Code of Federal Regulations · Section

§ 1.48-9 — -9 Definition Of Energy Property

26 C.F.R. § 1.48-9

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(a) In general. For purposes of the credit determined under section 48 of the Internal Revenue Code (Code), the term energy property means property that, taking into account the definition of the term unit of energy property (defined in paragraph (f)(2)(i) of this section) and of other terms defined in paragraph (b) and other provisions of this section, meets the requirements of paragraph (c) of this section and is of a type of energy property set forth in paragraph (e) of this section. If a property is described more than once in the types of energy property set forth in paragraph (e), only a single section 48 credit is allowed. Paragraph (d) of this section provides rules for property excluded from energy property. Paragraph (f) of this section provides rules for components included in an energy property. Paragraph (g) of this section provides the applicability date for this section.

(b) Definitions related to requirements for energy property. For purposes of section 48, this section, §§ 1.48-13 and 1.48-14, and any provision of the Code or this chapter that expressly refers to any of the foregoing, the definitions in this paragraph (b) apply:

(1) Construction, reconstruction, or erection of energy property. The term construction, reconstruction, or erection of energy property means work performed to construct, reconstruct, or erect energy property either by the taxpayer or for the taxpayer in accordance with the taxpayer's specifications.

(2) Acquisition of energy property. The term acquisition of energy property means a transaction by which a taxpayer acquires the rights and obligations to establish tax ownership of an energy property for Federal income tax purposes.

(3) Original use of energy property—(i) In general. The term original use of energy property means the first use to which a unit of energy property is put, whether or not such use is by the taxpayer.

(ii) Retrofitted units of energy property. A retrofitted unit of energy property acquired by the taxpayer will be treated as not being put to original use by the taxpayer unless the rules in § 1.48-14(a) regarding retrofitted energy property (80/20 Rule) or paragraph (e)(10)(v) of this section regarding modifications of certain energy storage technology apply. The question of whether a unit of energy property meets the 80/20 Rule or is modified (as described in paragraph (e)(10)(v) of this section) is a facts and circumstances determination.

(4) Allowable—(i) In general. For purposes of applying paragraph (c)(1)(ii) of this section, depreciation or amortization in lieu of depreciation (collectively, depreciation) is allowable with respect to energy property if such property is of a character subject to the allowance for depreciation under section 167 of the Code and the basis or cost of such property is recovered using a method of depreciation (for example, the straight line method), which includes any additional first year depreciation deduction method of depreciation (for example, under section 168(k) of the Code). Further, if an Internal Revenue Service adjustment with respect to the Federal income tax or information return for such taxable year requires the basis or cost of such energy property to be recovered using a method of depreciation, depreciation is allowable to the taxpayer with respect to energy property.

(ii) Exclusions from allowable. For purposes of paragraph (b)(4)(i) of this section, depreciation is not allowable with respect to energy property if the basis or cost of such property is not recovered through a method of depreciation but, instead, such basis or cost is recovered through a deduction of the full basis or cost of the energy property in one taxable year (for example, under section 179 of the Code).

(5) Placed in service—(i) In general. Energy property is considered placed in service in the earlier of:

(A) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such energy property begins; or

(B) The taxable year in which the energy property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income. Energy property in a condition or state of readiness and availability for a specifically assigned function includes, but is not limited to, components that are acquired and set aside during the taxable year for use as replacements for a particular energy property (or energy properties) to avoid operational time loss and equipment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. However, components acquired to be used in the construction of an energy property will not be considered in a condition or state of readiness and availability for a specifically assigned function.

(ii) Energy property subject to § 1.48-4 election to treat lessee as purchaser. Notwithstanding paragraph (b)(5)(i) of this section, energy property with respect to which an election is made under § 1.48-4 to treat the lessee as having purchased such energy property is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.

(6) Unit of energy property. The term unit of energy property is defined in paragraph (f)(2)(i) of this section. No provision of this section or § 1.48-13 or § 1.48-14 uses the term unit in respect of energy property with any meaning other than that provided in paragraph (f)(2)(i) of this section.

(7) Claim. With respect to a section 48 credit determined with respect to energy property of a taxpayer, the term claim means filing a completing Form 3468, Investment Credit, or any successor form(s) with the taxpayer's timely filed (including extensions) Federal income tax return for the taxable year in which the energy property is placed in service, and includes the making of an election under section 6417 or 6418 of the Code and corresponding regulations with respect to such section 48 credit and made on the taxpayer's Federal income tax return or annual information return.

(c) Requirements for energy property—(1) In general. Energy property must satisfy each of the requirements of paragraphs (c)(1)(i) through (v) of this section:

(i) The taxpayer constructs, reconstructs, or erects the property, or, if the original use of the property commences with the taxpayer, acquires the property;

(ii) Depreciation (or amortization in lieu of depreciation) is allowable with respect to the property;

(iii) The property meets the performance and quality standards as provided in paragraph (c)(2) of this section;

(iv) The construction of the property begins before the date provided in section 48 (if any such date is provided); and

(v) The property is placed in service by the taxpayer by the date provided in section 48 (if any such date is provided).

(2) Performance and quality standards—(i) In general. Energy property must meet performance and quality standards, if any, that have been prescribed by the Secretary of the Treasury or her delegate (after consultation with the Secretary of Energy) and are in effect at the time of acquisition of the energy property.

(ii) Special rules for performance and quality standards—(A) Small wind energy property—(1) Small wind energy property must meet one of the following performance and quality standards in effect at the time of acquisition of the small wind turbine:

(i) American Wind Energy Association Small Wind Turbine Performance and Safety Standard 9.1 (AWEA standards);

(ii) International Electrotechnical Commission standards 61400-1, 61400-2, 61400-11, 61400-12 (IEC standards); or

(iii) ANSI/ACP Small Wind Turbine Standard 101-1 (ACP standards).

(2) Taxpayers may rely on a certification that the performance and quality standards set forth in this paragraph (c)(2)(ii)(A)(1) are met. Guidance published in the Internal Revenue Bulletin sets forth the requirements to certify that the performance and quality standards provided in this paragraph (c)(2)(ii)(A)(1) are met. See § 601.601 of this chapter.

(B) Electrochromic glass property. To be eligible for the section 48 credit, electrochromic windows must be rated in accordance with the National Fenestration Rating Council (NFRC) and secondary glazing systems must be rated in accordance with the Attachments Energy Rating Council (AERC) Rating and Certification Process, or subsequent revisions. See paragraph (e)(2)(ii) of this section for the definition of electrochromic glass property.

(iii) Time of acquisition. For purposes of applying performance and quality standards, the time of acquisition is the date the taxpayer enters into a binding contract (defined in paragraph (c)(2)(iv) of this section) to acquire the property, or, in the case of property constructed, reconstructed, or erected by the taxpayer, the earlier of the date that—

(A) The taxpayer begins construction, reconstruction, or erection of the property, or

(B) The taxpayer and another person enter into a binding contract (as defined in paragraph (c)(2)(iv) of this section) requiring the other person to construct, reconstruct, or erect property and to place the property in service for an agreed upon use.

(iv) Binding contract. For purposes of this paragraph (c)(2), whether a contract is binding is determined based on the rules described in § 1.168(k)-2(b)(5)(iii)(A).

(d) Property that is not energy property—(1) Interaction with section 45. Energy property does not include any property that is part of a qualified facility the production from which is allowed as a credit determined under section 45 of the Code (section 45 credit) for the taxable year or any prior taxable year. However, see paragraph (f)(3) of this section for rules regarding property that is an integral part of an energy property that is also used by a qualified facility. See § 1.48-14(f)(1) for rules regarding making an election under section 48(a)(5) to treat a qualified facility as an energy property.

(2) Other property. Energy property also does not include power purchase agreements, goodwill, going concern value, or renewable energy certificates.

(e) Types of energy property. The types of energy property eligible for a section 48 credit are:

(1) Solar energy property—(i) In general. Solar energy property is equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool. Solar energy property includes solar electric generation equipment (as defined in paragraph (e)(1)(ii) of this section), solar process heat equipment (as defined in paragraph (e)(1)(iii) of this section), and equipment that uses solar energy to heat or cool a structure or provide hot water for use in a structure, and parts related to the functioning of all such equipment.

(ii) Solar electric generation equipment. Solar electric generation equipment is equipment that converts sunlight into electricity through the use of devices such as solar cells or other collectors.

(iii) Solar process heat equipment. Solar process heat equipment is equipment that uses solar energy to generate steam at high temperatures for use in industrial or commercial processes.

(2) Fiber-optic solar energy property and electrochromic glass property—(i) Fiber-optic solar energy property. Fiber-optic solar energy property is equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.

(ii) Electrochromic glass property. Electrochromic glass energy property uses electricity to change its light transmittance properties (both visible and near infrared light) in order to heat or cool a structure. For purposes of section 48, windows, including secondary windows (also referred to as secondary glazings), that incorporate electrochromic glass are treated as electrochromic glass property.

(3) Geothermal energy property—(i) In general. Geothermal energy property is equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e)(2) of the Code), but only, in the case of electricity generated by geothermal power, up to (but not including) the electrical transmission stage. Geothermal equipment includes production equipment (as defined in paragraph (e)(3)(ii) of this section) and distribution equipment (as defined in paragraph (e)(3)(iii) of this section).

(ii) Production equipment. For purposes of paragraph (e)(3)(i) of this section, production equipment is equipment necessary to bring geothermal energy from the subterranean deposit to the surface, including well-head and downhole equipment (such as screening or slotting liners, tubing, downhole pumps, and associated equipment). Production, injection, and monitoring wells required for production of the geothermal deposit qualify as production equipment. If geothermal energy is used to generate electricity, production equipment also includes the property necessary to produce electricity. Production equipment does not include equipment used for exploration and development of geothermal deposits, such as drilling wells.

(iii) Distribution equipment. For purposes of paragraph (e)(3)(i) of this section, distribution equipment is equipment that transports geothermal energy from a geothermal deposit to the site of ultimate use. If geothermal energy is used to generate electricity, distribution equipment includes equipment that transports geothermal fluids between the geothermal deposit and the power plant. Distribution equipment also includes components of a building's heating and/or cooling system, such as pipes and ductwork that distribute within a building the energy derived from the geothermal deposit.

(4) Qualified fuel cell property. Qualified fuel cell property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatts (kW) (1 kW in the case of a fuel cell power plant with a linear generator assembly) of electricity using an electrochemical or electromechanical process, and an electricity-only generation efficiency greater than 30 percent. For this purpose, electricity-only generation efficiency may be calculated by dividing the heat rate of the fuel cell (for example, kilowatt-hours (kWh) electricity produced per kilogram (kg) of fuel consumed) by the higher heating value of the fuel (for example, kWh per kg). A fuel cell power plant is an integrated system comprised of a fuel cell stack assembly, or linear generator assembly, and associated balance of plant components that converts a fuel into electricity using electrochemical or electromechanical means. A linear generator assembly does not include any assembly that contains rotating parts.

(5) Qualified microturbine property. Qualified microturbine property is a stationary microturbine power plant that has a nameplate capacity of less than 2,000 kW and an electricity-only generation efficiency of not less than 26 percent at International Standard Organization conditions. A stationary microturbine power plant is an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and associated balance of plant components that converts a fuel into electricity and thermal energy. A stationary microturbine power plant also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors.

(6) Combined heat and power system (CHP) property—(i) In general. CHP property is property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications). CHP property must produce at least 20 percent of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof), and at least 20 percent of its total useful energy in the form of electrical or mechanical power (or combination thereof). The energy efficiency percentage of CHP property must exceed 60 percent (except in the case of CHP systems that use biomass within the meaning of section 45). CHP property does not include any property comprising a system if such system has a capacity in excess of 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities.

(ii) Components excluded. CHP property does not include property used to transport the energy source to the generating facility or to distribute energy produced by the facility.

(7) Qualified small wind energy property. Qualified small wind energy property is property that uses a qualifying small wind turbine to generate electricity. A qualifying small wind turbine means a wind turbine that has a nameplate capacity of not more than 100 kW.

(8) Geothermal heat pump (GHP) property. GHP property is equipment that uses the ground, ground water, or other underground fluids as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

(9) Waste energy recovery property (WERP)—(i) In general. WERP is property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Examples of buildings or equipment the primary purpose of which is not the generation of electricity include, but are not limited to, manufacturing plants, medical care facilities, facilities on college campuses, pipeline compressor stations, and associated equipment. WERP does not include any property that has a capacity in excess of 50 MW.

(ii) Coordination with CHP property. Any WERP that is part of a system that is a CHP property is not treated as WERP for purposes of section 48 unless the taxpayer elects to not treat such system as a CHP property for purposes of section 48.

(10) Energy storage technology—(i) In general. Energy storage technology includes electrical energy storage property described in paragraph (e)(10)(ii) of this section, thermal energy storage property described in paragraph (e)(10)(iii) of this section, and hydrogen energy storage property described in paragraph (e)(10)(iv) of this section.

(ii) Electrical energy storage property. Electrical energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transportation of goods or individuals, electrical energy storage property includes, but is not limited to, rechargeable electrochemical batteries of all types (such as lithium ion, vanadium flow, sodium sulfur, and lead-acid), ultracapacitors, physical storage such as pumped storage hydropower, compressed air storage, flywheels, and reversible fuel cells.

(iii) Thermal energy storage property—(A) In general. Thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Thermal energy storage property includes equipment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating, a residential or commercial building. It does not include property that transforms other forms of energy into heat in the first instance. Property that removes heat from, or adds heat to, a storage medium for subsequent use is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used for heating or cooling of the interior of a residential or commercial building. Paragraph (e)(10)(iii)(B) of this section provides a safe harbor for determining whether a thermal energy storage property has such a purpose. Thermal energy storage property does not include a swimming pool, CHP property, or a building or its structural components. For example, thermal energy storage property includes, but is not limited to, a system that adds heat to bricks heated to high temperatures that later use this stored energy to heat a building through the HVAC system; thermal ice storage systems that use electricity to run a refrigeration cycle to produce ice that is later connected to the HVAC system as an exchange medium for air conditioning the building; heat pump systems that store thermal energy in an underground tank, an artificial pit, an aqueous solution, a borehole field, or a solid-liquid phase change material to be extracted for later use for heating and/or cooling; and air-to-water heat pump systems with a water storage tank. However, consistent with § 1.48-14(d), if thermal energy storage property, such as a heat pump system, includes equipment, such as a heat pump, that also serves a purpose in an HVAC system that is installed in connection with the thermal energy storage property, the taxpayer's basis in the thermal energy storage property includes the total cost of the thermal energy storage property and HVAC system less the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cooling.

(B) Safe harbor. A thermal energy storage property will be deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building if that thermal energy storage property is capable of storing energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for a minimum of one hour.

(iv) Hydrogen energy storage property. Hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Hydrogen energy storage property includes, but is not limited to, above ground storage tanks, underground storage facilities, and associated compressors. Property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property.

(v) Modifications of energy storage energy property. With respect to electrical energy storage property and hydrogen energy storage property placed in service after December 31, 2022, energy storage technology that is modified as set forth in this paragraph (e)(10)(v) is treated as electrical energy storage property described in paragraph (e)(10)(ii) of this section or hydrogen energy storage property described in paragraph (e)(10)(iv) of this section, except that the basis of any existing property prior to such modification is not taken into account for purposes of this section and section 48. This paragraph (e)(10)(v) applies to any electrical energy storage property and hydrogen energy storage property that either:

(A) Was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property had a nameplate capacity of less than 5 kWh and is modified in a manner that such property (after such modification) has a nameplate capacity (after such modification) of not less than 5 kWh; or

(B) Is described in section 48(c)(6)(A)(i) and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh.

(11) Qualified biogas property—(i) In general. Qualified biogas property is property comprising a system that converts biomass (as defined in section 45K(c)(3), as in effect on August 16, 2022) into a gas that consists of not less than 52 percent methane by volume (tested at the point described in paragraph (e)(11)(ii) of this section), or is concentrated by such system into a gas that consists of not less than 52 percent methane (tested at the point described in paragraph (e)(11)(ii) of this section), and captures such gas for sale or productive use and not for disposal via combustion. Qualified biogas property also includes any property that is part of such system that cleans or conditions such gas, including gas upgrading equipment, to make the gas suitable for sale or productive use. For example, qualified biogas property includes, but is not limited to, an anaerobic digester. Property that is an integral part of qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system and mixing or pumping equipment.

(ii) Methane content requirement. The methane content requirement described in section 48(c)(7)(A)(i) and paragraph (e)(11)(i) of this section is measured at the point at which the biogas exits the qualified biogas property.

(iii) Flaring Allowance. While a qualified biogas property generally may not capture biogas for disposal via combustion, combustion in the form of flaring will not disqualify a qualified biogas property provided the primary purpose of the qualified biogas property is sale or productive use of biogas and any flaring is in compliance with all relevant Federal, State, regional, Tribal, and local laws and regulations.

(12) Microgrid controllers—(i) In general. A microgrid controller is equipment that is part of a qualified microgrid and is designed and used to monitor and control the energy resources and loads on such microgrid. A qualified microgrid is an electrical system that includes equipment that is capable of generating not less than 4 kW and not greater than 20 MW of electricity; is capable of operating in connection with the electrical grid and as a single controllable entity with respect to such electrical grid, and independently (and disconnected) from such electrical grid; and is not part of a bulk-power system (as defined in section 215 of the Federal Power Act (16 U.S.C. 824o)).

(ii) Capable of operating in connection with the electrical grid. For purposes of this paragraph, a qualified microgrid includes an electrical system that is capable of operating in connection with the larger electrical grid, regardless of whether a connection to the larger electrical grid exists.

(13) Other property included in section 48. Any other property specified by section 48 as energy property is energy property for purposes of this section and §§ 1.48-13 and 1.48-14.

(f) Property included in energy property—(1) In general. An energy property includes a unit of energy property (defined in paragraph (f)(2)(i) of this section) that meets the requirements of paragraph (c) of this section, that is not excluded from energy property as provided in paragraph (d) of this section, and that is of a type of energy property included in paragraph (e) of this section. Property owned by the taxpayer that is an integral part of an energy property (as defined in paragraph (f)(3) of this section) is treated as part of that energy property. Energy property does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage. Energy property also generally does not include equipment that is an addition or modification to an existing energy property. However, see § 1.48-14(a) for rules regarding retrofitted energy property (80/20 Rule) and paragraph (e)(10)(v) of this section for rules regarding modifications of certain types of energy storage technology.

(2) Unit of energy property—(i) Definition. The term unit of energy property means all functionally interdependent components of property (as defined in paragraph (f)(2)(ii) of this section) owned by the taxpayer that are operated together and that can operate apart from other energy properties within a larger energy project (as defined in § 1.48-13(d)). For rooftop solar energy property, all components of energy property that are installed on a single rooftop are treated as a single unit of energy property. See § 1.48-13(d) for rules regarding the treatment of multiple energy properties as an energy project for certain purposes.

(ii) Functionally interdependent—(A) In general. Except as provided in paragraph (f)(3)(ii)(B) of this section, with respect to components of a unit of energy property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or store electricity, thermal energy, or hydrogen as provided by section 48(a)(3) and (c) and as described in paragraph (e) of this section.

(B) Components of certain energy property. In the case of solar process heat equipment, fiber-optic solar energy property, electrochromic glass property, GHP property, qualified biogas property, and microgrid controllers, with respect to components of such property, the term functionally interdependent means that the placing in service of each component is dependent upon the placing in service of each of the other components in order to perform the intended function of the energy property as provided by section 48(a)(3) and (c) and as described in paragraph (e) of this section.

(3) Integral part—(i) In general. For purposes of the section 48 credit, property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property as provided by section 48(a)(3) and (c) and as described in paragraph (e) of this section and is essential to the completeness of the intended function. Property that is an integral part of an energy property is treated as part of that energy property. A taxpayer may not claim the section 48 credit for any property not owned by the taxpayer that is an integral part of energy property owned by the taxpayer. Multiple energy properties (whether owned by one or more taxpayers) may include shared property that may be considered an integral part of each energy property so long as the cost basis for the shared property is properly allocated to each energy property. The total cost basis of such shared property divided among the energy properties may not exceed 100 percent of the cost of such shared property. In addition, the exclusion in paragraph (d)(1) of this section does not apply to property that is shared by a qualified facility (as defined in section 45(d)) and an energy property if it is an integral part of that energy property. The basis of any such property must be properly allocated across the energy property and qualified facility that share such property.

(ii) Power conditioning and transfer equipment. Property that is an integral part of energy property includes power conditioning equipment and transfer equipment used to perform the intended function of the energy property as provided by section 48(a)(3) and (c) and as described in paragraph (e) of this section. Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters voltage to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware and software used to monitor, operate, and protect transfer equipment. Power conditioning equipment and transfer equipment that are integral to an energy property may be integral to another energy property or used by a qualified facility (as defined in section 45(d)), so long as the total cost basis of the integral property is properly allocated across the energy property and qualified facility that share such property.

(iii) Roads. Roads that are an integral part of an energy property are integral to the activity performed by the energy property such as onsite roads that are used for equipment to operate and maintain the energy property. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property.

(iv) Fences. Fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property.

(v) Buildings. Generally, buildings are not integral parts of an energy property because they are not integral to the activity of the energy property. However, the structures described in paragraphs (f)(3)(vi) and (vii) of this section are not treated as buildings for this purpose.

(vi) Structures essentially items of machinery or equipment. A structure that is essentially an item of machinery or equipment is not treated as a building for purposes of paragraph (f)(3)(v) of this section.

(vii) Structures that house certain property. A structure that houses property that is integral to the activity of an energy property is not treated as a building for purposes of paragraph (f)(3)(v) of this section if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced if the energy property it initially houses is replaced.

(4) Location of energy property. Any property that meets the requirements of paragraphs (f)(2) and (3) of this section is part of an energy property regardless of where such property is located.

(5) Examples. This paragraph provides examples illustrating property included in energy property.

(i) Example 1. Solar energy property. X constructs a solar energy property (Solar Property) comprised of 500 separate solar panels. The solar panels are connected by wires, cables, and combiner boxes. Generated electricity is conditioned for subsequent use through one inverter and eventually carried to a substation that houses a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. All components of the Solar Property up to the inverter are functionally interdependent components of the Solar Property. The inverter and up to and including the transformer are integral parts of the Solar Property. Therefore, the Solar Property is an energy property for purposes of the section 48 credit. When X places the Solar Property in service, the cost of the components up to and including the transformer is included in the basis of the Solar Property for purposes of computing the section 48 credit.

(ii) Example 2. Co-located energy properties. Assume the same facts as in paragraph (f)(5)(i) of this section (Example 1), except that Y constructs a wind energy property (Wind Property) near X's solar energy property (Solar Property). X's Solar Property and Y's Wind Property each connect to a substation that houses a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. X and Y each pay 50% of the cost of, and own a 50% undivided interest in, the transformer and related power conditioning equipment housed in the substation. X's Solar Property and Y's Wind Property are separate energy properties. When X and Y place their respective energy properties in service, the cost of the components up to and including 50% of the cost of the transformer and related power conditioning equipment is included in X's and Y's basis in their respective energy properties for purposes of computing the section 48 credit.

(iii) Example 3. Qualified offshore wind energy project. Z constructs an offshore wind farm (Offshore Wind Energy Project) comprised of 150 turbines (energy properties) for which Z makes a valid election under section 48(a)(5) to claim the section 48 credit in lieu of the section 45 credit. The alternating current electricity generated by the individual wind turbines will be carried by inter-array cables to an offshore substation where a transformer will step up the voltage of the electricity and a converter will convert it to direct current so it may be transported by subsea export cables to an onshore substation adjacent to the point of interconnection with the electrical grid. When the electricity reaches the onshore substation, it will flow into another converter where it will be converted back to alternating current, and then through a transformer and associated switchgear where it will be converted to electrical grid voltage and where the Offshore Wind Energy Project can be electrically isolated from the grid. The electricity will then pass through an intertie that will take the electricity from the substation to the point of interconnection with the electrical grid. All components of the Offshore Wind Energy Project, up to and including the transformer and switchgear housed in the onshore substation, are either functionally interdependent components or integral parts of the energy properties that comprise the Offshore Wind Energy Project. Therefore, when Z places the Offshore Wind Energy Project in service, the cost of the components up to and including the transformer and switchgear housed in the onshore substation are included in the aggregate basis of the energy properties that comprise the Offshore Wind Energy Project for purposes of computing the section 48 credit.

(iv) Example 4. Co-located energy property and qualified facility. X constructs a wind facility (Wind Facility) that is co-located with an energy storage technology (Energy Storage). The Wind Facility and Energy Storage share power conditioning and transfer equipment. The power conditioning and transfer equipment are integral parts of the Energy Storage, and are therefore considered energy property. Therefore, X will include a properly allocated share of the shared power conditioning and transfer equipment costs to determine the section 48 credit for the Energy Storage. If the Wind Facility otherwise satisfies the requirements of the section 45 credit, X may claim the section 45 credit with respect to the Wind Facility.

(g) Applicability date. This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after December 12, 2024.

26 C.F.R. § 1.48-6 26 C.F.R. § 1.481-1

Authorizing Statute