Step-By-Step Guide To Claiming Section 48 ITC For Your Energy Project

The Section 48 Investment Tax Credit (ITC) offers significant financial incentives for energy projects. However, the rules have recently changed. If your project began construction after December 31, 2024, it must now comply with the new provisions of Section 48 Investment Tax Credit. This guide will walk you through the step-by-step process of claiming this valuable credit.

Claiming Section 48 Investment Tax Credit For Your Energy Project

The eligibility criteria for the new Section 48 Investment Tax Credit aims to generate electricity without creating greenhouse gas emissions. Hence, the new regime is technology-neutral and aims at the output of the entire process.

Shifting from technology-specific to technology-neutral programs affects several kinds of technologies that have qualified for the older regime. For example, certain energy property types, such as combined heat and power systems and qualified biogas properties, may no longer qualify under the new rules.

So, to qualify for the credit, your project must meet set milestones as well as fulfill the new requirements as stated in the updated regulations.

Guide To Claiming Section 48 Investment Tax Credit

Any project owner seeking a claim for the Section 48 Investment Tax Credit for their energy projects must start construction for tax purposes immediately.

Step 1: Understand the New Regime:

Earlier, there were two categories of ITC for renewable energy projects, including ITC under section 48 and Production Tax Credit under section 45. Both of these programs were well-aligned before the IRA. However, for the present credit programs, the eligibility is on the basis of types of technology, which are discussed below:

Projects commencing construction after December 31, 2024, must qualify for the new credit regime wherein the Inflation Reduction Act (IRA) introduces Section 48E Clean Energy ITC and Section 45Y Clean Electricity PTC as technology-neutral credits. This emphasizes their alignment with greenhouse gas emissions reduction goals. Under this new credit regime, the eligibility aims to create electricity without generating any greenhouse gas emissions. Furthermore, this new credit regime focuses on the results and is technology-neutral.

Moreover, qualification for the new regime might require a challenging lifecycle analysis to create a greenhouse gas emissions rate that is not above zero. Such studies might be time-consuming and subject to fluctuating regulatory requirements every year.

Step 2: Begin Construction

To stand eligible for Section 48 Investment Tax Credit and begin construction, your project must align with any of the following tests:

The Physical Work Test

The physical work test aims to initiate physical work of a particular nature on the project. It means beginning manufacturing activities or on-site material construction, which are crucial to the energy property or starting physical work off-site by obtaining equipment that is eligible by ITC and starting fabrication by the end of the year. In any case, physical work is essential.

The 5% Safe Harbor Test

The 5% safe harbor test means the expenditure of a minimum of 5% of the total eligible cost of the facility. This includes obtaining a minimum financial investment for the development of the project.

Taxpayers should elaborate on either continuous efforts or continuous construction between the date of the start of the construction and the date when the project is located in service. Moreover, all the work should be performed under a written contract with the vendors included, and the costs should have been paid prior to December 31st, 2024.

Step 3: Additional Implications In Regard To December 31, 2024

Any project owners seeking direct payment of their IRA credits must consider the implications in regard to the project construction after December 31, 2024.

Direct payment recipients are needed to fulfill the domestic content requirements for energy projects above 1mW or must be subject to limitations on the credit amount they will receive via direct payment. However, projects that start construction in 2025 will receive 85% of the credit. Moreover, projects starting construction in 2026 will not receive any credit unless they fulfill domestic content requirements.

Not only this, but projects generating below 1mW stand exempt from this limitation. The table given below represents the credit percentage offered for projects that do not fulfill domestic content:

	The overall tax credit reduction in upcoming years when the domestic content requirements are not fulfilled:
1.	100% when construction begins before January 1, 2024
2.	90% when construction starts in calendar year 2024
3.	85% when construction starts in calendar year 2025
4.	0% for construction starting after December 31, 2025 (Note: Only if domestic content requirements are unmet. If requirements are met, projects remain eligible.)

	The percentage needed to fulfill the domestic content requirement increases over the given time
1.	40% for projects starting construction before 2025
2.	45% for projects starting construction in 2025
3.	50% if a project starts construction in 2026
4.	55% if a project starts construction after 2026

Conclusion

The new credit regime, starting from January 1, 2025, releases major changes to energy project tax credits, focusing on the importance of organizations claiming Section 48 Investment Tax Credit and starting construction by December 31, 2024, if they want to qualify for present benefits. Companies seeking to fulfill qualifying projects from now through 2028 should act promptly to avail the eligibility of the projects and enhance potential credits before the new limitations and eligibility requirements come into effect.