(a) Retrofitted energy property—(1) In general. For purposes of section 48(a)(3)(B)(ii), (5)(D)(iv), and (8)(B)(iii) of the Internal Revenue Code (Code), a retrofitted energy property may be originally placed in service even though it contains some used components of the unit of energy property only if the fair market value of the used components of the unit of energy property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of the unit of energy property (80/20 Rule). Only the cost of new components of the unit of energy property is taken into account for purposes of computing the credit determined under section 48 (section 48 credit) with respect to the unit of energy property. The cost of new components of the unit of energy property includes all costs properly included in the depreciable basis of the new components. If the taxpayer satisfies the 80/20 Rule with regard to the unit of energy property and the taxpayer pays or incurs new costs for property that is an integral part of the energy property (as defined in § 1.48-9(f)(3)(i)), then the taxpayer may include the new costs paid or incurred for property that is an integral part of the energy property (as defined in § 1.48-9(f)(3)(i)) in the basis of the energy property for purpose of the section 48 credit. In the case of an energy project (as defined in § 1.48-13(d)), the 80/20 Rule is applied to each unit of energy property comprising an energy project.

(2) Excluded costs. Costs incurred for new components of property added to used components of a unit of energy property may not be taken into account for purposes of the section 48 credit unless the taxpayer satisfies the 80/20 Rule (as provided in paragraph (a)(1) of this section) by placing into service a unit of energy property 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 energy property taking into account the cost of the new components of property plus the value of the used components of property.

(3) Examples. This paragraph (a)(3) provides examples illustrating the provisions of this paragraph (a):

(i) Example 1. Retrofitted solar energy property that satisfies the 80/20 Rule. Z owns an existing solar energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. Z replaces used components of the solar energy property with new components of property at a cost of $1.4 million. The retrofitted solar energy property constitutes a unit of energy property. The fair market value of the remaining original components of the retrofitted solar energy property is $100,000, which is not more than 20 percent of the retrofitted solar energy property's total value of $1.5 million (that is, the cost of the new components ($1.4 million) + the value of the remaining original components ($100,000)). The value of the old components of the retrofitted solar energy property is 7 percent of the value of total value of the retrofitted solar energy property ($100,000/$1.5 million), thus the retrofitted solar energy property will be considered newly placed in service for purposes of section 48, and Z will be able to claim a section 48 credit based on the cost of the new components ($1.4 million).

(ii) Example 2. Capital improvements to an existing energy property that do not satisfy the 80/20 Rule. X owns an existing unit of energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. The fair market value of the unit of energy property is $1 million. During the tax year, X makes capital improvements to the unit of energy property. The expenditures for such capital improvements total $300,000. X may not claim a section 48 credit for the $300,000 spent on capital improvements during the tax year because the capital improvements did not satisfy the 80/20 Rule.

(iii) Example 3. Upgrades to a qualified hydropower production facility that satisfies the 80/20 Rule: Y owns a qualified hydropower production facility (hydropower facility) as defined under section 45 and no taxpayer, including Y, has ever claimed a section 45 credit for the hydropower facility. The hydropower facility consists of a unit of energy property 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 energy property. Y makes upgrades to the unit of energy property 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 energy property. The remaining original components of the unit of energy property 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 48, and Y will be able to make a valid section 48(a)(5) election and claim a section 48 credit based on the cost of the new components ($1.5 million).

(b) Dual use property—(1) Definition. For purposes of section 48, the term dual use property means property that uses energy derived from both a qualifying source (that is, from an energy property defined in § 1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f)(2) of this section)) and from a non-qualifying source (that is, sources other than an energy property defined in § 1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f)(2) of this section)).

(2) Qualification as energy property—(i) In general. Dual use property qualifies as energy property if its use of energy from non-qualifying sources does not exceed 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(ii) of this section) during an annual measuring period (as defined in paragraph (b)(2)(iii) of this section). If the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the basis of the energy property will be taken into account in computing the amount of the section 48 credit (for example, if 80 percent of the energy used by a dual use property is from qualifying sources, 80 percent of the basis of the dual use property will be taken into account in computing the amount of the section 48 credit).

(ii) Aggregation of energy inputs. The measurement of energy use required for purposes of paragraph (b)(2)(i) of this section may be made by comparing, on the basis of British thermal units (Btus), energy input to dual use property from all qualifying sources with energy input from all non-qualifying sources. To convert the energy inputs for CHP into Btus, the lower heating value of the fuel is used for CHP property and the higher heating value of the hydrogen is used for fuel cells. The Commissioner may also accept any other method that accurately establishes the relative annual use of energy derived from all qualifying sources and of energy input from all non-qualifying sources by dual use property.

(iii) Annual measuring period. For purposes of paragraph (b)(2)(i) of this section, the term annual measuring period means with respect to an item of dual use property the 365-day period (366-day period in case of a leap year) beginning with the day the dual use property is placed in service (initial annual measuring period) or a 365-day period (366-day period in case of a leap year) beginning the day after the last day of the immediately preceding annual measuring period (subsequent annual measuring period).

(iv) Recapture. If, for any subsequent annual measuring period (within the recapture period specified in section 50(a) of the Code, the equipment's use of energy from all qualifying sources is reduced below 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(i) of this section), then recapture of the section 48 credit is required under section 50(a).

(v) Example. On October 1, 2021, X, a calendar year taxpayer, places in service a unit of energy property that includes a system that heats its office building by circulating hot water heated by energy derived from a geothermal deposit through the building. The water heated by energy derived from a geothermal deposit is not hot enough to provide sufficient heat for the building. The circulation system includes an electric boiler in which the water is further heated before being circulated in the heating system. Energy from the electric boiler is not from a qualifying source and therefore the system is dual use property. On a Btu basis, sixty percent of the total energy input to the circulating system during the initial annual measuring period (the 365-day period beginning on October 1, 2021) is energy derived from a geothermal deposit. Accordingly, the circulation system, including the pumps and pipes that circulate the hot water through the building, are part of the unit of energy property and eligible for a section 48 credit. Sixty percent of the basis of the circulation system is taken into account in determining the section 48 credit for X's unit of energy property. During the 365-day period beginning on October 1, 2023, forty-five percent of the total energy input to the circulating system (on a Btu basis) is energy derived from a geothermal deposit. X's section 48 credit is therefore subject to recapture under section 50.

(c) Energy property eligible for multiple Federal income tax credits—(1) In general. The basis of energy property may be eligible for calculating both the section 48 credit and another Federal income tax credit, subject to the limitation provided in paragraph (c)(2) of this section.

(2) Limitation. Except as provided in paragraph (g) of this section, a taxpayer may not claim both a section 48 credit and another Federal income tax credit with respect to the same basis in an energy property. See paragraph (e) of this section for special rules regarding ownership of energy property.

(d) Incremental cost—(1) In general. For purposes of section 48, if a component of energy property is also used for a purpose other than the intended function of the energy property, only the incremental cost of a component of energy property is included in the basis of the energy property. 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 solar energy property above the surface of an existing roof of a building that A owns. The solar energy property 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 energy property, it constitutes part of that energy property 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 energy property for purposes of the section 48 credit.

(e) Special rules concerning ownership—(1) Basis. For purposes of section 48, a taxpayer that owns an energy property is eligible for the section 48 credit only to the extent of the taxpayer's basis in the energy property. In the case of multiple taxpayers holding direct ownership in an energy property, each taxpayer determines its basis based on its fractional ownership interest in the energy property.

(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of energy property for a section 48 credit to be determined with respect to such taxpayer's interest. No section 48 credit may be determined with respect to a taxpayer's ownership of one or more separate components of an energy property if the components do not constitute a unit of energy property. However, the use of property owned by one taxpayer that is an integral part of an energy property owned by a second taxpayer will not prevent a section 48 credit from being determined with respect to the second taxpayer's energy property (though neither taxpayer would be eligible for a section 48 credit with respect to the first taxpayer's property).

(3) Related taxpayers—(i) Definition. For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).

(ii) Related taxpayer rule. For purposes of this section, related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an investment in an energy property with respect to which a section 48 credit may be determined.

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

(i) Example 1. Fractional ownership required to satisfy section 48. X and Y own fractional ownership interests in a GHP property that is a unit of energy property. Because X and Y each own a fractional ownership interest in a unit of energy property, a section 48 credit may be determined with respect to X's and Y's fractional ownership interests in the unit of energy property.

(ii) Example 2. Separate ownership of GHP property. A GHP property is comprised of coils in the ground and several individual heat pumps used in conjunction with those coils. X owns both the coils in the ground and one of the individual heat pumps used in conjunction with the coils. Y owns one or more of the individual heat pump(s) used in conjunction with the coils. No section 48 credit may be determined with respect to Y because Y owns merely a component of energy property rather than a unit of energy property as defined in § 1.48-9(f)(2). However, while X does not own all of the individual heat pumps used in conjunction with the coils, X does own both the coils in the ground and one heat pump used in conjunction with the coils and thus owns an entire unit of energy property. Accordingly, X may compute a section 48 credit with respect to this unit of energy property.

(iii) Example 3. Shared ownership of property that is an integral part of separate energy properties. X owns a wind energy property that is a unit of energy property and Y owns a solar energy property that is a unit of energy property that are co-located. Both X's wind energy property and Y's solar energy property connect to a substation that houses a step-up 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 own a 50 percent fractional ownership interest in the step-up transformer. The step-up transformer is an integral part of both the wind energy property and the solar energy property (as defined in § 1.48-9(f)(3)(i)). As a result, X and Y may both compute a section 48 credit for their respective energy properties by including their respective bases in the step-up transformer.

(iv) Example 4. Separate ownership of property that is an integral part of separate energy property. X owns a wind energy property that is a unit of energy property and property that is an integral part of the wind energy property, specifically a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a solar energy property that is a unit of energy property that connects to X's transformer. X and Y are not related persons within the meaning of paragraph (e)(3)(i) of this section. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48 credit for its solar energy property, but it cannot include any basis relating to the transformer.

(v) Example 5. X owns a wind energy property that is a unit of energy property and a solar energy property that is a unit of energy property. Both the wind energy property and the solar energy property 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 energy property and the solar energy property (within the meaning of § 1.48-9(f)(3)(i)) and is owned by Y. X and Y are related persons within the meaning of paragraph (e)(3)(i) of this section. X and Y are treated as one taxpayer under paragraph (e)(3)(ii) of this section. X may include the basis of the transformer in computing its section 48 credit with respect to the wind energy and the solar energy property (but may not include more than 100% of that basis in the aggregate).

(f) Election to treat qualified facilities as energy property—(1) In general. If a taxpayer makes an election under section 48(a)(5)(C) (pursuant to paragraph (f)(5) of this section) to treat qualified property that is part of a qualified investment credit facility as energy property with respect to which a section 48 credit may be determined, such property will be treated as energy property for purposes of section 48. No section 45 credit may be determined with respect to any qualified investment credit facility and the requirements of section 45 are not imposed on a qualified investment credit facility.

(2) Qualified investment credit facility. The term qualified investment credit facility means any facility—

(i) That is a qualified facility (within the meaning of section 45) described in section 45(d)(1) through (4), (6), (7), (9) or (11);

(ii) That meets the placed in service and beginning of construction requirements (if any) provided in section 48;

(iii) With respect to which no credit has been allowed under section 45; and

(iv) For which the taxpayer makes an irrevocable election under section 48(a)(5) and paragraph (f)(5) of this section.

(3) Qualified property. The term qualified property means property that meets each of the requirements of paragraphs (f)(3)(i) through (iv) of this section. Regardless of where qualified property is located, any qualified property that meets the requirements of this paragraph (f)(3) is part of a qualified investment credit facility with respect to which a section 48 credit may be determined.

(i) The property is tangible personal property or other tangible property (not including a building or its structural components), but only if such other tangible property is an integral part of the qualified investment credit facility.

(ii) Depreciation (or amortization in lieu of depreciation) is allowable (as defined in § 1.48-9(b)(4)) with respect to the property.

(iii) The taxpayer constructs, reconstructs, or erects the property (as defined in § 1.48-9(b)(1)) or acquires the property (as defined in § 1.48-9(b)(2)) if the original use of the property (as defined in § 1.48-9(b)(3)) commences with the taxpayer.

(iv) The property is not intangible property.

(4) Definitions related to requirements for qualified property—(i) Tangible personal property. The term tangible personal property means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) that is contained in or attached to a building. Further, all property that is in the nature of machinery (other than structural components of a building or other inherently permanent structure) is considered tangible personal property even though located outside a building. Local law is not controlling for purposes of determining whether property is or is not tangible property or tangible personal property. Thus, tangible property may be personal property for purposes of the section 48 credit even though under local law the property is considered to be a fixture and therefore real property.

(ii) Other tangible property. The term other tangible property means tangible property other than tangible personal property (not including a building and its structural components), that is used as an integral part of furnishing electrical energy by a person engaged in a trade or business of furnishing any such service.

(iii) Integral part—(A) In general. Property owned by a taxpayer is an integral part of a qualified investment credit facility owned by the same taxpayer if it is used directly in the intended function of the qualified investment credit facility and is essential to the completeness of the intended function of the qualified investment credit facility. A taxpayer may not claim the section 48 credit for any property that is not owned by the taxpayer, regardless of whether that property is otherwise an integral part of the taxpayer's qualified investment credit facility.

(B) Power conditioning and transfer equipment. Property that is an integral part of a qualified investment credit facility includes power conditioning equipment and transfer equipment used to perform the intended function of the qualified investment credit facility. 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 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 in order 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 used to monitor, operate, and protect transfer equipment.

(C) Roads. Roads that are an integral part of a qualified investment credit facility are integral to the activity performed by the qualified investment credit facility; these include onsite roads that are used for equipment to operate and maintain the qualified investment credit facility. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by a qualified investment credit facility.

(D) Fences. Fencing is not an integral part of a qualified investment credit facility because it is not integral to the activity performed by the energy property.

(E) Buildings. Generally, buildings are not integral parts of a qualified investment credit facility because they are not integral to the activity of the qualified investment credit facility. However, the structures described in paragraphs (f)(4)(iii)(F) and (G) of this section are not treated as buildings for this purpose.

(F) 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)(4)(iii)(E) of this section.

(G) Structures that house certain property. A structure that houses property that is integral to the activity of a qualified investment credit facility is not treated as a building for purposes of paragraph (f)(4)(iii)(E) of this section if the use of the structure is so closely related to the use of the housed qualified investment credit facility that the structure clearly can be expected to be replaced if the qualified investment credit facility it initially houses is replaced.

(5) Time and manner of making election—(i) In general. To make an election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility as a qualified investment credit facility, a taxpayer must claim the section 48 credit with respect to such qualified investment credit facility on a completed Form 3468, Investment Credit, or any successor form(s), and file such form with the taxpayer's timely filed (including extensions) Federal income tax return for the taxable year in which the qualified investment credit facility is placed in service. The taxpayer must also attach a statement to its Form 3468, or any successor form(s), filed with its timely filed Federal income tax return (including extensions) that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified investment credit facility subject to an election under section 48(a)(5) and paragraph (f) of this section. A separate election must be made for each qualified facility that meets the requirements provided in paragraph (f)(5)(v) of this section to be treated as a qualified investment credit facility. If any taxpayer owning an interest in a qualified facility makes an election with respect to such qualified facility, that election is binding on all taxpayers that directly or indirectly own an interest in the qualified facility.

(ii) Special rule for partnerships and S corporations. In the case of a qualified facility owned by a partnership or an S corporation, the election under paragraph (f) of this section is made by the partnership or S corporation and is binding on all ultimate credit claimants (as defined in § 1.50-1(b)(3)(ii)) of a section 48 credit. The partnership or S corporation must file a Form 3468, Investment Credit, or any successor form(s), with its timely filed partnership or S corporation return (including extensions) with respect to Federal income tax for the taxable year in which the qualified investment credit facility is placed in service to indicate that it is making the election and attach a statement that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified facility subject to the election. The ultimate credit claimants must claim the section 48 credit on a completed Form 3468, or any successor form(s), and file such form with a timely filed (including extensions) Federal income tax return for the taxable year in which the ultimate credit claimant's distributive share or pro rata share of the section 48 credit is taken into account under section 706(a) of the Code or section 1366(a) of the Code, respectively. The partnership or S corporation making the election must provide the ultimate credit claimants with the necessary information to complete Form 3468, or any successor form(s), to claim the section 48 credit.

(6) Election irrevocable. The election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility as an energy property is irrevocable.

(g) Coordination rule for sections 42 and 48 credits. As provided under section 50(c)(3)(C), in determining eligible basis for purposes of calculating a section 42 credit, a taxpayer is not required to reduce its basis in an energy property by the amount of the section 48 credit determined with respect to the property. The basis of an energy property may be used to determine a section 48 credit and may also be included in eligible basis to determine a section 42 credit. See paragraph (e) of this section for special rules regarding ownership of energy property.

(h) Qualified interconnection costs included in certain lower-output energy properties—(1) In general. For purposes of determining the section 48 credit, energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (h)(2) of this section), in connection with the installation of energy property (as defined in § 1.48-9(a)) that has a maximum net output of not greater than five megawatts (MW) (as measured in alternating current) (as described in paragraph (h)(3) of this section). The qualified interconnection property must provide for the transmission or distribution of the electricity produced or stored by such energy property and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (h)(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 48 credit.

(2) Qualified interconnection property. The term qualified interconnection property means, with respect to an energy project that is not a microgrid controller, 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 energy project 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 § 1.48-9(b)(1)), 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 § 1.48-9(b)(3)), of which, pursuant to an interconnection agreement (as defined in paragraph (h)(4) of this section), commences with a utility (as defined in paragraph (h)(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) 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 an energy property. As a result, qualified interconnection property is not taken into account in determining whether an energy project satisfies the prevailing wage and apprenticeship requirements in section 48(a)(10)(A) and (11), the requirements for the domestic content bonus credit amount referenced in section 48(a)(12), or the increase in credit rate for energy communities provided in section 48(a)(14).

(3) Five-Megawatt Limitation—(i) In general. The Five-Megawatt Limitation is measured at the level of the energy property in accordance with section 48(a)(8)(A). The maximum net output of an energy property is measured only by nameplate generating capacity (in alternating current) of the unit of energy property, which does not include the nameplate capacity of any integral property, at the time the energy property is placed in service. The nameplate generating capacity of the unit of energy property is measured independently from any other energy properties that share the same integral property.

(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. For purposes of paragraph (h)(1) of this section, the determination of whether an energy property has a maximum net output of not greater than five MW (as measured in alternating current) is based on the nameplate capacity for purposes of paragraph (h)(1) of this section. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy property. Paragraphs (h)(3)(iv) and (v) of this section provide rules for applying the Five-Megawatt Limitation (as provided in paragraph (h)(1) of this section) to electrical generating energy property and electrical energy storage property, respectively.

(iii) Nameplate capacity for energy properties that generate in direct current for purposes of the Five-Megawatt Limitation. For energy properties that generate electricity in direct current, the taxpayer may choose to determine whether an energy property 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 energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating current; or

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

(iv) Electrical generating energy property. In the case of an electrical generating energy property, the Five-Megawatt Limitation is determined by using the maximum electrical generating output in megawatts that the unit of energy property 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 energy property.

(v) Electrical energy storage property. In the case of electrical energy storage property (as defined in § 1.48-9(e)(10)(ii)), the Five-Megawatt Limitation is determined by using the energy storage property's maximum net output as its nameplate capacity.

(4) Interconnection agreement. The term interconnection agreement means an agreement with a utility for the purposes of interconnecting the energy property 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 energy property leased by such taxpayer.

(5) Utility. For purposes of section 48(a)(8) and this paragraph (h), 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—(i) In general. In the case of costs paid or incurred for qualified interconnection property as defined in paragraph (h)(2) of this section, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules similar to the rules of section 50(c) (including section 50(c)(3)).

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

(i) Example 1. Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by taxpayer. X places in service two solar energy properties (Solar Properties) each with a maximum net output of 4 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 Solar Properties that inverts the direct current electricity into alternating current). Each inverter is integral property to each Solar Property but is not shared by the Solar Properties. The Solar Properties share a step-up transformer, which is integral property to both Solar Properties. As part of the development of the Solar Properties, payment of qualified interconnection costs is required by the utility to modify and upgrade the utility's transmission system at or beyond the point of interconnection to accommodate such 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 X paid or incurred for qualified interconnection property subject to the terms of the interconnection agreement, to calculate X's section 48 credits for each of the Solar Properties because each has a maximum net output of not greater than five MW (alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48 credit amount for both Solar Properties.

(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by separate taxpayers. X places in service a solar energy property (Solar Property) with a maximum net output of 3 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Solar Property that inverts the direct current electricity into alternating current). Y places in service a wind facility (Wind Facility), for which Y has made a valid election under section 48(a)(5), with a maximum net output of 4 MW (as measured in alternating current). The Solar Property and the Wind Facility share a step-up transformer, which is integral to both facilities. As part of the development of the Solar Property and the Wind Facility, payment of qualified interconnection costs is required by the utility to modify and upgrade the transmission system at or beyond the point of interconnection to accommodate that 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 48 credits for the Solar Property and the Wind Facility because each has a maximum net output of not greater than five MW (in alternating current).

(iii) Example 3. Application of Five-Megawatt Limitation to an interconnection agreement for a single energy property. X develops three solar properties (Solar Properties) located in close proximity. The Solar Properties are not considered an energy project pursuant to the definition in § 1.48-13(d). Each of the Solar Properties is a unit of energy property that has a maximum net output of 4 MW. The nameplate capacity of each Solar Property is determined by using the sum of the nameplate generating capacities within the unit of each Solar Property in direct current, which is deemed the nameplate generating capacity of each Solar Property in alternating current. Electricity from the three Solar Properties 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 Properties 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 Properties to calculate its section 48 credit for each of the Solar Properties, subject to the terms of each interconnection agreement, because each of the Solar Properties has a maximum net output of not greater than five 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 48 credit amount for both Solar Properties.

(iv) Example 4. Application of Five-Megawatt Limitation to a single interconnection agreement for multiple energy properties. The facts are the same as in paragraph (h)(7)(iii) of this section (Example 3), except that X is party to one interconnection agreement with the utility with respect to the three solar energy properties (Solar Properties) and the interconnection agreement allows for a maximum output of 12 MW (as measured in alternating current). With respect to each of the three Solar Properties, X may include the costs it paid or incurred for qualified interconnection property for each Solar Property to calculate its section 48 credit for each Solar Property, subject to the terms of the interconnection agreement, because each Solar Property has a maximum net output of not greater than five MW (in alternating current).

(v) Example 5. Application of Five-Megawatt Limitation to an Energy Project. The facts are the same as in paragraph (h)(7)(iv) of this section (Example 4), except that the three solar energy properties (Solar Properties) are also subject to a common power purchase agreement and as a result, are considered an energy project (as defined in § 1.48-13(d)). With respect to each of the three Solar Properties, X may include the costs it paid or incurred for qualified interconnection property to calculate its section 48 credit for each of the three Solar Properties, subject to the terms of the interconnection agreement, because each of the Solar Properties has a maximum net output of not greater than five MW (in alternating current).

(vi) Example 6. Utility payment reducing costs borne by taxpayer. In year 1, X places in service a solar energy property (Solar Property) 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 energy property, which is the first component of property attached to each of the Solar Properties 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 Property 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 (h)(6) of this section. X properly includes the $1 million paid to the utility in determining its credit under section 48 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 48 credit in year 1.

(vii) Example 7. Non-utility payment reducing costs borne by taxpayer. The facts in year 1 are the same as in paragraph (h)(7)(vi) of this section (Example 6). 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 48 credit in year 1.

(i) Cross references. (1) For rules regarding the coordination of the section 42 credit and section 48 credit, see section 50(c)(3).

(2) For rules regarding the denial of double benefit for qualified biogas property, see section 45(e).

(3) For applicable recapture rules, see section 50(a).

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

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

(6) For application of the normalization rules to determine the section 48 credit taken by certain regulated companies, including rules regarding the election not to apply the normalization rules to energy storage technology (as defined in section 48(c)(6)), see section 50(d)(2).

(j) 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.

[T.D. 10015, 89 FR 100651, Dec. 12, 2024]