Beginning of Construction for IRA Qualified Facilities

The Internal Revenue Service has released guidance for determining the beginning of construction of a qualified facility, property, or project or equipment (collectively, “qualified facility”) for purposes of the increased Inflation Reduction Act credits or deduction by satisfying the prevailing wage and apprenticeship requirements. The beginning of construction guidance is based on prior Internal Revenue Service notices that the renewable industry has relied on over the past decade.  

If construction of the qualified facility began, as determined in accordance with the below methods, on or prior to January 29, 2023, the prevailing wage and apprenticeship requirements do not have to be met to qualify for the increased credit amount.

A taxpayer that begins construction of a qualified facility on or after January 29, 2023, must meet the prevailing wage and apprenticeship requirements for the increased credit amount. 

Taxpayers may establish the beginning of construction of a qualified facility under two methods — the “physical work test” and the “five percent safe harbor.” Taxpayers using either method must also demonstrate continuous construction or continuous efforts towards the completion of the qualified facility based facts and circumstances. In lieu of proving continuous construction or efforts, taxpayers will be deemed to meet this requirement if the qualified facility is placed in service no more than four to six calendar years from the calendar year construction began (or no more than ten years for certain offshore or projects built on federal land).  

Beginning of Construction

Physical Work Test

Under the “physical work test,” qualified facility construction begins when “physical work of a significant nature” commences, and the taxpayer maintains a “continuous program of construction.” This test focuses on the nature of the work performed rather than the amount of work or the costs. Physical work of a significant nature excludes preliminary activities even if the cost of those preliminary activities is properly included in the depreciable basis of the qualified facility. Preliminary activities include planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environmental and engineering studies, or clearing a site. Physical work of a significant nature does not include work to produce property that is either in existing inventory or is normally held in inventory by a vendor.

Work performed directly by the taxpayer and indirectly performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business is included in determining whether construction has begun. Both on-site and off-site work may be considered for demonstrating that physical work of a significant nature has begun.

Five Percent Safe Harbor

Under the “five percent safe harbor,” qualified facility construction begins when a taxpayer (i) pays or incurs five percent or more of the total qualified facility cost and (ii) makes continuous efforts, thereafter, to advance towards completion of the qualified facility. All costs properly included in the depreciable basis of a qualified facility are considered to determine whether the five percent safe harbor has been met. Costs associated with property yet to be delivered to the taxpayer that is manufactured, constructed, or produced by another for the taxpayer pursuant to a binding written contract with the taxpayer, are deemed incurred by the taxpayer when the costs are incurred by the person in accordance with IRC Section 461.

We’re Here to Help

Weaver is here to help with all aspects of your clean energy projects from reviewing your process flow diagrams to determine qualified facilities, to assisting you to navigate complex IRA credit compliance requirements and evolving regulations, to construction and operations phase wage rate and apprenticeship compliance audits.

Visit our Inflation Reduction Act Resources page or contact us for assistance.

©2023