Beginning of Construction Exception for Tax Credits
The beginning of construction exception is a provision under the Inflation Reduction Act that allows certain energy projects to qualify for enhanced tax credits without complying with the prevailing wage and apprenticeship requirements. This exception applies if construction or installation of a facility began before January 29, 2023, for credits under sections 30C, 45, 45Q, 45V, 45Y, 48, 48E, and the deduction under section 179D.
Key Aspects of the Exception
- Eligible Tax Credits and Deductions: The exception covers enhanced credit rates under various sections, including solar investment tax credits (ITC) and production tax credits (PTC), among others.
- Deadlines for Qualification: To qualify for the exception, construction must have commenced prior to January 29, 2023. This deadline is crucial for projects aiming to avoid prevailing wage and apprenticeship requirements.
- Determining the Start of Construction: The IRS provides two primary methods to establish when construction has begun:
- Physical Work Test: Actual physical work of a significant nature must start.
- Five Percent Safe Harbor: The taxpayer must incur at least 5% of the total cost of the facility.
- Continuity Requirement: After starting construction, the project must demonstrate continuous progress or efforts toward completion. A project is deemed to satisfy this requirement if it is placed in service within a specified timeframe (e.g., within four years for most projects).
- Prevailing Wage and Apprenticeship Rules: Projects beginning construction after January 29, 2023, must comply with prevailing wage and apprenticeship requirements unless they qualify under specific exceptions, such as the one-megawatt exception for smaller facilities.
Benefits and Implications
- Increased Credits: Without needing to meet prevailing wage and apprenticeship requirements, eligible projects can secure higher tax credit rates.
- Simplified Compliance: Projects that meet the beginning of construction exception may avoid the complexity and costs associated with complying with these wage and apprenticeship rules.
Overall, the beginning of construction exception offers significant benefits for energy projects by easing compliance burdens and potentially increasing tax credit amounts for projects initiated before the specified deadlines.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-does-the-beginning-of-construction-exception-work-for-tax-credits/
