TO: People's Solar Energy Fund
FROM: Jeremy Kalin
DATE: February 14, 2023
RE: IRS Notice 2023-17 on Solar Low- and Moderate-Income Environmental Justice Capacity Limitation for LMI Communities Bonus to Investment Tax Credit
As the Inflation Reduction Act required, yesterday the U.S. Treasury and IRS published IRS Notice 2023-17, 180 days after enactment of the IRA. In large part, the Notice met the bare minimum requirements of the 180-day deadline of the Act to establish the Low-Income Communities Bonus Credit Program.
This memo lays out what the Notice does detail, and provides some further guidance on developing LMI-Bonus eligible projects.
The IRA allows certain solar projects to receive a federal Investment Tax Credit equal to 30% of the project cost, for projects smaller than 1,000 kilowatts or that meet prevailing wage or apprenticeship requirements. Solar projects can also receive some bonuses to the 30% base ITC.
Section 48(e) of the Internal Revenue Code established an “environmental justice communities” bonus to the ITC, of either 10% or 20%, as indicated below, described as the “LMI Bonus” credit.
Congress limited the total capacity of all eligible projects receiving LMI Bonus credits to 1.8 Gigawatts each year for 2023 and 2024. The similar program structure and requirements are likely to apply to environmental justice communities bonuses under the new Section 48E “technology-neutral” low-carbon tax credit for which solar projects are nearly certain to be eligible.
Given the timing described below, it appears that the earliest date in which projects will secure any LMI Bonus Credit is sometime in Q3 of 2023. Projects wishing to take advantage of the LMI Bonus Credit must not be placed in service before that date.
The U.S. Department of Energy will administer the LMI-Bonus credit program, including application review and recommendation to the IRS for selection of applicants within the Capacity Limitation. DOE will also conduct the lottery or other process when applications exceed the available Capacity Limitation, as detailed below.
The IRS expects that DOE will start accepting applications in Q3 2023.
Applications will be accepted in a “phased approach” during 60-day application windows. I believe this means that DOE will review applications every 2 months, in bulk. If the total qualified and complete applications of each 60-day block is less than the total allocations within each Category, described below, then all qualified applicants will receive allocations. If the total qualified and complete application capacity exceeds the Category total allocations within each 60-day application window, DOE will conduct a lottery or other similar process.
DOE will recommend to the IRS the selection of applications, and the IRS will accept or reject the applicant’s request for a LMI-Bonus credit application and notify the applicant. I believe that applications will be rejected or accepted in whole for each facility.
Treasury, the IRS and DOE will coordinate first to accept and review applications for projects in the LMI Residential Building category (Category 3) and the LMI Economic Benefit category (Category 4), for a 60-day application window. Then Treasury, the IRS and DOE will coordinate on applications for Low-Income Community projects (Category 1) and Indian Land projects (Category 2), on a similar 60-day application window.
The 1.8 Gigawatt total capacity limitation for Low-Income Bonus credits under the IRA are reserved in the following categories:
Category 1 : Located in a Low Income Community census tract 700 MW
Projects located within 45D census tracts as defined by the New Market Tax Credit statute
10% LMI Bonus Credit
Category 2: Located on Indian Land 200 MW
10% LMI Bonus Credit
Category 3: Qualified Low-Income Residential Building Project 700 MW
Projects installed on a federally-supported affordable housing rental building with the financial benefits of the solar project allocated equitably among the residential occupants of the building.
20% LMI Bonus Credit
Category 4: Qualified Low-Income Economic Beneficiaries 200 MW
Projects in which at least 50% of financial benefits of the electricity produced are provided to households with income less than 200% of poverty line applicable to a family of the size involved or less than 80% Area Median Income.
20% LMI Bonus Credit
Treasury and the IRS aniticpate issuing additional criteria on allocating the 2023 Capacity Limitation among each applicants.
Project applications can only be submitted for one category allocation. Projects eligible for more than one category can apply for the higher LMI Bonus Credit category.
If a Category’s allocation is fully awarded and subscribed, in a subsequent 60-day application window, Treasury and the IRS may reallocate capacity limited between the categories up to the maximum 1.8 Gigawatt total allocation for the LMI Bonus Credit program.
ALLOCATION RECEIPT IS NOT CERTAIN COMPLIANCE
Projects receiving a capacity allocation for the LMI Bonus Credit program still must otherwise demonstrate to the IRS that the project and claiming taxpayer has fully complied with the requirements of the LMI Bons Credit statute under Section 48(e) of the Code.
WHAT DON’T WE KNOW YET?
The following is a brief, incomplete list of some of the remaining items reuiring further guidance and clarification that are likely of interest:
- Specific DOE application process.
- Timing of the initial DOE application for Categories 3 and 4.
- Timing of the initial DOE application for Categories 1 and 2.
- DOE lottery process when total applications exceed the specific Category allocation.
- More specific eligibility for each Category.
- More specific creiteria for allocating Capacity Limitations within each Category.
- Parameters of the qualifying “financial benefit” for Category 3 projects.
- Parameters of the qualifying “financial benefit” for Category 4 projects.