Treasury releases final rules on Sec. 48 ITC

The Dept. of the Treasury and the IRS have released the final rules for the Sec. 48 Energy Credit – also known as the federal investment tax credit (ITC). For decades, the ITC has fueled U.S. clean energy development by providing a tax credit for investments in qualifying clean energy property – generally 30% of the cost of the project, although the level of the credit has varied over time and by technology.

While the ITC has advanced clean energy projects, its effectiveness was limited by the need for recurring short-term and retroactive legislative extensions, creating uncertainty and making it harder for clean energy developers to make investments and secure financing for projects.

The Inflation Reduction Act extended the ITC – as well as the closely related production tax credit (PTC) – until 2025, at which point the ITC and PTC will switch to a tech-neutral approach with credits that will be available in full for projects beginning construction at least through 2033.

“By ending short-term legislative extensions for the ITC, the Inflation Reduction Act has given clean energy project developers clarity and certainty to undertake major investments and produce new clean power to meet growing electricity demand,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo. “Today’s announcement will help lower consumers’ utility bills, strengthen U.S. energy security, and create good-paying jobs.”

Although the final rules retain the core framework of the proposed rules and guidance Treasury and the IRS issued in November 2023, the final rules clarify general rules for the ITC and its definitions of property eligible for the credit, informed by 350 written comments from stakeholders. Specific issues raised by commenters that the final rules address include:

• Offshore wind: The final rules retain the clarification made in the proposed rules that owners of offshore wind farms can claim the credit for power conditioning and transfer equipment (e.g., subsea cables) that they own.
• Geothermal heat pumps: The final rules clarify that the owner of underground coils can claim the ITC if they own at least one heat pump used in conjunction with the coils.
• Biogas: The final rules clarify what property is qualified biogas property and what is an integral part of qualified biogas property.
• Definition of “energy project”: The final rules revise the definition of energy project to require ownership of the energy properties plus four or more factors from a list of seven factors and clarify that taxpayers can assess the factors at any point during construction or during the taxable year energy properties are placed in service.
• Co-located energy storage: The final rules clarify that a Sec. 48 credit (ITC) may be claimed for energy storage technology that is co-located with and shares power conditioning equipment with a qualified facility for which a Sec. 45 credit (PTC) is claimed.
• Hydrogen storage: The final rules clarify that hydrogen energy storage property does not need to store hydrogen that is solely used as energy and not for other purposes.

Projects can claim the Sec. 48 ITC on projects that began construction before Jan. 1, 2025. After that date, the ITC and PTC will transition to the technology-neutral “clean electricity production credit” (Sec. 45Y) and “clean electricity investment credit” (Sec. 48E). The technologies recognized include wind, solar, hydropower, marine and hydrokinetic, nuclear fission and fusion, geothermal, and certain types of waste energy recovery property (WERP).