U.S. Treasury Finalizes Investment Tax Credit Rules

The U.S. Department of the Treasury and the Internal Revenue Service have released final rules for the Section 48 Investment Tax Credit, or ITC, providing clarity and certainty for clean energy development to pursue major investments. The final rules clarify specific issues relating to offshore wind, hydrogen storage, co-located energy storage, and  geothermal heat pumps.

The ITC has supported U.S. clean energy growth for decades by offering a tax credit for investments in eligible clean energy projects typically covering 30 percent of project costs, though the credit level has varied based on technology and over time. The Inflation Reduction Act, enacted in 2022, extended the ITC and the related Production Tax Credit, or PTC, until 2025. Starting in 2025, both credits will transition to a technology-neutral approach, with full credits available for projects that commence construction at least through 2033. The act serves to eliminate short-term recurring legislative extensions, which had led to uncertainty for renewable energy projects and increased difficulty in financing projects.

The new ITC rules largely maintained the original framework of the proposed rules published in November 2023, with additional clarifications for specific issues. The department’s revised ITC rules address feedback from 350 stakeholders for specific technical clarifications. The final ITC rule clarifies the definition of “energy project”. Energy projects must include ownership of energy properties along with four or more factors from a list of seven factors. Taxpayers should be able to assess these factors during construction or the taxable year in which the project starts operations.

For offshore wind, the revisions are minimal from the original ITC rules. In the new rules, owners of offshore wind farms who also own power conditioning and transfer equipment, such as subsea cables are eligible for the tax credit.

The final rules specify that a Section 48 credit can be claimed for energy storage technology co-located with and sharing power conditioning equipment with a qualified facility eligible for a Section 45 credit. Additionally, the rules clarify that hydrogen energy storage property does not need to store hydrogen exclusively for energy use and may serve other purposes as well.

Investment and production tax credits are a vital tool in bolstering the domestic clean energy industry. In October, the department finalized the rules for the Advanced Manufacturing Production Credit to bolster domestic manufacturing in the clean energy sector.