Treasury Department Notice of Proposed Rulemaking: Definition of Energy Property and Rules Applicable to the Energy Credit

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On November 17, 2023, the Treasury Department released guidance in the form of a notice of proposed rulemaking (NPRM) on the Investment Tax Credit (ITC) for clean energy property pursuant to Section 48 of the Internal Revenue Code. The proposed regulations contain important definitions and details on the applicability of fast-growing technologies that the Section 48 ITC was expanded to include as part of the landmark clean energy tax package under the Inflation Reduction Act of 2022 (IRA), including offshore wind and battery storage.

Stakeholder comments on the NPRM are due by January 22, 2024, as are requests to speak and outlines of topics to be discussed at a public hearing on the NPRM scheduled for February 20, 2024 at 10 a.m. ET. Relevant highlights from the guidance are described in more detail below.


Energy Property Definition

Consists of all components that meet Section 48 statutory requirements, including:

  • Components of an energy property included in a unit of energy property because they are functionally interdependent, and;
  • Taxpayer-owned property that are integral parts of such energy property

General Requirements

  • Construction, Reconstruction, or Erection of Energy Property. Treasury largely adopted the definition of the term “constructed, reconstructed, or erected” from existing rules, which apply to energy property if the work is performed for the taxpayer according to the taxpayer’s specifications.
  • Acquisition and Original Use of Energy Property. Treasury adopted the existing standard that property is deemed to be acquired when reduced to physical possession or control by the taxpayer.
  • Acquisition of energy property means a transaction by which a taxpayer obtains rights and obligations, including title based on the local laws where the energy property is sited, unless said property is possessed or controlled by the taxpayer as a lessee.
  • Original use is the first use to which property is put, whether or not such use corresponds to the use of such property by the taxpayer.
  • Depreciation Allowable. Treasury clarified that the 100 percent additional first year depreciation is an acceptable method. Treasury also largely adopted existing rules to determine depreciation allowable under Section 48.
  • Performance and Quality Standards for Energy Property. Treasury adopted existing rules that provide energy property must meet quality and performance standards, if any, prescribed by the Secretary and are in effect at the time of acquisition.
  • Time of acquisition refers to either (i) the date the taxpayer enters into a binding contract to acquire the property; or (ii) for property constructed, reconstructed, or erected by the taxpayer, the earlier of the date that the taxpayer begins construction, reconstruction, or erection of the property, or the date the taxpayer and another person enter into a binding contract requiring the other person to construct, reconstruct , or erect property and place the property in service for an agreed upon use.
  • Binding contract is one enforceable under State law against the taxpayer or a predecessor, and does not limit damages to a specified amount.1
  • Placed in Service. Treasury largely adopted existing rules that define the placed in service date as the earlier of (i) the taxable year in which the period for depreciation of such property begins; or (ii) the taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function in either a trade or business or in the production of income.
  • With respect to credit elections that treat a lessee as having purchased the energy property, the placed in service date corresponds to the taxable year in which the lessor transfers possession to the lessee.


Treasury clarified that any part of a qualified facility that has received a Section 45 Production Tax Credit (PTC) for any prior taxable year, including the PTC for clean hydrogen (§45V) and carbon capture (§45Q), is ineligible for the Section 48 ITC.

Proposed Definitions


Solar energy property is defined as any property that has solar energy equipment to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, except property used to generate energy for the purposes of heating a swimming pool. Solar electric generation equipment, a new definition set forth by Treasury, includes equipment that converts sunlight into electricity through the use of devices such as solar cells or other type of collectors.

Energy Storage

Energy storage property is defined to mean property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, that stores energy), and has a nameplate rating of not less than 5 kilowatt-hours (kWh).

Fuel Cell

Fuel cell property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatt (kW) (1 kW in the case of a fuel cell power plant with a linear generator assembly) of electricity using an electrochemical process or electromechanical process and an electricity only generation efficiency greater than 30 percent.


Geothermal property means equipment used to produce, distribute, or use energy derived from a geothermal deposit, including production and distribution equipment, consistent with the definitions provided under existing rules.2

Microgrid Controllers

Microgrid controllers are defined as equipment that is part of a qualified microgrid and designed and used to monitor and control the energy resources and loads on such microgrid.3

Other Energy Property

Importantly, additional property specified in future legislation under Section 48 may be treated as energy property; the proposed regulations apply accordingly.


Scope of Included Components

To determine which project components qualify as energy property, the NPRM follows a function-oriented approach using the concepts of functional interdependence and integral parts of an energy property.4

Unit of Energy Property

Consists of all functionally interdependent components of property owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project.

Functional Interdependence

Components of property are functionally interdependent if the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen, or otherwise perform its intended function as Section 48 and the NPRM provide.

Energy property generally includes all components necessary to generate or store electricity or thermal energy for transmission, distribution, or use up to (but not including) that stage that transmits, distributes, or uses electricity or thermal energy. Energy property generally would not include equipment that is an addition or modification to an existing energy property unless the NPRM dictates otherwise.

Integral Part of an Energy Property

To be an integral part of energy property, such parts must be used directly in the intended function of the energy property as Section 48 and the NPRM provided, and be essential to the completeness of the intended function.


Illustrative Examples

Offshore Wind

The guidance establishes that power conditioning and transfer equipment may qualify for inclusion in the credit basis related to qualified offshore wind facilities when meeting the definition of integral part described in the NPRM.5

  • Applying the tests described above, Treasury provided that all components of an offshore wind facility up to and including the transformer and switchgear housed in the onshore substation are eligible under Section 48. Treasury did not extend this treatment to transmission and distribution.

Onsite Roads

Similarly, onsite roads used for equipment to operate and maintain energy property are treated as an integral part of such property for the purposes of the Section 48 ITC.

  • Roads primarily used for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property.

Fences and Buildings

By contrast, the guidance provides that structures such as fences and buildings are not integral parts of an energy property because they are not integral to the activity performed by the energy property.

  • In some cases, certain types of structures may not be treated as buildings for the purposes of the integral parts test, such as (i) a structure that is essentially an item of machinery or equipment; and (ii) a structure that houses property that is integral to the activity of an energy property, if the use of the structure is so closely related to the housed energy property that the structure clearly can be expected to be replaced when the energy property it initially houses is replaced.

Energy Projects

The proposed regulations clarify the definition of “energy project” to ensure consistent application of IRA prevailing wage and apprenticeship (PWA) requirements, the domestic content bonus credit, and the energy communities bonus credit.


  • One or more energy properties that are operated as part of a single project.
  • Multiple energy properties would be treated as a single energy project if, at any point during the construction of the multiple energy properties, they are

(i) owned by a single taxpayer; and (ii) any two or more of the following factors apply:

  1. The energy properties are construction on continuous pieces of land;
    1. The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
    1. The energy properties have a common intertie;
    1. The energy properties share a common substation, or thermal energy off-take point;
    1. The energy properties are described in one or more common environmental or other regulatory permits;
    1. The energy properties are constructed pursuant to a single master construction contract; or
    1. The construction of the energy properties are financed pursuant to the same loan agreement.
  2. Related taxpayers would be treated as one taxpayer in determining whether multiple energy properties are treated as an energy project.
  3. If multiple energy properties are treated as a single project for beginning of construction purposes with respect to the Section 48 ITC, those multiple energy properties would also be treated as one energy project for purposes of the PWA requirements, domestic content bonus credit, and energy communities bonus credit.
Interconnection Property

Interconnection Property

The IRA added a provision to Section 48 regarding the inclusion of amounts paid or incurred by the taxpayer for qualified interconnection property regarding the installation of lower-output energy property. The NPRM includes rules that would clarify this expansion and Treasury requests further comment in multiple areas. These include:

Qualified Interconnection Property

  • The proposed regulations clarify that amounts paid or incurred by the taxpayer for qualified interconnection property that is required to accommodate the interconnection of energy property with a maximum net output of not greater than 5 MW are eligible to be included in the basis of the Section 48 ITC.
  • The maximum net output of energy property is measured only by nameplate generating capacity of the unit of energy property at the time it is placed in service.

Costs Included in Basis of Related Energy Property

  • Only amounts paid or incurred by a taxpayer for property that is constructed, reconstructed, or erected by the taxpayer are included.
  • When a utility reimburses a taxpayer for costs the taxpayer pays or incurs for qualified interconnection property, the utility should provide the taxpayer with information regarding such costs by the project placed in service date.
  • Taxpayers must retain documentation in compliance with section 6001 of the Code; the NPRM does not provide any specific type of required documentation and any documentation that satisfies section 6001 will suffice.

Five-Megawatt Limitation

  • The 5 MW limitation applies at the level of energy property.
  • In accordance with the standard above, the NPRM states that an energy project comprised of multiple energy properties with a combined nameplate capacity in excess of 5 MW is nonetheless eligible to include amounts paid or incurred by the taxpayer for qualified interconnection property if each energy property satisfies the five-megawatt limitation.

Non-Application to Certain Types of Energy Properties

  • The provision concerning qualified interconnection property is inapplicable with respect to microgrid controllers, electrochromic glass, fiber optic solar energy, and thermal energy property.
Additional Rules & Technical Definitions

Additional Rules and Technical Definitions

Recapture Rules Under PWA Requirements

In the NPRM, Treasury provided additional guidance regarding the recapture rules for any project that fails to satisfy PWA requirements with respect to an alteration or repair of such project for the five-year period beginning on the date such project is originally placed in service. The Department offered the following points of clarification:

  • Taxpayers are subject to recapture for a failure to satisfy PWA requirements at any time during the aforementioned five-year period.
  • The five-year recapture period begins on the day an energy project is placed in service and ends on the day that is five full years after the placed-in-service date.
  • Each 365-day period within the recapture period is a separate recapture year.
  • Whether a recapture event has occurred is determined at the close of the taxable year that begins or ends within the five-year recapture period.
  • The IRS will verify compliance via an annual information reporting requirement made at the time the taxpayer files its income tax or other annual return following the close of each recapture year.
  • If the increased credit amount is subject to recapture, then the corresponding increase in tax would be assessed with respect to the taxable year in which the recapture event occurred.
  • Taxpayers whose increased credit amount is subject to recapture may still be entitled to the base credit amount if all necessary requirements are satisfied.

Location of Energy Property

If property is a functionally interdependent part of an energy property as previously defined, such property is part of an energy property regardless of location.

Retrofitted Energy Property

The “80/20” rule applies to energy property for purposes of the Section 48 ITC (i.e., a qualified facility may qualify as originally placed in service even though it contains some used property, provided that the fair market value of the used property is not more than 20 percent of the facility’s total value).

Dual Use Property

  • The NPRM states that it would be most consistent with statutory intent to reduce the applicable threshold of the “Dual Use” rule from 75 to 50 percent (i.e., energy property must derive a minimum of 50 percent of energy from a qualifying source during an annual measuring period).
  • If less than 50 percent of energy used is from qualifying sources, then the eligible basis is zero, and the property is not eligible for the Section 48 ITC.
  • If between 50 and 100 percent of energy used is from qualifying sources, only a proportionate amount of the eligible basis of the energy property will be taken into account in computing the applicable credit amount.

Energy Property Eligible for Multiple Credits

The same energy property may be eligible for both the Section 48 ITC and other credits subject to certain limitations, including those described previously.

Multi-Party Ownership

  • In cases where energy property is owned by multiple taxpayers, each party is eligible for the Section 48 credit to the extent of the party’s fractional ownership interest.
  • Relative to offshore wind, Treasury clarified that if power conditioning and transfer equipment owned by one taxpayer is an integral part of an energy property owned by an unrelated taxpayer, the taxpayer that owns the power conditioning and transfer equipment would not be eligible for the Section 48 ITC but the taxpayer that owns the energy property would be eligible.

Coordination with Other Code Provisions

  • In cases where a taxpayer that owns a qualified facility elects to claim the Section 48 ITC in lieu of the Section 45 PTC, the NPRM provides that the requirements of Section 45 are not imposed, but the election is binding on all taxpayers that directly or indirectly own an interest in the facility.
  • The NPRM further requires that the election be made at the entity level and is binding on all ultimate credit claimants.

Co-located Energy Storage Property and Other Qualified Facilities

In the NPRM, Treasury acknowledged that energy storage technologies eligible for the Section 48 ITC are often co-located with qualified facilities seeking the Section 45 PTC and may share power conditioning and transfer equipment.

  • Accordingly, the NPRM provides that power conditioning and transfer equipment that is shared by a qualified facility and an energy property may be treated as an integral part of the Section 48 energy property. Such shared property is not considered part of qualified facility and so the sharing of such property will not impact the ability of a taxpayer to claim the Section 48 ITC for the energy property or the Section 45 PTC for the qualified facility.

  • 5 For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount.
  • 5 For the definition of “geothermal deposit,” “production equipment,” and “distribution equipment” see section 613(e)(2), proposed §1.48-9(e)(3)(ii)), and proposed §1.48-9(e)(3)(iii), respectively.
  • 3 For the definition of “qualified microgrid,” see Section 48(c)(8)(B).
  • 4 See unpublished NPRM at p. 40.
  • 5 See proposed §1.48-9(f)(3)(i).