Eligibility enforcement of higher tax credit rates for qualifying energy construction projects under the Inflation Reduction Act (PL 117-169) hinges on guidance that a practitioner estimated might not be issued until next year.
Under the recently enacted law, which created and expanded various clean-energy provisions, projects must satisfy several labor requirements to receive the full credit amounts. However, such requirements won’t take effect until 60 days after the Treasury Department publishes clarifying guidance.
“We are seeing a lot of taxpayers rushing to begin construction right now,” Brian Americus, a Deloitte managing principal, said September 13 at a webinar hosted by the American Bar Association’s Tax Section. “The open question is when this guidance will actually come out.”
Americus projected the guidance could come in early 2023. Hannah Hawkins, a KPMG principal in the firm’s renewable-energy group, offered a more optimistic forecast of the end of this year.
First among the Inflation Reduction Act’s statutory requirements is that qualifying energy projects must provide a prevailing wage—or a basic pay floor—during the initial five-year period after a project is placed into service. This applies to work performed by employees and contractors or subcontractors relating to construction, alteration, or repairs.
Next, the law imposes a minimum threshold for the percentage of such work that must be done by a qualified apprentice. The applicable percentage for 2022 is 10%, increasing to 12.5% the following year, with the phase-in completed at 15% for facility construction in 2024 and beyond.
If taxpayers don’t pay prevailing wages or if they use too many nonapprentice hours on an energy project, “there is a very severe penalty in that the credit amounts are reduced to 20% of the full credit amount,” Americus explained. For example, a 30% investment tax credit could become only 6% if the requirements aren’t met. “The whole industry across various credits is looking to the IRS and Treasury to provide guidance now on how exactly to meet those requirements,” he said.
Americus and Hawkins sought to promote additional energy credit guidance on what it would mean to begin construction. The IRS has rolled out several notices on the topic in recent years. Citing existing guidance, Americus said there are “two ways to begin construction”: A taxpayer can satisfy the so-called physical work test by beginning work on a facility of significant nature, a determination subject to a fact-based analysis.
Alternatively, construction is considered to have begun when a taxpayer incurs 5% or more of the total cost of a facility, pursuant to Code Sec. 461. Projects completed within four to 10 years, depending on the technology, meet a special rule known as the continuity requirement. The COVID-19 pandemic prompted the IRS to expand the continuity safe harbor, most recently clarified in Notice 2021-41.
Energy projects on which construction begins before any effective guidance generally would still benefit from the bonus credit rates. “If taxpayers begin construction as soon as possible right now … they can qualify and not have to worry about substantiating proof that the inflation bill’s labor requirements are met,” Americus said.
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