How to Qualify for the Energy Community Tax Credit Bonus

The Inflation Reduction Act of 2022 introduced the energy community tax credit bonus, an incentive for clean energy projects. This bonus provides an additional credit on top of the base Investment Tax Credit (ITC) or Production Tax Credit (PTC) available for renewable energy developments. The primary goal is to stimulate economic growth and investment in areas that have been historically dependent on the fossil fuel industry. By offering enhanced financial benefits, the policy encourages the construction of new clean energy facilities in communities transitioning away from traditional energy sources. The bonus applies to a wide range of projects, from utility-scale solar and wind farms to smaller distributed generation and energy storage systems.

Determining Eligibility for the Bonus

Qualification for the energy community bonus hinges on a project’s geographic location. The Internal Revenue Service (IRS) has defined three distinct categories of locations that constitute an “energy community.” A project needs to be situated in an area that meets the criteria for just one of these categories to be eligible for the additional tax credit.

A project may be eligible if it is built on a “brownfield site.” The definition for this category is tied to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). A brownfield is identified as real property where expansion, redevelopment, or reuse is complicated by the potential presence of a hazardous substance, pollutant, or contaminant. This means a site with a history of industrial use could potentially qualify, even if the contamination is only suspected and not fully confirmed.

Another pathway to eligibility is through the statistical area category, based on local economic data. This category includes Metropolitan Statistical Areas (MSAs) or non-MSAs that meet two conditions. First, for any year after 2009, the area must have had at least 0.17% direct employment or 25% of local tax revenue related to fossil fuels. Second, the area must have had an unemployment rate at or above the national average for the previous year. The IRS provides annual lists of these qualifying areas.

The final category focuses on communities directly impacted by recent coal industry closures. A census tract qualifies as an energy community if a coal mine within its borders was closed after December 31, 1999. A tract also qualifies if a coal-fired electric generating unit located within it was retired after December 31, 2009. Any census tract that directly shares a border with a tract containing a closed coal mine or retired coal plant also qualifies as an energy community under the “adjoining tract” rule.

Required Information and Substantiation

Before a taxpayer can claim the bonus, they must gather information to prove the project’s location qualifies. A primary resource for this process is the Department of Energy’s (DOE) Energy Communities IWG mapping tool. This interactive map allows users to enter a project’s address or latitude and longitude coordinates to see if it falls within any designated energy community areas. The map displays qualifying census tracts for coal closures, statistical areas, and provides information on brownfield sites.

For projects seeking to qualify under the brownfield site category, the documentation requirements are more specific. The taxpayer must substantiate that the property meets the CERCLA definition of a brownfield. This is often accomplished by obtaining a Phase I Environmental Site Assessment (ESA), a report prepared by an environmental professional to identify potential contamination liabilities. In some cases, a more intensive Phase II ESA, which involves collecting soil and water samples, may be necessary.

The IRS has established a safe harbor rule for project planning. This provision states that if a project’s location qualifies as an energy community on the date that construction begins, it will retain that status for the entire duration of the credit period for that project. This rule protects developers from the risk that a location’s eligibility might change due to updated unemployment data or revised census tract boundaries.

Claiming the Tax Credit Bonus

Once a project’s eligibility is confirmed and documentation is compiled, the bonus can be claimed. The bonus is not a separate credit; instead, it is claimed as an enhancement to the underlying base credit on the relevant federal tax form. For projects utilizing the Investment Tax Credit (ITC), this is done on Form 3468, Investment Credit.

On the form, the taxpayer will need to check a specific box attesting that the facility is located in an energy community. This action certifies to the IRS that the project meets the location requirements. While this certification is not filed with the tax return, taxpayers must maintain all necessary documentation to substantiate their claim. This includes records like screenshots from the DOE mapping tool or environmental site assessments, which must be made available in the event of an IRS examination.