On Oct. 19, 2023, the portal to apply for the Low-Income Communities Bonus Credit under Section 48 will be open. Most developers will be eligible for at least a 50% investment tax credit (ITC). This 50% ITC would consist of a 30% base credit and a 20% bonus credit for eligible solar and wind facilities that are installed in low-income communities (a qualified low-income residential building project). A 50% credit on the cost of your solar property is a significant benefit (see example below).
If you are interested in obtaining these credits, it is best to start preparing to apply now. The 20% bonus credit is allocated through a competitive process, and applications submitted on the portal within the first 30 days will be treated as submitted on the same date and at the same time, and on a rolling basis thereafter.
- The ITC is claimed 100% upfront when the property is placed in service. The ITC reduces the federal income tax liability by the applicable percentage of the cost of a solar system that is installed during the tax year.
- The ITC can be specially allocated to the general partner if the tax equity investor only has an appetite for low-income housing tax credit (LIHTC) or otherwise.
- Labor requirements including paying prevailing wages are waived for projects with a maximum net output of less than 1 megawatt of electrical energy. Most solar installations at LIHTC properties are below 1 megawatt which equates to the electricity consumed by 400 to 900 homes in a year.
- No reduction in LIHTC eligible basis by the amount of the ITC (IRA change).
- Any costs related to the solar system continues to increase your eligible basis.
- Revenue Procedure 2003-27 provides the process under § 48(e) to apply for an allocation of environmental justice solar and wind capacity limitation.
- Applications will require information such as the applicable category, ownership, location, facility size/capacity, whether the applicant or facility meet additional selection criteria, and other information.
- The landing page for the application process is: Low-Income Communities Bonus Credit Program | Department of Energy.
- Department of Energy (DOE) will evaluate submitted applications based on the established capacity limitation per program year and provide a recommendation to the Internal Revenue Service (IRS) regarding whether to award an applicant an amount of capacity limitation.
- The IRS then considers DOE’s recommendation and issues a capacity limitation allocation award letter or a denial letter for facilities that are not accepted into the program.
To illustrate how the ITC is calculated and applied at a business, consider a business that commenced construction of a solar PV system in 2023, placed it in service in 2025, and uses the calendar year as its tax year. The 500-kW system costs $1 million and has a capacity factor of 20% in the first year. The net effect of claiming the ITC, bonus depreciation, and accelerated depreciation on its 2025 tax liability is a reduction of approximately $582,845 in 2025 tax liability. The business will continue to claim accelerated depreciation deductions for tax years 2026, 2027, 2028, 2029, and 2030 — but the specific depreciation rate will vary by year.
If you would like to learn more about obtaining renewable energy tax credits for installing solar panels on your properties, please reach out to Deepan Patel or your Nelson Mullins contact. To read our previous article on the Low-Income Community Bonus Credit Program under Section 48, click here.