The “dual-use property” restrictions historically limited the ability to claim investment tax credits (ITCs) for energy storage equipment that was co-located with or used energy from both qualifying and non-qualifying energy sources. However, recent regulatory changes have substantially altered the treatment of these restrictions for energy storage tax credits:
Impact of Dual-Use Property Restrictions on Energy Storage Tax Credits
- Pre-Inflation Reduction Act (IRA) Situation:
Previous guidance imposed dual-use property restrictions that generally prevented claiming an ITC for energy storage facilities co-located with generation facilities if the energy storage used non-qualifying energy sources, constraining credit eligibility. - Post-IRA Final Guidance:
The IRS has clarified and relaxed these restrictions. Specifically, the dual-use property restrictions are no longer generally applicable to energy storage facilities claiming the ITC. Energy storage can now be co-located with energy generation facilities without disqualifying the storage from the ITC, effectively removing a significant barrier to claiming credits for co-located storage systems. - Section 48 Regulations on Dual Use Rule (Energy Property Generally):
For energy property that uses energy from both qualifying and non-qualifying sources (the dual use scenario), the final IRS regulations allow such property to qualify for ITCs if the use of non-qualifying energy does not exceed 50% of total energy input in a year. If the qualifying energy use is between 50% and 100%, only a proportional part of the property’s basis is eligible for the credit. - Exemption of Energy Storage from Dual Use Rule:
Crucially, the final regulations explicitly state that the dual use rule does not apply to energy storage technology placed in service after December 31, 2022. Energy storage is now classified as a separate category of energy property under the IRA, and as such, its eligibility for ITCs is independent of the dual use limitations that apply to other energy properties. - Incremental Cost Rule Applies Instead:
Instead of the dual-use rule, energy storage tax credits follow the incremental cost rule under Section 48E. This means only the incremental cost attributable to the energy storage functionality (above a baseline non-energy storage use) counts toward the credit base. This includes thermal, electric, and hydrogen storage with a minimum capacity threshold.
Summary
| Aspect | Dual-Use Restrictions for Energy Storage |
|---|---|
| Applicability Post-2022 | Generally not applicable to energy storage placed in service after 12/31/2022 |
| Co-location with Generation | Allowed without disqualifying ITC eligibility for storage |
| Non-storage Energy Property Use | For other energy properties, non-qualifying energy use limited to 50% for partial credit |
| Credit Basis Calculation | Energy storage uses incremental cost rule instead of dual-use allocation |
This regulatory shift significantly broadens the eligibility for ITCs on energy storage systems, removing prior barriers linked to dual-use energy concerns and facilitating increased investment in storage technologies alongside generation assets.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-the-dual-use-property-restrictions-impact-energy-storage-tax-credits/
