BOC Requirements Under the Inflation Reduction Act

The Inflation Reduction Act (IRA) introduced and extended several clean energy provisions to promote investment in the United States. Crucial to these provisions are the beginning of construction (BOC) requirements. These requirements are crucial to determine eligibility for various energy tax credits, including Production Tax Credits (PTC) and Investment Tax Credits (ITC).

Defining the Beginning of Construction

To determine which incentives are applicable under the IRA, a project must meet specific requirements related to the start of construction. The IRS outlines two primary methods to establish the BOC:

1. Physical Work Test: This method involves starting significant and continuous physical work at the project site under a written contract. This includes excavation of foundations, setting supports, and equipment installation. Off-site work can also qualify if it involves producing essential components that are not normally held in inventory. For example, manufacturing wind turbine blades specifically for a project, under a signed contract, can meet this requirement.
2. Five Percent Safe Harbor: Under this method, a taxpayer can establish the beginning of construction by paying or incurring at least 5% of the total project cost in a given year. Eligible expenditures include all costs that contribute to the depreciable basis of the property generating the credit and those directly related to the construction or manufacturing of project components under a contract. These expenditures must be accompanied by continuous efforts to advance the project toward completion.

Continuous Construction Requirement

Once a project has met the BOC requirement, the IRS also mandates it must make continuous progress toward completion. This means that work must be consistent and ongoing, with limited interruptions.

The continuity requirement ensures that projects claiming the IRA's tax benefits are genuinely advancing toward becoming operational.

Continuity Safe Harbor

To provide flexibility to taxpayers, the IRS has issued safe harbor deadlines, extending the time to complete projects under certain circumstances. The Continuity Safe Harbor allows projects that began construction to still qualify for the tax credits if they are placed in service within a specific time frame — generally within four to six years after construction begins.

A few notable continuity safe harbors include:

• Section 48C (Qualifying Advanced Energy Project Credit): If placed in service within five calendar years of the construction start.
• Sections 45 (Production Tax Credit), 45Y (Clean Electricity Production Credit), 48 (Investment Tax Credit) & 48E (Clean Energy Investment Credit): If a qualified facility is placed in service no more than four calendar years after construction began.
• For offshore projects and projects built on federal lands, the placed in service date extends to no more than 10 calendar years.
• Section 45Q (Carbon Oxide Sequestration Credit): If placed in service no more than six calendar years after construction of the qualified facility or carbon capture equipment began.

Impact on Energy Investments

The BOC requirements are critical for developers and investors in the renewable energy sector in order to secure valuable tax credits that significantly enhance the financial viability of clean energy projects.

These provisions are designed to accelerate the transition to renewable energy, contributing to the broader goals of reducing greenhouse gas emissions and promoting sustainable development.

Understanding and adhering to BOC requirements is essential for anyone involved in the development of renewable energy projects. As you consider clean energy projects or updates to your facilities, be sure to work alongside a trusted energy services provider.