Code of Federal Regulations · Section

§ 1.48E-4 — e-4 Rules Of General Application

26 C.F.R. § 1.48E-4

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(a) Qualified interconnection costs included in certain lower-output qualified facilities—(1) In general. For purposes of determining the section 48E credit (as defined in § 1.48E-1(a)), the qualified investment with respect to a qualified facility (as defined in § 1.48E-2(a)) includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (a)(2) of this section), in connection with a qualified facility (as defined in § 1.48E-2(a)) that has a maximum net output of not greater than 5 MW (as measured in alternating current) as described in paragraph (a)(3) of this section (Five-Megawatt Limitation). The qualified interconnection property must provide for the transmission or distribution of the electricity produced by a qualified facility and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (a)(6) of this section. If the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal income tax principles may require the taxpayer to reduce the amounts of costs treated as paid or incurred for qualified interconnection property to determine a section 48E credit.

(2) Qualified interconnection property. For purposes of this paragraph (a), the term qualified interconnection property means, with respect to a qualified facility, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the qualified facility interconnects to such transmission or distribution system in order to accommodate such interconnection; is either constructed, reconstructed, or erected by the taxpayer (as defined in § 1.48E-2(e)(4)), or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer; and the original use (as defined in § 1.48E-2(e)(6)) of which, pursuant to an interconnection agreement (as defined in paragraph (a)(4) of this section), commences with a utility (as defined in paragraph (a)(5) of this section). For purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) of the Internal Revenue Code (Code) must be taken into account, as applicable, with such original use determined on the date of the sale-leaseback or lease. Qualified interconnection property is not part of a qualified facility. As a result, qualified interconnection property is not taken into account in determining whether a qualified facility satisfies the requirements for the increase in credit rate for energy communities provided in section 48E(a)(3)(A) of the Code, the increase in credit rate for domestic content referenced in section 48E(a)(3)(B) (by reference to the rules of section 48(a)(12)) or the increase in credit rate for prevailing wage requirements referenced in section 48E(d)(3) and apprenticeship requirements referenced in section 48E(d)(4).

(3) Five-Megawatt Limitation—(i) In general. For purposes of this paragraph (a), the Five-Megawatt Limitation is measured at the level of the qualified facility in accordance with section 48E(b)(1)(B). The maximum net output of a qualified facility is measured only by nameplate generating capacity (in alternating current) of the unit of qualified facility, which does not include the nameplate capacity of any integral property, at the time the qualified facility is placed in service. The nameplate generating capacity of the unit of qualified facility is measured independently from any other qualified facilities that share the same integral property.

(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. For purposes of paragraph (a)(1) of this section, the determination of whether a qualified facility has a maximum net output of not greater than 5 MW (as measured in alternating current) is based on the nameplate capacity. The nameplate capacity for purposes of the Five-Megawatt Limitation is the maximum electrical generating output in megawatts that the unit of qualified facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output of a unit of qualified facility.

(iii) Nameplate capacity for qualified facilities that generate in direct current for purposes of the Five-Megawatt Limitation. For qualified facilities that generate electricity in direct current, a taxpayer determines whether a qualified facility has a maximum net output of not greater than five MW (in alternating current) by using the lesser of:

(A) The sum of the nameplate generating capacities within the unit of qualified facility property in direct current, which is deemed the nameplate generating capacity of the unit of qualified facility property in alternating current; or

(B) The nameplate capacity of the first component of the qualified facility that inverts the direct current electricity into alternating current.

(4) Interconnection agreement. For purposes of this paragraph (a), the term interconnection agreement means an agreement with a utility for the purposes of interconnecting the qualified facility owned by such taxpayer to the transmission or distribution system of the utility. In the case of the election provided under section 50(d)(5) (relating to certain leased property), the term includes an agreement regarding a qualified facility leased by such taxpayer.

(5) Utility. For purposes of this paragraph (a), the term utility means the owner or operator of an electrical transmission or distribution system that is subject to the regulatory authority of a State or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative.

(6) Reduction to amounts chargeable to capital account. In the case of costs paid or incurred for qualified interconnection property as defined in paragraph (a)(2) of this section, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules of section 50(c) (including section 50(c)(3)).

(7) Examples. This paragraph (a)(7) provides examples illustrating the application of the general rules provided in paragraph (a)(1) of this section and Five-Megawatt Limitation provided in this paragraph (a).

(i) Example 1. Application of Five-Megawatt Limitation to an interconnection agreement for qualified facilities owned by taxpayer. X places in service two solar qualified facilities (48E Facilities) each with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of an inverter, which is the first component of property attached to each of the 48E Facilities that inverts the direct current electricity into alternating current). The two 48E Facilities each have their own inverter, which is integral property to each facility, and share a step-up transformer, which is integral property to both facilities. As part of the development of the 48E Facilities, interconnection costs are required by the utility to modify and upgrade the transmission system at or beyond the common intertie to the utility's transmission system to accommodate the interconnection. X has an interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost to X of the qualified interconnection property. X may include the costs paid or incurred by X, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, to calculate X's section 48E credit for each of the 48E Facilities because each qualified facility has a maximum net output of not greater than 5 MW (alternating current).

(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for qualified facilities owned by separate taxpayers. X places in service a solar farm that is a qualified facility (as defined in § 1.48E-2(a)) (Solar Qualified Facility) with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Solar Qualified Facility that inverts the direct current electricity into alternating current). The Solar Qualified Facility includes an inverter, which is integral property. Y places in service a wind facility (as defined in § 1.48E-2(a)) (Wind Qualified Facility), with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Wind Qualified Facility that inverts the direct current electricity into alternating current). The Solar Qualified Facility and the Wind Qualified Facility share a step-up transformer, which is integral to both facilities. As part of the development of the Solar Qualified Facility and Wind Qualified Facility, interconnection costs are required by the utility to modify and upgrade the transmission system at or beyond the common intertie to the utility's transmission system to accommodate the interconnection. X and Y are party to the same interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost of the qualified interconnection property to X and Y. X and Y may include the costs paid or incurred by X and Y, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, to calculate their respective section 48E credits for the Solar Qualified Facility and the Wind Qualified Facility because each has a maximum net output of not greater than 5 MW (alternating current).

(iii) Example 3. Application of Five-Megawatt Limitation to an interconnection agreement for a single qualified facility. X develops three solar farms (Solar Qualified Facilities) located in close proximity. Each of the Solar Qualified Facilities is a unit of qualified facility that has a maximum net output of 4 MW. The nameplate capacity of each Solar Qualified Facility is determined by using the sum of the nameplate generating capacities within the unit of each Solar Qualified Facility in direct current, which is deemed the nameplate generating capacity of each Solar Qualified Facility in alternating current. Electricity from the three Solar Qualified Facilities feeds into a single gen-tie line and a common point of interconnection with the transmission system. X is party to a separate interconnection agreement with the utility for each of the Solar Qualified Facilities and each interconnection agreement allows for a maximum output of 10 MW (as measured in alternating current). X may include the costs it paid or incurred for qualified interconnection property for each of the Solar Qualified Facilities to calculate its section 48E credit for each of the Solar Qualified Facilities, subject to the terms of each interconnection agreement, because each of the Solar Qualified Facilities has a maximum net output of not greater than 5 MW (in alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48E credit amount for the Solar Qualified Facilities.

(iv) Example 4. Utility payment reducing costs borne by taxpayer. In year 1, X places in service a solar facility (Solar Qualified Facility) with a maximum net output of 3 MW (as measured in alternating current) by using the nameplate capacity of the inverter attached to the solar facility, which is the first component of the qualified facility that inverts the direct current electricity into alternating current. X is party to an interconnection agreement with a utility for the purpose of connecting the Solar Qualified Facility to the transmission or distribution system of the utility. Pursuant to the interconnection agreement, X pays $1 million to the utility, and the utility places in service qualified interconnection property. In year 1, X had no reasonable expectation of any payment from the utility or other parties with respect to the qualified interconnection property. The $1 million is properly chargeable to the capital account of X, subject to paragraph (a)(6) of this section. X properly includes the $1 million paid to the utility in determining its credit under section 48E for Year 1. In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays the utility $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. The utility pays $100,000 to X. Under these circumstances, the payment from the utility in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48E credit in year 1; instead X would treat the payment as income.

(v) Example 5. Non-utility payment reducing costs borne by taxpayer. The facts in year 1 are the same as in paragraph (a)(7)(iii) of this section (Example 3). In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays X $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. Y pays $100,000 to X. In year 1, X had no reasonable expectation of any payment from Y for subsequent agreements with Y or other parties with respect to the qualified interconnection property. Under these circumstances, the payment from Y in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48E credit in year 1; instead X would treat the payment as income.

(b) Expansion of facility; Incremental production (Incremental Production Rule)—(1) In general. Solely for purposes of this paragraph (b), 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 48E(b)(3)(A) (without regard to section 48E(b)(3)(A)(ii)), which 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 paragraph (b) 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 48E(b)(3). A new unit or an addition of capacity that meets the requirements of this paragraph (b) will be treated as a separate qualified facility. For purposes of this paragraph (b), a new unit or an addition of capacity requires the addition or replacement of qualified property (as defined in § 1.48E-2(e)), 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 48E(a)(2)(A)(ii)(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 § 1.48E-3(c) and paragraph (b)(2) of this section.

(2) Measurement standard. For purposes of this paragraph (b), taxpayers must use one of the measurement standards described in paragraph (b)(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 (b)(2)(ii) of this section if the taxpayer is able to use the measurement standard described in paragraph (b)(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 (b), 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 (b)(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.

(4) Computation of qualified investment for a new unit or an addition of capacity. For purposes of this paragraph (b), a new unit or an addition of capacity requires the addition or replacement of components of qualified property, including any new or replacement integral property, added to a facility necessary to increase capacity. The taxpayer's qualified investment during the taxable year that resulted in an increased capacity of a facility by reason of a new unit or addition of capacity is its total qualified investment associated with the components of property that result in the new unit or addition of capacity.

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

(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. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(e)). For purposes of this paragraph (b), this new unit will be treated as a separate facility (Facility J). X determines the amount of its section 48E credit based on the amount of its qualified investment in Facility J. Even though X claimed a section 45 credit for electricity produced by Facility H in taxable years 2020 through 2024, X can claim a section 48E credit for its qualified investment in 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. Both of these replacement and additional components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). 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 (b), Facility N's addition of capacity equal to 100 MW is treated as a new separate qualified facility placed in service on January 15, 2026 (Facility P). Y determines the amount of its section 48E credit based on the entire amount of its qualified investment on January 15, 2026. 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 48E credit for its investment in components of property needed to support the increase in capacity. 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, with associated capital expenditures. 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. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). 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 (b), 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 determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed to increase the capacity of the facility.

(iv) Example 4. Hydropower Addition of Capacity. X owns a hydropower plant (Facility H) 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. All of the existing turbine systems are replaced with new turbine and governor systems. The new turbines are more efficient, and are capable of more power output, than the original design installed in 1960. 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. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). X simultaneously invests 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 nameplate capacity from 180 MW to 190 MW, an increase of 10 MW over the previous nameplate capacity. For purposes of this paragraph (b), Facility H's addition of capacity is treated as a new separate qualified facility placed in service on April 16, 2026 (Facility A). X determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed in Facility A to result in the final 190 MW capacity, which would not include any investments in intangible property, such as those that might be associated with cybersecurity protection.

(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 48E. In 2028, the NRC authorized Facility N to restart, and, on October 1, 2028, Facility N placed in service qualified property that enabled Facility N to restart and resume operations, with an electrical capacity of 800 MW, as indicated in NRC documents related to the authorization to restart. For purposes of this paragraph (b), 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 (b), 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 determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed to restart the facility.

(c) Retrofit of an existing facility (80/20 Rule)—(1) In general. For purposes of section 48E(b)(3)(A)(ii), a retrofitted qualified facility or an energy storage technology (EST) may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility or unit of EST, provided that the fair market value of the used components of the unit of qualified facility or unit of EST is not more than 20 percent of the total value of the unit of qualified facility or unit of EST (that is, the cost of the new components of property plus the value of the used components of property within the unit of qualified facility or unit of EST) (80/20 Rule). A qualified facility or EST that meets the 80/20 Rule may claim the section 48E credit without regard to any addition of capacity to the qualified facility or EST.

(2) Expenditures taken into account. Notwithstanding the rule provided in paragraph (c)(1) of this section, only the cost of new components of the unit of qualified facility or unit of EST are taken into account for purposes of computing the credit determined under section 48E with respect to the qualified facility or EST.

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

(4) New costs. If the taxpayer satisfies the 80/20 Rule with regard to the unit of qualified facility or unit of EST and the taxpayer pays or incurs new costs for property that is an integral part of the qualified facility (as defined in § 1.48E-2(a)) or the EST (as defined in § 1.48E-2(g)), the taxpayer may include these new costs paid or incurred for property that is an integral part of the qualified facility or EST in the basis of the qualified facility or EST for purposes of the section 48E credit.

(5) Excluded costs. Costs incurred for new components of property added to used components of a unit of qualified facility or unit of EST may not be taken into account for purposes of the section 48E credit unless the taxpayer satisfies the 80/20 Rule by placing in service a unit of qualified facility or unit of EST for which the fair market value of the used components of property is not more than 20 percent of the total value of the unit of qualified facility or unit of EST taking into account the cost of the new components of property plus the value of the used components of property.

(6) Examples. This paragraph (c)(6) provides examples illustrating the rules of this paragraph (c).

(i) Example 1. Retrofitted facility that satisfies the 80/20 Rule. A owns an existing wind facility. On February 1, 2026, A replaces used components of unit of qualified facility of the 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 48E, assuming all the other requirements of section 48E are met, and A will be able to claim a section 48E credit based on its investment in 2026 ($2 million).

(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 defined in § 1.48E-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 § 1.48E-5). On January 1, 2027, Facility Z was retrofitted and now meets the requirements to be a qualified facility (as defined in § 1.48E-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 unit of qualified facility'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. Assuming all the other requirements of section 48E are met, Z may claim a section 48E credit based on its investment in the new components used to retrofit the existing facility in 2027.

(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 the unit of qualified facility of Facility N with new components at a cost of $200 million, and then places in Facility N in service on July 15, 2026. The fair market value of the remaining original components of the unit of qualified facility, prior to the retrofit, is $30 million, which is not more than 20 percent of the unit of qualified facility'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, assuming all the other requirements of section 48E are met, Facility N will be considered newly placed in service on July 15, 2026, for purposes of section 48E, and T will be able to claim a section 48E credit based on its investment in the new components ($200 million).

(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 6, 2026. The cost of the capital improvements to the unit of qualified facility of Facility C total $500,000 and the fair market value of the unit of qualified facility after the improvements is $2 million. The fair market value of the old components of the unit of qualified facility is $1,500,000 or 75 percent of the total fair market value of the Facility C 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 unit of qualified facility's total fair market value, Facility C does not meet the 80/20 Rule.

(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 48E, and Y will be able to claim a section 48E credit based on the cost of the new components ($1.5 million).

(d) Special rules regarding ownership—(1) Qualified investment with respect to a qualified facility or EST. For purposes of this paragraph (d), a taxpayer that owns a qualified investment with respect to a qualified facility or EST is eligible for the section 48E credit only to the extent of the taxpayer's basis in the qualified facility or EST. In the case of multiple taxpayers holding direct ownership through their qualified investments in a single qualified facility or EST (and such arrangement is not treated as a partnership for Federal income tax purposes), each taxpayer determines its basis based on its fractional ownership interest in the qualified facility or EST.

(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of qualified facility (as defined in § 1.48E-2(b)(2)) or unit of EST (as defined in § 1.48E-2(g)(2)) for a section 48E credit to be determined with respect to such taxpayer's interest. No section 48E credit may be determined with respect to a taxpayer's ownership of one or more separate components of a qualified facility or an EST if the components do not constitute a unit of qualified facility (as defined in § 1.48E-2(b)(2)) or unit of EST (as defined in § 1.48E-2(g)(2)). However, the use of property owned by one taxpayer that is an integral part of a qualified facility or EST owned by another taxpayer will not prevent a section 48E credit from being determined with respect to the second taxpayer's qualified investment in a qualified facility or EST (though neither taxpayer would be eligible for a section 48E credit with respect to the first taxpayer's property). See § 1.48E-2(b)(3)(vi) for rules regarding shared integral property.

(3) Section 761(a) election. If a qualified facility or EST 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 or EST will be treated as a separate qualified facility or EST owned by such member.

(4) Examples. The following examples illustrate the rules in this paragraph (d). In each example, X and Y are unrelated taxpayers.

(i) Example 1. Fractional ownership required to satisfy section 48E. X and Y each own a direct fractional ownership interest in an entire qualified facility (as defined in § 1.48E-2(b)) and as a result, a section 48E credit may be determined with respect to X's and Y's qualified investment in their fractional ownership interests in the qualified facility.

(ii) Example 2. Ownership of separate components of property that are part of a qualified facility. X and Y each own separate components of a qualified facility, which taken together would constitute a unit of qualified facility but taken separately would not constitute a unit of qualified facility. X owns component A and Y owns component B. No section 48E credit may be determined with respect to either component A or component B because X and Y each owns a separate component of a qualified facility that does not constitute a unit of qualified facility (as defined in § 1.48E-2(b)(2)).

(iii) Example 3. Separate ownership of property that is an integral part of separate qualified facilities. X owns a solar farm that is a qualified facility (as defined in § 1.48E-2(b)) (Solar Qualified Facility), which includes property that is an integral part of the Solar Qualified Facility, specifically a transformer in which the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a wind facility that is a qualified facility (as defined in § 1.48E-2(b)) (Wind Qualified Facility) that connects to X's transformer. X and Y are not related persons within the meaning of paragraph (d)(4)(i) of this section. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48E credit for the Wind Qualified Facility, but it may not include any costs relating to the transformer in its section 48E credit base.

(iv) Example 4. Related taxpayers and property that is an integral part. X owns a wind facility that is a unit of qualified facility and a solar facility that is a unit of qualified facility. Both the wind facility and the solar facility are connected to a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. The transformer is an integral part of both the wind facility and the solar facility (within the meaning of § 1.48E-2(d)(3)(i)) and is owned by Y. X and Y are related persons within the meaning of paragraph (d)(4)(i) of this section. X and Y are treated as one taxpayer under paragraph (d)(4)(ii) of this section. X may include the basis of the transformer in computing its section 48E credit with respect to the wind facility and the solar facility (but may not include more than 100% of that basis in the aggregate).

(e) Coordination rule for section 42 credits and section 48E credits. As provided under section 50(c)(3)(C) of the Code, in determining eligible basis for purposes of calculating a credit under section 42 of the Code (section 42 credit), a taxpayer is not required to reduce its basis in a qualified facility or EST by the amount of the section 48E credit determined with respect to the taxpayer's qualified investment with respect to such qualified facility or EST. The qualified investment with respect to a qualified facility or EST property may be used to determine a section 48E credit and may also be included in eligible basis to determine a section 42 credit. See paragraph (d) of this section for special rules regarding ownership.

(f) Recapture—(1) In general. The credit calculated under section 48E(a) and § 1.48E-1(b) is subject to general recapture rules under section 50(a). Additionally, section 48E(g) provides for recapture for any qualified facility for which a taxpayer claimed a section 48E credit that has a greenhouse gas emissions rate (as determined under rules provided in § 1.45Y-5) of greater than 10 grams of CO2e per kWh during the five-year period beginning on the date such qualified facility is originally placed in service (five-year recapture period).

(2) Recapture event—(i) In general. Any event that results in a qualified facility having a greenhouse gas emissions rate (as determined under rules provided in § 1.45Y-5) of greater than 10 grams of CO2e per kWh during the five-year period is a recapture event. If a qualified facility's greenhouse gas emissions rate exceeds 10 grams of CO2e per kWh, the section 48E credit is subject to recapture.

(ii) Changes to the Annual Table. A change to the greenhouse gas emissions rate for a type or category of facility that is published in the Annual Table (as defined in § 1.48E-5(f)) after a facility is placed in service does not result in a recapture event.

(iii) Yearly determination—(A) In general. A determination of whether a recapture event occurred under this paragraph (f)(2) must be made for each taxable year (or portion thereof) occurring within the five-year recapture period, beginning with the taxable year ending after the date the qualified facility is placed in service. Thus, for each taxable year that begins or ends within the five-year recapture period, the taxpayer must determine, for any qualified facility for which it has claimed the section 48E credit, whether such facility has maintained a greenhouse gas emissions rate of not greater than 10 grams of CO2e per kWh.

(B) Annual reporting requirement. A taxpayer that has claimed the section 48E credit amount under § 1.48E-1(b), including a taxpayer that has transferred a specified credit portion under section 6418 of the Code, is required to provide to the IRS information on the greenhouse gas emissions rate of the qualified facility during the recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter.

(iv) Carryback and carryforward adjustments. In the case of any recapture event described in this paragraph (f)(2), the carrybacks and carryforwards under section 39 of the Code must be adjusted by reason of such recapture event.

(3) Recapture amount—(i) In general. If a recapture event occurred as described in paragraph (f)(2) of this section, the tax under chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by an amount equal to the applicable recapture percentage multiplied by the credit amount that was claimed by the taxpayer under § 1.48E-1(b).

(ii) Applicable recapture percentage. If the recapture event occurs:

(A) Within one full year after the property is placed in service, the recapture percentage is 100;

(B) Within one full year after the close of the period described in paragraph (f)(3)(ii)(A) of this section, the recapture percentage is 80;

(C) Within one full year after the close of the period described in paragraph (f)(3)(ii)(B) of this section, the recapture percentage is 60;

(D) Within one full year after the close of the period described in paragraph (f)(3)(ii)(C) of this section, the recapture percentage is 40; and

(E) Within one full year after the close of the period described in paragraph (f)(3)(ii)(D) of this section, the recapture percentage is 20.

(4) Recapture period. The five-year recapture period begins on the date the qualified facility is placed in service and ends on the date that is five full years after the placed in service date. Each 365-day period (366-day period in case of a leap year) within the five-year recapture period is a separate recapture year for recapture purposes.

(5) Increase in tax for recapture. The increase in tax under chapter 1 of the Code for the recapture of the credit amount claimed under section 48E(a) and § 1.48E-1(b) occurs in the year of the recapture event.

(g) Qualified progress expenditure election. A taxpayer may elect, as provided in § 1.46-5, to increase the qualified investment with respect to any qualified facility or EST of an eligible taxpayer for the taxable year, by any qualified progress expenditures made after August 16, 2022.

(h) Incremental cost—(1) In general. For purposes of section 48E, if a component of qualified property of a qualified facility or component of property of an EST is also used for a purpose other than the intended function of the qualified facility or EST, only the incremental cost of such component is included in the basis of the qualified facility or EST. The term incremental cost means the excess of the total cost of a component over the amount that would have been expended for the component if that component were used for a non-qualifying purpose.

(2) Example. A installs a solar qualified facility above the surface of an existing roof of a building that A owns. The solar qualified facility uses bifacial panels that convert to energy the light that strikes both the front and back of the panels. Therefore, along with installing the bifacial panels, A is reroofing their building with a reflective roof that has a highly reflective surface. Because the reflective roof enables the panels' generation of significant amounts of electricity from reflected sunlight, when installed in connection with the solar qualified facility, it constitutes part of that solar qualified facility to the extent that the cost of the reflective roof exceeds the cost of reroofing A's building with a non-reflective roof. The cost of reroofing with the reflective roof is $15,000 whereas the cost of a reroofing with a standard roof for the building would be $10,000. The incremental cost of the reflective roof is $5,000, and that amount is included in A's basis in the solar qualified facility for purposes of the section 48E credit.

(i) Cross references. (1) To determine applicable recapture rules, see section 50(a) of the Code.

(2) For rules regarding the credit eligibility of property used outside the United States, see section 50(b)(1) of the Code.

(3) For rules regarding the credit eligibility of property used by certain tax-exempt organizations, see section 50(b)(3) of the Code. See section 6417(d)(2) of the Code for an exception to the rule in section 50(b)(3) in the case of an applicable entity making an elective payment election.

(4) For application of the normalization rules to the section 48E credit in the case of certain regulated companies, including rules regarding the election not to apply the normalization rules to EST (as defined in section 48(c)(6) of the Code without regard to section 48(c)(6)(D) of the Code), see section 50(d)(2) of the Code.

(5) For rules relating to certain leased property, see section 50(d)(5) of the Code.

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

26 C.F.R. § 1.48E-3 26 C.F.R. § 1.48E-5

Authorizing Statute