IRS establishes program to allocate solar and wind capacity limitation

TAX ALERT | February 17, 2023

Authored by RSM US LLP

Executive summary: Treasury and IRS provide guidance on the investment tax credit for solar and wind projects in certain low-income communities.

The Department of Treasury (Treasury) and the IRS provided guidance to establish a program to allocate amounts of environmental justice solar and wind capacity limitation to qualified solar and wind facilities eligible for the investment tax credit (ITC). This program incentivizes solar and wind power in certain low-income areas under the Inflation Reduction Act of 2022 (the Act). Through this program, eligible property placed in service in connection with a solar or wind facility in certain low-income communities may qualify for a 10 or 20 percentage point increase in the ITC energy percentage. This is an allocated credit program; that is, taxpayers apply to Treasury to receive a portion of the capacity limitation from the program. The Act provided an annual capacity limitation of 1.8 gigawatts that may be allocated for calendar years 2023 and 2024.


An energy investment tax credit may be claimed for placing in service certain energy property, including certain solar and wind facilities and the associated energy storage technology at these facilities. The ITC is claimed as a general business credit. The ITC is calculated by multiplying the basis of each energy property placed in service during the taxable year by the energy percentage. The Act modified the energy credit in part by allowing Treasury to allocate capacity from an overall capacity limitation of 1.8 gigawatts (as measured in direct current) to facilities in certain communities. Eligible facilities must fit within the definition of at least one of four categories of eligible communities: (1) facilities located in a low-income community, (2) facilities located on Indian land, (3) facilities part of a qualified low-income residential building project and (4) facilities part of a qualified low-income economic benefit project. The owner of such facilities, upon receiving an allocation from the capacity limitation, may be able to increase their energy percentage by 10 or 20 percentage points.

IRS and Treasury release initial guidance on solar and wind capacity limitation under section 48(e)

The IRS and Treasury recently issued Notice 2023-17 (notice) providing guidance on the section 48(e) “Low Income Communities Bonus Credit Program” (program) under the Act. The notice establishes the program, describes the allocation process and sets out the timeline for applications.

This notice provides initial guidance on the general eligibility requirements for owners of solar and wind facilities eligible for the energy credit under section 48 of the Internal Revenue Code who wish to take part in the program. Additionally, the Notice provides a description of the four statutory facility categories for which an eligible facility may request an allocation, amounts of capacity limitation reserved for each facility category, a general description of the program, goals of the program, the application review process and the proposed timeline for the application periods in 2023 based on the four different project categories.

Timing and program administration 

The notice provides the IRS will accept applications for 2023 capacity allocations in two phases through 60-day application windows. The first application window is expected to open in the third quarter of 2023. The second application window will follow after, but an exact estimate was not included in the notice. For the calendar year 2023, the total annual Capacity Limitation of 1.8 gigawatts of direct current capacity will be divided among four categories.  

Category 1:
Located in a Low-Income Community

700 megawatts

Second application window

10 percentage point increase*

Category 2:
Located on Indian Land

200 megawatts

Second application window

10 percentage point increase*

Category 3:
Qualified Low-Income Residential Building Project

200 megawatts

First application window – Q3 2023

20 percentage point increase

Category 4:
Qualified Low-Income Economic Benefit Project

700 megawatts

First application window – Q3 2023

20 percentage point increase

*If not also part of category 3 or 4.

The Department of Energy (DOE) will review program applications for statutory eligibility and additional criteria that will be provided in forthcoming IRS guidance. The DOE will provide recommendations to the IRS regarding the selection of applications and allocation of capacity limitations. If the nameplate capacity of selected applications exceeds the capacity limitation for a given category, a lottery system or some other process will be used to allocate capacity limitations. The DOE will administer this process. Upon acceptance, the IRS will send a notification, including the allocated amount of capacity limitation, to the applicant. Within four years of receiving such notification applicants must place the eligible property in service to claim the increased credit rate.

The IRS plans to issue additional guidance, outlining specific application procedures, pertinent definitions and other information deemed necessary to apply for the Program.

Washington National Tax takeaways

Taxpayers pursuing wind or solar projects in one of the communities targeted by this program should carefully consider application procedures, allocation criteria and other program information in forthcoming IRS guidance. 

Taxpayers must prepare and submit compelling applications under the program guidelines to receive an allocation from the program. Applicants are able to resubmit an application in a subsequent year after receiving a rejection. For example, an applicant that does not receive a 2023 allocation may apply again for a 2024 allocation. 

Taxpayers might consider delaying a potentially eligible solar or wind project to receive an allocation from the capacity limitation. Facilities placed in service before receiving an allocation will not be eligible to receive the allocation.

Additional guidance is critical to understand the information necessary to submit a complete, compelling application for an allocation from the capacity limitation.

For more information, please consult with your tax advisor. 

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This article was written by Deborah Gordon, Brent Sabot, Eugene Boakye and originally appeared on 2023-02-17.
2022 RSM US LLP. All rights reserved.

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