Code of Federal Regulations · Section

§ 1.45Y-4 — y-4 Rules Of General Application

26 C.F.R. § 1.45Y-4

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(a) Only production in the United States is taken into account for purposes of section 45Y. Consumption, sales, or storage are taken into account for purposes of the section 45Y credit (defined in § 1.45Y-2(a)) only with respect to electricity the production of which is within the United States (within the meaning of section 638(1) of the Internal Revenue Code (Code)), or a United States territory, which for purposes of section 45Y and the section 45Y regulations (defined in § 1.45Y-2(a)) has the meaning of the term a possession of the United States (within the meaning of section 638(2)).

(b) Production attributable to the taxpayer—(1) In general. In the case of a qualified facility in which more than one person has an ownership share (and the arrangement is not treated as a partnership for Federal tax purposes) production from the qualified facility is allocated among such persons in proportion to their respective ownership shares in the gross sales from such qualified facility. The respective owners each determine their respective section 45Y credit under section 45Y(a) and based on their respective ownership shares in the gross sales from such qualified facility during the taxable year.

(2) Example of gross sales. A, B and C, all calendar year taxpayers, each own an interest in a solar facility which is a qualified facility (as defined in § 1.45Y-2(a)) (Solar Facility). A owns 45 percent, B owns 35 percent, and C owns 20 percent, and each are allocated gross sales from the Solar Facility in proportion to their ownership interest. The Solar Facility produced 1000 kWh of electricity during the taxable year. A, B, and C will each determine their respective section 45Y credit under section 45Y(a) and § 1.45Y-1(b) based on their allocable share of the gross sales from the 1000 kWh of electricity produced at the Solar Facility during the taxable year.

(3) Section 761(a) election. If a qualified facility is owned through an unincorporated organization that has made a valid election under section 761(a) of the Code, each member's undivided ownership share in the qualified facility will be treated as a separate qualified facility owned by such member.

(c) Expansion of facility; Incremental production (Incremental Production Rule)—(1) In general. Solely for purposes of this paragraph (c), the term qualified facility includes either a new unit or an addition of capacity placed in service after December 31, 2024, in connection with a facility described in section 45Y(b)(1)(A) (without regard to section 45Y(b)(1)(A)(ii)) that was placed in service before January 1, 2025, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity. This rule is only applicable to an addition of capacity or new unit that would not otherwise qualify as a separate qualified facility as defined in section 45Y(b)(1)(A). A new unit or an addition of capacity that meets the requirements of this paragraph (c) will be treated as a separate qualified facility. For purposes of this paragraph (c), a new unit or an addition of capacity requires the addition or replacement of components of property, including any new or replacement integral property, added to a facility necessary to increase capacity. For purposes of assessing the One Megawatt Exception provided in section 45Y(a)(2)(B)(i), the maximum net output for a new unit or an addition of capacity is the sum of the capacity of the added qualified facility and the capacity of the facility to which the qualified facility was added, as determined under § 1.45Y-3(c) and paragraph (c)(2) of this section.

(2) Measurement standard. For purposes of this paragraph (c), taxpayers must use one of the measurement standards described in paragraph (c)(2)(i), (ii), or (iii) of this section to measure the capacity and change in capacity of a facility, except a taxpayer cannot use the measurement standard described in paragraph (c)(2)(ii) of this section if they are able to use the measurement standard described in paragraph (c)(2)(i) of this section:

(i) Modified or amended facility operating licenses from the Federal Energy Regulatory Commission (FERC) or the Nuclear Regulatory Commission (NRC), or related reports prepared by FERC or NRC as part of the licensing process;

(ii) Nameplate capacity certified consistent with generally accepted industry standards, such as the International Standard Organization (ISO) conditions to measure the nameplate capacity of the facility consistent with the definition of nameplate capacity provided in 40 CFR 96.202; or

(iii) A measurement standard prescribed by the Secretary in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter).

(3) Special rule for restarted facilities. Solely for purposes of this paragraph (c), a facility that is decommissioned or in the process of decommissioning and restarts can be considered to have increased capacity from a base of zero if the conditions described in each of paragraphs (c)(3)(i) through (iv) of this section are met:

(i) The existing facility must have ceased operations;

(ii) The existing facility must have a shutdown period of at least one calendar year during which it was not authorized to operate by its respective Federal regulatory authority (that is, FERC or NRC);

(iii) The restarted facility must be eligible to restart based on an operating license issued by either FERC or NRC; and

(iv) The existing facility may not have ceased operations for the purpose of qualifying for the special rule for restarted facilities in this paragraph (c)(3).

(4) Computation of increased amount of electricity produced. To determine the increased amount of electricity produced by a facility in a taxable year by reason of a new unit or an addition of capacity, a taxpayer must multiply the amount of electricity that the facility produces during that taxable year after the new unit or addition of capacity is placed in service by a fraction, the numerator of which is the added capacity that results from the new unit or addition of capacity, and the denominator of which is the total capacity of the facility with the new unit or addition of capacity added, provided the added capacity and resulting total capacity are measured using a measurement standard identified in paragraph (c)(2) of this section.

(5) Examples. This paragraph (c)(5) provides examples illustrating the rules of paragraph (c) of this section.

(i) Example 1. New Unit. X owns a hydropower facility (Facility H) that was originally placed in service in 2020, with a FERC license authorizing an installed capacity of 60 megawatts. During taxable years 2020 through 2024, X claimed a section 45 credit for the electricity produced by Facility H. On July 1, 2025, as allowed by a FERC license amendment, X places in service components of property comprising a new unit that results in Facility H having an increased authorized installed capacity of 90 megawatts in 2025. For purposes of paragraph (c) of this section, this new unit will be treated as a separate facility (Facility J). X may claim a section 45Y credit during the 10-year credit period starting on July 1, 2025, based on the increased amount of electricity generated as a result of the new unit, which is determined by multiplying the electricity that Facility H produces with Facility J by one-third (equal to the 30-megawatt increase in capacity that results from the addition of Facility J divided by the 90 megawatt capacity of Facility H with Facility J). Even though X claimed a section 45 credit for the existing capacity of Facility H in taxable years 2020 through 2024, X can claim a section 45Y credit for the production of electricity associated with Facility J. X may also continue to claim the section 45 credit through taxable year 2030 for electricity generated by Facility H (excluding the incremental electricity generation related to Facility J).

(ii) Example 2. Addition of Capacity. Y owns a nuclear facility (Facility N) that was originally placed in service on January 1, 2000. Y claimed a section 45U credit in taxable years 2024 and 2025 for the electricity generated by Facility N. On January 15, 2026, Y completed and placed in service an investment associated with a power uprate approved by an NRC license amendment that involved the removal and replacement of components of property and placing in service additional components of property. NRC reports associated with the license amendment describe the uprate as increasing the nuclear facility's electrical capacity by 100 MW to 900 MW. For purposes of this paragraph (c), Facility N's addition of capacity is treated as a new separate qualified facility placed in service on January 15, 2026 (Facility P). Y may claim a section 45Y credit during the 10-year credit period starting on January 15, 2026, based on the increased amount of electricity produced at Facility N that is attributable to the addition of capacity (Facility P), which is determined by multiplying the electricity that Facility N produces with Facility P by

1/9 (equal to the 100-megawatt increase in capacity divided by Facility N's new total capacity of 900 megawatts with Facility P, as described in NRC reports associated with the license amendment). Even though Y claimed a section 45U credit in taxable years 2024 and 2025 for the existing capacity of Facility N, Y can claim a section 45Y credit for the production of electricity associated with Facility P. Y may also continue to claim the section 45U credit for electricity generated by Facility N (excluding the incremental electricity generation related to Facility P).

(iii) Example 3. Geothermal Turbine and Generator Additions of Capacity. X owns a geothermal power plant (Facility G) with a 24 MW nameplate capacity, which is placed in service in 2007. Over the subsequent years, the plant's generating capability declines because of physical degradation of the turbine and generator. On March 1, 2027, X places in service components of property at Facility G that increase its capacity. The turbine rotor is removed, and the eroded blades are replaced with new blades. The generator is refurbished by removing old subcomponents of the generator and replacing those with new subcomponents, as well as replacing the old copper windings with new windings in concert with new insulation. After the upgrade, the plant increases its nameplate capacity to 26 MW, an increase of 2 MW over the previous nameplate capacity. For purposes of this paragraph (c), the addition of capacity to Facility G is treated as a new separate qualified facility placed in service on March 1, 2027 (Facility N). X may claim a section 45Y credit during the 10-year credit period starting on March 1, 2027, based on the amount of electricity produced by Facility N, which is determined by multiplying the aggregate amount of electricity that Facility G produces with Facility N by 1/13 (that is, the fraction equal to the 2-megawatt increase in nameplate capacity attributable to Facility N divided by the new total aggregate 26 megawatt nameplate capacity of Facility G with Facility N).

(iv) Example 4. Hydropower Addition of Capacity. X owns a hydropower plant (Facility H) that was placed in service in 1960. Facility H has become less efficient since it was placed in service with attendant reductions in its generating capacity. As approved by a FERC license amendment, X increases Facility H's capacity by installing new headcovers, new turbines with integrated dissolved oxygen injection, and a new high pressure digital governor system. The new turbines are more efficient and are capable of more power output than the original design. Improvements to the generators involve removing the old asphalt coated copper windings and purchasing and then installing new epoxy coated double wound windings. X adds digital controls to effectively utilize new digital governors while simultaneously investing in cybersecurity protection. As set forth in the FERC order amending its license, these investments, which are placed in service on April 15, 2026, increase Facility H's authorized installed capacity from 180 MW to 190 MW, an increase of 10 MW. For purposes of this paragraph (c), Facility H's addition of capacity is treated as a new separate qualified facility placed in service on April 16, 2026 (Facility A). X may claim a section 45Y credit during the 10-year credit period starting on April 16, 2026, based on the amount of electricity produced by Facility A, which is determined by multiplying the aggregate amount of electricity that Facility H produces with Facility A by 1/19 (equal to the 10-megawatt increase in capacity attributable to Facility A divided by the new total aggregate 190 MW capacity of Facility H with Facility A).

(v) Example 5. Nonoperational Nuclear Facility that Satisfies Restart Rule. T owns a nuclear facility (Facility N) that was originally placed in service in 1982. In 2020, Facility N ceased operations, began decommissioning, and the NRC no longer authorized the operation of Facility N. T did not cease operations at Facility N for the purpose of qualifying for the special rule for restarted facilities under section 45Y. In 2028, the NRC authorized Facility N to restart and, on October 1, 2028, Facility N placed in service components of property and restarted and resumed operations, with an electrical capacity of 800 MW, as indicated in NRC documents related to the authorization to restart. For purposes of this paragraph (c), the restart of Facility N is considered to have increased capacity from a base of zero, and Facility N is treated as having an addition of capacity equal to 800 MW. For purposes of this paragraph (c), Facility N's 800 MW addition of capacity is treated as a new qualified facility placed in service on October 1, 2028 (Facility P). T may claim a section 45Y credit during the 10-year period starting on October 1, 2028, based on the increased amount of electricity produced at Facility N that is attributable to that addition of capacity (Facility P).

(d) Retrofit of an existing facility (80/20 Rule)—(1) In general. For purposes of section 45Y(b)(1)(B), a facility may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility, provided the fair market value of the used components of the unit of qualified facility is not more than 20 percent of the total value of the unit of qualified facility (that is, the cost of the new components of property plus the fair market value of the used components of property within the unit of qualified facility) (80/20 Rule). If a facility satisfies the requirements of the 80/20 Rule, then the date on which such qualified facility is considered originally placed in service for purposes of section 45Y(b)(1)(B) is the date on which the new components of property of the unit of qualified facility are placed in service. A qualified facility that meets the 80/20 Rule may claim the section 45Y credit without regard to any addition of capacity to the qualified facility.

(2) Cost of new components of property. For purposes of the 80/20 Rule, the cost of new components of the unit of qualified facility includes all costs properly included in the depreciable basis of the new components of property of the unit of qualified facility.

(3) Examples. The following examples illustrate the rules of this paragraph (d).

(i) Example 1. Retrofitted facility that meets the 80/20 Rule. A owns an existing wind facility. On February 1, 2026, A replaces used components of the unit of qualified facility of a wind facility with new components at a cost of $2 million. The fair market value of the remaining original components of the unit of qualified facility is $400,000, which is not more than 20 percent of the retrofitted unit of qualified facility's total fair market value of $2.4 million (the cost of the new components ($2 million) + the fair market value of the remaining original components of the unit of qualified facility ($400,000)). Thus, the retrofitted wind facility will be considered newly placed in service for purposes of section 45Y, and the section 45Y credit is allowable for electricity produced by A at the wind qualified facility and sold, consumed, or stored, during the 10-year period beginning on February 1, 2026, assuming all the other requirements of section 45Y are met.

(ii) Example 2. Retrofit of an existing facility that meets the 80/20 Rule. Facility Z, a facility that was originally placed in service on January 1, 2026, was not a qualified facility (as described in § 1.45Y-2(a)) when it was placed in service because it did not meet the greenhouse gas emissions rate requirements (as determined under rules provided in § 1.45Y-5). On January 1, 2027, Facility Z was retrofitted and now meets the requirements to be a qualified facility under § 1.45Y-2(a). After the retrofit, the cost of the new property included in the unit of qualified facility of Facility Z is greater than 80 percent of the unit of qualified facility of Facility Z's total fair market value. Because Facility Z meets the 80/20 Rule, Facility Z is deemed to be originally placed in service on January 1, 2027. Therefore, a section 45Y credit is allowable for electricity produced by Facility Z and sold, consumed, or stored during the 10-year period beginning on January 1, 2027, assuming all the other requirements of section 45Y are met.

(iii) Example 3. Retrofitted nuclear facility that satisfied the 80/20 Rule. T owns a nuclear facility (Facility N) that was originally placed in service on March 1, 1982. T replaces used components of property of unit of qualified facility of Facility N with new components at a cost of $200 million, placing in service the components of property on July 15, 2026. The fair market value of the remaining original components of the unit of qualified facility of Facility N, prior to the retrofit, is $30 million, which is less than 20 percent of the unit of qualified facility of Facility N's total fair market value of $230 million (the cost of the new components ($200 million) + the fair market value of the remaining original components of the unit of qualified facility ($30 million)) ($30 million/$230 million = 13%). Thus, Facility N will be considered newly placed in service on July 15, 2026, for purposes of section 45Y, and T will be able to claim a section 45Y credit based on the electricity generated at Facility N, assuming all the other requirements of section 45Y are met.

(iv) Example 4. Capital improvements to an existing qualified facility that do not satisfy the 80/20 Rule. X owns an existing facility, Facility C, that was originally placed in service on January 1, 2023. X makes capital improvements to Facility C that are placed in service on June 1, 2026. The cost of the capital improvements to the unit of qualified facility of Facility C is $500,000 and the fair market value of the unit of qualified facility of Facility C after the improvements is $2 million. The value of the old components of property of the unit of qualified facility is $1,500,000 out of $2.0 million, or 75 percent ($500,000/$2,000,000) of the total fair market value of the unit of qualified facility after the improvements. Because the fair market value of the new property included in the unit of qualified facility is less than 80 percent of the total fair market value of the unit of qualified facility, Facility C does not meet the 80/20 Rule. Facility C will not be considered a qualified facility (as defined in § 1.45Y-2(a)) eligible for the section 45Y credit. If the capital improvements to Facility C increase its nameplate capacity, the determination that it does not meet the 80/20 Rule does not prevent X from claiming a section 45Y credit if the requirements under paragraph (c)(1) of this section are met.

(v) Example 5. Upgrades to a hydropower qualified facility that satisfies the 80/20 Rule: Y owns a hydropower qualified facility (hydropower facility) and no taxpayer, including Y, has ever claimed a section 45 credit for the hydropower facility. The hydropower facility consists of a unit of qualified facility including water intake, water isolation mechanisms, turbine, pump, motor, and generator. The associated impoundment (dam) and power conditioning equipment are integral parts of the unit of qualified facility. Y makes upgrades to the unit of qualified facility by replacing the turbine, pump, motor, and generator with new components at a cost of $1.5 million. Y does not make any upgrades to the property that is an integral part of the unit of qualified facility. The remaining original components of the unit of qualified facility have a fair market value of $100,000, which is not more than 20 percent of the retrofitted hydropower facility's total value of $1.6 million (that is, the cost of the new components ($1.5 million) + the value of the remaining original components ($100,000)). Thus, the retrofitted hydropower facility will be considered newly placed in service for purposes of section 45Y, and Y will be able to claim a section 45Y credit based on the cost of the new components ($1.5 million).

(e) Applicability date. This section applies to qualified facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.

26 C.F.R. § 1.45Y-3 26 C.F.R. § 1.45Y-5

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