How the Low-Income Communities Bonus Credit Program Works

The Low-Income Communities Bonus Credit Program, established by the Inflation Reduction Act, provides an incentive for developing clean energy projects in specific areas. This program functions as an “adder,” supplementing the existing Investment Tax Credit (ITC) for certain solar and wind facilities. Its purpose is to encourage placing renewable energy infrastructure within low-income communities, on Indian lands, and in connection with affordable housing, distributing the benefits of clean energy to these areas.

The initiative is a competitive application process where project developers apply for an allocation of a national capacity limit. This allocation, if granted, increases the value of the ITC for the project. The bonus credit is designed to make smaller-scale clean energy projects more financially viable, thereby fostering job creation and lowering energy costs for families in these targeted communities.

Project and Location Eligibility

A project’s qualification for the program hinges on two primary factors: the nature of the energy facility and its geographic location. To be eligible, a project must be a solar or wind energy facility with a maximum net output of less than five megawatts (AC). This size limitation focuses the program on smaller-scale, community-oriented energy developments.

A project must also be situated in a location that meets specific definitions. One qualifying location is a “low-income community,” a designation determined by census tract data. These are the same criteria used for the New Markets Tax Credit (NMTC), which includes census tracts with a certain poverty rate or a median family income below a percentage of the state or metropolitan area median.

Another qualifying location is “Indian land,” which includes any land within an Indian reservation, public domain Indian allotments, and land held in trust by the United States for a tribe or individual. The specific definitions are outlined in the Indian Financing Act of 1974.

To verify if a proposed site meets these geographic requirements, developers can use official government mapping tools. The Department of Energy (DOE) provides online mappers that overlay qualifying census tracts and Indian land areas. These tools allow a developer to input a specific address or coordinates to receive a definitive determination of whether the location is eligible.

Bonus Credit Categories and Amounts

The program offers different levels of tax credit increases, sorted into four distinct categories. An applicant must select one category for their project, and the bonus credit is either 10 or 20 percentage points added to the base Investment Tax Credit.

Located in a Low-Income Community

This category provides a 10-percentage-point increase to the ITC. To qualify, a project must be located within a census tract designated as a “low-income community.” This determination uses poverty and income data as defined by the New Markets Tax Credit regulations under Internal Revenue Code section 45D.

Located on Indian Land

Projects located on Indian land are also eligible for a 10-percentage-point bonus credit. This category is intended to provide a direct incentive for investment and energy development that benefits tribal communities.

Qualified Low-Income Residential Building Project

This category offers a 20-percentage-point bonus credit for projects with more specific requirements. A project qualifies if it is installed on a residential rental building that participates in a covered affordable housing program, such as the Low-Income Housing Tax Credit program. A condition is that the financial benefits of the electricity generated must be equitably shared with the building’s residents.

Qualified Low-Income Economic Benefit Project

Also providing a 20-percentage-point credit increase, this category focuses on direct economic impact. A project is eligible if it provides at least 50 percent of the financial benefits of its electricity to qualifying low-income households. These are defined as households with incomes below 200 percent of the federal poverty line or below 80 percent of the area median gross income.

Required Application Information and Documentation

Applicants must compile comprehensive information about the proposed facility for the application. This includes the project’s name, its precise geographic location, the type of technology being used, and the facility’s planned capacity in megawatts (MW). Information regarding the ownership structure is also required, including the legal owner’s name and taxpayer identification number.

Ownership details are needed if the project is seeking priority consideration based on having majority ownership by a Tribal enterprise or a renewable energy cooperative. Applicants must also furnish specific documentation. A signed interconnection agreement with the local utility is a common requirement, demonstrating that the project has a viable plan to connect to the electrical grid.

For projects applying under Categories 3 or 4, which involve sharing financial benefits, detailed statements must be prepared describing how these benefits will be delivered to residents or low-income households. The application process requires the applicant to sign statements under penalty of perjury confirming that the information provided is true and accurate. Third-party verification may be needed to substantiate claims, particularly those related to the financial benefit-sharing plans.

The Application and Allocation Process

The Department of Energy (DOE) administers the program, and all applications must be submitted electronically through its online portal during an established application window. For the initial window, all applications received within the first 30 days are treated as if they were submitted at the same time.

The program has an annual capacity limitation, making it competitive. The government allocates a specific total amount of generating capacity each year, which for 2023 was 1.8 gigawatts, distributed across the four project categories. If a category is oversubscribed, the DOE employs a system to determine who receives an award.

The allocation process includes prioritization for certain projects. Half of the capacity in each category is reserved for projects that meet selection criteria, such as being located in persistent poverty counties or having majority ownership by entities like tribal enterprises. If a category is still oversubscribed after these priorities, the DOE uses a lottery system to randomly select which of the remaining projects will receive an allocation.

If an application is successful, the applicant receives a formal allocation letter from the DOE. This letter confirms the award of the bonus tax credit, and the project must then be placed in service within four years of receiving this allocation.