations that are typically sized to provide power for their 
respective dedicated sites. This commenter described several concerns 
including geographic and time disparity, the impact on small bidders, 
the ability to plan around the proposed definition's factors, and the 
impact on domestic content bonus credit amount requirements. Another 
commenter stated that the single project rule in the Proposed 
Regulations would capture energy properties located on contiguous 
parcels that are owned by the same tax equity partnership (which is 
overinclusive and does not take into account projects for which the 
owner of each project is a disregarded special purpose entity), yet the 
energy properties are subject to separate permits, separate power 
purchase agreements, separate substations and gen-tie lines, separate 
construction contracts, and separate construction loans and permanent 
debt, and ownership of the underlying real estate is separate.
    A commenter explained that typically, each project partnership will 
have a separate engineering, procurement, and construction (EPC) 
agreement. If, for example, project partnerships A, B, C, and D hold 
four separate energy properties and four separate EPC agreements are 
entered into on four separate dates, that would create four distinct 
prevailing wage rates that need to be tracked for prevailing wage 
purposes. If all four energy properties owned by the four project 
partnerships are deemed to be a single energy project, then each 
project partnership would still have to determine separately whether it 
met the PWA requirements due to the differing prevailing wage rates 
from the various dates the EPC contracts were signed. The commenter 
suggested that if any one of the four energy properties comprising the 
single energy project does not meet the PWA requirements, then none 
would be treated as meeting the requirements.
    Another commenter explained that the single project rule would make 
thousands of separate residential rooftop systems one ``energy 
project,'' because two of the factors (common construction and loan 
agreements) always will be met. This commenter explained that these 
systems generally are constructed under the same EPC contract and 
financed via the same debt facility purely as a matter of convenience 
and not because the systems are intended to be operated together as a 
single project. Therefore, the commenter explained that all rooftop 
photovoltaic (PV) solar systems installed by any individual EPC 
contractor (even if installed years apart and in separate States) 
potentially could be treated as one energy project under the Proposed 
Regulations. This commenter also raised concerns that this approach 
creates uncertainty and is thus administratively unworkable with regard 
to the timing of credit claims.
    Several commenters had concerns and requested clarification 
regarding the application of the single project rule to co-located 
energy property and energy storage technology (such as solar energy 
property and battery storage). A commenter explained that battery 
storage co-located within the solar array would meet the criteria that 
the projects be contiguous to one another (indeed integrated), and 
other criteria could apply as well, for example, that both types of 
energy property are part of the same construction contract and subject 
to the same permits. This commenter explained that the listed criteria 
in the Proposed Regulations appear to be focused on traditional energy 
generating projects, which makes sense if there are multiple energy 
properties that should be treated as a single energy project but could 
inadvertently bring energy storage technology under the umbrella of a 
section 45 credit solar project. Additionally, several commenters 
requested that if the single project rule is adopted in final 
regulations, such regulations should confirm that ``[s]ection 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),'' as 
stated in the preamble to the Proposed Regulations.
    Another commenter provided an example of a project in a school 
district (District) for which potentially varying PWA requirements must 
be met. The District installs solar energy properties on a school, 
district offices, and a supply warehouse located across separate non-
contiguous locations within the District boundaries. The District 
issues a single series of tax-exempt bonds to finance construction 
costs at all properties. After a single request for proposal, the 
District selects a single contractor to construct the energy properties 
at each location. Even if the District were to send out requests for 
proposals for each separate property, the same contractor may be 
selected for all sites. In addition, although the District could issue 
separate series of bonds for each site, those bonds may be considered a 
single issue under Sec.  1.150-1. Under the Proposed Regulations, the 
various solar energy properties would be considered a single energy 
project even though the energy properties are distinct and located 
miles apart.
    Many commenters proposed alternatives to the Proposed Regulations' 
definition of energy project. Several commenters recommended re-
instituting the facts and circumstances single project test from Notice 
2018-59. A commenter also suggested allowing taxpayers an option, but 
not a requirement, to elect to have multiple energy properties be 
``treated as one energy project'' if they meet the single project rule 
with two factors and common ownership found in the Proposed 
Regulations. This commenter stated that if the Proposed Regulations' 
definition of energy project is retained, the rule should change the 
timing for analyzing common ownership from ``at any point during the 
construction'' to ``when the energy property is placed in service.'' 
This commenter also suggested removing the related taxpayer rule and 
instead providing an option to elect to be treated as one taxpayer. 
Another commenter proposed that the final regulations could instead 
create a rebuttable presumption under which taxpayers can avoid having 
multiple energy properties treated as a single energy project by 
demonstrating that the project covers multiple technologies, taxpayers, 
taxable years, or interconnection agreements.

[[Page 100622]]

    A commenter proposed that to the extent that the Treasury 
Department and the IRS are concerned with the potential for abuse, the 
final regulations could require meeting three or four factors before 
mandating single project treatment. Alternatively, consistent with the 
approach taken in regulations under section 48(e) (T.D. 9979, 88 FR 
55506 (Aug. 15, 2023), corrected in 88 FR 59446 (Aug. 29, 2023), 
corrected in 88 FR 87903 (Dec. 20, 2023)), these final regulations 
could limit the application of the facts and circumstances 
determination to smaller projects (that is, under five megawatts). 
Another commenter offered as an alternative that the final regulations 
add a requirement for satisfaction of an additional factor or factors 
(that is, more than two) and provide that aggregation will only occur 
if the projects are clearly operated together. Another commenter 
similarly suggested that three factors should be met.
    Additionally, one commenter suggested that, if the rule were 
retained, further clarification is needed regarding what qualifies as a 
loan agreement and whether the definition of ``energy project'' applies 
to projects of any size. This commenter requested that the final 
regulations clarify that the definition does not include tax equity 
positions. This commenter also recommended that the final regulations 
align the effective date of the new energy project definition with the 
construction of an energy property or an energy project beginning on or 
after January 29, 2023, to eliminate any confusion regarding the new 
definition and to mitigate additional risk to taxpayers.
    A commenter supported the Proposed Regulations' definition of 
energy project in a comment submitted in response to the PWA Proposed 
Regulations stated that the Treasury Department and the IRS should make 
clear that a taxpayer seeking the increased credit rate for satisfying 
the PWA requirements cannot subdivide projects and construction 
contracts to evade the PWA requirements. The commenter stated that 
certain factors, including ownership and proximity, should determine 
whether multiple qualified facilities or units of equipment constitute 
one single qualified facility for purposes of determining whether the 
One Megawatt Exception applies. For example, with respect to solar 
projects, the commenter suggested that multiple energy properties 
should be treated as one single project if they are owned by a single 
legal entity, or the energy properties are constructed and/or installed 
in the same general geographic location or on adjacent or contiguous 
pieces of land. The same general geographic location may include more 
than one State, provided that the multiple energy properties are on 
adjacent or contiguous pieces of land.
    Overall, commenters expressed a view that the single project rule 
as drafted in the Proposed Regulations would apply to an overly broad 
range of energy properties and lead to illogical groupings and 
practical difficulties in complying with various bonus credit amounts 
and increased credit rates under section 48. Based on the concerns 
raised in these comments, the Treasury Department and the IRS 
acknowledge that additional flexibility is warranted. See part II.C. 4 
of this Summary of Comments and Explanation of Revisions.
2. Facts and Circumstances Approach
    Commenters asserted that a facts and circumstances approach should 
be applied to the definition of energy project. Several commenters 
raised concerns about inconsistency with prior guidance published in 
the Internal Revenue Bulletin with regard to the beginning of 
construction rules applicable to section 48. Commenters also stated 
that the Proposed Regulations would implement the energy project 
definition differently than a similar rule provided in the beginning of 
construction guidance and Notice 2022-61 (which addresses the 
application of PWA requirements), by mandating single-project treatment 
if common ownership and any two factors are met, rather than applying a 
facts and circumstances test. Similarly, commenters stated that 
regulations under section 48(e) for the Low-Income Communities Bonus 
Credit Program provide a single project definition that uses a facts 
and circumstances test.
    The Treasury Department and the IRS confirm that the definition of 
energy project in the Proposed Regulations adopts a different approach 
than the facts and circumstances test used in other tax guidance. These 
comments requesting alternatives to the Proposed Regulations' 
definition of energy project are not adopted because the increased 
credit rate for satisfying the PWA requirements, the domestic content 
bonus credit amount, and the increase in the credit rate for energy 
communities under section 48 require a greater degree of certainty for 
taxpayers and the IRS. Further, the Low-Income Communities Credit 
Program is a competitive, allocated credit program which requires an 
application; the section 48 credit does not. This difference in the 
process for claiming the section 48 tax credit supports the need for a 
more specific approach for the credit. Accordingly, the definition of 
energy project in these final regulations provides particular and 
specific requirements rather than a facts and circumstances approach.
3. Interaction With Domestic Content Bonus Credit Amounts
    Several commenters asserted that the definition of ``energy 
project'' in proposed Sec.  1.48-13(d) is inconsistent with the initial 
domestic content guidance set forth in Notice 2023-38, 2023-22 I.R.B. 
872. A few commenters stated that the application of the single project 
rule in the Proposed Regulations may cause any co-located energy 
properties to be aggregated for domestic content bonus credit amount 
purposes. The commenters suggested that this aggregation of different 
classes or categories of energy property as a single project is 
inappropriate and may create significant issues in qualifying for the 
domestic content bonus credit amount, including potentially distorting 
the domestic content calculation by overinclusion of costs for energy 
storage technology.
    Commenters provided specific examples with domestic content bonus 
credit amount implications. In one such example, a taxpayer places a 
solar array in service in 2023 and then places a battery energy storage 
system (BESS) associated with the array in service in 2026. 
Construction of the BESS began, for example, by clearing and grading at 
the site of the BESS in 2023. The solar array and the BESS are on 
contiguous parcels and share a common substation. Under the proposed 
rule, the array and the BESS would be treated as a single energy 
project. The array would qualify for the domestic content bonus credit 
amount, but the addition of the BESS would put the energy project below 
the applicable percentage calculation for domestic content purposes, 
despite the ``project'' involving different technologies and different 
tax years. The taxpayer may be unable to avoid this result for projects 
with limited access to substations or if required upgrades would exceed 
the value of the domestic content bonus credit amounts, and thus may 
choose not to add new BESS to the grid, in clear contravention of 
Congressional intent. However, assuming no other factors under the 
single project rule are present, the taxpayer could avoid this result 
simply by placing the BESS on a non-contiguous parcel, a result that is 
likely to be technically inefficient, and more importantly, is 
inconsistent with the intent of the domestic content bonus

[[Page 100623]]

credit as set forth by Congress in the IRA.
    Another commenter provided additional feedback on domestic content 
issues arising from placing different types of energy property in 
service in different taxable years. This commenter explained that if 
multiple energy properties were treated as a single project for 
purposes of the domestic content bonus credit amount, then the energy 
properties would be tested on a combined basis for the steel, iron, and 
manufactured components requirements. This could affect situations in 
which different types of energy properties are co-located, and the 
domestic content bonus credit amount could be pursued for one type of 
energy property but not for the other type of energy property. 
According to the commenter, the result likely would be that foreign 
products would be sourced for both types of energy property. Further, 
the commenter noted that combined testing would raise questions 
regarding the impact to energy properties that are placed in service 
years apart. For example, the commenter noted that if an earlier phase 
of an energy project did not qualify for the domestic content bonus 
credit amount, then it would likely be impossible for a later phase of 
the project to qualify if tested on a combined basis. Alternatively, 
the commenter noted that if an earlier phase of an energy project 
qualified for the domestic content bonus credit amount, then it could 
later become ineligible for the domestic content bonus credit amount if 
a later phase of that energy project caused the project to fail to meet 
the domestic content requirements.
    Another commenter stated that the Proposed Regulations' definition 
of energy project would deter many taxpayers from attempting to satisfy 
the domestic content bonus credit amount requirements and disqualify 
otherwise qualifying energy properties. This commenter explained that, 
increasingly, procurement decisions are made earlier in the project 
life cycle due to long lead times. Therefore, the commenter noted that 
a developer might be able to secure enough domestic equipment or steel 
to allow one energy property to satisfy the domestic content bonus 
credit amount requirements but not enough for additional energy 
properties. However, the commenter stated that if these multiple energy 
properties were aggregated and treated as a single energy project, that 
energy project likely would not qualify for the domestic content bonus 
credit amount since the combined domestic cost percentage would be 
unlikely to satisfy the adjusted percentage rule as defined in Notice 
2023-38.
    Some commenters asserted that the Proposed Regulations' definition 
of energy project should apply only to energy properties that are 
within the same category for purposes of section 48. These commenters 
also requested clarification that energy storage technology such as a 
BESS is treated as an ``energy project'' separate from solar energy 
property and other categories of energy property for purposes of the 
domestic content bonus credit amount. For example, a commenter 
highlighted the concern that ``energy project'' may be read broadly to 
apply to all energy properties that are owned by the same taxpayer and 
co-located, even if the energy properties are of different classes or 
categories and have separate pathways to eligibility. This commenter 
requested that the final regulations clarify the ``energy project'' 
definition by providing that the reference to ``one or more energy 
properties'' in section 48(a)(9)(A)(ii) should be properly interpreted 
to refer only to the same class or category of energy property. The 
commenter concluded that a better approach to the definition of 
``energy project'' would be to treat specific types of energy property, 
such as solar, wind, and other categories, as separate from energy 
storage technology property even if co-located, owned by the same 
taxpayer, and sharing common facilities and infrastructure.
    Section 48 applies the domestic content bonus credit amounts to an 
entire energy project defined as one or more energy properties that are 
part of a single project. As a result, all types of energy property, 
including energy storage technologies that meet the criteria as would 
be provided in proposed Sec.  1.48-13(d) are included within an energy 
project for purposes of the domestic content bonus credit amount. As 
noted earlier, the Treasury Department and the IRS recognize that 
additional flexibility is warranted with respect to the definition of 
energy project. The final regulations revise the definition of energy 
project to allow the taxpayer to choose when to assess the factors of 
an energy project, either at any point during construction or during 
the taxable year energy properties are placed in service. However, 
multiple types of energy property may be appropriately treated as a 
single energy project in certain situations. Accordingly, the final 
regulations do not adopt comments requesting that an energy project 
must be limited to energy properties of the same type.
4. Revisions to Definition of Energy Project
    The Treasury Department and the IRS agree with commenters that the 
Proposed Regulations' definition of energy project, described as 
ownership plus two factors, is too rigid and could have unintended 
impacts, such as preventing small rooftop solar installations from 
being eligible for the One Megawatt Exception and treating multiple 
energy properties that are located in different States as a single 
energy project. Further, the Treasury Department and the IRS understand 
that the ``at any point during construction'' language in the Proposed 
Regulations may be problematic for taxpayers, potentially grouping 
energy properties that will be placed in service in different taxable 
years.
    In response to the concerns raised by commenters, the definition of 
energy project is modified in the final regulations. The Proposed 
Regulations would have required two or more factors to be present. In 
the case of multiple energy properties owned by a taxpayer, the final 
regulations require that four or more factors be present and that the 
factors may be assessed, at the taxpayer's choice, either at any point 
during construction or during the taxable year the energy properties 
are placed in service. The Treasury Department and the IRS understand 
that taxpayers require flexibility given the varied landscape of energy 
property development and financing structures. However, the Treasury 
Department and the IRS disagree that a facts and circumstances analysis 
should be applied to the definition of energy project. Energy project 
is the statutory term for the unit of property to which the PWA 
requirements, the domestic content bonus credit amount, and the 
increase in credit rate for energy communities are applied. In 
addition, in promulgating these final regulations pursuant to the 
express delegation of authority in section 48(a)(16), the Treasury 
Department and the IRS determined that using particular and specific 
factors in the definition of energy project will increase certainty for 
taxpayers and the IRS. That increased certainty will promote sound tax 
administration and help to carry out the purposes of section 48(a).
    Separately, a commenter requested confirmation that an energy 
project will be deemed placed in service when the final energy property 
within the energy project is placed in service. Section 48(a)(9)(A)(ii) 
defines an ``energy project'' as a project consisting of one or more 
energy properties that are part of

[[Page 100624]]

a single project. Because the PWA requirements, the domestic content 
bonus credit amount, and the increase in credit rate for energy 
communities are each applied at the energy project level, the 
determination of whether an energy project meets any of these 
requirements cannot be made before the last of the multiple energy 
properties within such energy project are placed in service. 
Accordingly, the final regulations clarify the definition of energy 
project consistent with this comment.
    Further, the final regulations do not adopt proposed Sec.  1.48-
13(d)(3). The Proposed Regulations would have provided that, if 
multiple energy properties are treated as a single energy project for 
beginning of construction purposes with respect to the section 48 
credit, then the multiple energy properties also will be treated as a 
single energy project for purposes of the PWA requirements, the 
domestic content bonus credit amount, and the increase in credit rate 
for energy communities. The Treasury Department and the IRS recognize 
that this proposed rule may conflict with existing BOC guidance and the 
definition of ``energy project'' that is being adopted in these final 
regulations. Accordingly, the final regulations do not adopt this 
proposed rule.

D. One Megawatt Exception

1. Nonapplication to Certain Energy Properties
    Proposed Sec.  1.48-13(e) would provide rules for nameplate 
capacity for purposes of the One Megawatt Exception. Proposed Sec.  
1.48-13(e) would provide that for purposes of proposed Sec.  1.48-
13(b)(1), the determination of whether an energy project has a maximum 
net output of less than one MW of electrical (as measured in 
alternating current) or thermal energy is determined based on the 
nameplate capacity. Proposed Sec.  1.48-13(e) would provide that if 
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. 
Lastly, proposed Sec.  1.48-13(e) would provide that because 
electrochromic glass property (as defined in proposed Sec.  1.48-
9(e)(2)(ii)), fiber-optic solar energy property (as defined in proposed 
Sec.  1.48-9(e)(2)(i)), and microgrid controllers (as defined in 
proposed Sec.  1.48-9(e)(12)) do not generate electricity or thermal 
energy, these energy properties are not eligible for the One Megawatt 
Exception.
    Two commenters supported the rule as proposed, including 
disallowing the exception for certain properties. One of the commenters 
stated that the proposed rules for the One Megawatt Exception will 
provide certainty with respect to the applicability of labor standards 
and prevent fraud. Both commenters requested the Treasury Department 
and the IRS to retain the nameplate capacity rule for maximum net 
output in the final regulations.
    One commenter asserted that the One Megawatt Exception, as 
proposed, is too broad, undermining the PWA requirements, and should 
not apply to any energy properties that do not generate or produce 
electrical or thermal energy. This commenter disagreed with the 
alternatives provided for some types of energy property and requested 
clarity that others also should not be eligible, including GHP 
property, energy storage technology, clean hydrogen production 
facilities, and qualified biogas property.
    Conversely, most commenters asserted that the One Megawatt 
Exception should be available for non-energy generating property. Some 
commenters suggested that the final regulations provide a de minimis 
threshold to the One Megawatt Exception. A commenter suggested 
consideration of a basis dollar threshold with respect to prevailing 
wage exemptions for types of energy property that do not generate 
electricity, namely electrochromic glass, fiber-optic solar energy 
property, and microgrid controllers.
    Another commenter stated that these excluded types of energy 
property should be included if part of an ``energy project.'' 
Commenters explained that the One Megawatt Exception in section 
48(a)(9)(B)(i) applies to ``energy projects'' and therefore, can apply 
to microgrid controllers, fiber-optic solar energy property, or 
electrochromic glass that are combined with other types of energy 
property (for example, solar energy property) as part of an ``energy 
project.''
    Several commenters made the same point specifically regarding 
microgrid controllers. For example, a commenter stated that the final 
regulations should include microgrid controllers within the One 
Megawatt Exception. This commenter said that a strict statutory 
interpretation would mean that if the sum capacity of all energy 
properties within an energy project is below one MW, then the One 
Megawatt Exception is satisfied. The commenter asserted that this 
statutory interpretation is simple, straightforward, and accurately 
reflects the IRA. Similarly, a commenter suggested that to ensure small 
microgrid projects can take advantage of the One Megawatt Exception, 
the rule should allow microgrid controllers used in a microgrid for 
which the cumulative nameplate capacity value of the electrical 
generating distributed energy resources is less than one MW to be 
eligible for the One Megawatt Exception.
    Another commenter noted that the ineligibility of microgrid 
controllers for the One Megawatt Exception contradicts the definition 
of a qualified microgrid, which requires that a qualified microgrid 
includes equipment capable of generating not less than 4 kW and not 
greater than 20 MW of electricity. This commenter asserted that if the 
aggregate of the nameplate capacity of the assets managed by a 
qualified microgrid is under one MW, or if there are other physical 
limitations built into the microgrid that limit generation to one MW, 
then the microgrid controller should qualify for the One Megawatt 
Exception.
    Another commenter stated that because microgrid controllers do not 
generate energy, they should be considered to generate under one MW and 
thus should qualify for the One Megawatt Exception. This commenter 
asserted that because Congress did not specifically exclude energy 
properties with a maximum net output of less than one MW of electrical 
energy (and could have)--even if that output is zero--microgrid 
controllers should qualify under the plain language of the statute. A 
similar suggestion was raised by several commenters in the context of 
electrochromic glass. One commenter stated that nothing in section 
48(a)(9)(B)(i) suggests that the One Megawatt Exception is limited to 
generating property; the statute simply looks to the output of the 
project, if any. This commenter concluded that the simplest and 
clearest reading of section 48(a)(9)(B)(i) is that an energy property 
that does not generate electricity is eligible for the One Megawatt 
Exception.
    Similarly, another commenter stated that section 48(a)(9)(B)(i)'s 
focus on an energy project's energy output capability indicates that 
properties not producing any output could be considered for the One 
Megawatt Exception. This commenter asserted that the essence of the law 
was not to create a hierarchy favoring energy producers over non-
producers but to encourage a broad spectrum of energy efficiency and 
conservation measures.
    Another commenter stated that the Proposed Regulations' 
interpretation of the One Megawatt Exception is highly counterintuitive 
as it runs contrary to

[[Page 100625]]

obvious mathematical logic. This commenter stated that the One Megawatt 
Exception should be considered in light of the clear legislative intent 
behind it, which is that PWA requirements are disproportionately 
burdensome for smaller projects. This commenter alleged that, most 
troublingly, the interpretation is not merely prospective, from the 
date of publication of either the Proposed Regulations or the final 
regulations, but also retroactive, and that applying this 
interpretation retroactively will harm market actors who made good 
faith, logical decisions in the absence of any IRS guidance. This 
commenter requested that, at a minimum, the Treasury Department and the 
IRS apply rules regarding the One Megawatt Exception on a prospective 
basis.
    In addition to these comments, commenters also provided feedback on 
methods to measure the maximum net output of microgrid controllers to 
allow them to qualify for the One Megawatt Exception. One commenter 
proposed that a measurement of the maximum net generation that a 
microgrid controller can provide via interconnection to the grid be 
used to determine whether a microgrid controller is eligible for the 
One Megawatt Exception, and that the maximum net output be calculated 
as the nameplate capacity of the microgrid generation less the minimum 
historical microgrid load.
    Commenters also provided methods for electrochromic glass to 
qualify for the One Megawatt Exception. Two commenters suggested using 
anticipated energy savings for a building on which electrochromic 
windows are installed. For example, a commenter suggested that a 
taxpayer should be able to measure the amount of energy expected to be 
saved by use of the electrochromic glass property and compare that 
amount to one MW. The commenter noted that this approach is similar to 
the approach used to determine whether energy efficient investments in 
a commercial building qualify for a deduction under section 179D of the 
Code; this commenter recommended that final regulations provide that 
the DOE program ``Energy Plus'' model be used to determine the amount 
of anticipated energy savings. Two commenters also proposed a safe 
harbor that would deem any electrochromic glass property installed in 
any building to meet the One Megawatt Exception if no more than 60,000 
square feet of electrochromic glass is installed in the building. 
Another commenter highlighted administrative concerns with the non-
application of the One Megawatt Exception to electrochromic glass. The 
commenter explained that electrochromic glass is one of many structural 
components installed in a building, and laborers who are involved in 
the construction, alteration or repair of electrochromic glass may also 
be involved in the construction, alteration or repair of other building 
components that are not qualified energy property, creating an 
additional recordkeeping burden for taxpayers.
    The Treasury Department and the IRS have considered these comments 
on the One Megawatt Exception. The Treasury Department and the IRS 
appreciate the suggestions made by commenters in response to the 
request for comments in the Proposed Regulations regarding whether 
other methods of measurement may allow electrochromic glass property, 
fiber-optic solar energy property, and microgrid controllers to be 
eligible for the One Megawatt Exception. However, after considering the 
statute further as well as the intent of the rules in the context of 
the PWA requirements, the Treasury Department and the IRS have 
determined that the One Megawatt Exception applies only to the 
generation of electricity or thermal energy. The statutory language in 
section 48(a)(9)(B)(i) providing the increased credit amount for a 
project with a maximum net output of less than one MW of electrical (as 
measured in alternating current) or thermal energy, means that there 
must be output, and that output must be under one MW. The proposed 
conversion formulas for certain types of energy property, such as GHP 
property and energy storage property, do not undermine the PWA 
requirements. Rather, the proposed formulas provide clarity across 
various energy properties that generate output. Because electrochromic 
glass property, fiber-optic solar energy property, and microgrid 
controllers do not generate electrical or thermal energy, these types 
of energy property are not eligible for the One Megawatt Exception. 
These final regulations adopt this proposed rule without change.
2. Determination of Nameplate Capacity
    As explained in the preamble to the Proposed Regulations, the DOE 
has advised the Treasury Department and the IRS that for energy 
projects that generate electrical or thermal energy, the determination 
of an energy project's nameplate capacity will provide the necessary 
guidance to determine the maximum electrical generating output in 
megawatts 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. Accordingly, 
proposed Sec.  1.48-13(e) would provide that 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 
based on nameplate capacity. Proposed Sec.  1.48-13(e)(1) would provide 
that in the case of an electrical generating energy property, the 
nameplate capacity is 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.
    Proposed Sec.  1.48-13(e)(2) would provide that in the case of 
electrical energy storage property (as defined in proposed Sec.  1.48-
9(e)(10)(ii)), the nameplate capacity is the storage device's maximum 
net output.
    Proposed Sec.  1.48-13(e)(3) would provide that in the case of 
thermal energy storage property (as defined in proposed Sec.  1.48-
9(e)(10)(iii)) and other energy property that generates thermal energy 
for productive use (for example, direct geothermal use, GHP property, 
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 (Btu per hour/3,412,140 = MW) to determine if the 
thermal energy storage property satisfies the One Megawatt Exception. 
For projects delivering thermal energy to a building or buildings, this 
determination can be made with respect to 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.
    Proposed Sec.  1.48-13(e)(4) would provide that a hydrogen energy 
storage property (as defined in proposed Sec.  1.48-9(e)(10)(iv)) or a 
specified clean hydrogen production facility (as defined in section 
48(a)(15)(C)) must have a maximum net output of less than 3.4 mmBtu/
hour of hydrogen or equivalently 10,500 scf per hour of hydrogen to 
satisfy the One Megawatt Exception.
    Proposed Sec.  1.48-13(e)(5) would provide that 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

[[Page 100626]]

appropriate high heat value conversion factors found in the 
Environmental Protection Agency (EPA) Greenhouse Gas Reporting Rule 
(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.
    Commenters provided feedback on the proposed conversion factors 
specific to certain types of property. For example, a commenter 
recommended that for thermal energy storage property and other property 
generating thermal energy, the conversion from mmBtu/hr to tons for 
cooling should be 3-5 times higher than proposed Sec.  1.48-13(e)(3), 
which refers to 284 tons for cooling to determine if thermal energy 
property meets the One Megawatt Exception. This commenter said that the 
conversion factor provided by the Proposed Regulations is too low at a 
quarter of the conversion factor for electrical generating property, 
and instead the final regulations should use an electrical equivalent. 
This commenter stated that for buildings cooled by chilled-water 
systems, it is widely accepted that the electrical power (in kW) 
required to generate cooling (in ton) by chillers is approximately 0.6-
0.7 kW/ton for water-cooled chillers, and 1.1-1.2 kW/ton for air-cooled 
chillers, and cited a few sources. This commenter proposed replacing 
the conversion factor with 1,550 tons for water-cooled systems or 870 
tons for air-cooled systems.
    Similarly, for qualified biogas property, a commenter stated that 
the proposed conversion factor of 3.4 mmBtu/hr in proposed Sec.  1.48-
13(e)(5) for the One Megawatt Exception should be increased. The 
commenter stated that this conversion factor for qualified biogas 
property is theoretical and not based in practical applications. The 
commenter also noted that any biogas plant producing onsite power 
typically does not produce more than 10 mmBtu/hr, and that a plant of 
this size would be very small and likely face economic constraints even 
with the section 48 credit.
    In consultation with the DOE, the Treasury Department and the IRS 
have determined that the conversion formulas in the Proposed 
Regulations provide a direct and accurate conversion and that no 
changes are needed to the conversion factors for thermal energy 
property, thermal energy storage property, and other energy property 
that generates thermal energy for productive use, or for qualified 
biogas property. By providing a broadly-applicable rule, these 
conversion formulas should provide accurate results for a broad set of 
applications and technologies. The commenters' requests for specific 
formulas applicable to specific technologies conflict with the approach 
of these regulations to provide general rather than narrow rules. 
Therefore, the final regulations adopt these rules as proposed.
    Other commenters stated general concerns regarding lack of clarity 
with the measurement methods included in the Proposed Regulations. 
These commenters focused their concerns on thermal energy storage 
property and property generating thermal energy. For example, a 
commenter stated that it is unclear whether the One Megawatt Exception 
applies with respect to the thermal energy generated from the thermal 
energy source for the thermal energy storage (TES) (for example, a 
chiller or heat pump), or to the nameplate capacity of the TES property 
itself (for example, peak discharge rate from TES). The commenter then 
asked what conditions govern the discharge rate of TES if the One 
Megawatt Exception refers to the nameplate capacity of the TES property 
itself. This commenter suggested that, alternatively, perhaps either 
could be used.
    The Treasury Department and the IRS recognize that demonstrating 
the nameplate capacity of thermal energy storage property may be 
technically impractical for some types of thermal energy storage 
property such as commercial heat pump storage systems. The Treasury 
Department and the IRS, following consultation with the DOE, revise the 
rule in the final regulations to provide an option when nameplate 
capacity for the thermal energy storage property is not available, to 
use the nameplate capacity of the equipment that delivers thermal 
energy. For example, the nameplate capacity of the heat pump to a 
thermal energy storage property would be converted to megawatts based 
on the conversion factors set forth in Sec.  1.48-13(e). For thermal 
energy storage property, as well as for other energy property that 
generates or distributes thermal energy for productive use, the final 
regulations clarify that the maximum thermal output that the entire 
system is capable of delivering is calculated as the greater of the 
maximum instantaneous rate of cooling or the rate of heating of the 
aggregate of all the equipment distributing energy for productive use, 
which for thermal energy storage is distributing the thermal energy 
from the thermal energy storage to the building or buildings. 
Alternatively, for purposes of thermal energy storage property only, 
when the nameplate capacity for the thermal energy storage property is 
unavailable, the maximum thermal output may be considered to be the 
greater of the rate of cooling or the rate of heating of the aggregate 
of the nameplate capacity of all the equipment delivering energy to the 
thermal energy storage property. Based on the comments, the Treasury 
Department and the IRS conclude that the revised rule will provide a 
clear, administrable standard of measurement.
    Several commenters had similar concerns regarding the measurement 
standard for geothermal energy property. A commenter explained that by 
design, a distributed GHP property's maximum net output is always less 
than the total nameplate capacity. These commenters asserted that, for 
equipment generating thermal energy, it is not clear how nameplate 
capacity is defined. Commenters recommended that nameplate capacity be 
defined as either the published rating data on the Air Conditioning, 
Heating, and Refrigeration Institute (AHRI) Certification Directory or 
project specific selections at design temperatures. Commenters also 
stated that many buildings require redundant equipment to ensure 
consistent operating conditions within the building if a piece of 
equipment fails, but that because the redundant equipment is not used 
during normal operation it should be excluded from the calculation of 
the one-MW threshold. These commenters also suggested the final 
regulations provide an example illustrating the method of assessment 
based on the use of thermal output from a full year.
    As previously explained, the final regulations provide that the 
discharge rate of a thermal energy source is based on the nameplate 
capacity of the equipment, which would be converted to megawatts based 
on the conversion factors set forth in Sec.  1.48-13(e). Therefore, 
taxpayers must use the nameplate capacity of the equipment. Commenters' 
concerns for geothermal energy property appear to be more focused on 
how to determine that nameplate capacity if not all equipment will be 
used or will only be used to a specific temperature. Proposed Sec.  
1.48-13(e)(3) would provide that, for projects delivering thermal 
energy to a building or buildings, the measurement 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. The Treasury Department and 
the IRS consulted with the DOE, and the

[[Page 100627]]

final regulations clarify that the maximum thermal output an entire 
project is capable of delivering at any given moment does not take into 
account the capacity of redundant equipment if such equipment is not 
operated when the system is at maximum output during normal operation. 
The determination of maximum thermal output is intended to reflect 
normal operating conditions for the energy project.
    Another commenter requested clarification regarding the measurement 
method for electrical energy storage property. The commenter asserted 
that it is unclear at what stage to determine maximum electrical 
generating output for the One Megawatt Exception, and that the 
definition of ``nameplate capacity'' is ambiguous because it turns on 
the phrase ``maximum electrical generating output'' but does not 
provide a method for determining such output. The commenter stated that 
for inverter-based resources, like solar and energy storage 
technologies, ``maximum electrical generating output'' could be 
determined at different stages. It could be measured as the initial 
output from PV modules (as measured in direct current), the subsequent 
output from associated storage (usually measured in direct current), or 
the final output after the inverter (measured in alternating current).
    In response to these comments, the Treasury Department and the IRS 
consulted with the DOE to provide a method of measuring nameplate 
capacity for an energy property that generates electricity in direct 
current. The final regulations provide a rule limited to energy 
properties that generate electricity in direct current. Under this 
rule, a taxpayer may choose to determine the maximum net output of each 
energy property that is part of the energy project (in alternating 
current) by using the lesser of (i) the sum of the nameplate generating 
capacities within the unit of energy property in direct current, which 
is deemed the nameplate generating capacity of the unit of energy 
property in alternating current; or (ii) the nameplate capacity of the 
first component of property that inverts the direct current electricity 
generated into alternating current. This rule provides flexibility for 
taxpayers while ensuring that the maximum net output (in alternating 
current) can be determined in an administrable and reasonably accurate 
manner for energy properties that generate electricity in direct 
current.

III. Rules Applicable to Energy Property

A. Retrofitted Energy Property (80/20 Rule)

    Proposed Sec.  1.48-14(a)(1) would provide generally that for 
purposes of section 48(a)(3)(B)(ii), (5)(D)(iv), and (8)(B)(iii), 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 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, then the taxpayer may include 
the new costs paid or incurred for property that is an integral part of 
the energy property in the basis of the energy property for purpose of 
the section 48 credit. Further, in the case of an energy project, the 
80/20 Rule is applied to each unit of energy property comprising an 
energy project.
    Proposed Sec.  1.48-14(a)(2) would provide that 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 by placing in 
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. Proposed Sec.  1.48-14(a)(3) would provide examples 
illustrating the 80/20 Rule.
1. General Comments Regarding the 80/20 Rule
    Several commenters provided comments regarding the 80/20 Rule. Some 
commenters favored retaining the 80/20 Rule for application in limited 
circumstances. Generally, commenters that opposed the use of the 80/20 
Rule expressed similar concerns regarding the ownership rules in the 
context of certain types of energy property.
    Commenters that opposed the 80/20 Rule asserted that it is 
inconsistent with previous Internal Revenue Bulletin guidance. Multiple 
commenters asserted that under current law, capital improvements to 
energy property are eligible for the section 48 credit without regard 
to the 80/20 Rule. These commenters pointed to existing Sec.  1.48-
2(b)(7) and the examples in existing Sec.  1.48-2(c) to support this 
assertion. Existing Sec.  1.48-2(b)(7) provides, in relevant part: 
``The term `original use' means the first use to which the property is 
put, whether or not such use corresponds to the use of such property by 
the taxpayer.'' A commenter noted that the examples in existing Sec.  
1.48-2(c) illustrate the difference between a reconditioned or rebuilt 
unit of energy property previously in service and the addition of 
``some used parts,'' on the one hand, and the addition of new property 
or capital improvements, on the other. Additionally, the commenter 
asserted that Example 5 in existing Sec.  1.48-2(c) establishes that 
capitalized costs are included in computing the section 48 credit. 
Importantly, existing regulations under Sec.  1.48-2 do not reflect the 
current version of section 48 and are not informative to the extent 
those regulations do not take into account subsequent amendments to 
section 48, such as amendments made by the IRA.
    Commenters also asserted that the purpose of the 80/20 Rule was to 
address the ``original use requirement'' or to achieve a new ``original 
placed in service date'' in the context of the production tax credit 
under section 45. These commenters explained that the 80/20 Rule was 
concerned with ensuring that taxpayers do not qualify for the entirety 
of the section 45 credit over a new ten-year credit period by making 
modest investments in an existing facility. Commenters explained this 
issue does not exist in the section 48 credit context, because the 
section 48 credit is available only for new property and not for any 
used components of property. A commenter noted that the 80/20 Rule only 
really matters if one is focused on the totality of the property that 
is used to produce energy in a manner incentivized by the Code. This is 
different for section 48, for which the proper focus is on specific 
items of energy property, not assemblages of energy property under 
common ownership. Commenters asserted that, by applying the 80/20 Rule 
to energy property under section 48 and excluding the cost of otherwise 
eligible

[[Page 100628]]

new equipment or property that does not satisfy the 80/20 Rule, the 
Proposed Regulations fundamentally misconstrue the 80/20 Rule's purpose 
and are inconsistent with current law.
    While commenters correctly noted that the purpose of the 80/20 Rule 
was to address the ``original use requirement'' or achieve a new 
``originally placed in service'' date, the 80/20 Rule remains relevant 
in the context of the section 48 credit. Section 48 requires the credit 
to be determined on the basis of energy property placed in service 
during the taxable year. In situations in which energy property has 
already been placed in service, existing units of energy property 
cannot qualify for the credit without the 80/20 Rule (with the 
exception of the modification of energy storage technology as provided 
in proposed Sec.  1.48-9(e)(10)(iii)).
    Supporters of retaining the 80/20 Rule noted that it should apply 
for purposes of the section 48 credit only in limited circumstances. 
First, the 80/20 Rule should apply to the acquisition of retrofitted 
energy property by a taxpayer for purposes of obtaining an original 
placed in service date for such retrofitted property (which commenters 
noted is the traditional application of the 80/20 Rule). Second, the 
80/20 Rule should apply if it is necessary for a qualified facility 
(otherwise eligible for the section 45 credit) to obtain a new original 
placed in service date, such as a retrofitted qualified facility for 
which the taxpayer elects to claim the section 48 credit in lieu of the 
section 45 credit.
    While many commenters suggested dropping the 80/20 Rule altogether, 
other commenters suggested a range of possible alternatives. For 
example, a commenter suggested excepting from the 80/20 Rule property 
that is no longer functional for its intended energy purpose such as a 
property that has fallen into disuse and has been sitting idle for 
years and that would require extensive renovations to return to use for 
its intended purpose; property that is no longer in a ``condition or 
state of readiness and availability for a specifically assigned 
function''; and property that has been idle for a certain period of 
time prior to rehabilitation and reuse such as property located in 
opportunity zones and property for which no tax credit has previously 
been claimed. This commenter also proposed requiring a reduced 
percentage threshold to meet the policy objectives of the 80/20 Rule 
and referred to the Dual Use percentage rules as more favorable than 
the 80/20 Rule.
    Multiple commenters suggested that, if the 80/20 Rule is retained, 
then the section 48 credit should apply to capital improvements without 
regard to the 80/20 Rule. However, these commenters noted that the 80/
20 Rule could continue to apply to individual components placed in 
service by the taxpayer. Commenters asserted that the application of 
the 80/20 Rule to capital improvements would lead to uneconomic 
decisions or waste, such as favoring demolition and rebuilding instead 
of investments to modify an existing energy property or encouraging 
many existing waste processing sites to continue to vent or flare 
methane. Commenters also expressed concerns regarding the prohibition 
on claiming the section 48 credit in respect of new property that is 
installed after other items of energy property have been placed in 
service in cases in which the 80/20 Rule is not met. A commenter 
explained that such interpretation would disincentivize asset owners 
from upgrading their existing solar plants to maximize energy 
generation. This concern was shared by other commenters in the context 
of maintenance and upgrades performed on certain types of energy 
property such as GHP property.
    Commenters also stated that networks of GHP properties grow over 
time by design, adding additional customer buildings and ground loop 
capacity as needed. Therefore, commenters asserted that application of 
the 80/20 Rule would hinder the adoption of networked GHP property as 
additional users may be reluctant to link into an existing shared 
ground loop due to the unavailability of the section 48 credit. Another 
commenter requested reconsideration of the 80/20 Rule, comparing the 
rule for modification of an energy storage technology (which is 
allowed) with ``equipment that may make trash or biomass energy 
properties more efficient'' (which is not allowed). This commenter also 
requested consideration of the 80/20 Rule in light of various factors 
such as planned versus unplanned improvements.
    In the context of a qualified biogas property, a commenter stated 
that the final regulations should clarify and explicitly state that any 
new cost paid or incurred by the taxpayer for property that is an 
integral part of the energy property may be included in the basis of 
the energy property for purposes of the section 48 credit, without 
regard to the application of the 80/20 Rule at the integral property 
level and regardless of whether the new costs paid or incurred would 
generally be eligible for the section 48 credit. As an example, the 
commenter noted that this approach would allow the section 48 credit 
for a landfill gas collection system that primarily serves a purpose 
unrelated to the qualified biogas property (that is, storage of 
municipal solid waste).
    Commenters also raised concerns regarding the use of the 80/20 Rule 
in the context of an energy project. Commenters generally asserted that 
the application of the 80/20 Rule disincentivizes new projects. A 
commenter requested that the final regulations clarify and explicitly 
state that the 80/20 Rule is applied separately with respect to each 
unit of energy property within an energy project and does not take into 
account any of the used property retained and used as an integral part 
of an energy project irrespective of whether these energy properties 
together are determined to satisfy any two or more of the factors 
described in proposed Sec.  1.48-13(d)(1)(i) through (vii). Another 
commenter explained the commenter's understanding that if a section 48 
credit is claimed on an energy project, then the 80/20 Rule would be 
applied to the entire project rather than to each component separately. 
The commenter asserted that this interpretation conflicts with the 
historical understanding of the 80/20 Rule as it applies to the section 
48 credit, which is based on each component of the unit of energy 
property. Another commenter noted that the final rule should make clear 
that any application of the 80/20 Rule does not apply to the entire 
energy project. If deemed applicable, it should be limited to the 
individual energy properties being put into operation by the claiming 
taxpayer and should not include new or expanded energy projects that 
are added to existing operations. The Proposed Regulations already 
would provide that in the case of an energy project, the 80/20 Rule is 
applied to each unit of energy property comprising an energy project 
and a taxpayer that satisfies the 80/20 Rule with respect to an 
individual unit of energy property that is part of a larger energy 
project may be eligible for the section 48 credit. Additional 
clarification to ensure that the 80/20 Rule is not applied at the 
energy project level is unnecessary.
    The Treasury Department and the IRS have considered the comments 
summarized earlier but decline to modify or abandon the 80/20 Rule as 
requested. The section 48 credit is available for ``each energy 
property placed in service'' during a taxable year. See section 
48(a)(1). The 80/20 Rule is designed to broaden the availability of the 
section 48 credit to provide a new original placed in service date for 
an energy property that includes some components of property that have

[[Page 100629]]

already been placed in service, rather than requiring the entire unit 
of energy property to be composed of only new property. The 80/20 Rule 
also encourages retrofitting of existing energy property provided there 
is sufficient new investment.
    As discussed, in part III.D. of this Summary of Comments and 
Explanation of Revisions, the ownership rules would provide that the 
section 48 credit is available for an entire unit of energy property 
and not for individual components of property. The 80/20 Rule is 
consistent with the ownership rules because it ensures that an energy 
property that is retrofitted to a sufficient extent is considered a new 
energy property, whereas the addition of mere components is not 
eligible for the section 48 credit.
    The lone express rule for modification of existing energy property 
in section 48 is found in section 48(c)(6)(B). This special rule is 
limited to modifications of existing energy storage technology. In the 
Proposed Regulations, the Treasury Department and the IRS noted the 
significance of Congress providing specifically for modifications to 
energy storage technology because the inclusion of this specific 
provision suggests that, otherwise, modifications of existing energy 
properties are ineligible for the section 48 credit. In light of this 
modification rule for energy storage technology, the structure of 
section 48 indicates that other modifications to existing energy 
property do not qualify for the credit.
    However, providing the 80/20 Rule is appropriate and consistent 
with its previous adoption for the section 48 credit in Internal 
Revenue Bulletin guidance. As explained in the preamble to the Proposed 
Regulations, Notice 2018-59 addresses the application of the 80/20 Rule 
to retrofitted energy property for purposes of applying the beginning 
of construction rules for 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. 
Consistent with the 80/20 Rule provided in Notice 2018-59, the 80/20 
Rule provided in these final regulations requires a taxpayer to own a 
unit of energy property to claim the section 48 credit. Additionally, 
Sec.  1.48-14(a) specifically provides that if a taxpayer satisfies the 
80/20 Rule, then the taxpayer may include the new costs paid or 
incurred for property that is an integral part of the energy property 
in the basis of the energy property for purposes of the section 48 
credit. By allowing an existing energy property to be retrofitted and 
afterwards to be treated as a new energy property, the 80/20 Rule is 
consistent with the ownership rules and is supported by the same 
rationale. Moreover, because modifications other than those described 
in section 48(c)(6)(B) (for existing energy storage technology) 
generally do not qualify for the section 48 credit, the provision of 
the 80/20 Rule is favorable to taxpayers and encourages substantial 
additional investment in existing energy property.
2. Application to Specific Technologies
    Commenters raised concerns regarding the application of the 80/20 
Rule to certain types of energy property. Several commenters had 
concerns about the application of the 80/20 Rule to qualified biogas 
property, battery energy storage, and qualified hydropower facilities. 
These issues were largely intertwined with concerns raised regarding 
the ownership requirement as it applies to these types of energy 
property.
a. Qualified Biogas Property
    Many commenters shared concerns about the application of the 80/20 
Rule stating that the rule would prevent the development of most 
qualified biogas property and other RNG projects. As described in the 
discussion of qualified biogas property in part I.B.5. of this Summary 
of Comments and Explanation of Revisions, commenters explained that 
unlike many other types of energy property incentivized under section 
48, components of qualified biogas property (as described in the 
Proposed Regulations) are likely to have been placed in service prior 
to the enactment of the IRA. Commenters also expressed concerns 
regarding the definition of ``qualified biogas property,'' the 
ownership provisions, and the 80/20 Rule, asserting that the combined 
impact of these rules provided in the Proposed Regulations would limit 
eligibility for qualified biogas property.
    According to a commenter, the 80/20 Rule should be aligned with the 
``original use'' requirement. To illustrate this point, the commenter 
provided an example, asserting that if a taxpayer is building a new 
unit of energy property that is functionally interdependent with a pre-
existing and previously placed in service unit of energy property 
(qualified or otherwise) that is owned by a separate taxpayer, the 
application of the 80/20 Rule is unnecessary. The commenter stated that 
for qualified biogas property, it is common for the entire system to be 
comprised of components of property owned by two different taxpayers 
and for the original use of these various components of property (that 
is, landfill gas collection components and cleaning and conditioning 
components, both compromising a qualified biogas property or 
``system'') to be with different taxpayers at potentially different 
points in time.
    Several commenters expressed concerns that the 80/20 Rule would not 
work for the qualified biogas projects that Congress intended to 
incentivize. Representative of that view, a commenter stated that the 
80/20 Rule is potentially problematic for RNG projects located at pre-
existing landfills. The commenter proposed that the application of the 
80/20 Rule be limited to the individual units put into operation by the 
claiming taxpayer and should not exclude new or expanded projects that 
are added to existing operations.
    Commenters' concerns stem from the ownership issues described in 
part III.D. of this Summary of Comments and Explanation of Revisions. 
As described in part III.D., the final regulations clarify the 
definition of what is included in qualified biogas property in a manner 
that is responsive to the ownership structures used by the biogas 
industry and allow for new property to be added to pre-existing 
landfills. Therefore, these final regulations do not adopt commenters' 
specific comments concerning the application of the 80/20 Rule to 
qualified biogas property.
b. Second Life Batteries
    The preamble to the Proposed Regulations explained that ``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 earlier in part III.A. of this Summary of Comments and 
Explanation of Revisions. The preamble to the Proposed Regulations 
requested comments on whether ``second life'' batteries should be 
considered new components for purposes of the 80/20 Rule.
    Commenters proposed considering second-life batteries that are 
disassembled substantially to the electric vehicle module level to be 
new energy property for purposes of the 80/20 Rule. These commenters 
reasoned that such batteries go through a substantial transformation 
process including dissembling and restructuring, which is a 
manufacturing process that meets the modification rule. A commenter 
suggested that, for

[[Page 100630]]

purposes of the 80/20 Rule, second life batteries be considered new 
energy property if documentation is provided supporting the fact that 
the batteries were remanufactured. Another commenter asserted that 
``second life'' batteries may be considered within the 80 percent 
portion (as new property) of the 80/20 Rule if applied to energy 
storage technology and believed this is especially applicable in 
contexts in which the batteries were originally used for a 
fundamentally different purpose, or if in their previous iteration the 
batteries were ineligible for the section 48 credit.
    The 80/20 Rule recognizes that a retrofitted energy property that 
contains only a relatively minimal amount of used components is 
essentially a new energy property. While ``second-life'' battery 
components may be used to modify an energy storage technology as 
provided in section 48(c)(6)(B) and addressed in part I.B.4.d. of this 
Summary of Comments and Explanation of Revisions, allowing primarily 
used components to be considered new property for purposes of applying 
the 80/20 Rule would be contrary to the basis of the 80/20 Rule. 
Accordingly, the Treasury Department and the IRS do not adopt these 
comments.
c. Hydropower Facilities
    Section 48(a)(3) provides and proposed Sec.  1.48-9(d)(1) would 
provide that for purposes of the section 48 credit, an energy property 
does not include any property that is part of a qualified facility the 
production from which is allowed a section 45 credit for the taxable 
year or any prior taxable year. Some commenters requested that the 
final regulations clarify the interplay of the 80/20 Rule under section 
48 in the case of a property that was previously part of a qualified 
facility under section 45. These commenters requested specific 
confirmation that the 80/20 Rule may be applied to a retrofitted pumped 
storage hydropower property for which the section 45 credit had 
previously been claimed to allow a section 48 credit to be claimed. 
Although the 80/20 Rule permits a retrofitted energy property to be 
treated as originally placed in service and qualify for the section 48 
credit even though it contains some used components, the 80/20 Rule 
must be applied by giving effect to the statutory language in section 
48(a)(3) that prohibits a section 48 credit on any property that is 
part of a facility the production from which is allowed as a section 45 
credit for the taxable year or any prior taxable year. However, in the 
case of a retrofitted qualified facility for which a section 45 credit 
was not allowed, the 80/20 Rule could be used to obtain a new original 
use and placed in service date in order to claim a section 48 credit if 
an election under section 48(a)(5) is made. After consideration of the 
comments, an example of the application of the 80/20 Rule to a 
qualified hydropower production facility has been added to the final 
regulations.

B. Dual Use Rule

    Former Sec.  1.48-9 includes a Dual Use Rule, which provides that a 
solar energy property, wind energy property, or geothermal equipment is 
eligible for the section 48 credit to the extent of the energy 
property's basis or cost allocable to its annual use of energy from a 
qualified source if the use of energy from ``non-qualifying'' sources 
does not exceed 25 percent of the total energy input of the energy 
property during an annual measuring period. This version of the Dual 
Use Rule is referred to as the ``75-percent Cliff.''
    Proposed Sec.  1.48-14(b)(1) would provide that for purposes of 
section 48, the term dual use property means property that uses energy 
derived from both a qualifying source (that is, from an energy property 
including a qualified facility for which an election has been made) and 
from a non-qualifying source (that is, sources other than an energy 
property including a qualified facility for which an election has been 
made).
    Proposed Sec.  1.48-14(b)(2)(i) would provide that, in general, 
dual use property will qualify as energy property if its use of energy 
from non-qualifying sources does not exceed 50 percent of its total 
energy input during an annual measuring period. If the energy used from 
qualifying sources is between 50 percent and 100 percent, only a 
proportionate amount of the 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).
1. Dual Use Rule and Energy Storage Technology
    The preamble to the Proposed Regulations explained that 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 
Proposed Regulations requested comments on the application of the Dual 
Use Rule to section 48 after its amendment by the IRA.
    A commenter suggested that the final regulations should eliminate 
the application of the Dual Use Rule for all energy storage, including 
energy storage property placed in service before January 1, 2023. In 
the alternative, the commenter suggested reducing the requirement for 
energy storage property placed in service prior to 2023 to 50 percent 
charging from qualifying energy sources. This commenter also requested 
that final regulations eliminate any penalties or recapture for energy 
storage systems that charge less from qualifying energy sources than 
they did during a previous annual measuring period. Finally, the 
commenter recommended that the final regulations allow for exceptions 
to charging restrictions during actual or anticipated emergency days, 
particularly when there are severe weather conditions, which are 
periods during which storage resources are badly needed. The commenter 
explained that the charging limitations disqualify energy storage 
property placed in service before January 1, 2023, that is charged by 
grid rather than by solar, wind, or other qualifying property from the 
section 48 credit eligibility. The commenter noted that it would be 
difficult to ensure that the charge comes from qualifying sources 
during severe weather conditions. Because these final regulations apply 
only to property placed in service after December 31, 2022, these 
comments are outside the scope of the regulations.
    Section 13102(q)(2) of the IRA provides that amendments to section 
48 regarding energy storage technology apply to properties placed in 
service after December 31, 2022. Accordingly, proposed Sec.  1.48-14(i) 
would limit application of proposed Sec.  1.48-14 ``to property placed 
in service after December 31, 2022, and during a taxable year beginning 
after the date of publication of the final rule.'' Therefore, the prior 
version of the Dual Use Rule referred to as the 75-percent Cliff 
continues to apply to energy properties placed in service prior to 
January 1, 2023. These final regulations do not adopt the requested 
change to the applicability date provided in the Proposed Regulations 
for these provisions.
2. Aggregation of Energy Inputs
    Proposed Sec.  1.48-14(b)(2)(ii) would provide that the measurement 
of energy

[[Page 100631]]

use required for purposes of proposed Sec.  1.48-14(b)(2)(i) is made by 
comparing, on the basis of Btus, energy input to dual use property from 
all qualifying sources with energy input from all non-qualifying 
sources. The Proposed Regulations further would provide that 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.
    A commenter requested clarification regarding the appropriate means 
of demonstrating annual energy consumption for an energy property, 
especially for solar water heating systems. The commenter noted that 
solar thermal systems have accepted Federal sizing guidelines for 
accurately estimating energy consumption by source, whether from solar, 
electric, gas, or other applicable technologies, and because of this, 
not all solar thermal systems may include heat meters or other 
specialized monitoring equipment that may be needed to determine the 
annual energy consumption by source requirements and, thus, requiring 
such measurement could add undue and unnecessary costs to comply with 
this rule. This commenter recommended that the final regulations 
specify types of monitoring in general, or in lieu of or in addition to 
monitoring, provide guidance on appropriate or acceptable energy 
consumption modeling that might otherwise meet this requirement. For 
example, the commenter noted system performance modeling that may be 
used to determine annual energy production for a given system that is 
situated in a specific climate and used in the ENERGY STAR Residential 
Water Heater Certification Program. This commenter also noted that 
clarification regarding the costs that can be included in the basis of 
an energy property would also be useful in other Dual Use contexts, 
such as for solar carports.
    The Treasury Department and the IRS decline to adopt additional 
measurements to determine energy input from qualifying and 
nonqualifying sources. The Proposed Regulations state that the 
Commissioner may 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. The final regulations will continue to allow the Commissioner 
to accept any other method that accurately establishes the qualifying 
sources and energy inputs to an energy property during the annual 
measuring period. Additionally, the final regulations do not provide 
clarification regarding what costs may be included in the basis of 
energy property. See part I.B of this Summary of Comments and 
Explanation of Revisions for a discussion of the definitions of types 
of energy property.
3. Dual Use Property and Microgrid Controllers
    The preamble to the Proposed Regulations states that certain 
equipment is necessary for a microgrid controller to perform its 
functions. However, such equipment may also have been required to be 
installed without the presence of a microgrid. An example is a 
communications system (for example, a local ethernet network or a 
commercial wireless network). Because 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. The communications system could also be used for 
other purposes and may not be dedicated to the microgrid system. The 
Treasury Department and the IRS consider the Dual Use Rule inapplicable 
to this scenario because it does not involve the use of energy derived 
from both qualifying and non-qualifying sources.
    A commenter asserted that it is necessary to create a Dual Use Rule 
for microgrid controllers because requiring specific equipment to be 
dedicated to the microgrid controller that could otherwise be used for 
multiple purposes is an inefficient use of resources. The commenter 
also noted that given the complexity and unique nature of microgrids, 
it is impossible to specify all conditions under which a Dual Use might 
arise. This commenter suggested that any component of property that is 
tied into the microgrid system (whether hardware-based or software-
based) becomes a necessary component of either the operation of the 
microgrid or the monitoring/maintenance of the operation of the 
microgrid. The commenter noted that existing equipment would not be 
included in the basis of the microgrid controller for purposes of the 
credit, but if new equipment is needed or if existing equipment needs 
to be replaced to accommodate the operations of the microgrid, such 
equipment should be included in the basis of the microgrid controller 
for purposes of the section 48 credit even if such equipment is 
partially used for other purposes that are not eligible for the section 
48 credit. This comment poses the issue of whether the cost of 
components of property is included in an energy property's basis even 
though such components can be used for purposes not intended for energy 
property. That issue is addressed in the discussion of the functional 
interdependence and integral property rules described in part I.C.2 and 
3 of this Summary of Comments and Explanation of Revisions.

C. Incremental Cost

    Former 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. Proposed Sec.  
1.48-14(d)(1) would adopt a similar definition and allow only the 
incremental cost of energy property to be included in basis for 
purposes of determining the section 48 credit.
    Proposed Sec.  1.48-14(d)(2) would provide as an example, a 
scenario in which the incremental cost of a reflective roof for the 
purpose of installing a solar energy property is $5,000, the difference 
between the costs of a reflective roof and a standard roof. A commenter 
suggested expanding this example to include other roof upgrades that 
enable the operation of energy property.
    The amount of incremental cost is determined on a case-by-case 
basis and the example is only intended to illustrate the general 
application of the incremental cost rule. Accordingly, this comment is 
not adopted.

D. Ownership Rules

    Proposed Sec.  1.48-14(e)(1) would provide that for purposes of 
section 48, a taxpayer that owns an energy property is eligible for the 
section 48 credit only to the extent of the taxpayer's basis in the 
energy property. Further, proposed Sec.  1.48-14(e)(1) would provide 
that in the case of multiple taxpayers holding direct ownership in an 
energy property, each taxpayer determines its basis based on its 
fractional ownership interest in the energy property.
    Proposed Sec.  1.48-14(e)(2) would provide that 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. Further, proposed Sec.  1.48-14(e)(2) 
would provide that 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, proposed Sec.  1.48-14(e)(2) would also provide that 
the use of property owned by one taxpayer that is an integral part of 
an

[[Page 100632]]

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.
    Proposed Sec.  1.48-14(e)(3)(i) would provide that the term 
``related taxpayers'' means members of a group of trades or businesses 
that are under common control (as defined in Treasury Regulations Sec.  
1.52-1(b)). Proposed Sec.  1.48-14(e)(3)(ii) would provide that 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.
    Many commenters disagreed with the application of the ownership 
rules. Several commenters raised general arguments focused on prior 
interpretations of section 48, while others voiced disagreement 
regarding the application of the ownership rules to qualified biogas 
property, GHP property, and offshore wind facilities (eligible for the 
section 48 credit through an election under section 48(a)(5)).
1. Prior Interpretations of the Ownership Rules
    Some commenters raised interpretations of the ownership rules and 
the definition of an ``energy property'' in caselaw and guidance. These 
commenters assert that these sources demonstrate that ownership of 
individual components of energy property, and not of an entire unit of 
energy property, is sufficient to claim the section 48 credit.
    Several commenters pointed to Cooper v. Commissioner, 88 T.C. 84 
(1987), which was decided under prior versions of sections 46 and 48 
and the regulations thereunder. In Cooper, the taxpayer asserted that 
owning specific components of solar water heating system was sufficient 
to claim the section 48 credit for solar energy property. While the Tax 
Court agreed that the taxpayer did not own the entire working solar 
water heating system, the Court held that the definition of a solar 
energy property provided in former section 48(l)(4) was sufficiently 
broad to provide a credit for component parts of a solar water heating 
system. Id. at 116-117.
    The Tax Court subsequently clarified the holding in Cooper, 
explaining that ``the property in Cooper consisted of integrated water-
heating systems that were ready for installation to discharge their 
designated function''; they just had not been installed yet. Olsen, 
T.C. Memo 2021-41 at *14. Conversely, in the Olsen case, the Tax Court 
found that ``[p]etitioners' lenses were mere components of a system . . 
. .'' and not a complete system and therefore unable to be placed in 
service as a system. Id. Stated otherwise, while commenters cite to 
Cooper to support the assertion that the section 48 credit is available 
for separate components of property within an energy property, the Tax 
Court clarified in Olsen that components that ``operate as part of a 
complicated . . . system and were incapable of performing any useful 
function in isolation'' were not placed in service. Id. at 13. 
Additionally, Cooper was decided under former section 48(l)(4) and not 
under the current version of section 48, which is substantially 
different.
    Commenters also cited Samis v. Commissioner, 76 T.C. 609 (1981), 
for the proposition that ownership of an entire energy property is not 
required to claim the section 48 credit. However, Samis stands only for 
the proposition that property connected to a building is a part of the 
building regardless of ownership. In Samis, although the taxpayers 
owned a ``total energy plant'' that provided hot water and heating/
cooling for a residential apartment complex not owned by the taxpayers, 
the total energy plant was held to be a structural component of the 
apartment complex and therefore not ``tangible personal property'' or 
``other tangible property'' qualifying for the investment credit. The 
Tax Court explained in a footnote that the ownership of the plant was 
irrelevant because the total energy plant is not eligible for the 
section 48 credit. Therefore, in Samis it was clear only that the 
taxpayer could not separate ownership of the heating and cooling system 
from the apartment complex to sidestep rules that the property must not 
be part of a building.
    Commenters also pointed to Revenue Ruling 78-268, 1978-2 C.B. 10, 
to support the premise that components of an energy property may be 
owned by different taxpayers. However, in Revenue Ruling 78-268, the 
taxpayers did not own just a component of one energy property--they 
owned a fractional interest in the entire facility. In Revenue Ruling 
78-268, four parties, two of which were tax-exempt, owned an electric 
generating facility through a tenancy in common. Revenue Ruling 78-268 
held that the presence of the tax-exempt owners did not disqualify the 
other owners from claiming a credit because the fractional interests in 
the tenancy in common were treated as separate assets. The Treasury 
Department and the IRS disagree with commenters that the holding of 
Revenue Ruling 78-268 conflicts with the ownership rules in the 
Proposed Regulations. Instead, Revenue Ruling 78-268 illustrates that a 
fractional interest in the entire energy property is sufficient for a 
taxpayer to claim a section 48 credit, which is the very rule in 
proposed Sec.  1.48-14(e)(2).
    Commenters also cited PLR 201536017 (PLR) to support the premise 
that ownership of an entire energy property is not required to claim 
the section 48 credit. However, private letter rulings are not 
precedential and cannot be relied upon by a taxpayer other than the 
taxpayer addressed in the PLR (see section 6110(k)(3) of the Code). 
Furthermore, the PLR does not involve the section 48 credit but instead 
section 25D of the Code. Regardless, similar to Revenue Ruling 78-268, 
the PLR involves credit eligibility through fractional ownership of an 
entire energy property, not ownership of just certain components. The 
PLR addresses a factual scenario in which a taxpayer purchased solar PV 
panels in an offsite array (that also contains other solar PV panels 
owned by other individuals) as well as a partial ownership in racking 
equipment, inverter equipment, and wiring and other equipment and 
installation services required for the integration of the panels in the 
array and the interconnection of the array to a local utility's 
electric distribution system. The PLR concludes that as a result, the 
taxpayer has made a ``qualified solar electric property expenditure'' 
under section 25D(d)(2) and the taxpayer is eligible to claim a section 
25D credit. To the extent this PLR provides any helpful analysis 
regarding the section 48 credit, it involves partial ownership in all 
the other equipment necessary to integrate the panels into the array 
and interconnect the array to a local utility's electric distribution 
system, and not just certain components.
    Finally, commenters pointed to FAQs 34 and 35 of guidance from the 
Treasury Department regarding payments under section 1603 of the 
American Recovery and Reinvestment Act of 2009 \1\ (Section 1603 Grant 
Program) to support the premise that ownership of an entire energy 
property is not required to claim the section 48 credit. FAQ 34 
addressed grant eligibility for a factual scenario involving an open-
loop biomass facility owned by one taxpayer that uses off-site 
feedstock conversion equipment owned by another taxpayer. The FAQ 
provided that the conversion equipment may be considered part of the 
open-loop

[[Page 100633]]

biomass facility eligible for the grant if the conversion equipment is 
integrated into the open-loop biomass facility. Evidence that the 
conversion facility is integrated into the open-loop biomass facility 
includes factors such as whether they are placed in service 
simultaneously, the extent to which the conversion facility's output is 
dedicated to the facility (for example, under an exclusive long-term 
supply contract), and the dependence of the open-loop biomass facility 
on the output of the conversion equipment (at least 75 percent).
---------------------------------------------------------------------------

    \1\ Payments for Specified Energy Property in Lieu of Tax 
Credits Under the American Recovery and Reinvestment Act of 2009, 
Frequently Asked Questions and Answers.
---------------------------------------------------------------------------

    Additionally, FAQ 35 addressed the procedural requirements of the 
1603 Grant Program as applied to the facts presented in FAQ 34, by 
providing that the taxpayer that owns the conversion equipment and 
taxpayer that owns the open-loop biomass facility must each submit an 
application filed jointly in order to receive Section 1603 grant 
payments. While the 1603 Grant Program did adopt concepts from sections 
45 and 48, the Section 1603 Grant Program is not based on any income 
tax provisions and thus is not a relevant precedent for purposes of the 
section 48 credit.
    The Proposed Regulations' approach to ownership eligibility is 
further supported by the IRA's amendments to section 48 and 
administrability considerations. The IRA amended section 48 to provide 
for an increased credit amount for energy projects satisfying the PWA 
requirements (section 48(a)(9) through (11)), a bonus credit amount for 
energy projects satisfying domestic content requirements (section 
48(a)(12)), and an increase in credit rate for energy projects in 
energy communities (section 48(a)(14)). Additionally, the IRA amended 
section 48(a)(8) to allow the cost of qualified interconnection 
property to be included in the basis of certain lower-output energy 
properties. This statutory framework indicates that special rules 
enacted by the IRA amendments apply to either an energy property or an 
energy project, which is further defined as a project consisting of one 
or more energy properties that are part of a single project. This 
statutory scheme requires that the section 48 credit is available only 
if an entire energy property (or energy project) is placed in service. 
Under the alternative ownership rules requested by commenters, a 
taxpayer's eligibility for the IRA's bonuses could depend, in many 
cases, on whether unrelated parties met the requirements for the 
various bonus credits provided by the IRA. This uncertainty would 
create severe challenges for tax administration.
    While the Treasury Department and the IRS understand the concerns 
raised by commenters, the statutory language and administrability 
concerns arising from the overall statutory scheme effected by the 
IRA's recent amendments both support a requirement that the taxpayer 
own all or a fraction of an entire energy property or energy project. 
Therefore, the final regulations do not adopt the changes to the 
ownership rules requested by the commenters. The rule is adopted as 
proposed.
2. Application to Qualified Biogas Property
    Commenters presented practical reasons for disagreeing with the 
ownership rules, particularly in the context of the section 48 credit 
for qualified biogas property placed in service at dairy farms and 
landfills. Commenters provided reasons that the owner of biogas 
upgrading equipment cannot be the same owner of the functionally 
interdependent qualified biogas property, which is described in 
proposed Sec.  1.48-9(e)(11)(i) as including, but not limited to, a 
waste feedstock collection system, a landfill gas collection system, 
mixing or pumping equipment, and an anaerobic digester. Commenters also 
explained that biogas upgrading equipment is often added to dairy farms 
and landfills, and those that engage in biogas upgrading are not the 
same owners of the underlying farms and landfills.
    A commenter explained that different types of qualified biogas 
property located at a site are almost always owned by different 
taxpayers as a result of regulatory constraints, financial capability, 
or other business considerations. Another commenter explained that 
because qualified biogas property is prohibitively expensive, farmers 
and ranchers often work with cooperatives or other organizations to 
facilitate shared ownership of such equipment, and the ownership rules, 
as proposed, would have an exclusionary effect on American agriculture 
and specifically on farmer-owned cooperatives. Emphasizing these same 
concerns, another commenter stated that often farmers and ranchers are 
not interested in an outside entity owning the anaerobic digester that, 
in addition to biogas, produces nutrients and water used within the 
farming operation and are therefore crucial for the farmers and 
ranchers to own and control.
    Commenters note that similar issues arise in the context of 
landfills. For example, a commenter (whose comments were endorsed by 
many others) explained that landfill owners often use collection 
equipment for compliance with regulatory requirements and view methane 
gas capture as a core operation. As a result, landfill gas collection 
systems are almost always owned and operated by the landfill operator, 
which may be a municipality, while the biogas upgrading equipment is 
owned by another taxpayer. This makes common ownership of both the 
functionally interdependent qualified biogas property as described in 
the proposed Sec.  1.48-9(e)(11) and the biogas upgrading equipment 
difficult to achieve.
    Moreover, those engaged in biogas upgrading at a landfill may not 
legally be allowed to own the landfill biogas equipment. For example, a 
commenter stated that the proposed treatment of a landfill gas 
collection system property as a functionally interdependent part of the 
qualified biogas property is problematic because it is very common for 
RNG production systems to be developed by a taxpayer at a landfill 
owned by a different taxpayer. In this type of arrangement, it is 
important for the owner of the landfill to retain ownership and control 
of the landfill gas collection property to comply with existing 
regulatory and permitting requirements for operation of the landfill. 
Additionally, this commenter noted that it is common for such landfill 
gas collection system property to have already been placed in service 
before biogas collected from the system is captured and integrated into 
a new RNG production system.
    Another commenter emphasized both timing issues and legal 
restrictions created by the ownership rules, stating that the ownership 
rules fail to recognize that most landfills have already installed gas 
capture and control systems (GCCS System). These systems are generally 
required under existing regulations, and the landfills typically insist 
on maintaining total control and ownership of the GCCS System to ensure 
they remain within regulatory requirements. This commenter explained 
that RNG developers provide additional equipment to further refine 
captured landfill gases into beneficial end use products, but that 
additional equipment may not benefit from section 48 credits under 
proposed Sec.  1.48-9(e)(11), which requires the split ownership of the 
GCCS System and gas upgrading equipment.
    The final regulations address the commenters' concerns through 
other revisions to the final regulations. The Treasury Department and 
the IRS expect that these revisions will alleviate the concerns raised 
by the biogas industry without requiring changes to the

[[Page 100634]]

ownership rules. For discussion of these revisions to the definition of 
qualified biogas property see part I.B.5. of this Summary of Comments 
and Explanation of Revisions.
3. Application to GHP Property and Geothermal Energy Property
    Commenters also provided feedback on the effect of the ownership 
rules in the context of GHP property and geothermal energy property. 
Many commenters asserted that the Proposed Regulations could cause 
significant potential harm to development of geothermal projects. These 
commenters stated that it is important that the Treasury Department and 
the IRS provide a method for split ownership of GHP property and 
geothermal energy property to qualify for the section 48 credit. In 
support of these requests, commenters pointed to congressional 
correspondence urging support for the geothermal industry and 
requesting guidance to allow for viable third-party ownership business 
models, including clarifying that GHP property and geothermal energy 
property are exempt from the ``limited use property'' doctrine.
    Commenters also explained that there are dozens of networked 
geothermal projects currently planned or deployed across the country. 
Commenters stated that networked GHP property and geothermal energy 
systems almost always involve multiple owners by design, and that GHP 
property networks can serve a diverse array of customer buildings while 
those customers own and maintain their own GHP property. Commenters 
stated that the ground loop and the heating and cooling units are 
functionally interdependent yet distinct components of the GHP property 
that are often owned by utilities. The commenters also noted that in 
many instances, utilities are prohibited by regulators from owning 
their customers' heating and cooling equipment. These commenters 
suggest that the delineation between outdoor and indoor equipment is 
sufficient to allow for clear allocation of the credit between 
taxpayers.
    Several other commenters made similar points about GHP property and 
the ownership rules. Some commenters emphasized the need for an 
exception for geothermal property and others focused on the reasoning 
for separate ownership. For example, a commenter highlighted the 
commonality of separate ownership arrangements because utilities are 
often prohibited from owning a customer's heating and cooling 
equipment. Another commenter provided a detailed discussion on separate 
ownership of geothermal property and highlighted the business necessity 
for this structure. This commenter explained that the barrier to 
geothermal energy use is the high cost and expertise required for the 
overall underground system. This commenter said it makes perfect sense 
for the underground system to be owned by a specialized company with 
both the technical skills and a long-range investment strategy. This 
commenter explained that in other cases, it will be independent 
companies that contract to supply geothermal energy to the edge of a 
facility. The commenter noted that in both cases, the facility or 
building owner would then connect to the system to make use of the 
geothermal energy, and that the energy user is required neither to make 
the investment in the geothermal system, nor to have expertise in 
developing the system.
    This same commenter also explained that the Proposed Regulations 
ignore historical precedent that virtually all geothermal energy 
development was split ownership. This commenter asserted that since the 
1980s and into the future, split ownership remains an important model 
for geothermal energy development and use. The commenter gave several 
examples illustrating the split ownership model across the United 
States.
    Commenters generally recommended that split ownership be allowed 
for geothermal property, including GHP property. One commenter (whose 
comments were endorsed by many others) suggested drawing the line at 
indoor/outdoor ownership. Another commenter asserted that property 
within a home or building should be considered an entire unit of energy 
property while another taxpayer owns the equipment underground as a 
separate unit of energy property. This commenter noted that the final 
regulations should define the scope of energy property to allow the 
taxpayer a section 48 credit based on the taxpayer's basis in energy 
property it owns.
    Commenters also noted the use of ``equipment'' in section 
48(a)(3)(A)(iii) and (vii) (for example) to refer to geothermal energy 
property is different from the use of ``system'' used in other places 
to refer to energy property (for example, section 48(c)(1)(C), which 
defines a fuel cell power plant). These commenters noted that if the 
equipment is viewed individually as is suggested by the differing 
definitions in section 48, then individual owners should be allowed to 
qualify in contravention of the coils/heat pump example included in the 
proposed rules. Commenters also made this point regarding use of the 
term ``equipment'' with reference to solar energy property.
    The statutory language does not support providing a special 
ownership rule for GHP property (or geothermal energy property) as 
requested by the commenters. In the case of GHP property, both the 
coils in the ground and the heat pump equipment are necessary for GHP 
property to satisfy the definition in section 48(a)(3)(A)(vii). Because 
both the coils and heat pump are necessary to perform the function of 
the GHP property, ownership of only the coils or only the heat pump is 
not ownership of the entire unit of energy property and therefore, is 
not ownership of GHP property, as statutorily defined.
    This analysis is consistent with the definition of ``geothermal 
energy property'' under section 48(a)(3)(A)(iii), which includes as 
energy property equipment used to produce, distribute, or use energy 
derived from a geothermal deposit (within the meaning of section 
613(e)(2)), but only, in the case of electricity generated by 
geothermal power, up to (but not including) the electrical transmission 
stage. That is, this definition encompasses production and disposition 
or use up to but not including electrical transmission. Because both 
the equipment that produces electricity from a geothermal deposit and 
equipment needed to either distribute or use such energy are necessary 
to perform the energy function of the geothermal energy property, 
ownership of only components of that equipment is not ownership of the 
entire unit of energy property and therefore, is not ownership of 
geothermal energy property, as statutorily defined.
    In response to these comments, the Treasury Department and the IRS 
have provided an example of GHP property in the final regulations to 
clarify that ownership of every heat pump that is connected to coils in 
the ground owned by the same taxpayer is not required to qualify, but 
that ownership of both coils and at least one heat pump is required. 
Additionally, other taxpayers may purchase heat pumps that attach to 
existing coil systems. While ownership of those heat pumps alone will 
not satisfy section 48, it is possible that the taxpayer may be 
eligible for a credit under section 25D.
    Commenters also requested an exemption for GHP property from the 
``limited use property'' doctrine. Property that is not commercially 
usable by anyone other than the lessee at the end of the lease term is 
considered ``limited use.'' Section 5.02 of Revenue Procedure 2001-28, 
2001-1 C.B. 1156, provides an example of a leased

[[Page 100635]]

smokestack attached to a warehouse owned by the lessee and concludes 
that the smokestack is limited-use property because it would not be 
commercially feasible to disassemble the smokestack at the end of the 
lease term and reconstruct it at a new location. Commenters expressed 
concern because, in one typical third-party ownership arrangement, a 
third-party owned ground loop is installed for the benefit of a 
building and leased to the building owner, with the building owner 
owning the heat pump.
    Under a longstanding body of case law and IRS guidance, if property 
is leased for substantially its entire useful life, then the 
transaction is treated more properly as a sale of the property for 
Federal income tax purposes than a lease, because the party designated 
as the lessee obtains the benefits and burdens of ownership of the 
property under the purported lease agreement. Grodt & McKay Realty, 
Inc. v. Commissioner, 77 T.C. 1221 (1981) (listing factors for 
determining whether the benefits and burdens of ownership of property 
have passed and a sale occurred); Rev. Rul. 55-541, 1955-2 C.B. 19 
(property determined to be leased for substantially its entire useful 
life and therefore results in a transfer of equitable ownership). A 
purported lease of limited-use property, therefore, may be treated as a 
sale for Federal income tax purposes because the lessee is considered 
to have acquired the benefits and burdens of ownership of the property 
for substantially its entire useful life. See Estate of Starr v. 
Commissioner, 274 F.2d 294 (9th Cir. 1959) (purported lease of a fire 
sprinkler system); Mt. Mansfield Television v. United States, 239 
F.Supp. 539 (D. Vermont 1964) aff'd 342 F.2d 994 (2d Cir. 1965) 
(purported lease of microwave equipment installed in a television 
station).
    Under this analysis, a third-party ownership arrangement involving 
a lease of a ground loop that cannot be removed at the end of the lease 
and used somewhere else may be characterized more properly for Federal 
income tax purposes as a sale (rather than a lease) of the ground loop 
to the building owner at the inception of the lease because the lessor 
must re-lease or sell the property to the lessee at the end of the 
lease term.
    To claim the section 48 credit, the taxpayer must own the energy 
property when it is placed in service. Consequently, the lessor of the 
ground loop in the lease financing transaction above may not be 
eligible for the section 48 credit for the cost of the ground loop 
insofar as it is treated as having transferred ownership of the ground 
loop to the purported lessee for Federal income tax purposes at the 
inception of the lease. This would be the case even if the proposed 
regulations were modified to permit separate ownership of components of 
an energy property, or in the absence of such a modification, even if 
the nominal owner of the ground loop owned a fractional ownership 
interest in the other components of the GHP property, which taken 
together constitutes an energy property. Because of the ``limited use 
property'' doctrine, the lessor of the ground loop may not be regarded 
as the tax owner of the ground loop when it is placed in service and, 
therefore, would not be eligible for the section 48 credit for its 
basis in the ground loop.
    Commenters presume that it is within the Treasury Department and 
the IRS's regulatory authority to revise the ``limited use property'' 
doctrine provided in Revenue Procedure 2001-28, 2002-1 C.B. 1156, to 
provide an exception for GHP property. However, Revenue Procedure 2001-
28 (and its predecessors, which date back to Revenue Procedure 75-21, 
1975-1 C.B. 715) merely provides guidelines for advance rulings on 
leveraged lease transactions, and notes that these guidelines ``do not 
define, as a matter of law, whether a transaction is or is not a lease 
for [F]ederal income tax purposes and are not intended to be used for 
audit purposes.'' Rather, the ``limited use property'' doctrine 
reflects the broader Federal income tax principle that the 
characterization of a leasing transaction for Federal income tax 
purposes is determined by its substance and not its form. Helvering v. 
F. & R. Lazarus & Co., 308 U.S. 252 (1939); Frank Lyon Co. v. United 
States, 435 U.S. 561 (1978). Consequently, explicit statutory 
authorization would be needed to exempt leases of GHP property from the 
``limited use property'' doctrine. The final regulations, therefore, do 
not exempt GHP property from the ``limited use property'' doctrine.
4. Application to Solar Energy Property and Offshore Wind Facilities
    Commenters also provided feedback on the effect of the ownership 
rules in the context of solar energy properties and offshore wind 
facilities. A commenter asserted that requiring a taxpayer to own a 
direct interest in each component of a unit of solar energy property is 
unreasonable. This commenter provided an example of a taxpayer that 
constructs and places in service a solar facility that has 1,000 
components and qualifies for the section 48 credit. If the taxpayer 
owns 999 components of the solar facility and another taxpayer owns the 
remaining one component, then the same solar facility that qualified 
for the section 48 credit because the taxpayer owned all components 
will no longer be energy property under the Proposed Regulations. This 
commenter said there does not seem to be any justification for this 
rule. This commenter highlighted that the facility is serving the same 
purpose and would be eligible for the same amount of section 48 credit. 
The commenter also asserted that introducing and defining the term 
``unit of energy property'' in a way that does not allow its components 
to be owned by more than a single taxpayer leads to an unreasonable 
result.
    This commenter requested that the Treasury Department and the IRS 
issue a rule enabling taxpayers to claim the section 48 credit for 
separate components of energy property. Alternatively, the commenter 
requested that the Treasury Department and the IRS issue a rule to 
limit the definition of unit of energy property with respect to a 
particular taxpayer to those components owned by that taxpayer. As has 
been discussed previously in part III.D.1 of this Summary of Comments 
and Explanation of Revisions, the statute requires the taxpayer to own 
an interest in an energy property to claim a section 48 credit.
    Some commenters were particularly concerned about the rule in the 
Proposed Regulations that a taxpayer is eligible to claim the credit 
for integral property only if that same taxpayer owns the unit of 
energy property. These commenters were specifically concerned about the 
ability of owners of power conditioning and transfer equipment to claim 
the section 48 in both the solar and offshore wind context. In general, 
the commenters disagreed that an integral property that would otherwise 
qualify if owned by the same taxpayer that owns the unit of energy 
property would not qualify if owned by another taxpayer. For example, a 
commenter asserted in the case of a single energy property in which 
energy property and integral parts are constructed together but owned 
by separate taxpayers, both taxpayers should be able to claim separate 
credits on the bases of their respectively owned portions. Similarly, 
the commenter noted that if a unit of energy property is constructed 
and placed in service by a taxpayer, and later another taxpayer 
constructs and places in service integral property, both taxpayers 
should be able to claim credits.

[[Page 100636]]

    A commenter made a similar point specifically about offshore wind 
facilities. This commenter noted that if the power conditioning 
equipment is owned by a taxpayer that has no ownership in the offshore 
wind facility, the power conditioning equipment would not qualify for 
the section 48 credit without changing its operation, character, or 
function but would have qualified had that taxpayer had an ownership 
interest in the offshore wind facility. The commenter stated that the 
power conditioning equipment continues to serve the same purpose, is 
used directly in the intended function of the offshore wind facility 
and is essential to the completeness of its intended function. This 
commenter pointed out that offshore wind facilities (such as those 
along the Atlantic coast) will involve multiple States, and it is 
unlikely that the same entity will own both the offshore wind facility 
and the integral supporting infrastructure, but both should be eligible 
for the credit.
    Another commenter made a similar point stating that power 
conditioning and transfer equipment has been established by the 
Proposed Regulations as an integral part of the production of 
electricity from an offshore wind facility, and that in accordance with 
precedent, the Treasury Department and the IRS should establish in the 
final regulations that the separate owner of this integral equipment 
may qualify for the section 48 credit. This commenter stated that this 
is essential to enabling the necessary flexibility for offshore wind 
developers to structure financially viable projects, and ultimately 
achieve the Administration's goal of deploying 30 gigawatts (GW) of 
offshore wind capacity by 2030. Another commenter noted that the 
distinction in the Proposed Regulations between functionally 
interdependent property (needed for generation of electricity) and 
other ``integral'' property for purposes of section 48 is arbitrary, 
illogical, and unnecessary for offshore wind properties involving 
multiple owners and there is no need for an owner of an offshore wind 
delivery system to have an artificial requirement to own some portion 
of the turbines. This commenter noted that permitting multiple owners 
to share the section 48 credit would not lead to overuse or ``double 
counting'' of the section 48 credit.
    Other commenters noted that allowing third party ownership of power 
conditioning and transfer equipment would significantly decrease the 
financial burden on developers and ratepayers, as well as diversify 
investment in the industry. Commenters also stressed the benefits of 
separate ownership as a more cost effective model of ownership, 
including efficiencies that provide lower overall costs to consumers; 
reduced environmental impacts (for example, fewer cables traversing 
sensitive marine ecosystems); efficient use of constrained cable 
corridors; fewer disruptions to communities than if each offshore wind 
facility develops its own offshore wind power conditioning and transfer 
equipment; and incentivizing competitive solicitation of such 
equipment.
    Generally, these commenters requested that integral property, 
specifically power conditioning equipment, be treated as a separate 
unit of energy property that may claim the section 48 credit. However, 
section 48 provides a credit only for property that satisfies the 
definitions of ``energy property'' provided at section 48(a)(3) and 
(c), and owners of only integral property do not own ``energy 
property'' as defined in section 48(a)(3) or (c). For example, power 
conditioning and transfer equipment does not alone generate electricity 
or satisfy an intended function provided by the statute. As a result, 
costs associated with integral property owned by a taxpayer that owns 
the related energy property may be included in basis of the energy 
property owned by the same taxpayer as provided in these final 
regulations because integral property is necessary for the intended use 
for an energy property, but integral property alone cannot qualify for 
the section 48 credit.

E. Calculation of Basis

    Proposed Sec.  1.48-14(e)(1) would provide that for purposes of the 
section 48 credit, a taxpayer that owns an energy property is eligible 
for the credit only to the extent of the taxpayer's basis in the energy 
property. In the case of multiple taxpayers holding direct ownership in 
an energy property, each taxpayer determines its basis based on its 
fractional ownership interest in the energy property. A commenter 
supported the fractional ownership rule for determining a taxpayer's 
basis and requested the extension of those rules to the credits under 
sections 30C and 45W of the Code.
    Other commenters, while opposing the ownership rules, also 
requested clarification of how to determine basis if the fractional 
ownership rule is retained. A commenter requested examples of the 
application of these ownership rules in the context of an animal waste-
to-RNG qualified biogas property in which the property comprising the 
qualified biogas property is owned by multiple taxpayers.
    Another commenter requested clarification regarding the allocation 
of a section 48 credit if taxpayers own different fractional ownership 
interests in the unit of energy property and related integral property. 
A commenter requested that the final regulations apply similar 
allocation rules provided in proposed Sec.  1.48-9(f)(3)(i) and (ii) to 
shared integral property in the context of a qualified investment 
credit facility under section 48(a)(5).
    Other commenters, while opposed to the ownership rules, suggested 
alternative ways to determine basis if there are multiple owners. Two 
commenters suggested that energy property that is integral to multiple 
energy projects (for example, as part of a ``shared collector system'' 
configuration) should be eligible for the section 48 credit based on 
the energy property's capacity allocable to each taxpayer's energy 
project. Another commenter supported the creation of a rule that can be 
used to determine if the primary use of a transmission line is for 
renewable energy generation and, if so, to allow it to qualify as a 
split ownership component of the qualifying renewable energy 
development (whether wind, solar, or geothermal). This commenter 
pointed to the use of the Open Access Transmission Tariff as a model 
for such test. This commenter also noted that the initial dedicated 
renewable connection capacity is likely to be oversized and so the IRS 
should be able to develop partial section 48 credit qualification over 
time if deemed necessary.
    Proposed Sec.  1.48-14(e)(1) would provide that a taxpayer 
determines its basis based on the taxpayer's fractional ownership in 
the energy property. Proposed Sec.  1.48-14(e)(4)(iii), Example 3, 
would provide an example in which integral property has two owners that 
each own one-half of the integral property with each owner including 
one-half of the basis of that property to determine their basis for 
section 48 credit purposes. The example does not look to whether the 
use of the integral property for qualifying uses corresponded to the 
one-half split in ownership.
    Proposed Sec.  1.48-9(f)(3) would provide that 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. In that scenario, the total cost 
basis of such shared property divided among the

[[Page 100637]]

energy properties may not exceed 100 percent of the cost of such shared 
property, but there is no requirement that the proportion of a 
taxpayer's ownership of the integral property must correspond with the 
proportion of the taxpayer's fractional ownership of the energy 
property.
    Because the fractional ownership rules applicable to multiple 
owners of integral property must comport with the general ownership 
rules, the Treasury Department and the IRS decline to adopt commenters' 
alternative suggestions on calculating the credit for integral 
property. Section 48 requires that the taxpayer own property that 
satisfies the statutory definition of an energy property, and therefore 
the determination cannot be tied to an alternative measure such as 
capacity. In response to the comment on transmission lines, proposed 
Sec.  1.48-9(f)(3)(ii), which is adopted in these final regulations, 
makes clear that energy property does not include any electrical 
transmission equipment, such as transmission lines and towers, or any 
equipment beyond the electrical transmission stage. Finally, in 
response to comments requesting clarifications with respect to the 
application of section 30C or 45W, such clarifications are more 
appropriately addressed in guidance under those provisions.
    Commenters also submitted questions concerning the specific costs 
that are capitalized and included in basis (for example, consultant 
labor and expenses associated with project/construction management, 
planning, design, engineering, and environmental services, contractor 
costs, legal services and permitting services). Issues concerning what 
costs may be capitalized and included in the basis of an energy 
property are similarly beyond the scope of these final regulations.

F. Election To Treat Qualified Facilities as Energy Property

    Section 48(a)(5) generally provides an election to treat a 
``qualified investment credit facility'' as energy property for 
purposes of the section 48 credit. 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 (within the meaning of section 45(d)(1) through (4), 
(6), (7), (9), or (11)) with respect to which no section 45 credit has 
been allowed and for which the taxpayer makes an irrevocable election 
under section 48(a)(5). 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.
    Proposed Sec.  1.48-14(f) would 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. Proposed Sec.  1.48-
14(f)(1) would provide that if a taxpayer makes an election under 
section 48(a)(5)(C) to treat qualified property that is part of a 
qualified investment credit facility 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. Proposed Sec.  
1.48-14(f)(1) would also provide that no section 45 credit may be 
determined with respect to any such qualified investment credit 
facility and that the requirements of section 45 are not imposed on a 
qualified investment credit facility. Additionally, proposed Sec.  
1.48-14(f)(1) would provide that no credit under section 45Q or 45V 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.
    Proposed Sec.  1.48-14(f)(2) would define the term ``qualified 
property'' for purposes of proposed Sec.  1.48-14(f). Proposed Sec.  
1.48-14(f)(3) would provide definitions related to requirements for 
qualified property. Proposed Sec.  1.48-14(f)(4) would define the term 
``qualified investment credit facility.'' Proposed Sec.  1.48-14(f)(5) 
would provide that intangible property is excluded from the definition 
of qualified property for purposes of the election under section 
48(a)(5).
    Several commenters asked whether a taxpayer may claim a section 48 
credit for energy storage technology co-located with a qualified 
facility for which a taxpayer claims the section 45 credit if the 
energy storage technology is an integral part of the qualified 
facility. As described in the preamble to the Proposed Regulations, 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, proposed Sec.  1.48-9(f)(3)(ii) 
would provide that power conditioning and transfer equipment that is 
shared by a qualified facility (as defined in section 45(d)) and an 
energy property may be treated as an integral part of the section 48 
energy property. Proposed Sec.  1.48-9(d) would also clarify that 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 an energy property or the 
section 45 credit for a qualified facility.
    In the preamble to the Proposed Regulations, the Treasury 
Department and the IRS requested comments regarding whether additional 
guidance is needed on this issue. After considering the comments 
received, the Treasury Department and the IRS confirm that even though 
shared power conditioning and transfer equipment is integral to a 
qualified facility for which the section 45 credit is claimed, co-
located energy storage technology remains a separate energy property 
under section 48. Therefore, a section 48 credit may be claimed for 
energy storage technology that is co-located with a qualified facility 
and shares power conditioning and transfer equipment with the qualified 
facility for which a section 45 credit is claimed.
    In the context of the section 48(a)(5) election, commenters 
requested that the final regulations confirm that components of 
property within a qualified hydropower facility (for which a section 
48(a)(5) election is made) are eligible for the section 48 credit. A 
commenter asked that regulations provide guidance regarding the scope 
of a ``qualified investment credit facility'' and ``qualified 
property,'' including examples specific to a qualified hydropower 
facility.
    Another commenter requested that the final regulations confirm that 
the section 48 credit for energy storage technology is available 
regardless of whether the energy storage technology is part of a 
qualified hydropower facility for which a section 45 credit is allowed. 
This commenter requested that final regulations confirm that any new 
investment in property with respect to pumped storage hydropower 
qualifies for the section 48 credit (as an energy storage technology) 
regardless of whether the property is shared with a qualified 
hydropower facility that claims or has claimed the section 45 credit. A 
section 48 credit may be claimed for energy storage technology that is 
co-located with a qualified facility and shares power conditioning and 
transfer equipment with the qualified facility for which a section 45 
credit is claimed. These final regulations provide rules of general 
applicability that taxpayers can use to determine whether they are 
eligible for a section 48 credit. The Treasury

[[Page 100638]]

Department and the IRS are not in a position to determine credit 
eligibility in specific fact scenarios in this final regulation. Thus, 
the final regulations do not provide the requested clarifications.
    Commenters also requested clarification concerning property that is 
included in offshore wind facilities. A commenter requested 
clarification that qualified property in a marshaling or operation and 
maintenance port that is an integral part of offshore wind energy 
facility should qualify as energy property for the purposes of the 
section 48 credit. The Proposed Regulations would provide a rule for 
location of energy property that addresses this comment. Under proposed 
Sec.  1.48-9(f)(4), any property that meets the requirements of 
proposed Sec.  1.48-9(f)(2) (unit of energy property rules) and 
proposed Sec.  1.48-9(f)(3) (integral part rules) is a part of an 
energy property regardless of where such property is located. The final 
regulations adopt this rule as proposed. However, these final 
regulations have revised proposed Sec.  1.48-14(f) to address only the 
election to treat qualified facilities as energy property, and several 
of the provisions in Sec.  1.48-14(f) have been rearranged under that 
subsection in the final regulations. Additionally, the coordination 
rule for the sections 42 and 48 credits has been moved from proposed 
Sec.  1.48-14(f)(5) to Sec.  1.48-14(g) in the final regulations.
    Additionally, the final regulations remove the references to 
``software'' from proposed Sec.  1.48-14(f)(3)(iii)(B) because section 
48(a)(5) limits ``qualified property'' to tangible property. Software 
generally is not tangible property.

G. Lower-Output Energy Properties and Qualified Interconnection Costs

1. Qualified Interconnection Property
    Section 48(a)(8)(A) provides generally that for purposes of 
determining the credit under section 48(a), energy property includes 
amounts paid or incurred by the taxpayer for qualified interconnection 
property in connection with the installation of energy property that 
has a maximum net output of not greater than five MW (as measured in 
alternating current), to provide for the transmission or distribution 
of the electricity produced or stored by such property, and that are 
properly chargeable to the capital account of the taxpayer (qualified 
interconnection costs).
    Section 48(a)(8)(B) provides that the term ``qualified 
interconnection property'' means, with respect to an energy project 
that is not a microgrid controller, any tangible property (1) 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, (2) that is either 
(i) constructed, reconstructed, or erected by the taxpayer, or (ii) for 
which the cost with respect to the construction, reconstruction, or 
erection of such property is paid or incurred by such taxpayer, and (3) 
the original use of which, pursuant to an interconnection agreement, 
commences with a utility.
    Section 48(a)(8)(C) and (D) provide additional definitions for 
purpose of this rule. Section 48(a)(8)(C) provides that 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 such utility. Section 
48(a)(8)(D) provides that for purposes of section 48(a)(8), 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. Section 
48(a)(8)(E) provides that in the case of costs paid or incurred for 
interconnection property, amounts otherwise chargeable to capital 
account with respect to such costs must be reduced under rules similar 
to the rules of section 50(c).
    Proposed Sec.  1.48-14(g)(1) would generally provide that for 
purposes of determining the section 48 credit, energy property includes 
amounts paid or incurred by the taxpayer for qualified interconnection 
property, in connection with the installation of energy property that 
has a maximum net output of not greater than five MW (as measured in 
alternating current). 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 Sec.  
1.48-14(g)(6).
    Proposed Sec.  1.48-14(g)(2) would define the term ``qualified 
interconnection property'' to mean, with respect to an energy project 
that is not a microgrid controller, any tangible property that is part 
of an addition, modification, or upgrade to a transmission or 
distribution system that is required at or beyond the point at which 
the energy project interconnects to such transmission or distribution 
system in order to accommodate such interconnection; is either 
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.
    Proposed Sec.  1.48-14(g)(2) also would provide that qualified 
interconnection property is not part of an energy property and that 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) and the increase in credit rate for energy communities 
provided in section 48(a)(14).
    Some commenters requested that the final regulations confirm that 
equipment required to modify and upgrade transmission or distribution 
systems beyond the point of interconnection would be considered 
qualified interconnection property and eligible for inclusion in basis. 
As already noted, proposed Sec.  1.48-14(g)(2) would define the term 
``qualified interconnection property'' to mean, with respect to an 
energy project that is not a microgrid controller, any tangible 
property that is part of an addition, modification, or upgrade to a 
transmission or distribution system that is required at or beyond the 
point at which the energy project interconnects to such transmission or 
distribution system in order to accommodate such interconnection. These 
final regulations adopt this definition in renumbered Sec.  1.48-
14(h)(2). Therefore, the Treasury Department and the IRS confirm that 
tangible property required to modify and upgrade transmission or 
distribution systems beyond the point of interconnection would 
(provided the property satisfies the other requirements of section 
48(a)(8)(B)) be considered qualified interconnection property and 
eligible for inclusion in basis for purposes of the section 48 credit.
    Some commenters requested that certain components or technologies 
be specifically listed as qualified interconnection property. For 
example, a commenter asked for clarification that existing technologies 
that can be used to upgrade grid infrastructure to allow for 
interconnection of energy projects

[[Page 100639]]

would be considered qualified interconnection property. Two commenters 
recommended including equipment between ``a customer's distribution 
system and the utility's distribution point of common coupling (POC).'' 
These commenters listed relays, switchgears (including low-voltage 
assemblies, medium-voltage assemblies, and circuit breakers), 
transformers, and voltage regulators.
    The Proposed Regulations would adopt the statutory requirements for 
qualified interconnection property provided in section 48(a)(8)(B). The 
final regulations adopt these rules as proposed. Because a definitive 
response to comments requesting greater specificity regarding equipment 
that is considered qualified interconnection property would require the 
Treasury Department and the IRS to conduct a complete factual analysis 
of the property in question, the requested clarifications are not 
addressed in these final regulations.
    One commenter requested that the final regulations include a 
detailed definition of ``point of interconnection'' to distinguish 
between energy property and qualified interconnection property for 
purposes of calculating the basis of the energy property eligible for a 
section 48 credit. After consultation with the DOE, the Treasury 
Department and the IRS understand that the ``point of interconnection'' 
is a term of art well understood by the industry and taxpayers seeking 
an interconnection agreement. At the transmission level, 
interconnection procedures are, in most of the United States, governed 
by the Federal Energy Regulatory Commission (FERC). Providing a further 
definition of ``point of interconnection'' outside of the FERC context 
risks creating confusion for generators and taxpayers. Therefore, no 
additional clarifications to define the ``point of interconnection'' 
are included in the final regulations.
a. Interaction With PWA Requirements
    Section 48(a)(9)(A)(i) (general rules for the increased credit 
amount for energy projects) provides that in the case of any energy 
project that satisfies the requirements of section 48(a)(9)(B), the 
amount of the credit determined under section 48(a) (determined after 
the application of section 48(a)(1) through (8) and (15), and without 
regard to this clause) is equal to such amount multiplied by 5.
    The Proposed Regulations did not address the interaction between 
the rules for qualified interconnection costs and the PWA requirements. 
A commenter requested that the final regulations confirm that the PWA 
requirements do not apply to the construction, alteration, or repair of 
interconnection property.
    Section 48(a)(9) provides that the increased credit amount (for 
satisfying the PWA requirements) is determined after the application of 
section 48(a)(8) (rules for interconnection property) and therefore, 
amounts paid or incurred by the taxpayer for qualified interconnection 
property in connection with the installation of energy property are 
eligible for the increased credit amount. However, the PWA requirements 
apply only to ``energy projects,'' which is defined in a way that 
excludes interconnection property. See section 48(a)(9)(A)(ii) 
(defining ``energy project'' as ``a project consisting of one or more 
energy properties that are part of a single project''); section 
48(a)(8)(B)(i) (defining ``interconnection property'' as required ``at 
or beyond the point at which the energy project interconnects to'' a 
transmission or distribution system, implying that interconnection 
property is distinct from the energy project). Thus, interconnection 
property is not subject to the PWA requirements.
    In addition to not being part of an energy project, interconnection 
property generally is not within the control of the taxpayer that owns 
the energy project because it need not be owned by the same taxpayer. 
Instead, qualified interconnection property may be owned by a utility 
and 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. It would be difficult or impossible in such a case for the 
taxpayer to control or monitor whether the construction of the 
interconnection property complies with PWA requirements. This may 
explain why the statute permits the increased credit amount for amounts 
paid or incurred for qualified interconnection property, without 
subjecting the construction of such property to the PWA requirements.
2. Interaction With Other Bonus Credit Amounts
    Section 48(a)(12)(A) provides generally that in the case of any 
energy project that satisfies the domestic content requirements, for 
purposes of computing the section 48 credit with respect to such 
property, the energy percentage is to be increased by the applicable 
credit rate increase, which is 2 percentage points in the case of an 
energy project that does not satisfy the requirements of section 
48(a)(9)(B), and 10 percentage points in the case of any energy project 
that satisfies those requirements.
    Section 48(a)(14)(A) provides that in the case of any energy 
project that is placed in service within an energy community (as 
defined in section 45(b)(11)(B), as applied by substituting ``energy 
project'' for ``qualified facility'' each place it appears), for 
purposes of computing the section 48 credit with respect to energy 
property that is part of such project, the energy percentage is to be 
increased by the applicable credit rate increase that is 2 percentage 
points in the case of any energy project that does not satisfy the 
requirements of section 48(a)(9)(B), and 10 percentage points in the 
case of any energy project that satisfies those requirements.
    A commenter requested clarification regarding the interaction 
between the rules for qualified interconnection costs and the 
computation of the domestic content bonus credit amount and the 
increased credit amount for energy projects located in an energy 
community. This commenter stated that if a community solar project 
seeks interconnection to the distribution grid, usually there will be 
upgrades or other investments necessary to support the connection to 
the distribution system. The commenter explained that the generator 
generally has little control or ability to determine the components or 
design of a distribution utility's interconnection requirements, and as 
a result, it is entirely appropriate to exclude these investments for 
the eligibility determination for the domestic content bonus credit 
amount and the increased credit amount for energy projects located in 
an energy community. According to the commenter, however, because these 
qualified interconnection costs are paid by the developer, they would 
still be part of the basis not only for the section 48 credit, but also 
for the domestic content bonus credit amount and the increased credit 
amount for energy projects located in an energy community. This 
commenter requested that the Treasury Department and the IRS confirm 
that this is the correct interpretation of the rule.
    As highlighted by commenter and as provided in proposed Sec.  1.48-
14(g)(2), qualified interconnection property is not part of an energy 
property and 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 and the 
increased credit amount for energy projects located in an energy 
community. However, the commenter requested clarification regarding

[[Page 100640]]

whether qualified interconnection costs are eligible for these 
provisions.
    Section 48(a)(8)(A) provides that for purposes of determining the 
credit under section 48(a), energy property includes amounts paid or 
incurred by the taxpayer for qualified interconnection property in 
connection with the installation of certain energy property (subject to 
certain additional requirements). Because the credit under section 
48(a) is calculated by multiplying the energy percentage--which 
includes any domestic content bonus credit amount and any increased 
credit amount for energy projects located in an energy community--by 
the basis of the energy project--which includes amounts paid or 
incurred by the taxpayer for qualified interconnection property, 
qualified interconnection costs are taken into account in calculating 
the domestic content bonus credit amount and the increased credit 
amount for energy projects located in an energy community to the extent 
included in the basis of the energy property.
3. Basis Reduction
    Section 48(a)(8)(E) provides that in the case of costs paid or 
incurred for interconnection property, amounts otherwise chargeable to 
capital account with respect to such costs are to be reduced under 
rules similar to the rules of section 50(c). Similarly, proposed Sec.  
1.48-14(g)(6) would provide that in the case of costs paid or incurred 
for qualified interconnection property as defined in proposed Sec.  
1.48-14(g)(2), amounts otherwise chargeable to capital account with 
respect to such costs must be reduced under rules similar to the rules 
of section 50(c). Neither the statute nor the proposed regulations 
specify whether the provisions of section 50(c)(1) or (3) apply. 
Section 48(a)(8)(A) provides that energy property includes amounts paid 
or incurred by the taxpayer for qualified interconnection property in 
connection with the installation of energy property. Therefore, the 
special rule in section 50(c)(3)(A), which provides for a basis 
reduction of 50 percent in the case of any energy credit, applies to 
qualified interconnection property the costs of which are included for 
purposes of the section 48 credit.
    Proposed Sec.  1.48-14(g)(6) would also provide that the taxpayer 
must pay or incur qualified interconnection property costs; therefore, 
any reimbursement, including by a utility, must be accounted for by 
reducing taxpayers' expenditure to determine eligible costs. As 
acknowledged in the preamble to the Proposed Regulations, and as raised 
by some commenters, uncertainty exists regarding the inclusion of 
qualified interconnection costs in situations in which the taxpayer 
that owns the energy property does not fully bear the qualified 
interconnection costs (for example, cases in which the taxpayer is 
reimbursed). In the preamble to the Proposed Regulations, the Treasury 
Department and the IRS requested comments on whether a payment, credit, 
or service received by the owner of the energy property (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 qualified interconnection costs 
that the first taxpayer may include in its basis for purposes of the 
section 48 credit.
    The Treasury Department and the IRS also requested comments on 
whether the costs paid by a 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. Further, the Treasury Department and the IRS requested 
comments 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. Lastly, the Treasury Department and the IRS 
requested comments 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 property.
    In response to these requests, commenters confirmed that future 
unforeseeable reimbursements of qualified interconnection costs may 
occur. Commenters also requested further guidance on these issues and 
provided recommendations for addressing these situations.
    A commenter recommended that the section 48 credit avoid accounting 
for any reimbursements paid to the taxpayer for qualified 
interconnection costs in a later taxable year. This commenter also 
suggested that the Treasury Department and the IRS incorporate a 
mechanism, similar to a recapture mechanism, in the final regulations 
to avoid a taxpayer receiving a greater amount in reimbursements than 
it paid for the qualified interconnection costs net of the section 48 
credit. This commenter raised concerns with situations in which the 
owner of an energy property receives reimbursement or revenue for 
qualified interconnection property, despite the energy project being 
situated in a region of the country with a ``participant funding'' 
mechanism (for example, generators must fully fund network upgrades 
without reimbursement). Additionally, this commenter cited the 
possibility that a utility may reimburse the taxpayer for all or a 
portion of the qualified interconnection costs, usually over a 20-year 
period. Additionally, this commenter noted that there are circumstances 
in which a future interconnection customer pays for the use of 
interconnection property by reimbursing the taxpayer, who is the 
initial interconnecting customer. This commenter noted that the first 
taxpayer would have no ability to foresee future payments from the 
second taxpayer at the time the first taxpayer interconnects to the 
utility's transmission system.
    Another commenter recommended that the final regulations disregard 
utility reimbursements, to the extent includible in taxpayers' gross 
income, to determine taxpayers' eligible qualified interconnection 
costs. This commenter also stated that the final regulations should 
clarify that unforeseeable payments for the use of interconnection 
property that a taxpayer has funded with no expectation of future 
compensation should not be treated as a reimbursement or as amounts 
paid toward qualified interconnection costs but should instead be 
treated as revenue.
    The Treasury Department and the IRS recognize that situations may 
arise in which the cost of qualified interconnection property is 
reduced after the taxable year in which the taxpayer claims the section 
48 credit. The Treasury Department and the IRS also recognize that 
other complicated situations may arise in determining whether a 
taxpayer has paid or incurred qualified interconnection costs. The 
comments received confirmed that these questions are not unique to the 
reimbursement of qualified interconnection costs and may also arise in 
the context of other tax credits. Therefore, the determination of 
whether qualified interconnection costs have been paid or incurred by 
the taxpayer and whether cost is reduced by virtue of transactions with 
the utility or with a third party should be based on generally 
applicable Federal tax principles.
    In consideration of the comments, the final regulations revise the 
rule regarding reduction to amounts chargeable to capital account to 
reflect the application of Federal tax principles to such transactions 
in determining the amount a taxpayer paid or incurred for qualified 
interconnection costs. The

[[Page 100641]]

final regulations, which are now at Sec.  1.48-14(h)(1) (previously 
proposed Sec.  1.48-14(g)(6)), explain that if the costs borne by the 
taxpayer are reduced by utility or non-utility payments, Federal tax 
principles may require the taxpayer to reduce the amount treated as 
paid or incurred for qualified interconnection property to determine a 
section 48 credit. The final regulations also include two examples.
4. Leases
    A commenter requested clarification regarding the treatment of 
qualified interconnection costs if an energy property is subject to a 
lease. This commenter questioned the availability of the section 48 
credit for qualified interconnection costs incurred by small projects 
in a sale-leaseback or any transaction in which the taxpayer that 
initially incurred the qualified interconnection costs is different 
than the taxpayer that claims the section 48 credit. The commenter 
noted that the Proposed Regulations do not address this question and 
made the issue worse in cases in which the ``three-month sale-
leaseback'' rule or the ``lease pass-through'' rule is combined with 
the section 48 credit rules regarding qualified interconnection costs.
    The commenter also requested that the final regulations address how 
the rule that the ``energy property shall include amounts paid or 
incurred by the taxpayer for qualified interconnection property'' 
operates if one taxpayer pays the interconnection costs, then sells the 
project to another taxpayer, and the second taxpayer claims the section 
48 credit. The commenter stated that the language in the Proposed 
Regulations seems to effectively deny companies using the three-month 
sale-leaseback and the lease-passthrough rules from claiming a section 
48 credit for qualified interconnection costs. The commenter suggested 
that the final regulations should add language that expands the 
original use rule to take into account the principles of section 
50(d)(4), with original use determined on the date of the sale-
leaseback or lease. The commenter also recommended that the definition 
of ``interconnection agreement'' in the final regulations be revised to 
include an acknowledgement that energy property can be leased if there 
is an election under section 50(d)(5). Finally, the commenter proposed 
designating and identifying specifically a portion of the purchase 
price for the sale of an energy project as a reimbursement for 
qualified interconnection costs.
    The Treasury Department and the IRS acknowledge that developers and 
operators of energy properties may utilize the existing sale-leaseback 
or lease-passthrough structures in cases in which they are seeking the 
section 48 credit. Nothing in these final regulations prohibits the 
application of general principles, including those in section 50(d). 
The specific applications of the sale-lease back or lease-passthrough 
rules, however, are beyond the scope of these regulations.
    The Treasury Department and the IRS recognize that the section 48 
credit attributable to interconnection costs for qualified 
interconnection property is allowed to a purchaser of energy property 
that bears those costs in connection with the purchase (for example, by 
adjusting the purchase price or making a separate payment to account 
for them). Thus, in the case of a purchase of energy property (or a 
deemed purchase of energy property in the case a pass-through lease 
transaction), any amount paid or incurred by the buyer attributable to 
the value of interconnection costs associated with that energy property 
is an amount paid or incurred with respect to the construction, 
reconstruction, or erection of that qualified interconnection property.
    Further, in the case of a sale-leaseback transaction subject to the 
``three-month rule'' provided in section 50(d)(4), the original use of 
the energy property is deemed to commence with the buyer-lessor not 
earlier than the date on which the property is used under the sale-
leaseback transaction, and in the case of a pass-through lease 
transaction, with the lessee as if the lessee actually purchased the 
property in accordance with Sec.  1.48-4.
    Accordingly, these final regulations revise Sec.  1.48-14(h)(2) 
(previously proposed Sec.  1.48-14(g)(2)) to provide ``[f]or purposes 
of determining the original use of interconnection property in the 
context of a sale-leaseback or lease transaction, the principles of 
section 50(d)(4) must be taken into account, as applicable, with such 
original use determined on the date of the sale-leaseback or lease.'' 
Likewise, these final regulations revise Sec.  1.48-14(h)(4) 
(previously proposed Sec.  1.48-14(g)(4)) to provide ``[i]n the case of 
the election provided under section 50(d)(5) (relating to certain 
leased property), the term includes an agreement regarding energy 
property leased by such taxpayer.''
5. Five-Megawatt Limitation
    Proposed Sec.  1.48-14(g)(3)(i) would provide that the Five-
Megawatt Limitation is measured at the level of the energy property in 
accordance with section 48(a)(8)(A). Further, proposed Sec.  1.48-
14(g)(3)(i) would provide that the maximum net output of an energy 
property is measured by the nameplate generating capacity of the unit 
of energy property at the time the energy property is placed in 
service.
    Proposed Sec.  1.48-14(g)(3)(ii) would describe nameplate capacity 
for purposes of the Five-Megawatt Limitation. The Proposed Regulations 
would provide that the determination of whether an energy property has 
a maximum net output of not greater than five MW (as measured in 
alternating current) is based on the nameplate capacity for purposes of 
proposed Sec.  1.48-14(g)(1). If applicable, taxpayers should use the 
ISO conditions to measure the maximum electrical generating output or 
usable energy capacity of an energy property. Proposed Sec.  1.48-
14(g)(3)(ii)(A) and (B) would provide rules for applying the Five-
Megawatt Limitation (as provided in proposed Sec.  1.48-14(g)(1)) to 
electrical generating energy property and electrical energy storage 
property, respectively.
    Proposed Sec.  1.48-14(g)(3)(ii)(A) would provide that in the case 
of an electrical generating energy property, the Five-Megawatt 
Limitation is based on 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.
    Proposed Sec.  1.48-14(g)(3)(ii)(B) would provide that in the case 
of electrical energy storage property, the Five-Megawatt Limitation is 
determined by the storage device's maximum net output, which is its 
nameplate capacity.
    Generally, commenters agreed that the Five-Megawatt measurement 
should be done at the level of underlying energy property, not the 
energy project. The final regulations (now found in Sec.  1.48-
14(h)(3)) retain the proposed rule that the Five-Megawatt Limitation is 
measured at the level of the energy property in accordance with section 
48(a)(8)(A).
    Other commenters expressed concerns with applying the Five-Megawatt 
Limitation based on nameplate capacity and by the reference to 
alternating current output. A commenter stated that the interchangeable 
use of two distinct electrical concepts, maximum net output in 
alternating current and nameplate generating capacity, in the Proposed 
Regulations could lead to misinterpretation and unintentionally

[[Page 100642]]

exclude otherwise qualifying interconnection property. A commenter 
stated that proposed Sec.  1.48-14(g)(3) must be modified to clarify 
that interconnection property eligible for the credit is measured at 
the point of output, that is, five MW (measured in alternating current) 
at the inverter, and not determined by the nameplate generation 
capacity. This commenter stated that section 48(a)(8) does not contain 
the words ``nameplate'' or ``capacity'' and instead, it refers to 
``output . . . measured in alternating current,'' which, for solar 
systems, can only be measured after the inverter. This commenter also 
stated that the definition of ``qualified interconnection property'' at 
proposed Sec.  1.48-14(g)(3)(ii)(A), as applied to property that 
generates electricity in direct current, such as solar panels, would 
result in a nullity, with only energy property that generates 
electricity in alternating current able to qualify for the credit.
    Similarly, a commenter stated that for purposes of claiming the 
section 48 credit for qualified interconnection property, the final 
regulations should refer only to energy property output in alternating 
current, without presuming that nameplate capacity perfectly 
corresponds to alternating current output. This commenter asserted that 
the final regulations should clarify that energy property is defined at 
the inverter level (that is, the source of alternating current output) 
for the purposes of determining eligibility of upstream network 
upgrades as qualified interconnection property.
    The Treasury Department and the IRS understand commenters' concerns 
and agree that the rule provided in the Proposed Regulations should be 
revised. Section 48(a)(8) refers to a maximum net output of not greater 
than five MW (as measured in alternating current). The Proposed 
Regulations provide for nameplate capacity in alternating current, 
without addressing types of energy property, such as solar energy 
property, that generate electricity in direct current. Nameplate 
capacity for these types of energy property is measured before the 
property's output is converted to alternating current by an inverter. 
Because an inverter would be considered property that is an integral 
part of the energy property and not part of the unit of property 
itself, measuring the nameplate capacity of an energy property that 
generates electricity in direct current would be difficult under the 
Proposed Regulations.
    In consultation with the DOE, the Treasury Department and the IRS 
conclude that nameplate generating capacity is the best and most 
practical measure of the maximum net output of an energy property. 
Therefore, the Treasury Department and the IRS do not adopt comments 
suggesting changes to the use of nameplate capacity. The final 
regulations at Sec.  1.48-14(h)(3)(ii) (previously proposed Sec.  1.48-
14(g)(3)(ii)) retain the rule that the determination of whether an 
energy property has a maximum net output of not greater than five MW 
(as measured in alternating current) is based on the nameplate capacity 
of the energy property.
    However, in response to comments, the Treasury Department and the 
IRS coordinated with the DOE to provide a method of measuring nameplate 
capacity for an energy property that generates electricity in direct 
current. The final regulations at Sec.  1.48-14(h)(3)(iii) (previously 
proposed Sec.  1.48-14(g)(3)(iii)) provide that, for energy properties 
that generate electricity in direct current, the taxpayer may choose to 
determine whether an energy property has a maximum net output of not 
greater than five MW (in alternating current) by using the lesser of: 
(i) the sum of the nameplate generating capacities within the unit of 
energy property in direct current, which is deemed the nameplate 
generating capacity of the unit of energy property in alternating 
current; or (ii) the nameplate capacity of the first component of 
property that inverts the direct current electricity generated into 
alternating current. This rule provides flexibility for taxpayers while 
ensuring that the maximum net output (in alternating current) of an 
energy property can be determined in an administrable and reasonably 
accurate manner for energy properties that generate electricity in 
direct current.
    A commenter recommended that the Treasury Department and the IRS 
clarify the size limitation for eligible properties with a nameplate 
capacity exceeding five MW. This commenter asserted that further 
clarification is needed to ensure that there is no gaming by projects 
that attempt to get around the Five-Megawatt Limitation, and to 
safeguard against the possibility of multiple energy properties being 
improperly treated as a single energy property. The commenter noted 
that this has been done effectively in many States by limiting the 
amount of capacity that can be installed on a parcel of land and 
precluding subdivisions that are performed for the purpose of 
circumventing a rule. The commenter also referenced guidelines 
developed by the Massachusetts Department of Energy Resources, which 
outline particular scenarios that would qualify for an exception 
allowing flexibility in the event that (i) there are multiple energy 
properties that are owned by separate regarded taxpayers; (ii) the 
energy properties are placed in service in a different tax year from 
other portions of the project; or (iii) there is a gap in time (for 
example, 6 to 12 months) between different properties being placed in 
service. As described in the preamble to the Proposed Regulations, 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.'' Since the statute clearly ties the 
Five-Megawatt Limitation to the energy property, as long as an energy 
property is five MW or less, the statute is satisfied.
    A few commenters requested greater clarity or examples regarding 
the application of the Five-Megawatt Limitation. For example, a 
commenter requested that the final regulations confirm that multiple 
energy properties each with a nameplate capacity of less than five MW 
could utilize common interconnection agreements (versus separate 
agreements). Other commenters requested clarification for cases in 
which multiple properties share interconnection property. Another 
commenter requested clarification or an example of multiple energy 
properties sharing interconnection property and the application of the 
Five-Megawatt Limitation with respect to various technologies and 
specifically solar energy property.
    In response to commenters that requested additional clarification 
of the Five-Megawatt Limitation, the final regulations add an 
additional example as well as provide clarifications to the existing 
examples. These clarifications illustrate the revised method of 
measuring nameplate capacity for an energy property that generates 
electricity in direct current. The clarifications also demonstrate the 
application of the Five-Megawatt Limitation in cases in which the 
nameplate capacity differs from the maximum output provided in the 
interconnection agreement. Specifically, the newly added example 
describes the application of the Five-Megawatt Limitation to an 
interconnection agreement for multiple energy properties owned by a 
single taxpayer. In that example, although the taxpayer has an 
interconnection agreement with the utility that allows for a maximum 
output of 10 MW (as measured in alternating current), the taxpayer may 
include the costs taxpayer paid or incurred for qualified 
interconnection property, subject to the terms of the

[[Page 100643]]

interconnection agreement, to calculate the taxpayer's section 48 
credits for each of the energy properties because each has a maximum 
net output of not greater than five MW (alternating current).
    A commenter proposed that the final regulations treat 
interconnection property as integral property by stating that in 
circumstances in which multiple energy properties (each with 
alternating current output at or below five MW) utilize higher-capacity 
interconnection property, such interconnection property should be 
deemed integral to multiple energy properties. Section 48(a)(8)(A) 
provides that energy property includes amounts paid for qualified 
interconnection property; it does not provide that energy property 
includes qualified interconnection property. Because the statute makes 
clear that interconnection property is distinct from energy property, 
it also cannot be property that is integral to an energy property. The 
preamble to the Proposed Regulations explains that 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.
6. Non-Application to Certain Types of Energy Properties
    The preamble to the Proposed Regulations clarified that the 
definition of qualified interconnection property specifically would 
exclude 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. Excluding certain properties 
from including interconnection costs is required by the statute and the 
fact that interconnection property is irrelevant to these technologies. 
The rule, therefore, is adopted as proposed.
    However, the Treasury Department and the IRS did receive a comment 
regarding qualified interconnection property and the application of the 
proposed rules to microgrid controllers. Section 48(a)(8)(B)(i) defines 
``qualified interconnection property'', with respect to an energy 
project that is not a microgrid controller. The commenter noted that 
section 48(a)(8)(B)(i) is not intended to disqualify an energy project 
from including interconnection property costs solely because such 
project includes a microgrid controller. The Treasury Department and 
the IRS agree with this commenter's view that if an energy project 
includes both a microgrid controller and another type of energy 
property, then interconnection property costs for the energy project 
may be included in calculating the section 48 credit for the other 
energy property.

IV. Severability

    If any provision in this rulemaking is held to be invalid or 
unenforceable facially, or as applied to any person or circumstance, it 
shall be severable from the remainder of this rulemaking, and shall not 
affect the remainder thereof, or the application of the provision to 
other persons not similarly situated or to other dissimilar 
circumstances.

Effect on Other Documents

    Notice 2009-52, 2009-25 I.R.B. 1094, will be obsoleted for tax 
years beginning after the date of 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.

Applicability Dates

    The provisions of Sec. Sec.  1.48-9 and 1.48-14 apply with respect 
to property that is placed in service during a taxable year beginning 
after December 12, 2024. Section 1.6418-5(f) applies to taxable years 
ending on or after December 12, 2024. Taxpayers may choose to apply 
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 December 12, 2024, provided taxpayers 
follow Sec. Sec.  1.48-9, 1.48-14, and 1.6418-5(f) in their entirety 
and in a consistent manner.
    Section 1.48-13 applies to energy projects placed in service in 
taxable years ending after December 12, 2024, and the construction of 
which begins after December 12, 2024. Taxpayers may choose to apply 
Sec.  1.48-13 to energy projects placed in service in taxable years 
ending on or before December 12, 2024, and energy projects placed in 
service in taxable years ending after December 12, 2024, the 
construction of which begins before December 12, 2024, provided that 
taxpayers apply 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 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 final regulations contain 
reporting and recordkeeping requirements that are required to verify 
the eligibility of the property for the credit. These collections of 
information generally are used by the IRS for tax compliance purposes 
and by taxpayers to facilitate proper reporting and compliance.
    The reporting requirement mentioned within these final regulations 
with respect to section 48 are in Sec.  1.48-14(f)(5), which provides 
the time and manner for a taxpayer to make a section 48(a)(5)(C) 
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 on Form 3468, which is

[[Page 100644]]

already approved in OMB Control Numbers 1545-0155 for trust and estate 
filers, 1545-0074 for individual filers, and 1545-0123 for business 
filers. These final regulations do not change the collection 
requirements already approved by OMB.
    These final regulations also include reporting requirements, in 
addition to the general reporting requirements set forth in Sec.  1.45-
12, for taxpayers that claim an increased credit amount under section 
48(a)(9)(B)(iii). These final regulations require taxpayers to verify 
compliance with the Prevailing Wage Requirements by providing 
information that includes the aggregate information detailed in Sec.  
1.45-12 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 Sec.  1.45-12, these 
reporting requirements are covered under OMB control numbers 1545-0074 
for individuals/sole proprietors, 1545-0123 for business entities, and 
1545-2315 for trust and estate filers. These final regulations are not 
changing or creating new collection requirements not already approved 
by OMB for Sec.  1.45-12.
    These final regulations also describe recapture procedures as 
detailed in 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. These final regulations are 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 604 of the RFA requires the agency to present a final 
regulatory flexibility analysis (FRFA) of the final regulations.
    These final regulations affect taxpayers, including small entities, 
that claim section 48 credits. Although data is not readily available 
about the number of small entities that are potentially affected by 
these rules, it is possible that a substantial number of small entities 
may be affected.
    In connection with the Proposed Regulations, the Treasury 
Department and the IRS presented an IRFA to invite comments on both the 
number of entities affected and the economic impact on small entities. 
No comments were received specific to these areas of inquiry. In the 
absence of comments in response to the Proposed Regulations, this FRFA 
is presented with the final regulations.
    In addition, pursuant to section 7805(f), the Proposed Regulations 
preceding these final regulations were submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small business, and no comments were received 
from the Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

A. Need for and Objectives of the Rule

    The final regulations will provide greater clarity to taxpayers for 
purposes of claiming the section 48 credit for energy property. These 
final regulations are 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 final regulations 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 final 
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 the Proposed Regulations and in this FRFA, 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 final 
regulations, if any, on small businesses.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses once taxpayers start to 
claim the section 48 credit using the guidance and procedures provided 
in these final regulations.
1. Impact of the Rules
    The final 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.
    Because the statutory changes that are reflected in the final 
regulations 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 
section 48 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 this Special Analyses.
2. Alternatives Considered
    The Treasury Department and the IRS considered alternatives to 
these final regulations. Significant alternatives considered include 
the definition of energy project in Sec.  1.48-13(d). As described in 
more detail in part II.C of the Summary of Comments and Explanation of 
Revisions section of this preamble, the Treasury Department and the IRS 
considered comments explaining that the energy project definition was 
too broad with only two factors required to cause energy properties to 
be considered an energy project. Commenters suggested instead providing 
that three or four factors should be met. Revising the definition of 
energy project to require three factors would resolve challenges for 
most commenters on this issue, which were represented by solar 
developers. However, section 48 encompasses many different technologies 
in addition to

[[Page 100645]]

solar photovoltaic energy property. Accordingly, to provide taxpayers 
flexibility across the various technologies eligible for the tax 
credit, Sec.  1.48-13(d) requires that four factors be met for energy 
properties to be considered an energy project.
3. Duplicative, Overlapping, or Conflicting Federal Rules
    The final regulations would not duplicate, overlap, or conflict 
with any relevant Federal rules. As discussed above, these final 
regulations 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 Mandates 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 final 
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 final 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. These final regulations do 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.

VII. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a major rule as defined by 5 U.S.C. 804(2). Under section 801(3) of 
the CRA, a major rule takes effect 60 days after the rule is published 
in the Federal Register.
    Notwithstanding this requirement, section 808(2) of the CRA allows 
agencies to specify a different effective date when the agency for good 
cause finds that such procedure would be impracticable, unnecessary, or 
contrary to the public interest and the rule shall take effect at such 
time as the agency promulgating the rule determines. Pursuant to 
section 808(2) of the CRA, the Treasury Department and the IRS find, 
for good cause, that a 60-day delay in the effective date is 
unnecessary and contrary to the public interest.
    The IRA amended section 48 in several ways, including by making 
additional types of energy property eligible for the section 48 credit 
and provided, for many such technologies, that construction must begin 
before January 1, 2025. Further, the IRA amendments included a special 
rule to allow certain lower-output energy properties to include amounts 
paid for qualified interconnection property in connection with the 
installation of energy property, and provided 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.
    Following the IRA's amendments to section 48, the Treasury 
Department and the IRS published the Proposed Regulations. In response 
to the Proposed Regulations, commenters continued to express 
uncertainty regarding the proper application of the statutory rules 
under section 48 and the need for timely final regulations because in 
many cases taxpayers must begin construction before January 1, 2025, in 
order to be eligible to claim the section 48 credit.
    Consistent with Executive Order 14008 (January 27, 2021), letters 
from Members of Congress urging expeditious publication of final 
regulations, and commenters' request for finalized rules, the Treasury 
Department and the IRS have determined that an expedited effective date 
of the final regulations is appropriate here to provide certainty to 
taxpayers placing in service energy property before provisions expire 
and taxpayers seeking to begin construction before January 1, 2025 to 
maintain eligibility for the section 48 credit. The final regulations 
provide needed rules on what the law requires for taxpayers to begin 
job-generating construction of capital-intensive projects qualifying 
for section 48 credits. Accordingly, the Treasury Department and the 
IRS have determined that the rules in this Treasury decision will take 
effect on the date of publication in the Federal Register.

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.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS 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;
0
b. Removing the entry for Sec. Sec.  1.6418-0-1.6418-5; and
0
c. Adding entries in numerical order for Sec. Sec.  1.48-13, 1.48-14, 
and 1.6418-1 through 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 1.6418-1 also issued under 26 U.S.C. 6418(g) and (h).
    Section 1.6418-2 also issued under 26 U.S.C. 6418(g) and (h).
    Section 1.6418-3 also issued under 26 U.S.C. 6418(g) and (h).
    Section 1.6418-4 also issued under 26 U.S.C. 6418(g) and (h).
    Section 1.6418-5 also issued under 26 U.S.C. 48(a)(10)(C) and 
6418(g) and (h).
* * * * *

0
Par. 2. Section 1.48-9 is revised to read as follows:

[[Page 100646]]

Sec.  1.48-9  Definition of energy property.

    (a) In general. For purposes of the 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. If a property is described more than once in the types of 
energy property set forth in paragraph (e), only a single section 48 
credit is allowed. 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, 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 definitions in this paragraph (b) 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 acquires the rights 
and obligations to establish tax ownership of an energy property for 
Federal income tax purposes.
    (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 be treated as not 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 (collectively, 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) 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.
    (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 (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, that 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--(1) Small wind energy property must meet one of 
the following performance and quality standards in

[[Page 100647]]

effect at the time of acquisition of the small wind turbine:
    (i) American Wind Energy Association Small Wind Turbine Performance 
and Safety Standard 9.1 (AWEA standards);
    (ii) International Electrotechnical Commission standards 61400-1, 
61400-2, 61400-11, 61400-12 (IEC standards); or
    (iii) ANSI/ACP Small Wind Turbine Standard 101-1 (ACP standards).
    (2) Taxpayers may rely on a certification that the performance and 
quality standards set forth in this paragraph (c)(2)(ii)(A)(1) are met. 
Guidance published in the Internal Revenue Bulletin sets forth the 
requirements to certify that the performance and quality standards 
provided in this paragraph (c)(2)(ii)(A)(1) are met. 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 (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), 
whether a contract is binding is determined based on the rules 
described in 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) 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 
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, such as drilling wells.
    (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.

[[Page 100648]]

    (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). 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 (GHP) property. GHP property 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 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--(A) In general. 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 property that 
transforms other forms of energy into heat in the first instance. 
Property that removes heat from, or adds heat to, a storage medium for 
subsequent use is property that is designed with the particular purpose 
of substantially altering the time profile of when heat added to or 
removed from the thermal storage medium can be used for heating or 
cooling of the interior of a residential or commercial building. 
Paragraph (e)(10)(iii)(B) of this section provides a safe harbor for 
determining whether a thermal energy storage property has such a 
purpose. Thermal energy storage property does not include a swimming 
pool, CHP property, or a building or its structural components. For 
example, thermal energy storage property includes, but is not limited 
to, a system that adds heat to bricks heated to high temperatures that 
later use this stored energy to heat a building through the HVAC 
system; thermal ice storage systems that use electricity to run a 
refrigeration cycle to produce ice 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, an 
artificial pit, an aqueous solution, a borehole field, or a solid-
liquid phase change material to be extracted for later use for heating 
and/or cooling; and air-to-water heat pump systems with a water storage 
tank. However, consistent with Sec.  1.48-14(d), if thermal energy 
storage property, such as a heat pump system, includes equipment, such 
as a heat pump, that also serves a purpose in an HVAC system that is 
installed in connection with the thermal energy storage property, the 
taxpayer's basis in the thermal energy storage property includes the 
total cost of the thermal energy storage property and HVAC system less 
the cost of an HVAC system without thermal storage capacity that would 
meet the same functional heating or cooling needs as the heat pump 
system with a storage medium, other than time shifting of heating or 
cooling.
    (B) Safe harbor. A thermal energy storage property will be deemed 
to have the purpose of substantially altering the time profile of when 
heat added to or removed from the thermal storage medium can be used to 
heat or cool the interior of a residential or commercial building if 
that thermal energy storage property is capable of storing energy

[[Page 100649]]

that is sufficient to provide heating or cooling of the interior of a 
residential or commercial building for a minimum of one hour.
    (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 
includes, but is not limited to, above ground storage tanks, 
underground storage facilities, and associated compressors. Property 
that is an integral part of hydrogen energy storage property includes, 
but is not limited to, hydrogen liquefaction equipment and gathering 
and distribution lines within a hydrogen energy storage property.
    (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), except that such property had a 
nameplate 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) 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), 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, including gas upgrading equipment, to 
make the gas suitable for sale or productive use. For example, 
qualified biogas property includes, but is not limited to, an anaerobic 
digester. Property that is an integral part of qualified biogas 
property includes, but is not limited to, a waste feedstock collection 
system, a landfill gas collection system and mixing or pumping 
equipment.
    (ii) Methane content requirement. The methane content requirement 
described in section 48(c)(7)(A)(i) and paragraph (e)(11)(i) of this 
section is measured at the point at which the biogas exits the 
qualified biogas property.
    (iii) Flaring Allowance. While a qualified biogas property 
generally may not capture biogas for disposal via combustion, 
combustion in the form of flaring will not disqualify a qualified 
biogas property provided the primary purpose of the qualified biogas 
property is sale or productive use of biogas and any flaring is in 
compliance with all relevant Federal, State, regional, Tribal, and 
local laws and regulations.
    (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 1.48-14.
    (f) Property included in energy property--(1) In general. An energy 
property includes a unit of energy property (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 that 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 part of that 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 
energy property that are installed on a single rooftop are treated as a 
single unit of energy property. See Sec.  1.48-13(d) for rules 
regarding the treatment of multiple energy properties 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(a)(3) and (c) 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, GHP property, 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

[[Page 100650]]

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(a)(3) and (c) 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(a)(3) and (c) 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 treated as part of 
that energy property. A taxpayer may not claim the section 48 credit 
for any property not owned by the taxpayer that is an integral part of 
energy property 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, the exclusion in paragraph (d)(1) of 
this section does not apply to property that is shared by a qualified 
facility (as defined in section 45(d)) and an energy property if it is 
an integral part of that energy property. The basis of any such 
property must be properly allocated across the energy property and 
qualified facility that share such property.
    (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(a)(3) and (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 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)), 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 structures described in paragraphs 
(f)(3)(vi) and (vii) of this section are not treated as buildings for 
this purpose.
    (vi) Structures essentially items of machinery or equipment. A 
structure that is essentially an item of machinery or equipment is not 
treated as a building for purposes of paragraph (f)(3)(v) of this 
section.
    (vii) Structures that house certain property. A structure that 
houses property that is integral to the activity of an energy property 
is not treated as a building for purposes of paragraph (f)(3)(v) of 
this section 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 if 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 (Solar 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 one 
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 Solar Property up to the inverter are 
functionally interdependent components of the Solar Property. The 
inverter and up to and including the transformer are integral parts of 
the Solar Property. Therefore, the Solar Property is an energy property 
for purposes of the section 48 credit. When X places the Solar Property 
in service, the cost of the components up to and including the 
transformer is included in the basis of the Solar Property for purposes 
of computing the section 48 credit.
    (ii) Example 2. Co-located energy properties. Assume the same facts 
as in paragraph (f)(5)(i) of this section (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 an intertie. X and Y each 
pay 50% of the cost of, and own a 50% undivided interest in, the 
transformer and related power conditioning equipment housed in the 
substation. 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 energy project. Z 
constructs an offshore wind farm (Offshore Wind Energy Project) 
comprised of 150 turbines (energy properties) for which Z makes a valid 
election under section 48(a)(5) 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

[[Page 100651]]

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 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 Energy Project 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 Energy Project, up to and including the 
transformer and switchgear housed in the onshore substation, are either 
functionally interdependent components or integral parts of the energy 
properties that comprise the Offshore Wind Energy Project. Therefore, 
when Z places the Offshore Wind Energy Project in service, the cost of 
the components up to and including the transformer and switchgear 
housed in the onshore substation are included in the aggregate basis of 
the energy properties that comprise the Offshore Wind Energy Project 
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. The 
power conditioning and transfer equipment are integral parts of the 
Energy Storage, and are therefore considered energy property. 
Therefore, X will include a properly allocated share of the shared 
power conditioning and transfer equipment costs to determine the 
section 48 credit for the Energy Storage. If the Wind Facility 
otherwise satisfies the requirements of the section 45 credit, X may 
claim the section 45 credit with respect to 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 December 12, 2024.

0
Par. 3. Sections 1.48-13 and 1.48-14 are 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 credit 
determined under section 48(a) of the Internal Revenue Code (Code), 
after the application of section 48(a)(1) through (8), and (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), Sec.  1.45-7(a)(2) and (3) and (b) through (d), 
and paragraph (c) of this section, the apprenticeship requirements of 
section 45(b)(8) 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(a)(2) and (3) and (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) and this paragraph (c), for purposes of determining the 
increased credit amount under section 48(a)(9)(B)(iii), the taxpayer is 
deemed to satisfy the prevailing wage requirements of section 
48(a)(10)(A)(ii) at the time such project is placed in service.
    (2) Transition waiver of penalty for prevailing wage requirements. 
For purposes of the transition waiver described in Sec.  1.45-
7(c)(6)(iii), the penalty payment required by Sec.  1.45-7(c)(1)(ii) to 
cure a failure to satisfy the Prevailing Wage Requirements in paragraph 
(b)(3) of this section is waived with respect to a laborer or mechanic 
who performed work in the construction, alteration, or repair of an 
energy project on or after January 29, 2023, and prior to December 12, 
2024, if the taxpayer relied upon Notice 2022-61, 2022-52 I.R.B. 560, 
or the Proposed Regulations (REG-132569-17) (88 FR 82188), corrected in 
89 FR 13293 (Feb. 22, 2024), to determine when the activities of any 
laborer or mechanic became subject to the prevailing wage requirements, 
and the taxpayer makes the correction payments required by Sec.  1.45-
7(c)(1)(i) with respect to such laborer and mechanics within 180 days 
of December 12, 2024.
    (3) Exception. For purposes of satisfying the prevailing wage 
requirements of paragraph (b)(3) of this section, Sec.  1.45-7(a)(1) 
does not apply.
    (4) Recapture--(i) In general. In the case of an energy project 
that receives the increased credit amount under paragraph (a) of this 
section by reason of satisfying the requirements of paragraph (b)(3) of 
this section, the increased credit amount 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 with respect to the alteration or repair of any project 
during the five-year recapture period described in paragraph (c)(6) of 
this section remains 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 described in Sec.  1.45-7(c) does

[[Page 100652]]

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), Sec.  1.45-7(b) through (d), and paragraph (c)(1) 
of this section are satisfied for the recapture year(s) occurring 
during each taxable year. If no alteration or repair work occurs during 
the five-year recapture period, the taxpayer is deemed to satisfy the 
Prevailing Wage Requirements described in paragraph (b)(3) of this 
section with respect to such 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 of the Code 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). If the IRS determines 
that a taxpayer that claimed the increased credit amount under section 
48(a)(9)(B)(iii) 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.  1.45-7(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 retain the amount 
of the section 48(a) credit (base credit) determined under section 
48(a) of this section provided all requirements were met in the year of 
determination.
    (5) Recapture amount--(i) In general. If a recapture event has 
occurred as described in paragraph (c)(3)(ii) of this section, 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 allowed to the taxpayer 
pursuant to paragraphs (a) and (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; or
    (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.
    (6) 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.
    (7) 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 (a) of this section occurs in the year of the 
recapture event.
    (8) 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 (a) of this section 
or transferred a specified credit portion under section 6418 that 
includes an increased credit amount under paragraph (a) 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.
    (9) 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) and this paragraph 
(c) in accordance with the provisions of Sec.  1.6418-5(f)(3).
    (d) Energy project defined--(1) In general. For purposes of the 
increased credit amount provided by section 48(a)(9) and paragraphs (b) 
and (c) of this section, 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), 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 
they are owned by a taxpayer (subject to the related taxpayer rule 
provided in paragraph (d)(2) of this section) and any four 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 is financed 
pursuant to the same loan agreement.
    (2) Time of determination--(i) Energy project. A taxpayer may make 
the determination that multiple energy properties are an energy project 
either--
    (A) At any point during the construction of the multiple energy 
properties, or
    (B) During the taxable year in which the last such energy property 
is placed in service.
    (ii) Placed in Service. An energy project (as defined in Sec.  
1.48-13(d)) is considered placed in service on the date the last of the 
energy properties within the energy project is placed in service.
    (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 multiple 
energy properties are treated as an energy

[[Page 100653]]

project with respect to which a section 48 credit may be determined.
    (4) Separate reporting for energy properties within an energy 
project--(i) In general. While multiple energy properties may be 
treated as a single energy project for specified purposes, this 
information must be separately reported for each energy property within 
an energy project on Form 3468, Investment Credit, or any successor 
form(s), and such form must be filed 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.
    (e) Nameplate capacity for purposes of the One Megawatt Exception--
(1) In general. For purposes of paragraph (b)(1) of this section, 
whether an energy project has a maximum net output of less than 1 
megawatt (MW) of electrical (as measured in alternating current) or 
thermal energy is determined based on the nameplate capacity. If an 
energy project is comprised of more than one energy property, the 
energy project's maximum net output is calculated as the sum of the 
nameplate capacity of each energy property. If 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)(2) through (7) of this 
section provide rules for measuring output for different types of 
energy properties to determine whether the One Megawatt Exception (as 
provided in paragraph (b)(1) of this section) applies. Because 
electrochromic glass 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.
    (2) Nameplate capacity for energy properties that generate in 
direct current for purposes of the One Megawatt Exception. Only for 
energy properties that generate electricity in direct current, the 
taxpayer may choose to determine the maximum net output (in alternating 
current) of each energy property that is part of the energy project by 
using the lesser of:
    (i) The sum of the nameplate generating capacities within the unit 
of energy property in direct current, which is deemed the nameplate 
generating capacity of the unit of energy property in alternating 
current; or
    (ii) The nameplate capacity of the first component of property that 
inverts the direct current electricity into alternating current.
    (3) Electrical generating energy property. In the case of an 
electrical generating energy property, the One Megawatt Exception is 
determined by using maximum electrical generating output in megawatts 
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.
    (4) Electrical energy storage property. In the case of electrical 
energy storage property (as defined in Sec.  1.48-9(e)(10)(ii)), the 
One Megawatt Exception is determined by using the storage device's 
maximum net output. If the output of electrical energy storage property 
is in direct current, apply the rules of paragraph (2) of this section.
    (5) Thermal energy storage property and other property generating 
or distributing 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 or distributes thermal energy for productive 
use (for example, geothermal energy property, GHP property, solar 
process heat property), the One Megawatt Exception is determined by 
using the property's maximum net output. The maximum net output in MW 
is calculated by using a conversion whereby one MW is equal to 3.4 
million British Thermal Units per hour (mmBtu/hour) for heating and 284 
tons for cooling (Btu per hour/3,412,140 = MW). The maximum net output 
is the maximum instantaneous rate of discharge and is determined based 
on the nameplate capacity of the equipment that generates or 
distributes thermal energy for productive use (including distributing 
the thermal energy from the storage medium). For purposes of 
determining the maximum net output of thermal energy storage property, 
if the nameplate capacity of the thermal energy storage is not 
available, the nameplate capacity of the equipment delivering thermal 
energy to the thermal energy storage may be used. For thermal energy 
storage property and other energy property distributing thermal energy 
to a building or buildings, the nameplate capacity 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. The maximum thermal output 
an entire project is capable of delivering at any given moment does not 
take into account the capacity of redundant equipment if such equipment 
is not operated when the system is at maximum output during normal 
operation. For thermal energy storage property and other energy 
property that generates or distributes thermal energy for a productive 
use, the maximum thermal output that the entire system is capable of 
delivering is considered to be the greater of the rate of cooling or 
the rate of heating of the aggregate of the nameplate capacity of the 
equipment distributing energy for productive use, including 
distributing the thermal energy from the thermal energy storage medium 
to the building or buildings. If such nameplate capacity is 
unavailable, in the case of thermal energy storage property only, the 
maximum thermal output may instead be considered to be the greater of 
the rate of cooling or the rate of heating of the aggregate of the 
nameplate capacity of all the equipment delivering energy to the 
thermal energy storage property in the project.
    (6) Hydrogen energy storage property and specified clean hydrogen 
production facilities. In the case of 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)), the 
One Megawatt Exception is determined by using the property's or 
facility's maximum net output. The maximum net output in MW is 
calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/
hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per 
hour of hydrogen.
    (7) Qualified biogas property. In the case of qualified biogas 
property, the One Megawatt Exception is determined by the property's 
maximum net output. The maximum net output in MW is calculated by using 
a conversion whereby one MW is equal to 3.4 mmBtu/hour. 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 Environmental Protection Agency 
(EPA) Greenhouse Gas Reporting Rule (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. This section applies to energy projects 
placed in service in taxable years ending on or after December 12, 
2024, and the construction of which begins after December 12, 2024.

[[Page 100654]]

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), (5)(D)(iv), and (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 the cost 
of new components of the unit of energy property is taken into account 
for purposes of computing the 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)), then 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 credit. 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 percent of the retrofitted solar energy property's 
total value of $1.5 million (that is, 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 7 percent of the value of total value of the 
retrofitted solar energy property ($100,000/$1.5 million), 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.
    (iii) Example 3. Upgrades to a qualified hydropower production 
facility that satisfies the 80/20 Rule: Y owns a qualified hydropower 
production facility (hydropower facility) as defined under section 45 
and no taxpayer, including Y, has ever claimed a section 45 credit for 
the hydropower facility. The hydropower facility consists of a unit of 
energy property including water intake, water isolation mechanisms, 
turbine, pump, motor, and generator. The associated impoundment (dam) 
and power conditioning equipment are integral parts of the unit of 
energy property. Y makes upgrades to the unit of energy property by 
replacing the turbine, pump, motor, and generator with new components 
at a cost of $1.5 million. Y does not make any upgrades to the property 
that is an integral part of the unit of energy property. The remaining 
original components of the unit of energy property have a fair market 
value of $100,000, which is not more than 20 percent of the retrofitted 
hydropower facility's total value of $1.6 million (that is, the cost of 
the new components ($1.5 million) + the value of the remaining original 
components ($100,000)). Thus, the retrofitted hydropower facility will 
be considered newly placed in service for purposes of section 48, and Y 
will be able to make a valid section 48(a)(5) election and claim a 
section 48 credit based on the cost of the new components ($1.5 
million).
    (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 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)(2) 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)(2) of this 
section)).
    (2) Qualification as energy property--(i) In general. Dual use 
property qualifies 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 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. To convert the energy inputs for 
CHP into Btus, the lower heating value of the fuel is used for CHP 
property and the higher heating value of the hydrogen is used for fuel 
cells. 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

[[Page 100655]]

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 
(initial annual measuring period) 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 (subsequent annual 
measuring period).
    (iv) Recapture. If, for any subsequent annual measuring period 
(within the recapture period specified in section 50(a) of the Code, 
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).
    (v) Example. On October 1, 2021, X, a calendar year taxpayer, 
places in service a unit of energy property that includes a system that 
heats its office building by circulating hot water heated by energy 
derived from a geothermal deposit through the building. The water 
heated by energy derived from a geothermal deposit is not hot enough to 
provide sufficient heat for the building. The circulation system 
includes an electric boiler in which the water is further heated before 
being circulated in the heating system. Energy from the electric boiler 
is not from a qualifying source and therefore the system is dual use 
property. On a Btu basis, sixty percent of the total energy input to 
the circulating system during the initial annual measuring period (the 
365-day period beginning on October 1, 2021) is energy derived from a 
geothermal deposit. Accordingly, the circulation system, including the 
pumps and pipes that circulate the hot water through the building, are 
part of the unit of energy property and eligible for a section 48 
credit. Sixty percent of the basis of the circulation system is taken 
into account in determining the section 48 credit for X's unit of 
energy property. During the 365-day period beginning on October 1, 
2023, forty-five percent of the total energy input to the circulating 
system (on a Btu basis) is energy derived from a geothermal deposit. 
X's section 48 credit is therefore subject to recapture under section 
50.
    (c) Energy property eligible for multiple Federal income tax 
credits--(1) In general. 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. Except as provided in paragraph (g) of this 
section, a taxpayer may not claim both a section 48 credit and another 
Federal income tax credit with respect to the same 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 section 48, 
if a component of energy property is also used for a purpose other than 
the intended function of the energy property, only the incremental cost 
of a component of energy property is included in the basis of the 
energy property. The term incremental cost means the excess of the 
total cost of a component over the amount that would have been expended 
for the component if that component were used for a non-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. Therefore, along with installing the 
bifacial panels, A is reroofing their building with a reflective roof 
that has a highly reflective surface. Because the reflective roof 
enables the panels' generation of significant amounts of electricity 
from reflected sunlight, when installed in connection with the solar 
energy property, it constitutes part of that energy property to the 
extent that the cost of the reflective roof exceeds the cost of 
reroofing A's building with a non-reflective roof. The cost of 
reroofing with the reflective roof is $15,000 whereas the cost of a 
reroofing with a standard roof for the building would be $10,000. The 
incremental cost of the reflective roof is $5,000, and that amount is 
included in A's basis in the solar energy property for purposes of the 
section 48 credit.
    (e) Special rules concerning ownership--(1) Basis. For purposes of 
section 48, a taxpayer that owns an energy property is eligible for the 
section 48 credit only to the extent of the taxpayer's basis in the 
energy property. In the case of multiple taxpayers holding direct 
ownership in an energy property, each taxpayer determines its 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 (though neither taxpayer would be eligible 
for a section 48 credit with respect to the first taxpayer's 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 GHP property 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. Separate ownership of GHP property. A GHP property 
is comprised of coils in the ground and several individual heat pumps 
used in conjunction with those coils. X owns both the coils in the 
ground and one of the individual heat pumps used in conjunction with 
the coils. Y owns one or more of the individual heat pump(s) used in 
conjunction with the coils. No section 48 credit may be determined with 
respect to Y because Y owns merely a component of energy property 
rather than a unit of energy property as defined in Sec.  1.48-9(f)(2). 
However, while X does not own all of the individual heat pumps used in 
conjunction with the coils, X does own both the coils in the ground and 
one heat pump used in conjunction with the coils and thus owns an 
entire unit of energy property. Accordingly, X may compute a section 48 
credit with respect to this unit of energy property.
    (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 property that are co-located. Both X's wind energy 
property and Y's solar energy property connect to a substation

[[Page 100656]]

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 percent 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 their respective bases in 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. X 
and Y are not related persons within the meaning of paragraph (e)(3)(i) 
of this section. 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 cannot include any basis relating to the transformer.
    (v) Example 5. X owns a wind energy property that is a unit of 
energy property and a solar energy property that is a unit of energy 
property. Both the wind energy property and the solar energy property 
are connected to a transformer where the electricity is stepped up to 
electrical grid voltage before being transmitted to the electrical grid 
through an intertie. The transformer is an integral part of both the 
wind energy property and the solar energy property (within the meaning 
of Sec.  1.48-9(f)(3)(i)) and is owned by Y. X and Y are related 
persons within the meaning of paragraph (e)(3)(i) of this section. X 
and Y are treated as one taxpayer under paragraph (e)(3)(ii) of this 
section. X may include the basis of the transformer in computing its 
section 48 credit with respect to the wind energy and the solar energy 
property (but may not include more than 100% of that basis in the 
aggregate).
    (f) Election to treat qualified facilities as energy property--(1) 
In general. If a taxpayer makes an election under section 48(a)(5)(C) 
(pursuant to paragraph (f)(5) of this section) to treat qualified 
property that is part of a qualified investment credit facility 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 qualified investment credit facility and the 
requirements of section 45 are not imposed on a qualified investment 
credit facility.
    (2) 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);
    (ii) That meets the placed in service and beginning of construction 
requirements (if any) provided in section 48;
    (iii) With respect to which no credit has been allowed under 
section 45; and
    (iv) For which the taxpayer makes an irrevocable election under 
section 48(a)(5) and paragraph (f)(5) of this section.
    (3) Qualified property. The term qualified property means property 
that meets each of the requirements of paragraphs (f)(3)(i) through 
(iv) of this section. Regardless of where qualified property is 
located, any qualified property that meets the requirements of this 
paragraph (f)(3) is part of a qualified investment credit facility with 
respect to which a section 48 credit may be determined.
    (i) The property is tangible personal property or other tangible 
property (not including a building or its structural components), but 
only if such other tangible property is an integral part of the 
qualified investment credit facility.
    (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.
    (iv) The property is not intangible property.
    (4) Definitions related to requirements for qualified property.
    (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 section 48 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 not owned by the taxpayer, regardless of whether that 
property is otherwise an integral part of the taxpayer's qualified 
investment credit facility.
    (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 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,

[[Page 100657]]

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 
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 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 a qualified 
investment credit facility 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 
structures described in paragraphs (f)(4)(iii)(F) and (G) of this 
section are not treated as buildings for this purpose.
    (F) Structures essentially items of machinery or equipment. A 
structure that is essentially an item of machinery or equipment is not 
treated as a building for purposes of paragraph (f)(4)(iii)(E) of this 
section.
    (G) Structures that house certain property. A structure that houses 
property that is integral to the activity of a qualified investment 
credit facility is not treated as a building for purposes of paragraph 
(f)(4)(iii)(E) of this section 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 if 
the qualified investment credit facility it initially houses is 
replaced.
    (5) Time and manner of making election--(i) In general. To make an 
election under section 48(a)(5) and paragraph (f) 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 form(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) of this section. A separate election must be made for each 
qualified facility that meets the requirements provided in paragraph 
(f)(5)(v) 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) of this section is made by the partnership 
or S corporation and is binding on all ultimate credit claimants (as 
defined in Sec.  1.50-1(b)(3)(ii)) of a section 48 credit. The 
partnership or S corporation must file a Form 3468, Investment Credit, 
or any successor form(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 
in which the ultimate credit claimant's distributive share or pro rata 
share of the section 48 credit is taken into account under section 
706(a) of the Code or section 1366(a) of the Code, respectively. 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 section 48 credit.
    (6) Election irrevocable. The election under section 48(a)(5) and 
paragraph (f) of this section to treat a qualified facility as an 
energy property is irrevocable.
    (g) Coordination rule for sections 42 and 48 credits. As provided 
under section 50(c)(3)(C), in 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 to determine a section 42 credit. See 
paragraph (e) of this section for special rules regarding ownership of 
energy property.
    (h) Qualified interconnection costs included in certain lower-
output energy properties--(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 (h)(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 five megawatts (MW) (as 
measured in alternating current) (as described in paragraph (h)(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 (h)(6) of this section. 
If the costs borne by the taxpayer are reduced by utility or non-
utility payments, Federal income tax principles may require the 
taxpayer to reduce the amounts of costs treated as paid or incurred for 
qualified interconnection property to determine a section 48 credit.
    (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 (h)(4) of this section), commences with a utility (as defined 
in paragraph (h)(5) of this section). For purposes of

[[Page 100658]]

determining the original use of interconnection property in the context 
of a sale-leaseback or lease transaction, the principles of section 
50(d)(4) must be taken into account, as applicable, with such original 
use determined on the date of the sale-leaseback or lease. 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 project satisfies the prevailing wage and 
apprenticeship requirements in section 48(a)(10)(A) and (11), the 
requirements for the domestic content bonus credit amount referenced in 
section 48(a)(12), or the increase in credit rate for energy 
communities provided in section 48(a)(14).
    (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). The maximum net output of an 
energy property is measured only by nameplate generating capacity (in 
alternating current) of the unit of energy property, which does not 
include the nameplate capacity of any integral property, at the time 
the energy property is placed in service. The nameplate generating 
capacity of the unit of energy property is measured independently from 
any other energy properties that share the same integral property.
    (ii) Nameplate capacity for purposes of the Five-Megawatt 
Limitation. For purposes of paragraph (h)(1) of this section, the 
determination of whether an energy property has a maximum net output of 
not greater than five MW (as measured in alternating current) is based 
on the nameplate capacity for purposes of paragraph (h)(1) of this 
section. If 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 (h)(3)(iv) and (v) of this section provide rules for 
applying the Five-Megawatt Limitation (as provided in paragraph (h)(1) 
of this section) to electrical generating energy property and 
electrical energy storage property, respectively.
    (iii) Nameplate capacity for energy properties that generate in 
direct current for purposes of the Five-Megawatt Limitation. For energy 
properties that generate electricity in direct current, the taxpayer 
may choose to determine whether an energy property has a maximum net 
output of not greater than five MW (in alternating current) by using 
the lesser of:
    (A) The sum of the nameplate generating capacities within the unit 
of energy property in direct current, which is deemed the nameplate 
generating capacity of the unit of energy property in alternating 
current; or
    (B) The nameplate capacity of the first component of property that 
inverts the direct current electricity into alternating current.
    (iv) Electrical generating energy property. In the case of an 
electrical generating energy property, the Five-Megawatt Limitation is 
determined by using the maximum electrical generating output in 
megawatts 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. If 
applicable, taxpayers should use the International Standard 
Organization (ISO) conditions to measure the maximum electrical 
generating output of a unit of energy property.
    (v) Electrical energy storage property. In the case of electrical 
energy storage property (as defined in Sec.  1.48-9(e)(10)(ii)), the 
Five-Megawatt Limitation is determined by using the energy storage 
property's maximum net output as 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. In the case of the election 
provided under section 50(d)(5) (relating to certain leased property), 
the term includes an agreement regarding energy property leased by such 
taxpayer.
    (5) Utility. For purposes of section 48(a)(8) and this paragraph 
(h), 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--(i) In 
general. In the case of costs paid or incurred for qualified 
interconnection property as defined in paragraph (h)(2) of this 
section, amounts otherwise chargeable to capital account with respect 
to such costs must be reduced under rules similar to the rules of 
section 50(c) (including section 50(c)(3)).
    (7) Examples. This subparagraph provides examples illustrating the 
application of the general rules provided in paragraph (h)(1) of this 
section and Five-Megawatt Limitation provided in this paragraph (h).
    (i) Example 1. Application of Five-Megawatt Limitation to an 
interconnection agreement for energy properties owned by taxpayer. X 
places in service two solar energy properties (Solar Properties) each 
with a maximum net output of 4 MW (as measured in alternating current 
by using the nameplate capacity of an inverter, which is the first 
component of property attached to each of the Solar Properties that 
inverts the direct current electricity into alternating current). Each 
inverter is integral property to each Solar Property but is not shared 
by the Solar Properties. The Solar Properties share a step-up 
transformer, which is integral property to both Solar Properties. As 
part of the development of the Solar Properties, payment of qualified 
interconnection costs is required by the utility to modify and upgrade 
the utility's transmission system at or beyond the point of 
interconnection to accommodate such interconnection. X has an 
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 to X of the qualified 
interconnection property. X may include the costs X paid or incurred 
for qualified interconnection property subject to the terms of the 
interconnection agreement, to calculate X's section 48 credits for each 
of the Solar Properties because each has a maximum net output of not 
greater than five MW (alternating current). X cannot include more than 
the total costs X paid or incurred for the qualified interconnection 
property in calculating the aggregate section 48 credit amount for both 
Solar Properties.
    (ii) Example 2. 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 3 MW (as measured in alternating current 
by using the nameplate capacity of the first component of property 
attached to the Solar Property that inverts the direct current 
electricity into alternating current). Y places in service a wind 
facility (Wind Facility), for which Y has made a valid election under 
section 48(a)(5), with a maximum net output of

[[Page 100659]]

4 MW (as measured in alternating current). The Solar Property and the 
Wind Facility share a step-up transformer, which is integral to both 
facilities. As part of the development of the Solar Property and the 
Wind Facility, payment of qualified interconnection costs is required 
by the utility to modify and upgrade the transmission system at or 
beyond the point of interconnection to accommodate that 
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 to X 
and Y. 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, to calculate their respective 
section 48 credits for the Solar Property and the Wind Facility because 
each has a maximum net output of not greater than five MW (in 
alternating current).
    (iii) Example 3. Application of Five-Megawatt Limitation to an 
interconnection agreement for a single energy property. X develops 
three solar properties (Solar Properties) located in close proximity. 
The Solar Properties are not considered an energy project pursuant to 
the definition in Sec.  1.48-13(d). Each of the Solar Properties is a 
unit of energy property that has a maximum net output of 4 MW. The 
nameplate capacity of each Solar Property is determined by using the 
sum of the nameplate generating capacities within the unit of each 
Solar Property in direct current, which is deemed the nameplate 
generating capacity of each Solar Property in alternating current. 
Electricity from the three Solar Properties feeds into a single gen-tie 
line and a common point of interconnection with the transmission 
system. X is party to a separate interconnection agreement with the 
utility for each of the Solar Properties and each interconnection 
agreement allows for a maximum output of 10 MW (as measured in 
alternating current). X may include the costs it paid or incurred for 
qualified interconnection property for each of the Solar Properties to 
calculate its section 48 credit for each of the Solar Properties, 
subject to the terms of each interconnection agreement, because each of 
the Solar Properties has a maximum net output of not greater than five 
MW (in alternating current). X cannot include more than the total costs 
X paid or incurred for the qualified interconnection property in 
calculating the aggregate section 48 credit amount for both Solar 
Properties.
    (iv) Example 4. Application of Five-Megawatt Limitation to a single 
interconnection agreement for multiple energy properties. The facts are 
the same as in paragraph (h)(7)(iii) of this section (Example 3), 
except that X is party to one interconnection agreement with the 
utility with respect to the three solar energy properties (Solar 
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 Properties, X may include the costs it paid or 
incurred for qualified interconnection property for each Solar Property 
to calculate its section 48 credit for each Solar Property, subject to 
the terms of the interconnection agreement, because each Solar Property 
has a maximum net output of not greater than five MW (in alternating 
current).
    (v) Example 5. Application of Five-Megawatt Limitation to an Energy 
Project. The facts are the same as in paragraph (h)(7)(iv) of this 
section (Example 4), except that the three solar energy properties 
(Solar 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 
Properties, X may include the costs it paid or incurred for qualified 
interconnection property to calculate its section 48 credit for each of 
the three Solar Properties, subject to the terms of the interconnection 
agreement, because each of the Solar Properties has a maximum net 
output of not greater than five MW (in alternating current).
    (vi) Example 6. Utility payment reducing costs borne by taxpayer. 
In year 1, X places in service a solar energy property (Solar Property) 
with a maximum net output of 3 MW (as measured in alternating current 
by using the nameplate capacity of the inverter attached to the solar 
energy property, which is the first component of property attached to 
each of the Solar Properties that inverts the direct current 
electricity into alternating current). X is party to an interconnection 
agreement with a utility for the purpose of connecting the Solar 
Property to the transmission or distribution system of the utility. 
Pursuant to the interconnection agreement, X pays $1 million to the 
utility, and the utility places in service qualified interconnection 
property. In year 1, X had no reasonable expectation of any payment 
from the utility or other parties with respect to the qualified 
interconnection property. The $1 million is properly chargeable to the 
capital account of X, subject to paragraph (h)(6) of this section. X 
properly includes the $1 million paid to the utility in determining its 
credit under section 48 for Year 1. In Year 4, taxpayer Y enters into 
an agreement with the utility under which Y pays the utility $100,000 
for the use of qualified interconnection property placed in service by 
the utility pursuant to the interconnection agreement between X and the 
utility. The utility pays $100,000 to X. Under these circumstances, the 
payment from the utility in year 4 would not require X to reduce the 
amount treated as paid or incurred for the qualified interconnection 
property for the purpose of determining the section 48 credit in year 
1.
    (vii) Example 7. Non-utility payment reducing costs borne by 
taxpayer. The facts in year 1 are the same as in paragraph (h)(7)(vi) 
of this section (Example 6). In Year 4, taxpayer Y enters into an 
agreement with the utility under which Y pays X $100,000 for the use of 
qualified interconnection property placed in service by the utility 
pursuant to the interconnection agreement between X and the utility. Y 
pays $100,000 to X. In year 1, X had no reasonable expectation of any 
payment from Y for subsequent agreements with Y or other parties with 
respect to the qualified interconnection property. Under these 
circumstances, the payment from Y in year 4 would not require X to 
reduce the amount treated as paid or incurred for the qualified 
interconnection property for the purpose of determining the section 48 
credit in year 1.
    (i) Cross references. (1) For rules regarding the coordination of 
the section 42 credit and section 48 credit, see section 50(c)(3).
    (2) For rules regarding the denial of double benefit for qualified 
biogas property, see section 45(e).
    (3) For applicable recapture rules, see section 50(a).
    (4) For rules regarding the credit eligibility of property used 
outside the United States, see section 50(b)(1).
    (5) For rules regarding the credit eligibility of property used by 
certain tax-exempt organizations, see section 50(b)(3). 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 determine the 
section 48 credit taken by certain regulated companies, including rules 
regarding the election not to apply the normalization rules to energy 
storage

[[Page 100660]]

technology (as defined in section 48(c)(6)), see section 50(d)(2).
    (j) Applicability date. This section applies with respect to 
property placed in service after December 31, 2022, and during a 
taxable year beginning after December 12, 2024.

0
Par. 4. Section 1.6418-5 is amended by adding paragraph (f) and 
revising paragraph (j) to read as follows:


Sec.  1.6418-5  Special rules.

* * * * *
    (f) Notification and impact of recapture under section 
48(a)(10)(C)--(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)(ix), if, during any taxable year, 
there is recapture under section 48(a)(10)(C) of the Code and Sec.  
1.48-13(c)(4) 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)(6)), such eligible taxpayer and the transferee 
taxpayer must follow the notification process in paragraph (f)(2) of 
this section with the Federal income tax consequences of 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)(5).
    (3) Impact of recapture--(i) Section 48(a)(10)(C) recapture event. 
The transferee taxpayer is responsible for any amount of tax increase 
under section 48(a)(10)(C) and Sec.  1.48-13(c)(5) upon the occurrence 
of a recapture event under Sec.  1.48-13(c)(4), provided that if an 
eligible taxpayer retains any amount of an eligible credit determined 
with respect to an energy property directly held by the eligible 
taxpayer, the amount of the tax increase under section 48(a)(10)(C) and 
Sec.  1.48-13(c)(5) that the eligible taxpayer is responsible for is 
equal to the recapture amount multiplied by a fraction, the numerator 
of which is the total credit amount that the eligible taxpayer 
retained, and the denominator of which is the total credit amount 
determined for the energy property. The amount of the tax increase 
under section 48(a)(10)(C) that the transferee taxpayer is responsible 
for is equal to the recapture amount multiplied by a fraction, the 
numerator of which is the specified credit portion transferred to the 
transferee taxpayer, and the denominator of which is the total credit 
amount determined for the energy property.
    (ii) Impact of section 48(a)(10)(C) recapture event on basis of 
energy property held by eligible taxpayer. The eligible taxpayer must 
increase the basis of the energy property (as of the first day of the 
taxable year in which the recapture event occurs) by an amount equal to 
the recapture amount provided to the eligible taxpayer by the 
transferee taxpayer pursuant to the notification required under 
paragraph (f)(2) of this section and the recapture amount on any credit 
amounts retained by the eligible taxpayer in accordance with section 
48(a)(10)(C) and Sec.  1.48-13(c)(4).
* * * * *
    (j) Applicability dates--(1) In general. Except as provided in 
paragraph (j)(2) of this section, this section applies to taxable years 
ending on or after April 30, 2024. For taxable years ending before 
April 30, 2024, taxpayers, however, may choose to apply the rules of 
this section and Sec. Sec.  1.6418-1 through 1.6418-3 provided the 
taxpayers apply the rules in their entirety and in a consistent manner.
    (2) Paragraph (f) of this section. Paragraph (f) of this section 
applies to taxable years ending on or after December 12, 2024.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: November 25, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-28190 Filed 12-4-24; 4:15 pm]
BILLING CODE 4830-01-P`