October 25, 2023

Eyes on Energy Tax Update: Third Quarter 2023

Holland & Knight Alert
Amish Shah | Brad M. Seltzer | Nicole M. Elliott | Joshua David Odintz | Roger David Aksamit | Kenneth W. Parsons | Daniel Graham Strickland | Mary Kate Nicholson | Rachel T. Provencher | Eli Brander

Eyes on Energy Tax Update is a regular publication of the Holland & Knight Renewable and Alternative Energy Tax Team that provides highlights of important developments. The Renewable and Alternative Energy Tax Team also publishes more in-depth publications on certain developments. To subscribe to these publications, please add yourself to our Renewable Energy list.

The third quarter of 2023 saw continued developments as a result of the enactment of the Inflation Reduction Act of 2022 (IRA), court activity and announcements from federal agencies. Below, we summarize the updates you need to know.

IRS Rulings and Guidance

Following the enactment of the IRA, related guidance continued to be released by the U.S. Department of the Treasury and IRS.

  • Following the release of initial guidance, the Treasury Department and IRS released proposed regulations regarding increased credit or deduction amounts available to taxpayers meeting prevailing wage and registered apprenticeship requirements (PWA requirements) for clean and alternative energy-related projects as provided for in the IRA. In addition to the proposed regulations, the IRS released a set of frequently asked questions and Publication 5855, which summarizes the PWA requirements. (See Holland & Knight's previous alert, "Treasury, IRS Issue Proposed Regulations on IRA Prevailing Wage and Apprenticeship Requirements," Aug. 29, 2023.) The proposed regulations follow recent action taken by the U.S. Department of Labor (DOL) to finalize regulations under the Davis-Bacon Act. (See Holland & Knight's previous alert, "U.S. Department of Labor Announces Final Rule Revamp of the Davis-Bacon Act," Aug. 10, 2023.)
  • The Treasury Department and IRS released proposed regulations addressing the transfer of clean vehicle credits under Sections 25E and 30D of the Internal Revenue Code (Code). In conjunction with the proposed regulations, the IRS released Revenue Procedure 2023-33, which provides procedures for the transfer of these credits from the taxpayer who elects to transfer such credit to an eligible entity for credits transferred beginning in 2024. The IRS also updated its series of frequently asked questions regarding the new, previously owned and qualified commercial clean vehicle credits. (See Holland & Knight's previous alert, "Treasury, IRS Release Proposed Regulations and Procedures for Clean Vehicle Credit Transfers," Oct. 9, 2023.)
  • The IRS released Notice 2023-65, which provides guidance on the new energy-efficient home credit under Section 45L, as amended by the IRA. The Notice addresses 1) the person who is eligible for the credit, 2) determining the applicable amount of the credit, 3) energy saving requirements, 4) certification requirements and 5) substantiation requirements.
  • Following the release of final regulations, the IRS opened the portal for applications for the Low-Income Communities Bonus Credit Program, which provides a 10 percent to 20 percent bonus credit for certain eligible small wind and solar projects. (For more information, see Holland & Knight's previous alert, "Treasury Department, IRS Release Preliminary Low-Income Community Bonus Credit Guidance," Feb. 17, 2023.)
  • The IRS released Notice 2023-59, addressing the requirements for home energy audits with respect to the energy-efficient home improvement credit under Section 25C. The Notice provides information regarding 1) the requirements that the forthcoming proposed regulations would set forth for qualifying as a home energy auditor and 2) the substantiation requirement and transition rule, respectively, that the forthcoming proposed regulations would establish for taxpayers claiming the credit with respect to home energy audits.

The IRS also provided guidance in a private letter ruling (PLR) regarding normalization.

  • In the PLR, the IRS concluded that a condemnation of public utility property is effectively a "retirement" or "disposition" that requires the elimination of Accumulated Deferred Income Taxes (ADIT) associated with the condemned property. (See Holland & Knight's previous alert, "Condemned to Lose Your ADIT?," Oct. 18, 2023.)

Key Cases

  • In Chemoil Corp. v. United States, 1:19-cv-6314 (S.D.N.Y.), the U.S. District Court for the Southern District of New York ruled in favor of the federal government's motion for summary judgment, finding that the economic substance doctrine applied to the alcohol fuel mixture credit allowed under Section 6426(b) of the Code.

Other Energy Developments

In July 2023, the Organization for Economic Cooperation and Development (OECD) published administrative guidance regarding the treatment of refundable and transferable credits under Pillar Two. Prior to this guidance, it was unclear how the IRA credits would be treated. Nonrefundable credits operate to reduce covered taxes, lowering the effective tax rate in a jurisdiction. The July 2023 guidance provides that refundable or transferable credits under the IRA are treated as covered taxes and do not reduce the effective tax rate. However, the amount of covered taxes is reduced by the difference between the face value of the credit and the amount paid by a transferee. For example, if a taxpayer pays $95 for a Section 45X credit worth $100, then the taxpayer can claim $95 as covered taxes.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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