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credit-eligible portion of the tax basis of toward completion of the qualified The phrase “building or its structural
qualified property. facility or property during the period components” in Sec. 48D(b)(2)(B)(i)
Historically, the IRS and Treasury beginning in the calendar year immedi- is similar to the threshold requirement
have focused on eligible basis associated ately succeeding the calendar year that for a qualified rehabilitated building
with federal ITC claims through exams construction has commenced, through that is eligible for the rehabilitation
as well as part of the Sec. 1603 grant-in- the date that the qualified facility or credit under Sec. 47(c)(1)(A), which
lieu-of-ITC program. Having sufficient property is placed in service.¹⁰ refers to a “building (and its structural
documentation is crucial to accurately Generally, the Sec. 48D credit is components).” The regulations under
calculating and substantiating Sec. 48D claimed in the tax year that the qualified former Sec. 48(a), which included the
credit claims. Best practices may include property is placed in service for federal investment credit for a qualified reha-
commissioning a cost-segregation study. tax purposes (i.e., ready and available for bilitated building, provided that the term
Note that the IRS may impose a 20% its assigned function). For example, if a “building” generally means “any structure
penalty on any excessive amounts treated company begins construction related to or edifice enclosing a space within its
as payments or amounts received as qualified property on Dec. 31, 2026 (the walls, and usually covered by a roof, the
payments due to a lack of reasonable day before the statutory sunset date), purpose of which is, for example, … to
cause, which may include insufficient and places the property in service on Jan. provide working, office, parking, display,
documentation to substantiate the credit 1, 2028, the Sec. 48D credit is claimed or sales space.”¹³
amount.⁹ in tax year 2028. However, taxpayers It is unusual for the eligible basis of
Furthermore, taxpayers that have may instead elect to accelerate claiming an ITC to include the cost of a build-
planned projects with an expected the Sec. 48D credit based on certain ing or its structural components, so this
placed-in-service date after Dec. 31, progress expenditure rules under Secs. provision can significantly increase the
2026, should consider contemporane- 46(c)(4) and (d).¹¹ percentage of a project’s costs that may
ous documentation of a beginning- Generally, this applies with respect be credit-eligible. However, as noted
of-construction strategy to support a to the taxpayer’s expenditures for the above, any buildings or their structural
determination that construction began construction of any progress expenditure components, including a portion of
before Jan. 1, 2027. The IRS provides property with a normal construction pe- them, used for offices, administrative
two methods to establish the begin- riod of two years or more that is expect- services, or other functions unrelated
ning of construction when determining ed to be qualified property in the hands to manufacturing do not satisfy the
eligibility for ITCs: (1) having paid or of the taxpayer when placed in service.¹² requirements as qualified property and
incurred at least 5% of the total cost of Sec. 48D(b)(2) defines “qualified prop- must be excluded from eligible basis.
the depreciable basis of the qualified erty” as tangible property (including any Nor does the qualified investment with
facility or property, excluding land and building or its structural components, respect to any advanced manufacturing
property not integral to the facility (5% except for a building or portion of a facility for any tax year include that por-
safe harbor), and (2) starting physical building used for offices, administrative tion of the basis of any property that is
work of a significant nature on-site or services, or other functions unrelated to attributable to qualified rehabilitation
off-site related to a qualified facility or manufacturing), with respect to which expenditures with respect to a qualified
property (physical work test). depreciation (or amortization in lieu of rehabilitated building, as defined in
Moreover, once it has been deter- depreciation) is allowable, that is either: Sec. 47(c)(2).¹⁴
mined that construction has commenced (1) constructed, reconstructed, or erected
under the 5% safe harbor and/or the by an eligible taxpayer; or (2) acquired Advanced manufacturing facility
physical work test, the beginning-of- by the taxpayer, if the original use of the While Sec. 48D(b)(3) defines “ad-
construction requirement is satisfied property commences with the taxpayer; vanced manufacturing facility” as a
only if the taxpayer further satisfies and (3) that is integral to the operation facility for which “the primary purpose
certain continuity requirements that re- of an advanced manufacturing facility of is the manufacturing of semiconduc-
quire continuous efforts or construction an eligible taxpayer. tors or semiconductor manufacturing

9. See Secs. 6676(a) (relating to refund claims) and 48D(d)(2)(F) (relating to 12. Regs. Sec. 1.46-5(d).
amounts treated as payments). 13. Regs. Sec. 1.48-1(e).
10. See Notice 2013-29, as clarified or modified by subsequent notices through 14. Sec. 48D(b)(4).
Notice 2021-41.
11. Sec. 48D(b)(5).

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