June 25, 2024 | By Dorian Hunt, Head of Renewables

Investment tax credits (“ITCs”) are used to incentivize the construction and operation of certain types of real estate and energy assets. In some situations, Congress has added extra incentive in the form of additional credits to further incentivize specific behavior. Of relevance here, § 48(e) increases the amount of the § 48 energy investment credit with respect to eligible property of the taxpayer that is part of a qualified solar or wind facility if the taxpayer applies for and is awarded an allocation of environmental justice solar and wind capacity limitation (the “capacity limitation”) as part of the low-income communities bonus credit program (the “Low-Income Community Adder”). § 48(e)(4)(C) tells us that the annual capacity limitation for this adder is 1.8 gigawatts in each of 2023 and 2024. So, you’re probably wondering why I am bothering to talk when here we are about to stumble over the halfway point of 2024 with 2025 visible if you squint. Well, rejoice, because the concepts discussed here and the Low-Income Community Adder are going to continue to be available in 2025 and later under § 48E(h). As with any tax incentive, however, the Low-Income Community Adder has some strings attached. This article provides a brief overview of the tax gift that is the Low-Income Community Adder (including guidance issued by the government with regard to it) but focuses on situations in which the taxpayer may be forced to return it (i.e., the circumstances under which the adder may be taken away). First, we’ll start with the basics of the ITC and the Low-Income Community Adder. 

Overview – § 48 Energy Credit

The ITC available totaxpayers derives from the general business credit allowed to a  under § 38.i That section provides that a taxpayer is allowed a tax credit for a tax year in an amount equal to the sum of – (i) the business credits carried forward to the tax year, (ii) the business credit for the current year, and (iii) the business credit carryback to the tax year. § 38 itself does not describe a specific tax credit but provides rules for computing the taxpayer’s credit for a tax year derived from other Code sections. Of relevance here, the computation under § 38 includes the investment credit described in § 46.  

Like § 38, § 46 itself is not a specific credit, but rather a conglomeration of credits available under other Code sections. Specifically, the investment credit under § 46 includes (among other things) the § 48 energy credit. The § 48 energy credit was enacted to incentivize investment by taxpayers in certain assets. Thus, the § 48 energy credit is equal to a specified percentage of the tax basis of each energy property placed in service by the taxpayer during the tax year; that percentage is generally six percent for projects that don’t meet the prevailing wage and apprenticeship requirements (“PW&A Requirements”) of § 48(a)(10) and (11) and 30% for those that do  

Example 1: In 2024, X places into service Property A, which qualifies as energy property under § 48. X’s basis in the property is $1,000,000, and the property qualifies for a 6 percent credit under § 48(a)(9). X is entitled to a $60,000 credit in 2024. 

Low-Income Community Adder

The legislation commonly referred to as the Inflation Reduction Act of 2022 (the “IRA”) added the Low-Income Community Adder to the Code. As noted above, the Low-Income Community Adder increases the amount of the § 48 energy credit determined under section 48(a) with respect to eligible property that is part of a qualified solar or wind facility that receives an allocation of the capacity limitation for the calendar year under the low-income communities bonus credit program (the “Low-Income Communities Bonus Credit Program”). Under the program, the annual capacity limitation is 1.8 gigawatts of direct current capacity for each of calendar years 2023 and 2024, and zero thereafter (the “Capacity Limitation”); at least 50 percent of the total Capacity Limitation in each facility category is reserved for qualified facilities meeting  certain ownership or geographic criteria.ii The Low-Income Community Adder may increase the § 48 energy credit by 10 percent for eligible property that is located in a low-income community (a “Category 1 Facility”) or on Indian land (a “Category 2 Facility”) and by 20 percent for eligible property that is part of a qualified low-income residential building project (a “Category 3 Facility”) or a qualified low-income economic benefit project (a “Category 4 Facility”). 

Example 2: Assume the same facts as in Example 1, except that the energy property is a Category 4 Facility with respect to which X has applied for and been granted an allocation under the Low-Income Communities Bonus Credit Program. In this case, the credit rate will be 26 percent of basis. Thus, X generally is entitled to a $260,000 credit in 2024. 

A careful reader might chuckle derisively thinking that by assuming a 6% credit, I implied that the PW&A Requirements hadn’t been met, yet I went ahead and attributed a 20 percentage point increase for the Low-Income Community Adder to the project. Well, this Adder is like no other. The adders for energy communities and domestic content are limited to 2 percentage point increases when applied to a projects that have not fulfilled or were deemed to fulfill the PW&A Requirements, however no such limitation applies to the Low-Income Community Adder. 

The Regulations also clarify that a § 42 low-income housing tax credit (“LIHTC”) project counts as a Category 3 Facility. Further, § 50(c)(3)(C) and proposed regulation 1.48-14(f) provide that the basis upon which the LIHTC is determined is not reduced by virtue of claiming the § 48 ITC, provided all other requirements are fulfilled. This is a rare instance where we may be able to claim multiple tax credits against the same dollar of spend.  

Obviously, the Low-Income Community Adder creates a significant benefit that materially increases a taxpayer’s investment in the relevant property. After enactment of the IRA, investors were looking for guidance from the IRS as to how that benefit could be obtained. 

Government Guidance

The IRS and Treasury issued Notice 2023-17,iii which established the program to allocate amounts of environmental justice solar and wind capacity limitation to qualified solar and wind facilities eligible for the § 48 energy credit under the “Low-Income Communities Bonus Credit Program.” The notice also provided initial guidance regarding the overall program design, the application process, and additional criteria to be considered in determining which applicants would receive an allocation under the program in calendar year 2023.  

The notice divided the total annual capacity limitation among the four facility categories. Under the notice, the owner (and only an owner) of a facility could apply for an allocation of the capacity limitation. For each facility owned by an applicant, the applicant could apply for an allocation of capacity limitation in only one category for calendar year 2023; applicants that did not receive an allocation are permitted to apply for future allocations in later calendar years.  Applications were accepted for calendar year 2023 during a 60-day application window according to facility type. The entire program was (and continues to be) administered by the Department of Energy (the “DOE”), which reviews applications and provides recommendations to the IRS. Based on these recommendations, the IRS will accept or reject an application for an allocation.  

In Notice 2023-17, the IRS announced its intent to issue additional guidance in the future. The IRS followed up on this promise by issuing Revenue Procedure 2023-27,iv which provided guidance necessary to implement the Low-Income Communities Bonus Credit Program for the 2023 program year. The revenue procedure provided additional guidance including the information an applicant must submit to obtain an allocation, the application review process and the actual manner of receiving an allocation from the IRS.  As it did in Notice 2023-17, the IRS described the division of the annual capacity limitation available for allocation across the four facility categories. 

Revenue Procedure 2023-27 provided more detail on the process of applying for an allocation. Specifically, applications are collected through a portal hosted by the DOE. The application and required attestations were to be submitted under penalty of perjury by a person authorized under state law to bind the applicant. Further, if the applicant was a member of a consolidated group, the submission also must have been authorized by an officer of the common parent of the group. Any application must have included:  

  1. The name, address, and taxpayer identification number of the applicant; 
  2. If the applicant is a subsidiary member of a consolidated group, the name and taxpayer identification number of the parent of that group; 
  3. The name and telephone number of the person submitting the application on behalf of the applicant; and 
  4. Any other information required by the DOE’s publicly available written procedures.  

In addition to the above, the applicant was required to include specific information about the particular facility with respect to which the allocation is sought. This included information about the location of the facility, as well as the expected maximum net output of the facility. Finally, the applicant was required to submit a variety of attestations relating to the suitability of the facility, as well as the satisfaction of state and local requirements. Once submitted, an application was reviewed by the DOE, which provided a recommendation to the IRS regarding whether to award an applicant an amount of capacity limitation with respect to a facility. Based on that recommendation, the IRS would award an allocation or reject the application.  

In the case a facility category was oversubscribed, applications in the category were entered into a lottery to determine the order of the DOE’s review. As part of the lottery, the DOE separated applications to group all applications that purport to meet the ownership and geographic criteria described in § 1.48(e)-1(h); fifty percent of the capacity limitation in each facility category was reserved for qualified solar or wind facilities meeting these criteria. The IRS sent final decision letters through the portal to inform applicants of the outcome of their application process.   

Revenue Procedure 2023-27 was superseded by Revenue Procedure 2024-19,v which generally follows the earlier revenue procedure but also provides important clarifying changes to the application, documentation, and lottery procedures that apply to the 2024 program year. Once again, the IRS also describes the total capacity limitation for the calendar year, as well as the allocation of that capacity across the facility categories (and subcategories).  

The revenue procedures described above largely provided administrative guidance as to the actual process for applying for and receiving an allocation of under Low-Income Community Adder program. In 2023, the IRS and Treasury issued final regulations providing more substantive guidance under § 48(e) (the “Final Regulations”). Of relevance here, the Final Regulations described situations in which the Low-Income Community Adder may be eliminated or recaptured in certain situations.  

What Can Go Wrong? 

All of the guidance described above relates to qualification for an allocation of capacity limitation to a particular project. However, the primary focus of this article is on what could lead to a reduction in the § 48 credit amount after a successful application for an allocation. In other words, what can happen after the award of a capacity limitation that results in the facility being disqualified from all or some portion of the Low-Income Community Adder? Returning to the facts in Example 2, is there something that could cause the $260,000 credit to be eliminated or recaptured? Section 48(e) and the regulations thereunder describe several situations that might result in elimination or recapture of the adder.   

First, § 1.48(e)-1(m) provides that a facility that has been awarded an allocation of capacity limitation as part of the Low-Income Communities Bonus Credit Program will be disqualified and lose its allocation if any of the following occur: 

  1. The location where the facility will be placed in service changes; 
  2. The net output of the facility increases such that it exceeds the less than 5 MW AC output limitation provided in § 48(e)(2)(A)(ii) or the nameplate capacity decreases by the greater of 2 kW or 25 percent of the Capacity Limitation awarded in the allocation (AC for a wind facility and DC for a solar facility); 
  3. The facility cannot satisfy the requirement to equitably allocation financial benefits among applicants (if applicable) as planned; 
  4. The eligible property that is part of the facility that received the Capacity Limitation allocation is not placed in service within four years after the date the applicant was notified of its allocation of Capacity Limitation; or 
  5. The facility received a Capacity Limitation allocation based, in part, on meeting the ownership criteria and ownership of the facility changes prior to the facility being placed in service (unless the original applicant transfers the facility to an entity treated as a partnership for federal tax purposes and the original applicant – (i) retains at least a one percent interest (either directly or indirectly) in each material item of partnership income, gain, loss, deduction, and credit of such partnership; and (ii) is a managing member or general partner (or similar title) under state law of the partnership (or directly owns 100 percent of the equity interests in the managing member or general partner) at all times during the existence of the partnership). 

Example 3: Assume the same facts as in Example 2, except – (i) X received its allocation because it satisfied the ownership requirements; and (ii) prior to the time at which the facility is placed in service X contributes to facility to its wholly owned corporate subsidiary, Y. In that case, neither X nor Y will be entitled to the Low-Income Community Adder under a strict reading of § 1.48(e)-1(m).   

Note that each of the disqualification situations involves what is perceived to be a fundamental change in the energy property between the time it receives an allocation of the capacity limitation and when the facility is placed in service (and thus the taxpayer is entitled to the credit). To keep the allocation, the taxpayer must ensure that none of these changes occurs. However, that may be difficult in practice as one may argue that many of the events that cause recapture are those that might occur in the ordinary course of business. Investment tax credit stakeholders have long been aware of the limitations applicable once a property has been placed into service, but the rules around the restrictions in § 1.48(e)-1 listed above introduce additional traps for the unwary.  

Even if the original applicant is actually allocated and continues to qualify for the Low-Income Community Adder when the facility is placed in service, all or some portion of the benefit of the Low-Income Community Adder may nevertheless be eliminated under the recapture rules. Specifically, § 48(e)(5) provides that rules similar to the rules of § 50(a) apply to recapture the benefit of the adder with respect to any property that ceases to be property eligible for the adder (but which does not cease to be investment credit property in general).  

Section 1.48(e)-1(n)(3) provides that a recapture event occurs if – (i) the property fails to provide the required financial benefits; (ii) the property fails to equitably allocate financial benefits to occupants; (iii) the property fails to provide at least 50 percent of financial benefits to qualifying households or to provide those households the required minimum 20 percent bill credit discount rate; (iv) for residential rental property, the building ceases to participate in a covered housing program or other affordable housing problem; or (v) the facility increases output above 5MWvi, unless it is proven the increase is from a new facility.vii Further, if a project is placed into service after it applies for the Adder, but before it gets approved for the Adder, the Adder will not be available even if the application is subsequently approved. Timing is crucial.  

In summary, properties claiming an additional investment tax credit under section 48(e) now have to deal with two distinct recapture frameworks. If a property runs afoul of any of the rules in § 1.48(e)-1(n)(3), then the Low-Income Community Adder is subject to recapture (notwithstanding the one-time ability to remedy a failure within 12 months as described in § 1.48(e)-1(n)(2)). If a property runs afoul of the old-fashioned recapture rules in §50, both the base credit and its Low-Income Community Adder are subject to recapture. 


When the Low-Income Community Adder applies, it significantly increases the return on investment in the relevant energy property. However, if a taxpayer successfully applies for and is granted a capacity limitation, it is not time to relax. Instead, the taxpayer must be diligent in ensuring that certain requirements continue to be met when the relevant property is placed in service, and even for five years after that date. Otherwise, that generous gift must be returned or exchanged for one of significantly less value.