THE INVESTMENT TAX CREDIT (ITC), EMBODIED IN SECTION 48 of the Internal Revenue Code (IRC), provides a substantial financial incentive designed to stimulate investment in renewable and clean energy. The ITC encourages potential investors to partake in the installation of renewable and clean energy systems, thereby promoting environmentally sustainable practices in the United States. The relevance of the ITC has surged recently, especially in the context of the current administration’s focus on sustainable energy development and practices. The ITC has been revised multiple times since 1992, the most recent revision occurring in August 2022 under the Inflation Reduction Act (Act).1 The first portion of this article provides an overview of the requirements to qualify for the ITC in general. The second portion takes a deeper dive into the changes to the ITC implemented by the Act and related guidance, with attention to updates recently released by the Internal Revenue Service (IRS), including those related to transferability and direct pay. GENERAL ITC REQUIREMENTS To qualify for the ITC, eligible energy properties must satisfy three key criteria: (i) the taxpayer must own the property; (ii) the property must reach operational status within the year the credit is first claimed; and (iii) the property and project must comply with specific federal and state guidelines.2 1. Eligible Property The ITC applies primarily to energy properties, including solar, wind, and geothermal energy properties.3 Applicable energy properties include a wide range of equipment and systems, including solar energy systems, geothermal systems, fuel cells, and small wind turbines. The Act expanded the scope of applicable energy projects to include: (i) solar facilities beginning construction before Jan. 1, 2025; (ii) standalone energy storage technology; and (iii) zero-emission projects that start construction on or after Jan. 1, 2025.4 An eligible property must meet the following criteria to qualify for the ITC: Must be constructed, reconstructed, or erected by the taxpayer; Depreciation or amortization must be allowable on the property; and Meet certain performance and quality standards promulgated by the U.S. Secretary of the Treasury, if any, in effect at the time of acquisition. 2. Ownership & Operational Status In order to claim the ITC, the taxpayer must possess ownership of the energy property.5 The energy property must be “placed in service,” meaning it must be ready and available for use, in the year the tax credit is claimed.6 However, for property that satisfies the “beginning of construction” requirement, the ITC can be claimed if the property is placed in service by a specific deadline (usually within four years after the construction began).7 3. Beginning Construction A 30% ITC is available for taxpayers who “began construction” by Dec. 31, 2019, with reduced percentages available for projects begun after this date.8 Two methods may be used to determine when construction begins: the “Physical Work Test” and the “5% Safe Harbor.” Continual progress towards completion is mandatory for both methods, generally requiring the project to be “placed in service” within the fourth calendar year after commencement of construction. A. Physical Work Test Under the “Physical Work Test,” construction is considered to have begun when physical work of significant nature has started. This test focuses on the nature of the work performed, not the amount or cost. “Physical work of a significant nature” may include any off-site or on-site physical work, such as mounting equipment, manufacturing components, or installing equipment and structures. Preparatory work or work related to the assembly of component parts of energy property would not qualify as “physical work of a significant nature.” KEY INVESTMENT TAX CREDIT PROVISIONS AFFECTED BY THE INFLATION REDUCTION ACT, INCLUDING UPDATES ON TRANSFERABILITY & DIRECT PAY BY TRISTIN S. TAYLOR & HANNAH FISCHER FREY, BAIRD HOLM LLP 12 Nebraska CPA
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