Job Data a ‘Wild Card’ for Those Seeking Clean Energy Bonus Tax Credit

The landscape of communities eligible for a 10% bonus tax credit for clean energy projects could change depending on the economic outlook each year. It leaves some in the clean energy industry worried if projects in the works will make the cut.

Some developers will have to make decisions on the timing of a project without knowing for certain if the project will be in a community that’s eligible for the credit boost when unemployment data is updated.

The unemployment numbers are “reset every year based on last year’s data, and I think it’s the reset and timing of project placed-in-service date that makes planning for a little bit more difficult,” said Nat Eng, a California-based partner for Novogradac & Co LLP.

Projects can be eligible for the “energy community” bonus tax credit if a project is located in a community that has been dependent on fossil fuels.

To meet the energy community criteria, a project must either be in a brownfield, located in an area with a closed coal mine or a retired coal-fired electric power plant, or in an area with “significant” employment related to coal, oil, or natural gas, according to the Inflation Reduction Act.

The annual unemployment rates for the year are released in May of the following year, according to guidance from Treasury on Tuesday. Companies will rely on the previous year’s information to determine if they’re in an energy community.

If the employment situation changes, companies may find themselves planning a project in a community that is no longer in an energy community, further impacting the financial feasibility of the project.

Until the unemployment rates are released each year, the industry will not know the magnitude of risk, tax professionals said.

Data Dilemma

The value of the energy community bonus credit depends on the company and project. For some, the credit will help move projects forward, while for others, it is just an added benefit.

To maximize the tax incentives in the tax-and-climate law, the energy community bonus credit should be top of mind before companies actually start construction, said Nancy Dollar, San Francisco-based senior counsel at Hanson Bridgett LLP.

For the investment tax credits, the eligibility for the energy community is determined by when a project is ready for use or placed-in-service.

“In reality, I think developers actually have a hard time getting projects done on time because of supply chain issues and other externalities,” Eng said. “There’s a lot of things that go into constructing these projects that make ‘placed-in-service’ a little bit of a wild card.”

The guidance on the bonus tax credit outlined that the location of a project will continue to be considered an energy community for the duration of the credit period or placed-in-service date, depending on the credit.

A Treasury Department spokesperson said the safe harbor applies to projects that begin construction before the guidance was issued, easing a concern from tax professionals on whether the safe harbor applies for projects that began construction before the guidance April 4.

It’s not clear if companies that were planning projects based on previous data will be eligible for the bonus credit if the area no longer qualfies for an energy community, tax professionals said.

The Treasury spokesperson referred to the Dec. 31, 2022 statutory effective date for the energy community bonus when asked about the ambiguity.

The onus of watching the unemployment trends will be on the developer, tax professionals said.

When companies can’t predict the future and are trying to complete a deal, there will be some flexibility to take into account in the drafting document, said Lee Peterson, a senior manager at CohnReznick LLP in Atlanta.

“It is going to be a complexity to financing if you don’t have certainty about the future eligibility of a project, but being aware of the complexity is critical, so that you can appropriately draft flexibilities in the deal documents and the closing package,” Peterson said. He added insurance products may join the market to help mitigate the risk.

Tax professionals want a way to lock in a project located in an energy community before it’s placed-in-service and new data is released.

There may be some taxpayers who will try to “game” the data by doing everything they can to get a project placed-in-service before new data is released if the unemployment statistic might not be as favorable to secure the credit, said Stephen Tracy, a San Francisco-based partner at Novogradac.

John Godfrey, Senior Government Relations Director at the American Public Power Association said his members want as much certainty as possible when making plans about projects. “We are still reviewing the draft guidance, but I am not going to start panicking just yet,” he said.

—With assistance from Daniel Moore.