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There seems to be some confusion concerning the terms and the exact conditions of the section 45L credit. The latest retroactive extension that made the credit available for projects executed by the end of 2014 has generated additional questions. Does the section 45L incentive apply for projects started prior to December 31 without being fully completed? IRS has provisions concerning begun construction that can shed some light on the issue.
Begun Construction Provisions
Prior to the modifications that were introduced in 2012, the section 45L taxation credit was available solely for a qualified energy facility placed in service prior to the end of December 2014.
The problem is that energy efficiency projects will quite often require a longer period of time in order to be completed. This is one of the main reasons for the changed conditions that have been included in the American Taxpayer Relief Act of 2012.
The older requirement for facilities that have to be placed in service prior to the end of the term was replaced with a requirement for the construction of the energy efficient building to begin prior to the end of the year. Such constructions can qualify for the taxation incentives provided under section 45L.
Definition of Begun Construction
The next important question that will need to be answered in connection to the 45L credit is what projects correspond to the begun construction requirement. The IRS website is quite helpful in this regard, providing a lot of information about the specifics for begun constructions.
There are two main ways for determining when the construction of the facility has begun. The first is physical work of a significant nature. Physical work of a significant nature is defined as work on the construction that has been started either by the eligible taxpayer or by employees doing work for this person. On-site and off-site work both qualify as physical work of a significant nature.
This category does not include any preliminary work on the building. Design, for example, will not quality the building for the section 45L credit. Research, licensing, obtaining permits, looking for finances and securing will also not qualify.
The second requirement is meeting the safe harbor requirements. Under this requirement, the taxpayer should have incurred five percent or more of the total construction cost prior to December 31, 2014. In addition, IRS has to make sure that the taxpayer is making continuous efforts towards the completion of the project. There may be certain interferences that will be excluded from consideration. Such interferences include:
- Severe weather that stands in the way of safe construction work
- Natural disasters
- Labor stoppages, strikes and other employment-related problems
- Inability to obtain all of the necessary equipment for construction purposes
- Supply shortages
- Financial delays that can reach up to six months
- Delays based on requests from either state or federal agencies
These are the most important criteria that have to be met for begun construction to be considered. The IRS website features additional information about more specific scenarios and how to determine whether these will stand in the way of obtaining the 45L credit.
Steve Nanos
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