Sunstone Credit Primer- Inflation Reduction Act Tax Credits: An Update on the Low Income Community Adder
By: Ashley Cox and Duncan Hinkle
Context:
As a part of the Inflation Reduction Act (“IRA”)[1], the 30% federal tax credit earned by installing solar generation projects was extended until 2033. An even larger tax credit may be available if a project meets certain criteria:
- 10% adder for systems installed with a certain percentage of domestic content
- 10% adder for systems located in energy communities
- 10% to 20% adder for systems located in low income communities
The IRA did not define how to specifically qualify for these criteria and congress directed the Department of Treasury to create those rules. New guidance from the Treasury was recently released.[2] This guidance helps clarify how the “Low Income Communities” adder will work.
What We Already Knew about the Low Income Communities Adder:
The low income communities adder was limited to systems smaller than 5 mW. This adder also has a capacity limitation. The total allocation available from the government was capped at 1.8 gigawatts per year.
- 10% Adder if: the project is located on Indian land or in a “Low Income Community”. A Low Income Community is one located in a census tract (a) with a poverty rate of at least 20% or, (b) in a non-metropolitan area where the median family income is 80% or less of statewide income, or in a metropolitan area where the median family income is either 80% or less of statewide income or that of the metropolitan area.
- 20% Adder if: the project is part of a qualified low-income residential building project or a qualified low-income economic benefit project. A qualified low-income economic benefit project is defined as either (1) a qualified low-income residential building is a rental building that participates in an affordable housing program where the electricity produced by the facility is equitably allocated among the occupants. Types of affordable housing programs include the one covered by the Violence Against Women Act, Title V of the Housing Act of 1949, those administered by a tribally designated housing entity, or other programs determined by HUD or (2) a qualified low-income economic benefit project is one where at least 50% of the economic benefit of the electricity produced is provided to households that are at less than 200% of the poverty line OR less than 80% of the area median gross income.
New Guidance:
The annual allocation of 1.8 gW is divided into the following sections to ensure there is money for each type of qualifying system:
- Section 1: Located in a Low-Income Community (10% adder)- 700 MWdc
- Section 2: Located on Indian Land (10% adder)- 200 MWdc
- Section 3: Qualified Low-Income Residential Building Project (20% adder)- 200 MWdc
- Section 4: Qualified Low-Income Economic Benefit Project (20% adder)- 700 MWdc
A project can only apply for a single section (no stacking). If a system qualifies for both a 10% adder and a 20% adder, the project is not penalized and is eligible for the larger 20% adder.
Receiving an allocation does not automatically determine the project will qualify for the adder. You have to receive an allocation AND prove the requirements have been met (in a manner still to be released) for the project to actually earn the additional tax credit.
Timing is important! Facilities placed into service prior to being awarded an allocation will not be eligible to receive the tax credit.
Applications for allocations will be accepted during 60-day windows. The Department of Energy will administer the process. The window for Sections 3 and 4 applications will be in Q3 of 2023. Sections 1 and 2 do not have window scheduled at this time, but will come after Sections 3 and 4.
What we still don’t know:
- How exactly to apply for these allocations
- How exactly to get approved for the tax credit
What it means for Small and Medium Sized Commercial Solar:
- Windows create logjams. If you need the adder to satisfy the customer or make the project pencil, you’re not going to know if you have a project until after the window closes and an allocation determination is made.
- You may see some allocation sections fill up faster than others. There is no guidance or details around timelines, what happens if there is an oversubscription or the actual application and verification process.
- Sell your Low-Income project with the adder as upside. These application windows will create delays. You do not want your project to fall apart while waiting for an allocation determination.
- If the adder is required to make the economics work, Sunstone will have to hold NTP until you actually receive an allocation. We’ll also need assurances that the project will qualify for the adder, and that can’t happen until additional guidance is issued.
- Once additional guidance is issued, we will provide an update similar to this one.
Note: Sunstone Credit does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
[1] Inflation Reduction Act of 2022 (P.L. 117–169)
