See “A Primer on Carbon-Negative AI Data Centers” for more on this topic
The Investment Tax Credit (ITC) remains one of the most powerful tools for clean energy project development in the United States. Yet determining what actually qualifies as “energy property” under Section 48 of the Internal Revenue Code can be far more nuanced than it first appears.
Our Buena Vista Biomass Power (BVBP) project in California provides a useful case study for understanding where eligibility lines are drawn, and why experienced tax credit consulting is critical to getting it right.
Understanding ITC Eligibility
To qualify for the ITC, a project component must meet the definition of “energy property” under Section 48(a)(3). In short, it must be:
- Depreciable property used in a qualifying clean energy technology, and
- Integral to the generation or storage of clean electricity.
IRS guidance makes clear that not every asset associated with a clean energy project meets these criteria. For example, supporting infrastructure or unrelated downstream assets typically do not qualify, even if co-located with the energy facility.
Case Study: BVBP and the Energy Property Test
The Buena Vista Biomass Power facility is being converted from a legacy combustion-based biomass plant into a carbon-negative, pyrolysis-based system designed to power a co-located AI data center.
Here is how the ITC rules apply to the major components of this conversion:
| Project Component | ITC Eligible? | Reasoning |
|---|---|---|
| Legacy biomass power plant (pre-existing assets) | No | Existing infrastructure does not qualify as new “energy property.” Only new investment in qualifying systems can claim the ITC. |
| Biomass-to-pyrolysis conversion system | Yes | The new pyrolysis system produces clean, renewable power and therefore qualifies as “energy property.” |
| Battery Energy Storage System (BESS) | Yes | Energy storage technology that stores clean power for later use is explicitly covered under the Inflation Reduction Act’s ITC expansion. |
| Grid interconnection costs | No | IRS Notice 2018-59 clarifies that interconnection equipment generally does not qualify as energy property unless it is owned and operated as part of the generating facility itself. |
| Data center facility | No | The data center consumes energy rather than produces it, so it is not an energy property. |
| Servers, chips and GPUs | No | These are computing assets, not generation or storage equipment, and therefore ineligible. |
The Role of Professional ITC Guidance
Because ITC eligibility depends on detailed engineering, ownership and use criteria, projects benefit greatly from expert advisory support. As discussed in Tax Credit Consulting 101: Maximizing Project Value Through Expert ITC Guidance, working with experienced consultants ensures that:
- Qualifying assets are properly documented and certified,
- Basis allocation and cost segregation are handled correctly, and
- The project meets all prevailing wage, apprenticeship (PWA) and domestic content requirements needed to claim full credit value.
Beyond the ITC: Other Incentives and Depreciation Benefits
Even when certain components do not qualify for the ITC, they may still be eligible for Modified Accelerated Cost Recovery System (MACRS) depreciation. For instance, data center equipment or interconnection assets may not receive a tax credit, but they can still provide meaningful tax shield benefits through accelerated depreciation.
The Bottom Line
The ITC can cover a wide range of clean energy investments, but eligibility requires a detailed understanding of how each component contributes to power generation or storage. For BVBP and similar projects, that means the pyrolysis and storage systems qualify, but the existing plant infrastructure, data center and GPUs do not.
Understanding these boundaries helps investors model project economics more accurately and position their portfolios for maximum impact and compliance.