IRS Guidance on Low-Income Communities Bonus Credit for Native American Energy Projects
On February 14, 2023, Treasury issued initial guidance for the implementation of the Inflation Reduction Act (IRA) environmental justice capacity limitation program - now called the Low-Income Communities Bonus Credit Program. This program provides additional credits - based on MW - for up to 1.8 GW of solar, wind, and small wind projects located in low-income communities and Indian lands in 2023 and 2024. These credits can result in an additional increase in the tax credit of 10% or 20%, for up to 70%. This article summarizes the IRS guidance and its implications.
Guidance Summary
Solar, wind, small wind, and energy storage projects, with a maximum capacity of 5 MW are the only eligible projects. A project must be built ("placed into operation") within 4 years of receiving an allocation.
The 1.8 GW will be separated into separate categories, with each category receiving a set MW allocation.
For projects located in low-income communities (Category 1) or on Indian lands (Category 2), the allocation will provide an additional 10% tax credit.
- Low-income communities are defined as census tracts with a 20% poverty rate or higher, or 80% of the statewide median income.
- Indian lands are defined as any land located within the boundaries of an Indian reservation, pueblo, or rancheria; or for any land not located within the boundaries of an Indian reservation, pueblo, or rancheria, the title to which is held (i) in trust by the United States for the benefit of an Indian tribe or an individual Indian; (ii) by an Indian tribe or an individual Indian, subject to restriction against alienation under laws of the United States; or (iii) by a dependent Indian community; land that is owned by an Indian tribe and was conveyed by the United States to a Native Corporation pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.), or that was conveyed by the United States to a Native Corporation in exchange for such land; any land located in a census tract in which the majority of residents are Natives (as defined in section 3(b) of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(b)); and any land located in a census tract in which the majority of residents are persons who are enrolled members of a federally recognized Tribe or village.
Low-income housing or economic development projects will receive an additional 20% tax credit.
- A low-income housing project is one where the energy project is located on a residential rental building in an affordable housing program, which includes NAHASDA housing programs.
- A low-income economic development project must provide at least 50% of the benefits from the energy produced to low-moderate income households. In both circumstances, the economic benefits can include reduced energy costs from the project.
The IRS has also identified additional potential criteria for allocations, including ownership of the project, new market participants, substantial benefits to low-income communities, and commercially ready projects. Only the owner of the energy project can apply for the allocation, and the owner can only apply in one category.
Finally, Treasury anticipates a phased 60-day application window for each category of project. The phased applications will go in the following order: Category 3, Category 4, Category 1, then Category 2. In addition, a project placed into service before the owner is awarded an allocation will not be eligible to receive an allocation. If the allocations within a category are "oversubscribed," Treasury will use a lottery or other mechanism to award credit allocations. If allocations are "undersubscribed" Treasury will reallocate credit allocations across categories.
Implications for Tribes
As a reminder, Tribes will be eligible to elect to receive a direct payment in the amount of the tax credit for eligible energy projects, including projects eligible for the Low-Income Communities Bonus Credit Program. As such, a Tribe could receive as much as a 70% tax credit/direct payment for an eligible project. The following example illustrates the opportunity:
A Tribe constructs and owns a 5 MW community solar project, with storage, to offset power costs for tribal housing. The Tribe applies for, and receives, an allocation of 5 MW.
Cost to construct = $15 million
Tax Credits: Prevailing Wage 30%
Domestic Content 10%
Energy Community 10%
Category 3 Project 20%
Total Tax Credit 70%
= $10.5 million direct payment
Net cost of project = $4.5 million
Additionally, the phased application process will mean that Tribes1 with housing-related clean energy projects will have to be prepared to apply first for allocations. Because there is no tribal set-aside for the housing project category, Tribes will be competing with other project owners. On the other hand, other projects located on tribal lands will be the last to apply. This will give Tribes (or their third-party developers and partners) more time to prepare projects for this allocation. However, for Tribes that are further along in the development process, they must pay attention to the timing for the application, the award of an allocation and placing the project in service to avoid being ineligible for an allocation under this Program.
It is important to note the "use it or lose it" approach for Category 2 projects. If there are not enough projects applying for allocations (40 projects at 5 MW each) in Category 2, then Treasury will reallocate the tribal set-aside to other categories. These allocations will not be rolled over into the following year.
We continue to recommend that Tribes monitor the IRS guidance and rulemaking for updated information and requirements for IRA tax credits.
If you have any questions or require further information about this tax credit, or any other IRA tax credit, program, please contact our Quarles team at:
- Pilar Thomas: (520) 770-8744 / pilar.thomas@quarles.com
1The IRS has not issued guidance of whether tribal housing authorities will be eligible for the tax credit elective direct payment.