Clean Electricity Reg Commenters Want 80/20 Rule Tweaks

Clean electricity stakeholders told the IRS at a reg hearing this week that clarifications are needed before final regs are issued on two tax credits under the Inflation Reduction Act (P.L. 117-169) to iron out issues with the treatment of retrofits.

On May 29, the IRS released proposed regs on the Code Sec. 45Y Clean Electricity Production Credit and the Code Sec. 48E Clean Electricity Investment Credit, often referred to as the PTC and the ITC, respectively. The regs provide guidance on definitions, how to calculate the credits, and eligible properties.

Included in the proposed regs is the so-called 80/20 rule applicable to the retrofitting of existing qualifying facilities. Generally, the rule says that:

• “a facility may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility, provided that the fair market value of the used components of the unit of qualified facility is not more than 20 percent of the unit of qualified facility’s total value (that is, the cost of the new components of property plus the value of the used components of property within the unit of qualified facility).”

Additional proposed 80/20 rule guidelines for the PTC explain the timing of when new components are considered to be placed in service and that the cost of new components “includes all costs properly included in the depreciable basis of the new components of property.”

A two-day public rulemaking hearing was held August 12-13. Several speakers suggested revisions to the language of the 80/20 rule. Some, like Lisa Jacobson of the Business Council for Sustainable Energy, said the rule should not apply to retrofits only within the context of the ITC because it is more relevant to Section 45Y at the property level.

“As an example, if a taxpayer with an existing solar energy project wants to add new units of energy storage technologies, those should not be subject to the 80/20 rule,” said Jacobson. “Or if a taxpayer adds new wind turbines instead of retrofitting existing ones, then the 80/20 rule does not apply.”

Jacobson also requested that the final regs “define the unit of qualified facility as the specific components necessary to the production of electricity.”

Ben Norris of the Solar Energy Industries Association agreed it would be in the spirit of ‘tech neutrality’ to limit the 80/20 rule to the Clean Energy Production Credit. As far as the ITC, taxpayers should “have the ability to continue to make upgrades or add capacity without adding an entirely new unit of qualified facility,” said Norris, adding that such an approach “is consistent with the historic definitions of energy property under [Code Sec. 48] and the unit of property for other credit, cost recovery, and depreciation purposes.”

Michael Purdie of the National Hydropower Association sought confirmation that certain types of property are considered “integral property.” For example, hydropower facilities have other uses outside of power generation like flood control and water supply, said Purdie. Determining integral property at qualifying facilities is important for the 80/20 rule because it affects what property is factored into the calculation, he explained, and the “lack of guidance” is “inhibiting” the industry.

For information on how the Section 45Y credit will change beginning 2025, see Checkpoint’s Federal Tax Coordinator ¶ L-17541.

For information on the Section 48E credit post-2024, see Checkpoint’s Federal Tax Coordinator ¶ L-17971.