Clean energy projects often rely on federal tax credits to improve financial outcomes. One important incentive is the energy community tax credit bonus, which can add significant value to a project when structured correctly.
However, it also brings added complexity. Developers, investors, and tax credit buyers need to understand the rules before relying on them in a transaction.
This article explains the key factors to consider when structuring deals around the energy community tax credit bonus. It focuses on eligibility, timing, diligence, and risk management. The goal is to help deal teams make informed decisions using clear and simple guidance.
Understanding the Energy Community Bonus
The Inflation Reduction Act introduced several bonus credits, often called “adders.” One of these is the energy community bonus. It increases the base value of certain clean energy tax credits by 10%.
What the Bonus Provides
- A 10% increase in the value of eligible tax credits
- Applies only if prevailing wage and apprenticeship rules are met
- Cannot be stacked multiple times, even if a project qualifies under more than one category
For example, a project with a 30% investment tax credit could increase that credit to 40% if it qualifies for the energy community tax credit bonus.
Energy Community Categories to Evaluate
Projects must be located in a qualifying energy community. The law defines three distinct categories. Each category has its own rules and diligence needs.
Brownfield Sites
Brownfields are properties where redevelopment may be complicated by contamination. Qualification often relies on safe harbor pathways.
Common safe harbor paths include:
- Sites listed in federal or state brownfield programs
- Completion of a Phase II environmental assessment
- Phase I environmental assessments for smaller projects
- Brownfield qualification is often the most complex category to document.
Coal Closure Areas
These include census tracts where:
- A coal mine closed after 1999, or
- A coal-fired power plant retired after 2009
Once an area qualifies under this category, it remains eligible. This stability can reduce long-term risk in deal modeling.
Statistical Areas
Statistical areas qualify based on:
- Fossil fuel employment or tax revenue thresholds
- An unemployment rate at or above the national average
This category changes every year. A project may qualify one year and not the next. This creates a timing risk that must be addressed in contracts.
Timing and Eligibility Considerations
Timing is a critical factor when structuring deals around the energy tax credit bonus. Eligibility is not always measured at the same point for every credit type.
Investment Tax Credits (ITCs)
For ITC projects:
- Eligibility is determined when the project is placed in service.
- The test is not repeated after that date.
Delays in construction can impact whether a project still qualifies, especially in statistical areas.
Production Tax Credits (PTCs)
For PTC projects:
- Eligibility is tested annually over the ten-year credit period.
- A safe harbor applies if eligibility is confirmed at the beginning of construction.
Using the safe harbor can lock in the bonus for the full credit term.
The 50% Location Requirement
A project does not need to be fully located in an energy community. However, it must meet a minimum threshold.
Key rules include:
- At least 50% of nameplate capacity must be in an energy community.
- For storage projects, 50% of energy capacity applies.
- For non-energy projects, square footage is used.
Due Diligence Expectations
When a transaction relies on the energy community tax credit bonus, strong diligence is essential. Buyers face direct risk if credits are later disallowed. This is why location and category verification are closely reviewed before closing.
Location Verification
Buyers typically look for objective proof that the project meets eligibility requirements. This often includes verified project coordinates, site maps, references to IRS or federal agency lists, and confirmation that the 50% rule has been satisfied where applicable.
Category-Specific Review
Diligence standards vary by category. Statistical areas are checked against published IRS lists, while coal closure areas rely on fixed historical data. Brownfield claims usually require deeper review, often supported by legal or environmental opinions, due to the lack of a centralized federal list.
Key Risks to Address Early
When a deal depends on the bonus, several risks should be discussed early.
Common risk areas include:
- Construction delays affecting eligibility timing
- Annual changes in statistical area status
- Insufficient documentation for brownfield claims
- Failure to meet wage and apprenticeship rules
Clear contract language and conservative assumptions help reduce disputes later.
Conclusion
The energy community tax credit bonus can materially improve project economics. At the same time, it introduces added diligence and structuring requirements. Teams that treat the bonus as guaranteed without careful analysis may face challenges later.
By understanding eligibility categories, timing rules, transfer requirements, and diligence standards, parties can structure more resilient transactions. Thoughtful planning ensures the energy community tax credit bonus supports long-term value rather than creating unexpected risk.
