Representatives from the energy industry asked the IRS to further clarify or outright eliminate an eligibility test included in proposed energy credit regs for the purposes of qualifying for the Investment Tax Credit (ITC) under the Inflation Reduction Act (PL 117-169).
80/20 rule.
The 2022 inflation bill amended Code Sec. 48 to allow new types of energy property qualify for the ITC and provides for a larger credit if taxpayers satisfy certain prevailing wage and apprenticeship requirements (up to 30% from a general baseline of 6%). The ITC is calculated as a percentage of the basis of energy property placed in service during the taxable year.
Proposed IRS regs issued in November aimed to codify existing guidance on retrofitted energy property and dual use property. Notice 2016-31 provides that a “facility may qualify as originally placed in service even though it contains some used property, provided the fair market value of the used property is not more than 20 percent of the facility’s total value (the cost of the new property plus the value of the used property).” This became known as the “80/20 rule.”
Notice 2018-59 applied the rule to the Code Sec. 48 beginning of construction requirements and explained that “the cost of the new energy property includes all properly capitalized costs of the new energy property,” as outlined in the November proposed regs, which apply the 80/20 rule to energy property for the purposes of the credit.
Industry response.
The IRS held a two-day public rulemaking hearing on the proposed regs February 20 and 21. Approximately 300 comments were submitted during the comment period, and over 40 speakers presented both in person and telephonically. A reoccurring point made throughout the hearing from representatives of various energy organizations and companies — particularly those in the biogas industry — was that the 80/20 rule as applied by the proposed regs is faulty because it is based on whole energy systems and not individual components.
Below is a snapshot of feedback the IRS received on the matter:
Geoffrey Dietz — Coalition for Renewable Natural Gas: “[T]he final rule should be revised to eliminate application of 80/20 with respect to capital improvement. We believe this statute should be interpreted to incentivize adding gas upgrading equipment to an existing landfill gas collection system or anaerobic digester, the systems that aggregate and collect biogas, and which can have significant value relative to gas upgrading equipment. This 80/20 test simply doesn’t comport with how capital value is apportioned at biogas projects and it discourages the use of existing infrastructure.
“If Treasury and the IRS determine that 80/20 is applicable, it should make clear that the rule only applies to individual components, rather than to the unit of energy property, or to equipment that was added perhaps after the [Inflation Reduction Act] was enacted.”
Lisa Jacobson — Council for Sustainable Energy: “This interpretation, we believe, conflicts with the historical understanding of the 80/20 rule as it applies to ITC property, which is based on each component at the unit of energy property. The proposed regulation’s interpretation of the 80/20 rule in the context of ITC property would create barriers to ITC qualification, especially in the context of addressing maintenance and upgrades.
“Further, even a significant upgrade to a project or, for example, expanding its capacity, would not meet the 80/20 rule, unless the retained original components associated with the base project have a fair market value of not more than 20% of the expanded project.”
Heather Dziedzic — American Biogas Council: “Biogas systems often involve different assets under different owners. Perhaps more than any other energy property type, biogas systems often involve adjacent industry infrastructure, utilizing waste collection handling like landfills, wastewater treatment systems, and manure storage systems. Under the 80/20 rule, these adjacent assets may significantly impact the eligibility of new investments in biogas property since they arguably serve as one of the primary … collection and capture systems necessary for biogas production. We believe this is an incorrect application of the 80/20 rule and an unnecessary restriction.”
Correction notice.
On February 22, the IRS issued a correction to the proposed regs and reopened the comment window until March 25. The revised regs now include necessary gas upgrading equipment to the definition of qualified biogas property.
“A correction is needed to clarify that gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen, would be energy property if it is an integral part of an energy property,” read the correction, which was published in Thursday’s edition of the Federal Register.
For more information regarding the 80/20 rule, see Checkpoint’s Federal Tax Coordinator ¶L-16401.3J.
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