IRA: Energy Communities and Brownfields Tax Guidance: What Companies Need To Know

Initial guidance for the bonus credit amount for renewable energy projects located in “energy communities” answers numerous questions about how to prove a project qualifies for extra tax credits. The guidance—which is in Notice 2023-29 (the “Notice”)—was released on April 4, 2023. It is expected to be only the first phase of guidance on the subject, and notes that the Treasury Department and Internal Revenue Service (“IRS”) also anticipate issuing proposed regulations that will apply to taxable years ending after April 4, 2023. Taxpayers are permitted to rely on the Notice until those proposed regulations are issued. Highlights of the Notice include:

• Clarification of how to determine relevant statistical areas for purposes of the “Statistical Area Category” described below, and a list of qualifying statistical areas with sufficient direct fossil fuel-related employment to potentially qualify for the bonus credits;
• Confirmation that general unemployment rates are tested based on prior calendar year numbers, which are expected to be updated in May of each year;
• A list of qualifying census tracts that qualify for bonus credits under the “Coal Closure Category,” and clarification of when a coal mine is considered “closed” and a coal-fired electric generating unit is considered “retired;” and
• Rules for determining when a project’s energy community status is tested and how to determine qualification if a project staddles qualifying and non-qualifying statistical areas or census tracts.

Concurrent with the release of the Notice, the U.S. Energy Information Administration published an interactive mapping tool that will be updated in May of each year as new employment data becomes available. The map is intended to assist taxpayers in determining whether a project qualifies under the “Statistical Area Category”, or “Coal Closure Category” described below (although the map does not show Brownfield sites described below).^[1]

Background on the Energy Community Bonus Credit Amount

• The Inflation Reduction Act of 2022 (the “IRA”) introduced a two-tier “base” rate and “increased” rate structure for federal income tax credits for renewable energy projects. The “increased” rate is worth five times the value of the base rate and is available if a project meets, or is grandfathered from, prevailing wage and apprenticeship requirements.^[2] Additionally, projects qualifying for renewable energy tax credits under section 45 (production tax credit), 45Y (clean energy production tax credit), 48 (investment tax credit), or 48E (clean electricity investment tax credit) also qualify for a “bonus credit amount” worth up to an additional 10% if located in an “energy community.”^[3]
• There are three categories of energy communities: (1) brownfield sites (the “Brownfield Category”), (2) metropolitan statistical areas (“MSAs”) or non-MSAs with 0.17% or greater direct employment or 25% or greater local tax revenues related to certain fossil fuel-related activities (at any time after 2009) and an unemployment rate above the national average rate for the previous year (the “Statistical Area Category”), and (3) census tracts or directly adjoining census tracts in which a coal mine has closed after 1999 or a coal-fired electric generating unit was retired after 2009 (“Coal Closure Category”).

Observation: As enacted, the IRA left open significant questions for developers about how to prove that a particular project is in an energy community. This has been especially true under the Statistical Area Category, where there are multiple competing data sets with similar information. This uncertainty has significantly slowed tax equity and debt financings related to adder eligibility in the first quarter of 2023.

Brownfield Category Guidance

• Brownfield Category Determinations – To qualify as a brownfield site, the expansion, redevelopment, or reuse of the site must be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant or be mine-scarred land, and the site must not be an excluded property as defined in 42 U.S.C. § 9601(39)(B).

  Observation:  Because the IRS declined in its guidance to limit the scope of the exclusions found in 42 U.S.C. § 9601(39)(B) (which is a portion of the definition for “brownfields” found in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”)), it appears that significant categories of sites with confirmed contamination will be excluded from approval as “brownfields”, including (among others):

  • Sites listed on the National Priorities List (and those proposed for listing);
  • Sites subject to a planned or ongoing removal actions or corrective actions under CERCLA or the Solid Waste Disposal Act (the “SWDA”), which includes the Resource Conservation and Recovery Act (“RCRA”);
  • Sites subject to administrative or judicial orders or consent decrees issued under CERCLA, SWDA and other statutes;
  • Sites subject to cleanup, corrective action or other orders under CERCLA, SWDA and other federal statutes;
  • Sites used for land disposal (i.e., landfills) that have submitted certain closure notifications under the SWDA;
  • Sites with petroleum impacts that have received funding under the federal Leaking Underground Storage Tank fund;
  • Sites under the jurisdiction, custody or control of a federal agency.

  As a result (unless there is further IRS guidance limiting these exclusions), many sites that are commonly thought of as brownfields will not qualify as brownfields under the energy community adder. (This seeming oddity results from the fact that the CERCLA definition was intended to provide funding for limited categories of brownfields that were not already subject to requirements under other federal regulatory schemes.)  Determining whether contaminated sites that would otherwise qualify as brownfields fall within one of the above exclusions will require a review of governmental records relating to the site. In some cases, the exclusion will be relatively clear. In others, development of facts in consultation with legal counsel may be necessary.

  Observation:  The CERCLA definition of hazardous substance, pollutant or contaminant largely excludes petroleum-based contamination and the guidance did not change this limitation. 42 U.S.C. § 9601(14) & (33).

• Brownfields Safe Harbor – The Notice also provides a “brownfields” safe harbor. A site will be considered a brownfield site if it is not in one of the excluded categories (described above) in 42 U.S.C. § 9601(39)(B) and satisfies at least one of the following three conditions:

  • Federal, state, territory, or federally recognized Indian tribal brownfield resources previously assessed the site as a brownfield site;
  • An ASTM E1903 Phase II Environmental Site Assessment (“ESA”) confirms the presence of a hazardous substance, or a pollutant or contaminant on the site; or
  • An ASTM E1527 Phase I ESA has been completed for projects with a nameplate capacity of 5MW (AC) or less.

  Observation:  The Phase II ESA safe harbor prong will require sampling of soil and groundwater conditions by an environmental technical consultant. Despite the safe harbor, there may still be interpretive questions that bear a review by environmental counsel following the receipt of Phase II results to ensure that relying on the safe harbor is reasonable under the circumstances.

  Observation:  The Phase I ESA safe harbor seems strangely incomplete (possibly a drafting oversight). It may require further clarification from the IRS before it can be safely relied upon. To explain, Phase I ESAs involve no actual soil or groundwater testing, and can and often do come back clean, finding no signs of contamination. Using a ‘clean’ Phase I ESA to support a brownfields adder seems at odds with legislative intent.

Statistical Area Category Guidance

• Statistical Area Determinations – The Notice clarifies the scope of MSAs and non-MSAs used to determine the relevant statistical areas and attaches a list of MSAs and non-MSAs to illustrate the boundaries.

• Fossil Fuel Employment – The Notice confirms the eight 2017 North American Industry Classification System (NAICS) industry codes that are to be used in determining the fossil fuel employment rate, which are the codes that the government uses to classify different types of employees. A list of MSAs and non-MSAs that have sufficient direct fossil fuel employment to qualify to the adder is attached to the Notice.

  Observation: The list of NAICS codes in the Notice is missing several categories that many had assumed would fall within the IRA’s description of the relevant fossil fuel activities including extraction, processing, transportation, or storage of coal, oil, or natural gas. This may result in fewer-than-expected projects qualifying for the adder unless the list is expanded in future guidance. 

• Fossil Fuel Tax Revenues – In recognition that fossil fuel tax revenue information is not readily available from public sources, Treasury and the IRS have invited public comment on the best data sources to use in determining qualification. Written comments are requested by May 4, 2023.

  Observation: For the reasons stated in the Notice, this has been the most challenging aspect of the energy community adders to evaluate. Hopefully Treasury and the IRS request for public comment on this aspect will yield a workable path forward.

• Unemployment Rate – The Treasury Department and the IRS will release a listing of MSAs and non-MSAs qualifying for this prong once unemployment data for 2022 becomes available, expected in May 2023. This listing will apply to the period beginning on January 1, 2023, and will remain effective until the next issued listing. It is expected to be updated each May.

  Observation:  The lists of potentially qualifying MSAs and non-MSAs provided so far are not sufficient on their own to confirm a project site qualifies under the Statistical Area Category, because determination of the unemployment rate is necessary to qualify. Once the listing is updated to take unemployment rates into account, taxpayers will be able to determine with confidence if a project site qualifies based on fossil fuel employment and unemployment rates. Determining whether a project site which does not meet the fossil fuel employment prong can still qualify due to fossil fuel tax revenues may continue to be an open question depending on what guidance the Treasury and the IRS can provide on this topic.   

Coal Closure Category Guidance

• Census Tract Scope and Qualifying Tracts - The term “census tract” for purposes of the Coal Closure Category is defined by reference to 2020 census data, and the Notice includes an appendix with a list of qualifying census tracts. Census tracts are considered “directly adjoining” if their boundaries touch at any single point.

• Definitions of “Closed” and “Retired” – Coal mines are considered “closed” for purposes of the adder if they have a mine status of “abandoned” or “abandoned and sealed” as determined by the U.S. Department of Labor’s Mine Safety and Health Administration in the Mine Data Retrieval System for any period of time after 1999. Coal-fired electric generating units will be considered retired if they have been classified as retired at any time since 2009 by the U.S. Energy Information Administration. The Notice describes procedures where taxpayers can try to appeal a listing that has been excluded because the coal mine or generating unit’s location determined by current latitude and longitude coordinates does not match the originally listed location.

  Observation: The list of qualifying census tracts will be very helpful for planning purposes and should also significantly help developers with projects in the relevant tracts obtain financing for the value of the adder.

General Location and Timing Rules

• The Notice establishes two tests for determining whether a project is located in or placed in service in an energy community, depending on the type of project:

  • Nameplate Capacity Test – A project with nameplate capacity (i.e., an electricity-generating project) is considered located in an energy community if 50% or more of the project’s nameplate capacity is in an area that qualifies as an energy community. This percentage is determined by dividing the energy-generating units that are located in an energy community by the total nameplate capacity of all the energy-generating units in the project.

    • Offshore Wind – For offshore wind projects, the nameplate capacity of the project is applied by attributing all of the nameplate capacity to the land-based power conditioning equipment that conditions energy generated by the project for transmission, distribution or use that is closest to the point of interconnection. The onshore substation is effectively the point of testing for energy community purposes.

  • Footprint Test – If a project does not have a nameplate capacity, such as a biogas project, the “Footprint Test” is applied instead of the Nameplate Capacity Test. A project is located in an energy community under the Footprint Test if 50% or more of the project’s square footage is in an area that qualifies as an energy community.

    Observation: The Footprint Test leaves open questions of how to set the boundaries of a given project and how to measure the square footage. 

• Timing of Determination:

  • Generally – Energy community status for projects qualifying for an investment tax credit under section 48 or 48E is tested on the date the project is placed in service. However, for projects qualifying for a production tax credit under section 45 or 45Y, energy community status is tested annually during each year of the ten-year tax credit period, opening the door to potential fluctuations in tax credit value.
  • Special Beginning of Construction Rule – The Notice permits projects to alternatively use the date on which they begin construction under established IRS guidance to determine energy community status. If a project is located in an energy community when it begins construction, it will be considered to continue to be located in an energy community for purposes of the entire tax credit period. Note that the language in the Notice does not limit this rule to projects that start construction after April 4, 2023, though it is possible that could change as the rules continue to evolve.

  Observation: The beginning of construction rule appears to recognize the time and cost investment that goes into site selection for a particular project. Developers should not lose the intended benefit of energy community status because certain site attributes shift (e.g., employment data) between the start of construction and placement in service. This is particularly significant for production tax credit projects, which would otherwise be subject to annual uncertainty. If the beginning of construction rule is not intended to apply to projects for which construction has begun prior to April 4, 2023, this could be a significant issue for many projects, as developers had previously planned to qualify projects as having begun construction early under the old phase down schedules for tax credits prior to the IRA in order to be grandfathered from prevailing wage and apprenticeship requirements.     

Heather Behrend, Josh Emmett, Zack Tavlin and Thuy My Do also contributed to this article.