Earlier this month, the IRS released much-awaited guidance on what areas will qualify as an “energy community” for purposes of the energy production and investment tax credits in Notice 2023-29.
Under Code sections 45, 45Y, 48, and 45E, qualifying energy projects located within an energy community are eligible for a significant bonus tax credit—10% or 2 percentage points, as applicable to the specific credit.
Three areas qualify as energy communities:
- Brownfield sites
These are areas that fall under a specific definition from the EPA. Generally, these are areas for which development or use is difficult due to contamination from harmful substances. - Statistical areas meeting fossil fuel and unemployment thresholds
These are areas that meet (i) either a Fossil Fuel Employment threshold or a Fossil Fuel Tax Revenue threshold and (ii) an unemployment threshold. - Coal closure sites
These are areas with a census tract in which (i) a coal mine closed after December 31, 1999, or (ii) a coal-fired electric generating unit was retired after December 31, 2007.
Brownfield sites:
The IRS Notice doesn’t spend much time on Brownfield sites; likely because those have a very specific definition under the Public Health and Welfare Code. “The term ‘brownfield site’ means real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.” 42 U.S.C. § 9601(39)(A). A number of sites are disqualified from the category of Brownfield sites for purposes of the tax credits—basically, if remediation of the hazardous conditions is planned and/or in progress, the area doesn’t count. See 42 U.S.C. § 9601(39)(B).
Statistical areas:
The statistical areas that qualify as energy communities do so by meeting one of two thresholds related to fossil fuels and an unemployment threshold. The area must either: (i) currently have, or had at any time after December 31, 2009, 0.17% or greater direct employment or (ii) 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas. Additionally, the area must have an employment rate at or above the national average for the previous year.
The statistical area categories generated a lot of commentary prior to the Notice release that asked the obvious question: employment, unemployment, and tax revenues change every year—what happens if the area qualifies one year and not the next? The Notice resolved this ambiguity by providing additional guidance on timing. The energy credits in question are based on facility construction dates or property placed-in-service dates. If the energy project begins construction in an area that qualifies as an “energy community” at the start, then said area will continue to be treated as an energy community for the applicable time period (either the period the credit can be claimed or the placed-in-service date). This timing rule is applicable to all of the energy community areas, not just the statistical areas, but is most relevant to the statistical areas, as that is the only category which invokes metrics that are subject to change every 12 months.
An area that is blatantly not illuminated by the Notice is the fossil fuel tax revenue threshold—the 25% or greater local tax revenues attributable to fossil fuel-related activities requirement (note that the fossil fuel requirement is a tax revenue or employment threshold). Per the Notice, “[d]etermining the level of Fossil Fuel Tax Revenue . . . presents certain data challenges because such data is not readily available from public sources.” The Notice invites commentary on, basically, how to figure this out. So stay tuned for details on how this requirement will be met.
Coal closure sites:
Coal closure sites that qualify as energy communities are explicitly defined, even more so than Brownfield sites. Two events will qualify an area as a coal closure site, and thus, an energy community: (1) a coal mine (surface or underground) has ever had, for any period of time, since December 31, 1999, a mine status of abandoned or sealed in the Mine Retrieval Data System maintained by the U.S. Department of Labor Mine Safety and Health Administration or (2) a coal-fired electric generating unit has, at any time since December 31, 2009, been classified as retired by the U.S. Department of Energy’s Energy Information Administration.
Both subcategories of coal closure sites are subject to data accuracy requirements—if the data maintained by the Mine Safety and Health Administration or the Energy Information Administration is inaccurate or irregular, the area will not be treated as an energy community. Accordingly, taxpayers are encouraged to double-check their data points for accuracy.
An area that is directly adjoining the actual coal closure site also constitutes an energy community under the Code and the Notice—a provision that is unique to the coal closure energy communities. “Directly adjoining” means any census tract that touches the census tract with the closed coal mine or the retired coal-fired electricity generating unit.
Along with the IRS Notice, the U.S. Department of Energy released an interactive map that highlights areas that are energy communities for purposes of the tax credit, found here. Nearly all of Texas is identified as a statistical area that meets the fossil fuel employment requirement for purposes of the statistical area energy community; however, areas that also meet the unemployment requirement are not yet identified.
Areas within Texas that include a coal closure site include Titus County, Wilbarger County, Harrison County, Panola County, Rusk County, Freestone County, Robertson County, Grimes County, Milam County, Maverick County, and Webb County. All of the census tracts surrounding the foregoing areas are also energy communities under the “directly adjoining” provision applicable to coal closure sites. Brownfield sites are not identified on the map at this time.
The Notice is a precursor to forthcoming Treasury Regulations on the points addressed. At this time, there is no ETA on said forthcoming Treasury Regulations; however, when issued, they are expected to be effective for tax years ending after April 4, 2023. In the meantime, taxpayers may rely on the substantive provisions of the published Notice (i.e., if the requirements change a little in the published Regulations, taxpayers who followed the Notice requirements will not be penalized).