The American Public Power Association recently joined with a broad coalition of governmental entities and the National Rural Electric Cooperative Association in filing comments with the U.S. Treasury Department and the Internal Revenue Service on exceptions to domestic content requirements for elective payment.
The Feb. 26 comments are in response to IRS Notice 2024-9, which provides “transitional” procedures for applicable entities to claim exceptions to the domestic content requirements for claiming elective payment (also known as direct payment) energy tax credits in 2024.
It also asks a series of questions intended to help Treasury and IRS develop regulations for implementing the exceptions to domestic content requirements for elective payment.
“We understand that implementation of these exceptions, as well as the domestic content requirements themselves, requires a balance between ensuring these provisions have the intended effect while also ensuring that they are not so restrictive or cumbersome as to prevent the use of elective payment entirely, particularly while domestic sources of equipment and materials are in their infancy,” the groups said.
“While Applicable Entities historically have been precluded from directly utilizing clean energy tax credits, it is our hope that practical regulations implementing the elective-payment rules enacted in the Inflation Reduction Act (IRA) will enable direct access to tax credits, recognizing the availability of domestic content in the marketplace, as well as the timing and nature of project development by Applicable Entities,” APPA and the other groups said.
They noted that The Notice establishes a procedure for an Applicable Entity to make an attestation that it has made a good-faith determination that it qualifies for the Increased Cost Exception and/or the Non-Availability Exceptions to the domestic-content requirement for elective payment (Good-Faith Determination).
This transition process is available for a qualified energy project construction that begins before January 1, 2025. The attestation is to be attached to the form required to be filed to seek elective payment for the qualified project, but the Notice does not indicate the date with respect to which the good-faith determination can, or should, be made.
“We appreciate the accommodation the Good-Faith Determination is intended to provide as part of the transition process. However, important clarifications are essential to make this process efficient and effective and should be included in any extension of this process in the future,” the groups said.
First, Treasury could provide further clarity by outlining a set of safe harbor steps that Applicable Entities can take to guarantee they are treated as having made a good-faith determination, they said.
For example, Treasury and the IRS could provide a safe harbor in the case of an Applicable Entity that sends out a well-publicized RFP, with a reasonable period for response – perhaps 30 days at a minimum – requesting bids that comply with domestic-content requirements, but allowing responses if the vendor cannot meet those requirements. In such an instance, a lack of responsive and responsible bids would be presumed to meet the conditions of the Non-Availability Exception.
“Alternatively, under the same scenario, assume the Applicable Entity receives responsive and responsible bids that meet domestic-content requirements, and it also receives responsive and responsible bids that do not meet domestic content requirements. In such a case, the Applicable Entity could then be allowed to compare the price estimates, and insofar as the estimated costs of construction would be 25 percent or more higher for the domestic-content compliant project than for a non-compliant project, then the Applicable Entity would be presumed to have made a good-faith determination that it qualifies for a price exception,” the groups said.
Second, the notice does not indicate the date with respect to which a Good-Faith Determination can or should be made, the groups noted.
Comparable determinations under other federal programs are made in advance, not after a project is completed, they said. “So, for example, the absence of a response to a well-publicized bid for a domestically manufactured product can be taken as proof that the product is not available in sufficient quantity and quality as of the time of the bid. We believe the same should be true here: an Applicable Entity should be allowed to make a Good-Faith Determination at any point that the method it is using for making such a determination allows.”
The commenters said the Applicable Entity could make the Good-Faith Determination at the point at which it failed to receive a responsive bid, even though it would not file an attestation to that effect until after the project was placed in service and a return was filed months or years in the future.
Third, the period during which a Good-Faith Determination may be made -- for projects the construction of which begins before January 1, 2025 – “may be of little use given the realities of project development,” APPA and the other groups argued.
They said that smaller projects may take eight to 18 months of development prior to the beginning of construction, and larger projects will be years in development prior to construction commencing.
“However, an Applicable Entity cannot sign contracts with project developers or engineering, procurement, and construction (EPC) firms needed for project development without knowing whether the project will meet domestic-content requirements (or one of its exceptions) and thereby qualify for elective payment. For example, one public power utility has a 43 MW upgrade to an existing wind facility for which it would like to begin the procurement process immediately. However, until there are domestic-content rules for when construction will actually begin – likely in 2025 or 2026 – the project is on indefinite hold.”
Additionally, projects subject to a National Environmental Policy Act review or a regional transmission organization/independent system operator interconnection queue process “take several years of development time before reaching a point where domestic products are purchased.”
“Even Applicable Entities with projects under development today would be unable to utilize the attestation process unless at a very mature stage of development,” the groups said.
“We strongly encourage Treasury and the IRS to extend the transition process period for as long as possible to end this logjam and allow the domestic market to materialize.”
Extending the attestation safe harbor for several years would provide more certainty to applicable entities seeking to build and own qualified energy properties, the groups said.
“We would also strongly encourage Treasury and the IRS to rely on a similar attestation process as part of the final regulations under the elective-payment rules, allowing Applicable Entities to make the up-front, good-faith determinations needed to allow a project to proceed, with attestations filed with the return seeking the associated elective payment.”
The groups also respond to specific requests for comments in their filing submitted to the U.S. Treasury Department and the Internal Revenue Service.
Specifically, the groups weighed in on, among other things, the following questions:
- For purposes of the Increased Cost Exception, what factors should be considered in defining the term “overall costs of construction”?
- For purposes of the Non-Availability Exception, what factors should be considered in defining the terms “sufficient and reasonably available quantities” or “satisfactory quality”?
- What documentation or other substantiation should be required of Applicable Entities to qualify for the Increased Cost Exception?
- What steps should be taken, if any, in implementing the Domestic Content Exceptions to reduce the burden on Applicable Entities?
In addition to NRECA, the letter was signed by the Government Finance Officers Association, the National League of Cities, the National Association of Counties, and the Special Districts Coalition.
The U.S. Department of Treasury and IRS on March 5 released final regulations relating to the implementation of elective payment of energy tax credits.
The final rule is primarily focused on the process and timeline for claiming and receiving an elective payment of energy tax credits. It does not provide guidance for meeting domestic content requirements for claiming elective payment, nor does it discuss the exceptions to those requirements.
