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New energy tax credit regime incentivizes projects to begin construction ahead of Dec. 31, 2024, deadline
How to navigate year three of the Inflation Reduction Act
Within the Inflation Reduction Act (IRA), there are more than 70 available tax credits, many of which are “entitlements,” meaning an organization is entitled to the tax credit if their project meets specific eligibility criteria. Most of these credits are effectively good through 2032 and this “10-year runway” is one of the largest in our nation’s energy policy history. This timeframe provides stakeholders with time to plan, develop and execute projects that could leverage the energy tax credit program as part of the energy transition.
While a large chunk of the 10-year runway remains, there continue to be significant changes in how the legislation is promulgated. Companies need to be aware of the changing tax credit details (including the deadlines). It is imperative that organizations get their wheels in motion now if they hope to benefit from the “new regime” starting in 2025 – and beyond.
Understanding the new regime
Historically, two categories of income tax credits were available for renewable energy projects (1) investment tax credits (ITC) under section 48 and (2) production tax credits (PTC) under section 45. Both programs were in place prior to the passage of the IRA. Eligibility under the existing credit programs is generally based on technology types, which are listed below.
As of Dec. 31, 2024, the existing credit regime under section 48 and section 45 expires. Projects that begin construction after Dec. 31, 2024, will need to qualify under the new credit regime of section 48E clean energy investment tax credits and section 45Y clean electricity production tax credits. Eligibility under the new credit regime focuses on producing electricity without producing greenhouse gas emissions. The new credit regime is essentially technology neutral and focuses on the output of the process.
The shift from a technology-specific to technology-neutral credit program impacts many of the technologies that have qualified under the old regime. Some will be left out of the new regime.
Further, qualification under the new regime may require complicated lifecycle analysis to establish a greenhouse gas (GHG) emissions rate that is not greater than zero. These studies can be time consuming and subject to changing regulatory requirements each year.
More on ITCs and PTCs
Under the current regime, ITC (section 48) and PTC (section 45) qualifying energy property types are listed below. For section 48, the base credits refer to the initial percentage of the investment costs that an eligible property can receive.
*Asterisks denote projects that are at risk of facing increased credit limitations – or potentially being phased out entirely – under the new regime. These are the projects that organizations want to begin construction on now, so that they can qualify for tax credits under the current regime.
Eligible energy property types
| Investment tax credits (ITC): section 48 | Production tax credits (ITC): section 45 |
Base credit 6% ITC property types
Base credit 2% ITC property types
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PTC proper types
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Projects that can begin construction (as defined below) prior to year-end, will be eligible to claim credits under the existing section 48 and section 45 credit regime and do not have to qualify under the new technology neutral regime.
How to meet “begun construction”
To demonstrate “begun construction,” taxpayers must meet one of the following requirements:
- Start physical work of a significant nature or
- Incur at least 5% of the total cost of the facility by the end of 2024
In either case, taxpayers must demonstrate continuous construction efforts – more on that in a bit – and work performed must be completed under a binding, written contract between vendors to prove “begun construction.”
The physical work test focuses on the nature of the work being performed, as opposed to any specific costs incurred. The work can be performed on site (the construction plot) or off site (at the factory). In fact, the ability to qualify while performing work off site is often a surprise to many.
A few examples of preliminary activities that do not pass the physical work test include planning and designing, permitting, financing, studying, surveying, site clearing and manufacturing or ordering equipment that is typically held in inventory by a vendor.
The 5% safe harbor test requires 5% of project costs to be incurred prior to Dec. 31, 2024, but this doesn’t include any physical construction requirements. It focuses, instead, on the total cost of the project and the qualifying costs of depreciable assets. In this case, the 5% can include hard costs in addition to the preliminary activities listed above.
However, the 5% project costs include a couple of noteworthy nuances. First, incurring 5% of project costs means more than simply completing the payment, in certain scenarios. Additionally, the definition of “incurred” is defined within the Internal Revenue Code and relies on the existing tax accounting methods of the project developer.
As referenced earlier, there is a “continuous construction” requirement with a four-year safe harbor period. If you place the project in service within four calendar years of “begun construction,” then you are deemed to have met the continuous construction requirement. So, for any current projects on which you have begun construction prior to Jan. 1, 2025, as long as they are placed in service during 2028 or before, they will pass the continuous construction test.
Of course, it is important to remember that construction timelines can change. So even if a project has begun construction and is scheduled to be put into service by 2028, it may make sense to document construction progress each year as a precaution.
Along those lines, it is also wise to start the process early, as strategic development, vendor engagement and documentation are stages that cannot be completed overnight. These steps take time and manpower in the form of project team members and vendors – and there is likely going to be a supply chain crunch near the end of the year – so we recommend starting the process as soon as possible.
Additional implications related to Dec. 31, 2024
For any project looking to receive direct payment of their IRA credits under section 6417, there are implications to projects beginning construction after Dec. 31, 2024.
Direct payment recipients are required to meet the domestic content requirements for projects or be subject to limitations on the amount credit they will receive as direct payment. The below table indicates the percentage of credit available for projects that do not meet domestic content. For projects beginning construction in 2025, 85% of the credit is available. For projects beginning construction in 2026, no credit is available unless domestic content requirements are met.
Projects producing less than one megawatt are exempt from this limitation. Further, there are certain exceptions to having the below limitations applied that were outlined in IRS Notice 2024-09. These exceptions are nuanced and often difficult to prove.
| Beginning Jan. 1, 2024, the overall tax credit is reduced in future years if the domestic content requirements are not met: | The required percentages to meet the domestic content requirement increase over time. The annual adjusted threshold percentages are: |
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Where to go from here?
The new credit regime beginning Jan. 1, 2025, introduces significant changes to energy project tax credits, emphasizing the importance for organizations to commence construction by Dec. 31, 2024, to qualify for existing benefits. Companies looking to complete qualifying projects between now and 2028 may act promptly to secure their projects' eligibility and maximize potential credits before the new eligibility requirements and limitations take effect.
Baker Tilly offers an end-to-end solution to help companies maximize their IRA opportunities. As you strive to secure the maximum eligible credits, we can assist with:
- Planning now to meet begun construction
- Determining other IRA bonus credits that may be afforded to your project
- Development advisory to help manage the project
- Maximizing the tax credit earned – pre- and post-construction cost certification
- Work-paper file generation to support investment tax credit claim
- Support management under audit of credit
Go there with an IRA specialist.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
