Low-Income Bonus Credits for Energy Projects under the Inflation Reduction Act

Low-Income Bonus Credits for Energy Projects under the Inflation Reduction Act


On August 16, 2022, President Biden signed into law the Inflation Reduction Act, referred to in this article as the IRA.

The IRA included approximately $394 billion of new investments and tax credits for clean, Renewable energy and low-carbon development to address the climate crisis. The majority of the IRA incentives and investments are accomplished via tax credits rather than direct spending, with commercial and industrial incentives accounting for 80% of the clean energy tax credit investments. The IRA represents the most significant change in the energy portion of the tax code since at least 2005.

The Inflation Reduction Act Expands Investment Tax Credits

The clean energy Investment Tax Credit (ITC) was dramatically expanded by Congress via the IRA.

Since its inception, the ITC had been a nonrefundable and nontransferable tax credit for projects like wind, solar, and biomass energy projects. The IRA made the ITC refundable to most tax-exempt entities, like governments and non-profit organizations. The ITC is also now transferrable in limited circumstances, though the ITC purchasers still have to comply with the passive income limitations described in this article.

In adopting the IRA, Congress set the ITC amount at 30% of project costs for those projects that meet prevailing wage and apprenticeship guidelines, and for all solar projects with a capacity of less than 1 megawatt, described in this article as “top tier projects.” Large projects that do not pay prevailing wage are eligible for an ITC of just 6%, and are described here as “second-tier projects.”


Congress also adopted several measures – “ITC adders” with the amount indicated:

  1. To spur additional investments in domestic manufacturing for U.S. steel, iron, and clean energy components ( the “Domestic Content” adder), a 10% bonus credit for top tier projects, and 2% bonus project for second-tier projects;
  2. For clean energy projects in areas impacted by recent closures of fossil fuel mines or fossil fuel power plants and brownfields ( the “Energy Communities” adder), a 10% bonus credit for top tier projects and 2% bonus credit for second-tier projects; and
  3. For projects built in distressed census tracts or that directly benefit low- and moderate-income families (the “Environmental Justice Communities” adder, described in this article).

The Environmental Justice Communities bonus to the ITC under Section 48(e) of the Internal Revenue Code adds an additional 10% or 20% to the ITC value, as indicated below, described by the IRS as the “LMI Bonus” credit. For any second-tier projects that still qualify for and receive LMI Bonus Credit allocations, even if the base credit is only 6%, the LMI Bonus credit amount is 10% or 20% depending the specific project category as described later in this article. Project owners claiming the ITC – whether via tax credit or the elective payment for tax-exempt entities – can receive an ITC valued as high as 40% or even 50% of project costs.


On February 15, 2023, the U.S. Treasury and IRS published a Notice to meet the IRA’s 180-day-after-enactment requirement to establish the Low-Income Communities Bonus Credit Program. The Notice addressed some questions, but as of this article, it still leaves many questions for later clarification.

For developers seeking to take advantage of the LMI Bonus Credit – whether the 10% bonus or the 20% bonus to the ITC – the Notice makes clear that LMI Bonus Credit projects will not be eligible until at least the third quarter of 2023. These projects must not be activated (technically “placed in service”) until the IRS and the U.S. Department of Energy (DOE) begin taking applications and granting LMI Bonus Credits allocations to specific projects.

More specifically, the Notice lays out how the IRS will allocate all of the LMI Bonus Credits within the national annual 1.8 gigawatt limit for 2023, in the 4 categories laid out by the IRA and detailed below.

The IRS is directing the DOE to administer the LMI Bonus Credit application process, which will be accepted in a “phased approach” during 60-day application windows. The DOE will likely review applications every 2 months, in bulk. If the total qualified and complete applications of each 60-day block is less than the total allocations within each category (described below), then all qualified applicants will receive allocations. If the total qualified and complete application capacity exceeds the total allocations within each 60-day application window, the DOE will conduct a lottery or other similar process. LMI Bonus Credit applications will be rejected or accepted in whole for each facility.

The DOE will first review applications for projects in the LMI Residential Building category (Category 3) and the LMI Economic Benefit category (Category 4), for a 60-day application window.


The 1.8 gigawatt total capacity limitation for Low-Income Bonus Credits under the IRA are reserved in the following categories:

  • Category 1 — Located in a Low-Income Community census tract — 700 MW
    • Projects located within 45D census tracts as defined by the New Market Tax Credit statute
    • 10% LMI Bonus Credit
  • Category 2 — Located on Indian Land — 200 MW
    • 10% LMI Bonus Credit
  • Category 3 — Qualified Low-Income Residential Building Project — 200 MW
    • Projects installed on a federally-supported affordable housing rental building with the financial benefits of the solar project allocated equitably among the residential occupants of the building.
    • 20% LMI Bonus Credit
  • Category 4 — Qualified Low-Income Economic Beneficiaries — 700 MW
    • Projects in which at least 50% of financial benefits of the electricity produced are provided to households with income less than 200% of poverty line applicable to a family of the size involved or less than 80% Area Median Income.
    • 20% LMI Bonus Credit

The IRS anticipates issuing additional criteria on allocating the 2023 Capacity Limitation among the applicants. Depending on demand for credits, the IRS may reallocate capacity limited between the categories up to the maximum 1.8 gigawatt total allocation for the LMI Bonus Credit program. Projects receiving a capacity allocation for the LMI Bonus Credit program still must otherwise demonstrate to the IRS that the project and claiming taxpayer have both fully complied with the requirements of the LMI Bonus Credit statute under Section 48(e) of the Code.


The following is a brief, incomplete list of some of the remaining items requiring further guidance and clarification that are likely of interest:

  • The specific DOE application process.
  • Timing of the initial DOE application for Categories 3 and 4.
  • Timing of the initial DOE application for Categories 1 and 2.
  • The DOE lottery process when total applications exceed the specific category allocation.
  • More specific eligibility for each category.
  • More specific criteria for allocating Capacity Limitations within each category.
  • Parameters of the qualifying “financial benefit” for Category 3 projects.
  • Parameters of the qualifying “financial benefit” for Category 4 projects.
Print Friendly, PDF & Email
Jeremy Kalin

Jeremy Kalin

As the son and grandson of small business owners and as a “recovering” former politician, I believe that private enterprise can help solve some of the big challenges we face in our world. That we are all better served when for-profit, nonprofit and public institutions all pull on the rope together. Read Jeremy's Bio.

Related Posts