Let’s lead with what is important: What could this bonus mean for your facilities?
We’ll talk another day about the trade-offs between ITC and PTC especially when considering the domestic content bonus. For today let’s focus on the ITC which is more advantageous for higher CAPEX projects with lower availability/capacity.
In essence the ITC values outlined above are a tax credit:
The base ITC is 6%
The energy credit for any taxable year is the energy percentage of the basis of each energy property place in service during such taxable year.
This is for the construction, reconstruction or erection of an energy property for which no credit has previously been claimed.
This base ITC is then bonified:
By meeting Inflation Reduction Act (“IRA”) labor requirements (6% x 5) = 30%
Through other Credit Enhancements:
Domestic Content Bonus = 10% (For a total ITC of 40%)
Energy Communities Bonus = 10% (For a total potential ITC of 50%)
In any case, this means it really matters that your organization look diligently into capturing and securing this incentive and related bonus. You should build your approach to be able to diligently and tangibly demonstrate compliance with all requirements.
Today we’ll cover the first 2 steps for you to follow:
1. Make sure you are building a “energy property”
To benefit from the ITC your “project” must qualify as an “energy property”.
The term "energy property" means that your project uses:
Solar Water Heat, Solar Space Heat, Geothermal Electric, Solar Thermal Electric, Solar Thermal Process Heat, Solar Photovoltaics, Wind (All), Geothermal Heat Pumps, Municipal Solid Waste, Combined Heat & Power, Fuel Cells using Non-Renewable Fuels, Tidal, Wind (Small), Geothermal Direct-Use, Fuel Cells using Renewable Fuels, Microturbines, Offshore Wind Biogas, Microgrid Controllers, and Interconnection Property.
Is allowed to be depreciated and meets performance and quality standards set forth (if any)
2. Then your property needs either to:
Have a maximum net output of less than 1 megawatt (as measured in alternating current).
Start construction before the full rules and guidance are published… but before January 29, 2023 (yes has passed)
Follow applicable rules & guidance once published
So far we have received guidance on Labor requirements and are expecting more rules to come
In essence, small projects automatically get the bonified ITC (e.g. base ITC x 5).
Larger projects however will need to meet the applicable rules and guidance or begin construction before January 29th, 2023 and pass the IRS closely scrutinizing your project by meeting the continuity requirements… e.g. meet the 5% safe harbor or the Physical Work Test.
For the Physical Work Test you will need to demonstrate to the IRS that you have begun work of a significant nature (either on or off site) and that you then maintain a continuous program of construction of the facility.
In the case of the Five Percent Safe Harbor you will qualify if you incurred 5% (or more) of the costs of the facility before Jan 29, 2023 and that you then maintain a continuous program of construction of the facility.
In both case most type of facilities also need to be placed in service in the next 4-6 years at depending on the underlying technology.
If you are wondering how you will comply will labor requirements or can benefit from the energy communities or domestic content bonus you will have to read our next article where we will dig into the current draft rules and their related implications.