IRA - Terms and Important Information Flashcards
The IRS has generally looked to five factors to determine when an energy facility is in a condition or state of readiness and availability for a specifically assigned function. They are:
- Approval of required licenses and permits;
- Passage of control of the facility to taxpayer;
- Completion of critical tests;
- Synchronized with grid, pipeline, or utility; and
- Commencement of daily or regular operation.
Requirements to obtain a Section 48 ITC include:
- The Project must begin construction by December 31, 2024 by meeting “begun construction” requirements;
- The property must qualify under IRC Section 48(a)(2) as “Energy Property”; and
- ITC is earned when energy property is placed in service, which may occur within four years of beginning construction to show continuous construction. See Continuous Construction Requirements for further information.
5% Safe Harbor Test
5% Safe Harbor Test: Taxpayer must pay or incur at least 5% of the total eligible (energy property) costs of the energy project
Incurred Defined: Treas. Reg. Section 1.461-1(a) defines incurred as when the below requirements have been satisfied:
* Establish the fact of liability;
* The amount of liability can be determined with reasonable accuracy; and
* Economic performance has occurred.
Economic Performance: Treas. Reg. Section 1.461-4(d)(6) allows for economic performance to occur when payment is made if the taxpayer can reasonably expect the services or property to be provided within 3½ months after the date of payment
Physical Work of a Significant Nature (“Physical Work Test”)
Begun construction is met under the physical work test when “physical work of significant work” begins. Per IRS Notice 2022-61, physical work performed both by the taxpayer and by others under a binding written contract are considered. Further, the Notice explicitly states the Physical Work Test focuses on the nature of work performed and not the amount or cost of work performed.
- A binding written contract is defined within Treas. Reg. Section 1.168(k)-1(b)(4)(ii) and includes the following requirements:
o Enforceable under state law;
o Does not limit damages to an amount less than 5% of the total contract price;
o Cannot be subject to provisions within the control of either party;
o Contract is not an option to acquire or sell; and
o Contract is not a supply agreement. - Physical work performed offsite does not include work to produce property that is either in existing inventory or is normally held in inventory by the vendor.
- Activities that are specifically excluded from meeting the physical work test include:
o Planning, designing, or securing financing;
o Conducting geologic mapping and modeling;
o Obtaining permits and licenses;
o Conducting geophysical, gravity, magnetic, seismic and resistivity surveys;
o Conducting environmental and engineering studies;
o Clearing a site;
o Conducting test drilling to determine soil condition; and
o Excavating to change the contour of the land (distinguished from excavation for footings and foundations).
80/20
📦 Refurbished Property Qualification: If a taxpayer buys used property and wants to claim the investment tax credit (ITC), at least 80% of the property’s value must come from new parts or components that are added during refurbishment or construction.
🔧 Only 20% Can Be Old: The remaining 20% (or less) of the total value can be from used or old equipment. This makes sure the property is mostly new and still qualifies for the credit.
💡 Purpose: This rule lets businesses refurbish existing equipment (like solar panels or biogas systems) and still get the tax credit—as long as the new investment is the major part of the cost.
Section 45W
🚐 What It Is: Section 45W provides a federal tax credit to businesses that purchase qualified commercial clean vehicles, like electric delivery vans, trucks, or buses. It’s part of the Inflation Reduction Act and is meant to encourage companies to switch to cleaner transportation.
💰 How Much You Get: The credit is up to $7,500 for vehicles under 14,000 pounds, and up to $40,000 for heavier vehicles, depending on battery capacity. The actual credit is the lesser of 15% of the vehicle’s cost (or 30% if it’s fully electric) or the max amounts mentioned.
✅ Key Requirements: The vehicle must be used strictly for business purposes, not for resale, and it can’t be powered by gas or diesel—it must be electric, hydrogen fuel cell, or another clean tech. Also, there’s no income cap or manufacturer limit, and both new and leased vehicles can qualify.
PWA
💼 What PWA Means: To get the full 30% Investment Tax Credit (ITC) under Section 48, you must follow Prevailing Wage and Apprenticeship rules. These rules make sure that workers on clean energy projects are paid fairly and that training opportunities are provided for new workers.
💵 Prevailing Wage Requirement: You must pay all laborers and mechanics at least the local prevailing wage, as determined by the U.S. Department of Labor, for similar work in the area. This applies to both construction and certain repair or maintenance work done during the first five years after the project is placed in service.
👷 Apprenticeship Requirement: A certain percentage of total labor hours must be performed by qualified apprentices (usually 12.5% to 15% depending on the project timeline). You also must make good-faith efforts to hire apprentices through registered programs.
