48C Qualified Advanced Energy Project Tax Credit: One Year Into the Inflation Reduction Act

By John R. Kirkwood, Christopher B. Berendt, Matthew R. Levy, Jason Deppen, Joshua L. Andrews, Aaron L. Szabo, Brian S. Fennerty, Bryan Michael Allen, Wendy Yan, Virginia M. Speck – Faegre Drinker Biddle & Reath LLP
Special to The Digest

The next round of funding for the qualified advanced energy project tax credit — known as 48C — is expected to open next year for a total of $6 billion, significantly larger than the first round of $4 billion. Applications for the first round of 48C tax credits totaled $42 billion, 10 times what was allocated for the first round. While the first round of funding for 48C is oversubscribed, that does not necessarily prevent new companies from applying in the second round of funding. Companies can learn from the first round of funding to improve their concept papers and applications and help enhance their position to receive funding in the second round.

The Inflation Reduction Act (IRA) recently celebrated its first anniversary with some programs becoming increasingly oversubscribed even before the funding is released. One of those programs is the qualifying advanced energy project tax credit — known as 48C — with $10 billion to be implemented by the Department of

Energy (DOE). The first round of funding for 48C received applications for over $42 billion — 10 times what was allocated. The total funding available for this first round is $4 billion, with at least $1.6 billion reserved for energy communities, or areas that have historically depended upon oil and gas or coal production and have higher than average unemployment, among other factors.

Such high interest in only the first round suggests future rounds will face similar amounts of oversubscription — highlighting the need for careful planning. The 48C tax credit was envisioned to incentivize companies and communities to develop projects such as clean energy manufacturing and recycling projects; industrial decarbonization (greenhouse gas (GHG) emission reduction projects); and critical material processing, refining, and recycling projects. Broadly, the 48C tax credit provides for up to 30% of investments in advanced energy projects, as defined in 26 USC § 48C(c)(1). As with many of the programs authorized under the IRA, certain aspects of the Biden Administration’s larger social priorities, such as incorporation of labor and other stated priorities, can affect the standing of individual applications.

DOE requires concept papers before an application can be submitted. The applicant is required to provide a discussion of the following criteria: (1) project in general; (2) commercial viability; (3) GHG impacts; (4) U.S. supply chain and domestic manufacturing impacts; and (5) workforce and community engagement. While the document is not supposed to be longer than 4–5 pages, the applicant is also expected to complete data sheets that are provided as part of the concept paper application process.

DOE will evaluate the concept papers based on how well the applicant meets the required criteria. For example, the direct and indirect jobs that are expected to be created from the project and what engagement efforts the applicant plans to implement.

By requiring concept papers, DOE hopes to reduce the total number of full applications. Upon receipt and review of the concept papers, DOE will then send applicants a letter encouraging or discouraging the submission of an application. Regardless of whether DOE encourages or discourages the submission of an application, all applicants are eligible to submit an application. However, DOE’s response to an applicant’s concept paper may be useful guidance when making the cost-benefit analysis of preparing a full application. After reviewing the full applications, DOE will provide recommendations to the U.S. Internal Revenue Service (IRS) who will then provide either an allocation or denial letter to the applicants. If an applicant was encouraged by DOE to submit a concept paper and its application was ultimately denied, the applicant can request a debriefing from DOE to discuss the reasons for the denial including the strengths and weaknesses of the application.

On May 31, 2023, IRS released additional guidance under Notice 2023-44 (the May 2023 Notice) that worked to provide key program dates. Appendix B to the May 2023 Notice states that the submission deadline for full applications is Fall 2023-Winter 2023/2024 meaning that DOE will have to send letters encouraging or discouraging applications prior to that time frame. Once an applicant receives a letter from DOE, the application portal will open seven days after the date of the letter. Applicants will have 45 days after the portal opens to submit their full application. Appendix B also clarifies that final allocation notifications by IRS must be made no later than March 31, 2024.

The second round of funding is expected to be announced in early 2024, after the determinations of the first round, giving future applicants time to build a concept paper and an application that has the highest likelihood of success. The application process is expected to open in late 2024. The second round of funding is likely to be $6 billion with a $2.4 billion energy community set aside, significantly more than the first round of funding of $4 billion. All rounds have a required 40% minimum set aside for energy communities.

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The complete advisory can be dowloaded here.