Title 26—Internal Revenue--Volume 1
PART 1—INCOME TAXES
§ 1.48-12   Qualified rehabilitated building; expenditures incurred after December 31, 1981.
(a) General rule —(1) In general. Under section 48(a)(1)(E), the portion of the basis of a qualified rehabilitated building that is attributable to qualified rehabilitation expenditures (within the meaning of section 48(g) and this section) is section 38 property. Property that is section 38 property by reason of section 48(a)(1)(E) is treated as new section 38 property and, therefore, is not subject to the used property limitation in section 48(c). Section 48(g)(1) and paragraph (b) of this section define the term “qualified rehabilitated building.” Section 48(g)(2) and paragraph (c) of this section define the term “qualified rehabilitation expenditure.” Section 48(g) (2)(B)(iv) and (3) and paragraph (d) of this section describe the rules applicable to “certified historic structures.” Section 48(q) and paragraph (e) of this section provide rules concerning an adjustment to the basis of the rehabilitated building. Paragraph (f) of this section provides guidance for coordination of these provisions with other sections of the Code, including rules for determining when the rehabilitation credit may be claimed.
(2) Effective dates and transition rules —(i) In general. Except as otherwise provided in this paragraph (a)(2)(i), this section applies to expenditures incurred after December 31, 1981, in connection with the rehabilitation of a qualified rehabilitated building. (See paragraph (c)(3)(i) of this section for rules concerning the determination of when an expenditure is incurred.) If, however, physical work on the rehabilitation began before January 1, 1982, and the building does not meet the requirements of paragraph (b) of this section, the rules in § 1.48-11 shall apply to the expenditures incurred after December 31, 1981, in connection with such rehabilitation. (See paragraph (b)(6)(i) of this section for rules determining when physical work on a rehabilitation begins.) The next to last sentence of paragraph (c)(8)(i) of this section applies to qualified rehabilitation expenditures that are qualified property under section 168(k)(2) or qualified New York Liberty Zone property under section 1400L(b) acquired by a taxpayer after September 10, 2001, and to qualified rehabilitation expenditures that are 50 percent bonus depreciation property under section 168(k)(4) acquired by a taxpayer after May 5, 2003. The last sentence of paragraph (c)(8)(i) of this section applies to qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and placed in service by a taxpayer during or after the taxpayer's taxable year that includes September 24, 2019. However, a taxpayer may choose to apply the last sentence in paragraph (c)(8)(i) of this section for qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. A taxpayer may rely on the last sentence in paragraph (c)(8)(i) of this section in regulation project REG-104397-18 (2018-41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer's taxable year that includes September 24, 2019.
(ii) Transition rules concerning ACRS lives. (A) For property placed in service before March 16, 1984, and any property subject to the exception set forth in section 111(g)(2) of Pub. L. 98-369 (Deficit Reduction Act of 1984), the references to “19 years” in paragraph (c)(4)(ii) and (7)(v) shall be replaced with “15 years” and the reference to “19-year real property” in paragraph (c)(4)(ii) shall be replaced with “15-year real property.”
(B) Except as otherwise provided in paragraph (a)(2)(ii)(A) of this section, for property placed in service before May 9, 1985, and any property subject to the exception set forth in section 105(b) (2) and (5) of Pub. L. 99-121 (99 Stat. 501, 511), the reference to “19 years” in paragraph (c)(4)(ii) and (7)(v) shall be replaced with “18 years” and the references to “19-years real property” in paragraph (c)(4)(ii) shall be replaced with “18-year real property.”
(iii) Transition rule concerning external wall definition. Notwithstanding the definition of external wall contained in paragraph (b)(3)(ii) of this section, in any case in which the written plans and specifications for a rehabilitation were substantially completed on or before June 28, 1985, and the building being rehabilitated would fail to meet the requirement of paragraph (b)(1)(iii) of this section if the definition of external wall in paragraph (b)(3)(ii) of this section were used, the term “external wall” shall be defined as a wall, including its supporting elements, with one face exposed to the weather or earth, and a common wall shall not be treated as an external wall. See paragraph (b)(2)(v) of this section for the definition of written plans and specifications.
(iv) Transition rules concerning amendments made by the Tax Reform Act of 1986 —(A) In general. Except as otherwise provided in section 251(d) of the Tax Reform Act of 1986 and this paragraph (a)(2)(iv), the amendments made by section 251 of the Tax Reform Act of 1986 shall apply to property placed in service after December 31, 1986, in taxable years ending after that date, regardless of when the rehabilitation expenditures attributable to such property were incurred. If property attributable to qualified rehabilitation expenditures is incurred with respect to a rehabilitation to a building placed in service in segments or phases and some segments are placed in service before January 1, 1987, and the remaining segments are placed in service after December 31, 1986, the amendments under the Tax Reform Act would not apply to the property placed in service before January 1, 1987, but would apply to the segments placed in service after December 31, 1986, unless one of the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section applies.
(B) General transition rule. The amendments made by sections 251 and 201 of the Tax Reform Act of 1986 shall not apply to property that qualifies under section 251(d) (2), (3), or (4) of the Tax Reform Act of 1986. Property qualifies for the general transition rule in section 251(d)(2) of the Act if such property is placed in service before January 1, 1994, and if such property is placed in service as part of—
( 1 ) A rehabilitation that was completed pursuant to a written contract that was binding on March 1, 1986, or
( 2 ) A rehabilitation incurred in connection with property (including any leasehold interest) acquired before March 2, 1986, or acquired on or after such date pursuant to a written contract that was binding on March 1, 1986, if—
( i ) Parts 1 and 2 of the Historic Preservation Certificate Application were filed with the Department of the Interior (or its designee) before March 2, 1986, or
( ii ) The lesser of $1,000,000 or 5 percent of the cost of the rehabilitation is incurred before March 2, 1986, or is required to be incurred pursuant to a written contract which was binding on March 1, 1986.
(C) Specific rehabilitations. See section 251(d) (3) and (4) of the Tax Reform Act of 1986 for additional rehabilitations that are exempted from the amendments made by sections 251 and 201 of the Tax Reform Act of 1986.
(b) Definition of qualified rehabilitated building —(1) In general. The term “qualified rehabilitated building” means any building and its structural components—
(i) That has been substantially rehabilitated (within the meaning of paragraph (b)(2) of this section) for the taxable year,
(ii) That was placed in service (within the meaning of § 1.46-3(d)) as a building by any person before the beginning of the rehabilitation, and
(iii) That meets the applicable existing external wall retention test or the existing external wall and internal structural framework retention test in accordance with paragraph (b)(3) of this section.
(2) Substantially rehabilitated building —(i) Substantial rehabilitation test. A building shall be treated as having been substantially rehabilitated for a taxable year only if the qualified rehabilitation expenditures (as defined in paragraph (c) of this section) incurred during any 24-month period selected by the taxpayer ending with or within the taxable year exceed the greater of—
(A) The adjusted basis of the building (and its structural components), or (B) $5,000.
(ii) Date to determine adjusted basis of the building —(A) In general. The adjusted basis of the building (and its structural components) shall be determined as of the beginning of the first day of the 24-month period selected by the taxpayer or the first day of the taxpayer's holding period of the building (within the meaning of section 1250(e)), whichever is later. For purposes of determining the holding period under section 1250(e), any reconstruction that is part of the rehabilitation shall be disregarded.
(B) Special rules. In the event that a building is not owned by the taxpayer, the adjusted basis of the building shall be determined as of the date that would have been used if the owner had been the taxpayer. The adjusted basis of a building that is being rehabilitated by a taxpayer other than the owner shall thus be determined as of the beginning of the first day of the 24-month period selected by the taxpayer or the first day of the owner's holding period, whichever is later. Therefore, if a building that is being rehabilitated by a lessee is sold subject to the lease prior to the date that the lessee has substantially rehabilitated the building, the lessee's adjusted basis is determined as of the beginning of the first day of the new lessor's holding period or the beginning of the first day of the 24-month period selected by the lessee (the taxpayer), whichever is later. If, therefore, the first day of the new lessor's holding period were later than the first day of the 24-month period selected by the lessee (the taxpayer), the lessee's adjusted basis for purposes of the substantial rehabilitation test would be the same as the adjusted basis of the new lessor as determined under paragraph (b)(2)(vii) of this section. If a building is sold after the date that a lessee has substantially rehabilitated the building with respect to the original lessor's adjusted basis, however, the lessee's basis may be determined as of the first day of the 24-month period selected by the lessee or the first day of the original lessor's holding period, whichever is later, and the transfer of the building will not affect the adjusted basis for purposes of the substantial rehabilitation test. The preceding sentence shall not apply, however, if the building is sold to the lessee or a related party within the meaning of section 267(b) or section 707(b)(1).
(iii) Adjusted basis of the building —(A) In general. The term “adjusted basis of the building” means the aggregate adjusted basis (within the meaning of section 1011(a)) in the building (and its structural components) of all the parties who have an interest in the building.
(B) Special rules. In the case of a building that is leased to one or more tenants in whole or inpart, the adjusted basis of the building is determined by adding the adjusted basis of the owner (lessor) in the building to the adjusted basis of the lessee (or lessees) in the leasehold and any leasehold improvements that are structural components of the building. Similarly, in the case of a building that is divided into condominium units, the adjusted basis of the building means the aggregate adjusted basis of all of the respective condominium owners (including the basis of any lessee in the leasehold and leasehold improvements) in the building (and its structural components). If the adjusted basis of a building would be determined in whole or in part by reference to the adjusted basis of a person or persons other than the taxpayer (e.g., a rehabilitation by a lessee) and the taxpayer is unable to obtain the required information, the taxpayer must establish by clear and convincing evidence that the adjusted basis of such person or persons in the building on the date specified in paragraph (b)(2)(ii) of this section is an amount that is less than the amount of qualified rehabilitation expenditures incurred by the taxpayer. If no such amount can be so established, the adjusted basis of the building will be deemed to be the fair market value of the building on the relevant date. For purposes of determining the adjusted basis of a building, the portion of the adjusted basis of a building that is allocable to an addition (within the meaning of paragraph (b)(4)(ii) of this section) to the building that does not meet the age requirement in paragraph (b)(4)(i) of this section shall be disregarded. (See paragraph (b)(2)(vii) of this section for the rule applicable to the determination of the adjusted basis of a building when qualified rehabilitation expenditures are treated as incurred by the taxpayer.)
(iv) Rehabilitation. Rehabilitation includes renovation, restoration, or reconstruction of a building, but does not include an enlargement (within the meaning of paragraph (c)(10) of this section) of new construction. The determination of whether expenditures are attributable to the rehabilitation of an existing building or to new construction shall be based upon all the facts and circumstances.
(v) Special rule for phased rehabilitation. In the case of any rehabilitation that may reasonably be expected to be completed in phases set forth in written architectural plans and specifications completed before the physical work on the rehabilitation begins, paragraphs (b)(2) (i), (ii), and (vii) of this section shall be applied by substituting “60-month period” for “24-month period.” A rehabilitation may reasonably be expected to be completed in phases if it consists of two or more distinct stages of development. The determination of whether a rehabilitation consists of distinct stages and therefore may reasonably be expected to be completed in phases shall be made on the basis of all the relevant facts and circumstances in existence before physical work on the rehabilitation begins. For purposes of this paragraph and paragraph (a)(2)(iii) of this section, written plans that describe generally all phases of the rehabilitation process shall be treated as written architectural plans and specifications. Such written plans are not required to contain detailed working drawings or detailed specifications of the materials to be used. In addition, the taxpayer may include a description of work to be done by lessees in the written plans. For example, where the owner of a vacant four story building plans to rehabilitate two floors of the building and plans to require, as a condition of any lease, that tenants of the other two floors must rehabilitate those floors, the requirements of this paragrpah (b)(2)(v) shall be met if the owner provides written plans for the rehabilitation work to be done by the owner and a description of the rehabilitation work that the tenants will be required to complete. The work required of the tenants may be described in the written plans in terms of minimum specifications (e.g., as to lighting, wiring, materials, appearance) that must be met by such tenants. See paragraph (b)(6)(i) of this section for the definition of physical work on a rehabilitation.
(vi) Treatment of expenses incurred by persons who have an interest in the building. For purposes of the substantial rehabilitation test in paragraph (b)(2)(i) of this section, the taxpayer may take into account qualified rehabilitation expenditures incurred during the same rehabilitation process by any other person who has an interest in the building. Thus, for example, to determine whether a building has been substantially rehabilitated, a lessee may include the expenditures of the lessor and of other lessees; a condominium owner may include the expenditures incurred by other condominium owners; and an owner may include the expenditures of the lessees.
(vii) Special rules when qualified rehabilitation expenditures are treated as incurred by the taxpayer. In the case where qualified rehabilitation expenditures are treated as having been incurred by a taxpayer under paragraph (c)(3)(ii) of this section, the transferee shall be treated as having incurred the expenditures incurred by the transferor on the date that the transferor incurred the expenditures within the meaning of paragraph (c)(3)(i) of this section. For purposes of the substantial rehabilitation test in paragrpah (b)(2)(i) of this section, the transferee's adjusted basis in the building shall be determined as of the beginning of the first day of a 24-month period, or the first day of the transferee's holding period, whichever is later, as provided in paragraph (b)(2)(ii) of this section. The transferee's basis as of the first day of the transferee's holding period for purposes of the substantial rehabilitation test in paragraph (b)(2)(i) of this section, however, shall be considered to be equal to the transferee's basis in the building on such date less—
(A) The amount of any qualified rehabilitation expenditures incurred (or treated as having been incurred) by the transferor during the 24-month period that are treated as having been incurred by the transferee under paragraph (c)(3)(ii) of this section, and
(B) The amount of qualified rehabilitation expenditures incurred before the transfer and during the 24-month period by any other person who has an interest in the building (e.g., a lessee of the transferor). The preceding sentence shall not apply, however, unless the transferee's basis in the building is determined with reference to ( 1 ) the transferee's cost of the building (including the rehabilitation expenditures), ( 2 ) the transferor's basis in the building (where such basis includes the amount of the expenditures), or ( 3 ) any other amount that includes the cost of the rehabilitation expenditures. In the event that the transferee's basis is determined with reference to an amount not described above (e.g., transferee's basis in one building is determined with reference to the transferee's basis in another building under section 1031(d)), the amount of the expenditures incurred by the transferor and treated as having been incurred by the transferee are not deducted from the transferee's basis for purposes of the substantial rehabilitation test. If a transferee's basis is determined under section 1014 or section 1022, any expenditures incurred by the decedent within the measuring period that are treated as having been incurred by the transferee under paragraph (c)(3)(ii) of this section shall decrease the transferee's basis for purposes of the substantial rehabilitation test.
(viii) Statement of adjusted basis, measuring period, and qualified rehabilitation expenditures. In the case of any tax return filed after August 27, 1985, on which an investment tax credit for property, described in section 48(a)(1)(E) is claimed, the taxpayer shall indicate by way of a marginal notation on, or a supplemental statement attached to, Form 3468—
(A) The beginning and ending dates for the measuring period selected by the taxpayer under section 48(g)(1)(C)(i) and paragraph (b)(2) of this section,
(B) The adjusted basis of the building (within the meaning of paragraph (b)(2) (iii) or (vii) of this section) as of the beginning of such measuring period, and
(C) The amount of qualified rehabilitation expenditures incurred, and treated as incurred, respectively, during such measuring period.
(ix) Partnerships and S corporations. If a building is owned by a partnership ( i.e., the building is partnership property) or an S corporation, the substantial rehabilitation test shall be determined at the entity level. Thus, the entity shall compare the amount of qualified rehabilitation expenditures incurred during the measuring period against its basis in the building at the beginning of its holding period or the beginning of its measuring period, whichever is later. (See section 1223(2) for rules concerning the determination of a partnership's holding period in the case of a contribution of property to the partnership meeting the requirements of section 721.) The adjusted basis of the building to a partnership shall be determined by taking into account any adjustments to the basis of the building made under section 743 and section 734. Any adjustments to the building's basis that are made under section 743 or section 734 after the beginning of the partnership's holding period, but before the end of the measuring period, shall be deemed for purposes of the substantial rehabilitation test to have been made on the first day of the partnership's holding period. However, in such case, the partnership's basis in the building shall be reduced by the amount of qualified rehabilitation expenditures incurred by the partnership. In the case of any tax return filed after January 9, 1989 on which a credit is claimed by a partner or a shareholder of an S corporation for rehabilitation expenditures incurred by a partnership or an S corporation, the partner or shareholder shall indicate on the Form 3468 on which the credit is claimed the name, address, and identification number of the partnership or S corporation that incurred the rehabilitation expenditures, and the partnership or S corporation shall, by way of a marginal notation on or a supplemental statement attached to the entity's return, provide the information required by paragraph (b)(2)(viii) of this section.
(x) Examples. The following examples illustrate the application of the substantial rehabilitation test in this paragraph (b)(2):
(ii) Assume the facts of example 3(i), except that after C begins physical work on the rehabilitation, but before C incurs $100,000 of expenditures, D acquires the building, subject to C's lease, from B for $200,000. D's holding period under section 1250(e) begins on the day after D acquired the building, and C's adjusted basis for purposes of the substantial rehabilitation test is $200,000, less the amount of expenditures incurred by C before the transfer. (See paragraphs (b)(2) (ii) and (vii) of this section.) Accordingly, if C incurred more than $200,000 (less the amount of expenditures incurred prior to the transfer) of qualified rehabilitation expenditures during 1982, the building would be substantially rehabilitated within the meaning of paragraph (b)(2) of this section. Under paragraph (b)(2)(ii)(B) of this section, however, C's adjusted basis for purposes of the substantial rehabilitation test would be $100,000 if C had substantially rehabilitated the building ( i.e., incurred more than $100,000 in rehabilitation expenditures) prior to B's sale to D.
(3) Retention of existing external walls and internal structural framework —(i) In general —(A) Property placed in service after December 31, 1986. Except in the case of property that qualifies for the transition rules in paragraphs (a)(2)(iv) (B) and (C) of this section, in the case of property that is placed in service after December 31, 1986, a building (other than a certified historic structure) meets the requirement in paragraph (b)(1)(iii) of this section only if in the rehabilitation process—
( 1 ) 50 percent or more of the existing external walls of such building are retained in place as external walls;
( 2 ) 75 percent or more of the existing external walls of such building are retained in place as internal or external walls; and
( 3 ) 75 percent or more of the internal structural framework of such building (as defined in paragraph (b)(3)(iii) of this section) is retained in place.
(B) Expenditures incurred before January 1, 1984, for property placed in service before January 1, 1987. With respect to rehabilitation expenditures incurred before January 1, 1984, for property that is either placed in service before January 1, 1987, or that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, a building meets the requirement in paragraph (b)(1)(iii) of this section only if 75 percent or more of the existing external walls of the building are retained in place as external walls in the rehabilitation process. If an addition to a building is not treated as part of a qualified rehabilitated building because it does not meet the 30-year requirement in paragraph (b)(4)(i)(B) of this section, then the external walls of such addition shall not be considered to be existing external walls of the building for purposes of section 48(g)(1)(A)(iii) (as in effect prior to enactment of the Tax Reform Act of 1986), and this section.
(C) Expenditures incurred after December 31, 1983, for property placed in service before January 1, 1987. With respect to expenditures incurred after December 31, 1983, for property that is either placed in service before January 1, 1987, or that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, the requirement of paragraph (b)(1)(iii) of this section is satisfied only if in the rehabilitation process either the existing external wall retention requirement in paragraph (b)(3)(i) (B) of this section is satisfied, or:
( 1 ) 50 percent or more of the existing external walls of the building are retained in place as external walls,
( 2 ) 75 percent or more of the existing external walls are retained in place as internal or external walls, and
( 3 ) 75 percent or more of the existing internal structural framework of such building is retained in place.
(D) Area of external walls and internal structural framework. The determinations required by paragraphs (b)(3)(i) (A), (B), and (C) of this section shall be based upon the area of the external walls or internal structural framework that is retained in place compared to the total area of each prior to the rehabilitation. The area of the existing external walls and internal structural framework of a building shall be determined prior to any destruction, modification, or construction of external walls or internal structural framework that is undertaken by any party in anticipation of the rehabilitation.
(ii) Definition of external wall. For purposes of this paragraph (b), a wall includes both the supporting elements of the wall and the nonsupporting elements, (e.g., a curtain, windows or doors) of the wall. Except as otherwise provided in this paragraph (b)(3), the term “external wall” includes any wall that has one face exposed to the weather, earth, or an abutting wall of an adjacent building. The term “external wall” also includes a shared wall ( i.e., a single wall shared with an adjacent building), generally referred to as a “party wall,” provided that the shared wall has no windows or doors in any portion of the wall that does not have one face exposed to the weather, earth, or an abutting wall. In general, the term “external wall” includes only those external walls that form part of the outline or perimeter of the building or that surround an uncovered courtyard. Therefore, the walls of an uncovered internal shaft, designed solely to bring light or air into the center of a building, which are completely surrounded by external walls of the building and which enclose space not designated for occupancy or other use by people (other than for maintenance or emergency), are not considered external walls. Thus, for example, a wall of a light well in the center of a building is not an external wall. However, walls surrounding an outdoor space which is usable by people, such as a courtyard, are external walls.
(iii) Definition of internal structural framework. For purposes of this section, the term “internal structural framework” includes all load-bearing internal walls and any other internal structural supports, including the columns, girders, beams, trusses, spandrels, and all other members that are essential to the stability of the building.
(iv) Retained in place. An existing external wall is retained in place if the supporting elements of the wall are retained in place. An existing external wall is not retained in place if the supporting elements of the wall are replaced by new supporting elements. An external wall is retained in place, however, if the supporting elements are reinforced in the rehabilitation, provided that such supporting elements of the external wall are retained in place. An external wall also is retained in place if it is covered (e.g., with new siding). Moreover, an external wall is retained in place if the existing curtain is replaced with a new curtain, provided that the structural framework that provides for the support of the existing curtain is retained in place. An external wall is retained in place notwithstanding that the existing doors and windows in the wall are modified, eliminated, or replaced. An external wall is retained in place if the wall is disassembled and reassembled, provided the same supporting elements are used when the wall is reassembled and the configuration of the external walls of the building after the rehabilitation is the same as it was before the rehabilitation process commenced. Thus, for example, a brick wall is considered retained in place even though the original bricks are removed (for cleaning, etc.) and replaced to form the wall. The principles of this paragraph (b)(3)(iv) shall also apply to determine whether internal structural framework of the building is retained in place.
(v) Effect of additions. If an existing external wall is converted into an internal wall ( i.e., a wall that is not an external wall), the wall is not retained in place as an external wall for purposes of this section.
(vi) Examples. The provisions of this paragraph (b)(3) may be illustrated by the following examples:
(4) Age requirement —(i) In general —(A) Property placed in service after December 31, 1986. Except in the case of property that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, a building other than a certified historic structure shall not be considered a qualified rehabilitated building unless the building was first placed in service (within the meaning of § 1.46-3(d)) before January 1, 1936.
(B) Property placed in service before January 1, 1987, and property qualifying under a transition rule. In the case of property placed in service before January 1, 1987, and property that qualifies under the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, a building other than a certified historic structure is considered a qualified rehabilitated building only if a period of at least 30 years has elasped between the date physical work on the rehabilitation of the building began and the date the building was first placed in service (within the meaning of § 1.46-3(d)) as a building by any person.
(ii) Additions. A building that was first placed in service before 1936 in the case described in paragraph (b)(4)(i)(A) of this section, or at least 30 years before physical work on the rehabilitation began in the case described in paragraph (b)(4)(i)(B) of this section, will not be disqualified because additions to such building have been added since 1936 in the case described in paragraph (b)(4)(i)(A) of this section, or are less than 30 years old in the case described in paragraph (b)(4)(i)(B) of this section. Such additions, however, shall not be treated as part of the qualified rehabilitated building. The term “addition” means any construction that resulted in any portion of an external wall becoming an internal wall, that resulted in an increase in the height of the building, or that increased the volume of the building.
(iii) Vacant periods. The determinations required by paragraph (b)(4)(i) of this section include periods during which a building was vacant or devoted to a personal use and is computed without regard to the number of owners or the identify of owners during the period.
(5) Location at which the rehabilitation occurs. A building, other than a certified historic structure is not a qualified rehabilitated building unless it has been located where it is rehabilitated since before 1936 in the case described in paragraph (b)(4)(i)(A) of this section. Similarly, in the case described in paragraph (b)(4)(i)(B) of this section, a building, other than a certified historic structure, is not a qualified rehabilitation building unless it has been located where it is rehabilitated for the thirty-year period immediately preceding the date physical work on the rehabilitation began in the case of a “30-year building” or the forty-year period immediately preceding the date physical work on the rehabilitation began in the case of a “40-year building.” (See  § 1.46-1(q)(1)(iii) for the definitions of “30-year building” and “40-year building.”)
(6) Definition and special rule —(i) Physical work on a rehabilitation. For purposes of this section, “physical work on a rehabilitation” begins when actual construction, or destruction in preparation for construction, begins. The term “physical work on a rehabilitation,” however, does not include preliminary activities such as planning, designing, securing financing, exploring, researching, developing plans and specifications, or stabilizing a building to prevent deterioration (e.g., placing boards over broken windows).
(ii) Special rule for adjoining buildings that are combined. For purposes of this paragraph (b), if as part of a rehabilitation process two or more adjoining buildings are combined and placed in service as a single building after the rehabilitation process, then, at the election of the taxpayer, all of the requirements for a qualified rehabilitated building in section 48(g)(1) and this section may be applied to the constituent adjoining buildings in the aggregate. For example, if such requirements are applied in the aggregate, any shared walls or abutting walls between the constituent buildings that would otherwise be treated as external walls (within the meaning of paragraph (b)(3) of this section) would not be treated as external walls of the building, and the substantial rehabilitation test in paragraph (b)(2) of this section would be applied to the aggregate expenditures with respect to all of the constituent buildings and to the aggregate adjusted basis of all of the constituent buildings. A taxpayer shall elect the special rule of this paragraph (b)(6)(ii) for adjoining buildings by indicating by way of a marginal notation on, or a supplemental statement attached to, the Form 3468 on which a credit is first claimed for qualified rehabilitation expenditures with respect to such buildings that such buildings are a single qualified rehabilitated building because of the application of the special rule in this paragraph (b)(6)(ii).
(c) Definition of qualified rehabilitation expenditures —(1) In general. Except as otherwise provided in paragraph (c)(7) of this section, the term “qualified rehabilitation expenditure” means any amount that is—
(i) Properly chargeable to capital account (as described in paragraph (c)(2) of this section),
(ii) Incurred by the taxpayer after December 31, 1981 (as described in paragraph (c)(3) of this section),
(iii) For property for which depreciation is allowable under section 168 and which is real property described in paragraph (c)(4) of this section, and
(iv) Made in connection with the rehabilitation of a qualified rehabilitated building (as described in paragraph (c)(5) of this section).
(2) Chargeable to capital account. For purposes of paragraph (c)(1) of this section, amounts are chargeable to capital account if they are properly includible in computing basis of real property under § 1.46-3(c). Amounts treated as an expense and deducted in the year they are paid or incurred or amounts that are otherwise not added to the basis of real property described in paragraph (c)(4) of this section do not qualify. For purposes of this paragraph (c), amounts incurred for architectural and engineering fees, site survey fees, legal expenses, insurance premiums, development fees, and other construction related costs, satisfy the requirement of this paragraph (c)(2) if they are added to the basis of real property that is described in paragraph (c)(4) of this section. Construction period interest and taxes that are amortized under section 189 (as in effect prior to its repeal by the Tax Reform Act of 1986) do not satisfy the requirement of this paragraph (c)(2). If, however, such interest and taxes are treated by the taxpayer as chargeable to capital account with respect to property described in paragraph (c)(4) of this section, they shall be treated in the same manner as other costs described in this paragraph (c)(2). Any construction period interest or taxes or other fees or costs incurred in connection with the acquisition of a building, any interest in a building, or land, are subject to paragraph (c)(7)(ii) of this section. See paragraph (c)(9) of this section for additional rules concerning interest.
(3) Incurred by the taxpayer —(i) In general. Qualified rehabilitation expenditures are incurred by the taxpayer for purposes of this section on the date such expenditures would be considered incurred under an accrual method of accounting, regardless of the method of accounting used by the taxpayer with respect to other items of income and expense. If qualified rehabilitation expenditures are treated as having been incurred by a taxpayer under paragraph (c)(3)(ii) of this section, the taxpayer shall be treated as having incurred the expenditures on the date such expenditures were incurred by the transferor.
(ii) Qualified rehabilitation expenditures treated as incurred by the taxpayer —(A) Where rehabilitation expenditures are incurred with respect to a building by a person (or persons) other than the taxpayer and the taxpayer subsequently acquires the building, or a portion of the building to which some or all of the expenditures are allocable (e.g., a condominium unit to which rehabilitation expenditures have been allocated), the taxpayer acquiring such property shall be treated as having incurred the rehabilitation expenditures actually incurred by the transferor (or treated as incurred by the transferor under this paragraph (c)(3)(ii)) allocable to the acquired property, provided that—
( 1 ) The building, or the portion of the building, acquired by the taxpayer was not used (or, if later, was not placed in service (as defined in paragraph (f)(2) of this section)) after the rehabilitation expenditures were incurred and prior to the date of acquisition, and
( 2 ) No credit with respect to such qualified rehabilitation expenditures is claimed by anyone other than the taxpayer acquiring the property. For purposes of this paragraph (c)(3)(ii), use shall mean actual use, whether personal or business. In the case of a building that is divided into condominium units, expenditures attributable to the common elements shall be allocable to the individual condominium units in accordance with the principles of paragraph (c)(10)(ii) of this section. Furthermore, for purpose of this paragraph (c)(3)(ii), a condominium unit's share of the common elements shall not be considered to have been used (or placed in service) prior to the time that the particular condominium unit is used.
(B) The amount of rehabilitation expenditures described in paragraph (c)(3)(ii)(A) of this section treated as incurred by the taxpayer under this paragraph shall be the lesser of—
( 1 ) The amount of rehabilitation expenditures incurred before the date on which the taxpayer acquired the building (or portion thereof) to which the rehabilitation expenditures are attributable, or
( 2 ) The portion of the taxpayer's cost or other basis for the property that is properly allocable to the property resulting from the rehabilitation expenditures described in paragraph (c)(3)(ii)(B)( 1 ) of this section.
(C) For purposes of this paragraph (c)(3)(ii), the amount of rehabilitation expenditures treated as incurred by the taxpayer under this paragraph (c) shall not be treated as costs for the acquisition of a building. The portion of the cost of acquiring a building (or an interest therein) that is not treated under this paragraph as qualified rehabilitation expenditures incurred by the taxpayer is not treated as section 38 property in the hands of the acquiring taxpayer. (See paragraph (c)(7)(ii) of this section.) (See paragraph (b)(2)(vii) for rules concerning the application of the substantial rehabilitation test when expenditures are treated as incurred by the taxpayer.)
(iii) Examples. The provisions of this paragraph (c) may be illustrated by the following examples:
(4) Incurred for depreciable real property —(i) Property placed in service after December 31, 1986. Except as otherwise provided in paragraph (c)(4)(ii) of this section (relating to certain property that qualifies under a transition rule), in the case of property placed in service after December 31, 1986, an expenditure is incurred for depreciable real property for purposes of paragraph (c)(1)(iii) of this section, only if it is added to the depreciable basis of depreciable property which is—
(A) Nonresidential real property,
(B) Residential rental property,
(C) Real property which has a class life of more than 12.5 years, or
(D) An addition or improvement to property described in paragraph (c)(4)(i) (A), (B), or (C) of this section.
(ii) Property placed in service before January 1, 1987, and property that qualifies under a transition rule. In the case of property placed in service before January 1, 1987, and property placed in service after December 31, 1986, that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, an expenditure attributable to such property shall be a qualified rehabilitation expenditure only if such expenditure is incurred for property that is real property (or additions or improvements to real property) with a recovery period (within the meaning of section 168 as in effect prior to its amendment by the Tax Reform Act of 1986) of 19 years (15 years for low-income housing) and if the other requirements of this paragraph (c) are met. For purposes of this section, an expenditure is incurred for recovery property having a recovery period of 19 years only if the amount of the expenditure is added to the basis of property which is 19-year real property or 15-year real property in the case of low-income housing. For purposes of this section, the term “low-income housing” has the meaning given such term by section 168(c)(2)(F) (as in effect prior to the amendments made by the Tax Reform Act of 1986).
(5) Made in connection with the rehabilitation of a qualified rehabilitated building. In order for an expenditure to be a qualified rehabilitation expenditure, such expenditure must be incurred in connection with a rehabilitation (as defined in paragraph (b)(2)(iv) of this section) of a qualified rehabilitated building. Expenditures attributable to work done to facilities related to a building (e.g., sidewalk, parking lot, landscaping) are not considered made in connection with the rehabilitation of a qualified rehabilitated building.
(6) When expenditures may be incurred. An expenditure is a qualified rehabilitation expenditure only if the building with respect to which the expenditures are incurred is substantially rehabilitated (within the meaning of paragraph (b)(2) of this section) for the taxable year in which the property attributable to the expenditures is placed in service ( i.e., the building is substantially rehabilitated during a measuring period ending with or within the taxable year in which a credit is claimed). (See paragraph (f)(2) of this section for rules relating to when property is placed in service.) Once the substantial rehabilitation test is met for a taxable year, the amount of qualified rehabilitation expenditures upon which a credit can be claimed for the taxable year is limited to expenditures incurred:
(i) Before the beginning of a measuring period during which the building was substantially rehabilitated that ends with or within the taxable year, provided that the expenditures were incurred in connection with the rehabilitation process that resulted in the substantial rehabilitation of the building;
(ii) Within a measuring period during which the building was substantially rehabilitated that ends with or within the taxable year, and
(iii) After the end of a measuring period during which the building was substantially rehabilitated but prior to the end of the taxable year with or within which the measuring period ends.
(7) Certain expenditures excluded from qualified rehabilitation expenditures. The term “qualified rehabilitation expenditures” does not include the following expenditures:
(i) Except as otherwise provided in paragraph (c)(8) of this section, any expenditure with respect to which the taxpayer does not use the straight line method over a recovery period determined under section 168 (c) and (g).
(ii) The cost of acquiring a building, any interest in a building (including a leasehold interest), or land, except as provided in paragraph (c)(3)(ii) of this section.
(iii) Any expenditure attributable to an enlargement of a building (within the meaning of paragraph (c)(10) of this section).
(iv) Any expenditure attributable to the rehabilitation of a certified historic structure or a building located in a registered historic district, unless the rehabilitation is a certified rehabilitation. (See paragraph (d) of this section which contains definitions and special rules applicable to rehabilitations of certified historic structures and buildings located in registered historic districts.)
(v) Any expenditure of a lessee of a building or a portion of a building, if, on the date the rehabilitation is completed with respect to property placed in service by such lessee, the remaining term of the lease (determined without regard to any renewal period) is less than the recovery period determined under section 168(c) (or 19 years in the case of property placed in service before January 1, 1987, and property placed in service that qualifies under the transition rules in paragraph (a)(2)(iv)(B) or (C) of this section).
(vi) Any expenditure allocable to that portion of a building which is (or may reasonably be expected to be) tax-exempt use property (within the meaning of section 168 and the regulations thereunder), except that the exclusion in this paragraph (c)(7)(vi) shall not apply for purposes of determining whether the building is a substantially rehabilitated building under paragraph (b)(2) of this section.
(8) Requirement to use straight line depreciation —(i) Property placed in service after December 31, 1986. The requirement in section 48(g)(2)(B)(i) and paragraph (c)(7)(i) of this section to use straight line cost recovery does not apply to any expenditure to the extent that the alternative depreciation system of section 168(g) applies to such expenditure by reason of section 168(g)(1) (B) or (C). In addition, the requirement in section 48(g)(2)(B)(i) and paragraph (c)(7)(i) of this section applies only to the depreciation of the portion of the basis of a qualified rehabilitated building that is attributable to qualified rehabilitation expenditures. However, see § 1.168(k)-1(f)(10) if the qualified rehabilitation expenditures are qualified property or 50-percent bonus depreciation property under section 168(k) and see § 1.1400L(b)-1(f)(9) if the qualified rehabilitation expenditures are qualified New York Liberty Zone property under section 1400L(b). Further, see § 1.168(k)-2(g)(9) if the qualified rehabilitation expenditures are qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054 (December 22, 2017)).
(ii) Property placed in service before January 1, 1987, and property placed in service after December 31, 1986, that qualifies for a transition rule. In the case of expenditures attributable to property placed in service before January 1, 1987, and property that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, the term “qualified rehabilitation expenditure” does not include an expenditure with respect to which an election was not made under section 168(b)(3) as in effect prior to its amendment by the Tax Reform Act of 1986, to use the straight line method of depreciation. In such case, the requirement that an election be made to use straight line cost recovery applies only to the cost recovery of the portion of the basis of a qualified rehabilitated building that is attributable to qualified rehabilitation expenditures. See section 168(f)(1), as in effect prior to its amendment by the Tax Reform Act of 1986, for rules relating to the use of different methods of cost recovery for different components of a building. In addition, such requirement shall not apply to any expenditure to the extent that section 168(f)(12) or (j), as in effect prior to the amendments made by the Tax Reform Act of 1986, applied to such expenditure.
(9) Cost of acquisition. For purposes of paragraph (c)(7)(ii) of this section, cost of acquisition includes any interest incurred on indebtedness the proceeds of which are attributable to the acquisition of a building, an interest in a building, or land open which a building exists. Interest incurred on a construction loan the proceeds of which are used for qualified rehabilitation expenditures, however, is not treated as a cost of acquisition.
(10) Enlargement defined —(i) In general. A building is enlarged to the extent that the total volume of the building is increased. An increase in floor space resulting from interior remodeling is not considered an enlargement. The total volume of a building is generally equal to the product of the floor area of the base of the building and the height from the underside of the lowest floor (including the basement) to the average height of the finished roof (as it exists or existed). For this purpose, floor area is measured from the exterior faces of external walls (other than shared walls that are external walls) and from the centerline of shared walls that are external walls.
(ii) Rehabilitation that includes enlargement. If expenditures for property only partially qualify as qualified rehabilitation expenditures because some of the expenditures are attributable to the enlargement of the building, the expenditures must be apportioned between the original portion of the building and the enlargement. The expenditures must be specifically allocated between the original portion of the building and the enlargement to the extent possible. If it is not possible to make a specific allocation of the expenditures, the expenditures must be allocated to each portion on some reasonable basis. The determination of a reasonable basis for an allocation depends on factors such as the type of improvement and how the improvement relates functionally to the building. For example, in the case of expenditures for an air-conditioning system or a roof, a reasonable basis for allocating the expenditures among the two portions generally would be the volume of the building, excluding the enlargement, served by the air-conditioning system or the roof relative to the volume of the enlargement served by the improvement.
(d) Rules applicable to rehabilitations of certified historic structures —(1) Definition of certified historic structure. The term “certified historic structure” means any building (and its structural components) that is—
(i) Listed in the National Register of Historic Places (“National Register”); or
(ii) Located in a registered historic district and certified by the Secretary of the Interior to the Internal Revenue Service as being of historic significance to the district.
(2) Definition of registered historic district. The term “registered historic district” means any district that is—
(i) Listed in the National Register, or
(ii) (A) Designated under a statute of the appropriate State or local government that has been certified by the Secretary of the Interior to the Internal Revenue Service as containing criteria that will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and (B) certified by the Secretary of the Interior as meeting substantially all of the requirements for the listing of districts in the National Register.
(3) Definition of certified rehabilitation. The term “certified rehabilitation” means any rehabilitation of a certified historic structure that the Secretary of the Interior has certified to the Internal Revenue Service as being consistent with the historic character of the building and, where applicable, the district in which such building is located. The determination of the scope of a rehabilitation shall be made on the basis of all the facts and circumstances surrounding the rehabilitation and shall not be made solely on the basis of ownership. The Secretary of the Interior shall take all of the rehabilitation work performed as part of a single rehabilitation, including any post-certification work, into account in determining whether the rehabilitation complies with the Department of Interior standards for rehabilitation and whether the certification should be granted, revoked, or otherwise invalidated.
(4) Revoked or invalidated certification. If the Department of Interior revokes or otherwise invalidates a certification after it has been issued to a taxpayer, the basis attributable to rehabilitation of the decertified property shall cease to be section 38 property described in section 48(a)(1)(E). Such cessation shall be effective as of the date the activity giving rise to the revocation or invalidation commenced. See section 47 for the rules applicable to property that ceases to be section 38 property.
(5) Special rule for certain buildings located in registered historic districts. The exclusion in paragraph (c)(7)(iv) of this section does not apply to a building in a registered historic district if—
(i) Such building was not a certified historic structure during the rehabilitation process; and
(ii) The Secretary of the Interior certified to the Internal Revenue Service that such building was not of historic significance to the district.
(6) Special rule for certain rehabilitations begun before an area is designated as a registered historic district. In general, the exclusion from the definition of qualified rehabilitation expenditure in paragraph (c)(7)(iv) of this section applies to any rehabilitation expenditures that are incurred after a building becomes a certified historic structure within the meaning of section 48 (g)(3)A) and paragraph (d)(1) of this section or the area in which a building is located becomes a registered historic district within the meaning of section 48 (g)(3)(B) and paragraph (d)(2) of this section. Rehabilitation expenditures incurred prior to such date, however, are not disqualified. In addition, rehabilitation expenditures made after the date the area in which a building is located becomes a registered historic district shall not be disqualified under paragraph (c)(7)(iv) of this section in any case in which physical work on the rehabilitation of a building begins prior to the date the taxpayer knows or has reason to know of an intention to nominate the area in which such building is located as a registered historic district. For purposes of this paragraph (d)(6), the taxpayer knows or has reason to know of such an intention if there is (A) a communication (written or oral) to the owner of any building within the district from the Department of the Interior, or any agency or instrumentality of the appropriate state or local government (or a designee of such agency or instrumentality) that the district in which the building is located is being considered for designation as a registered historic district, (B) a legal notice of such consideration published in a newspaper, or (C) a public meeting held to discuss such consideration. In order to take advantage of the special rule of this paragraph (d)(6), the taxpayer must attach to the Form 3468 filed for the taxable year in which the credit is claimed a statement that the taxpayer in good faith did not know, or have reason to know, of an intention to nominate the area in which the building is located as a registered historic district.
(7) Notice of certification —(i) In general. Except as otherwise provided in paragraph (d)(7)(ii) of this section, a taxpayer claiming the credit for rehabilitation of a certified historic structure (within the meaning of section 48(g)(3) and paragraph (d)(1) of this section) must attach to the Form 3468 filed with the tax return for the taxable year in which the credit is claimed a copy of the final certification of completed work by the Secretary of the Interior, and for returns filed after January 9, 1989, evidence that the building is a certified historic structure.
(ii) Late certification. If the final certification of completed work has not been issued by the Secretary of the Interior at the time the tax return is filed for a year in which the credit is claimed, a copy of the first page of the Historic Preservation Certification Application—Part 2—Description of Rehabilitation (NPS Form 10-168a), with an indication that it has been received by the Department of the Interior or its designate, together with proof that the building is a certified historic structure (or that such status has been requested), must be attached to the Form 3468 filed with the return. A notice from the Department of the Interior or the State Historic Preservation Officer, stating that the nomination or application has been received, or a date-stamped nomination or application shall be sufficient indication that the nomination or application has been received. The building need not be either listed in the National Register or be determined to be of historic significance to a registered historic district at the time the return is filed for the year in which the credit is claimed. (See paragraph (d)(1) of this section.) The taxpayer must submit a copy of the final certification as an attachment to Form 3468 with the first income tax return filed after the receipt by the taxpayer of the certification. If the final certification is denied by the Department of Interior, the credit will be disallowed for any taxable year in which it was claimed. If the taxpayer fails to receive final certification of completed work prior to the date that is 30 months after the date that the taxpayer filed the tax return on which the credit was claimed, the taxpayer must submit a written statement to the District Director stating such fact prior to the last day of the 30th month, and the taxpayer shall be requested to consent to an agreement under section 6501(c)(4) extending the period of assessment for any tax relating to the time for which the credit was claimed. The procedure permitted by the preceding sentence shall be used whenever the entire rehabilitation project is not fully completed by the date that is 30 months after the taxpayer filed the tax return upon which the credit was claimed (e.g., a phased rehabilitation) and the Secretary of the Interior has thus not yet certified the rehabilitation.
(iii) Effective dates. Paragraph (d)(7)(i) of this section applies to returns for taxable years beginning before January 1, 2002. The requirement in the fourth sentence of paragraph (d)(7)(ii) of this section applies only if the first income tax return filed after receipt by the taxpayer of the certification is for a taxable year beginning before January 1, 2002. For rules applicable to returns for taxable years beginning after December 31, 2001, see paragraph (d)(7)(iv) of this section.
(iv) Returns for taxable years beginning after December 31, 2001 —(A) In general. Except as otherwise provided in paragraph (d)(7)(ii) of this section and this paragraph (d)(7)(iv), a taxpayer claiming the credit for rehabilitation of a certified historic structure (within the meaning of section 47(c)(3) and paragraph (d)(1) of this section) for a taxable year beginning after December 31, 2001, must provide with the return for the taxable year in which the credit is claimed, the NPS project number assigned by, and the date of the final certification of completed work received from, the Secretary of the Interior. If a credit (including a credit for a taxable year beginning before January 1, 2002) is claimed under the late certification procedures of paragraph (d)(7)(ii) of this section and the first income tax return filed by the taxpayer after receipt of the certification is for a taxable year beginning after December 31, 2001, the taxpayer must provide the NPS project number assigned by, and the date of the final certification of completed work received from, the Secretary of the Interior with that return.
(B) Reporting and recordkeeping requirements. The information required under paragraph (d)(7)(iv)(A) of this section must be provided on Form 3468 (or its successor) filed with the taxpayer's return. In addition, the taxpayer must retain a copy of the final certification of completed work for as long as its contents may become material in the administration of any internal revenue law.
(C) Passthrough entities. In the case of a credit for qualified rehabilitation expenditures of a partnership, S corporation, estate, or trust, the requirements of this paragraph (d)(7)(iv) apply only to the entity. Each partner, shareholder or beneficiary claiming a credit for such qualified rehabilitation expenditures from a passthrough entity must, however, provide the employer identification number of the entity on Form 3468 (or its successor).
(e) Adjustment to basis —(1) General rule. Except as otherwise provided by this paragraph (e), if a credit is allowed with respect to property attributable to qualified rehabilitation expenditures incurred in connection with the rehabilitation of a qualified rehabilitated building, the increase in the basis of the rehabilitated property that would otherwise result from the qualified rehabilitation expenditures must be reduced by the amount of the credit allowed. See section 48(q) and the regulations there under for other rules concerning adjustments to basis in the case of section 38 property.
(2) Special rule for certain property relating to certified historic structures. If a rehabilitation investment credit is allowed with respect to property that is placed in service before January 1, 1987, or property that qualifies for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, and such property is attributable to qualified rehabilitation expenditures incurred in connection with the rehabilitation of a certified historic structure, the increase in the basis of the rehabilitated property that would otherwise result from the qualified rehabilitation expenditures must be reduced by one-half of the amount of the credit allowed.
(3) Recapture of rehabilitation investment credit. If during any taxable year there is a recapture amount determined with respect to any credit that resulted in a basis adjustment under paragraph (e) (1) or (2) of this section, the basis of such building (immediately before the event resulting in such recapture) shall be increased by an amount equal to such recapture amount. For purposes of the preceding sentence, the term “recapture amount” means any increase in tax (or adjustment in carrybacks or carryovers) determined under section 47(a)(5).
(f) Coordination with other provisions of the Code —(1) Credit claimed by lessee for rehabilitation performed by lessor. A lessee may take the credit for rehabilitation performed by the lessor if the requirements of this section and section 48(d) are satisfied. For purposes of applying section 48(d), the fair market value of section 38 property described in section 48(a)(1)(E) shall be limited to that portion of the lessor's basis in the qualified rehabilitated building that is attributable to qualified rehabilitation expenditures. In the case of a portion of a building that is divided into more than one leasehold interest, the qualified rehabilitation expenditures attributable to the common elements shall be allocated to the individual leasehold interests in accordance with the principles of paragraph (c)(10)(ii) of this section. Furthermore, a leasehold interest's share of the common elements shall not be considered to have been placed in service prior to the time that the particular leasehold interest is placed in service.
(2) When the credit may be claimed —(i) In general. The investment credit for qualified rehabilitation expenditures is generally allowed in the taxable year in which the property attributable to the expenditure is placed in service, provided the building is a qualified rehabilitated building for the taxable year. See paragraph (b) of this section and section 46(c) and § 1.46-3(d). Under certain circumstances, however, the credit may be available prior to the date the property is placed in service. See section 46(d) and § 1.46-5 (relating to qualified progress expenditures). Solely for purposes of section 46(c), property attributable to qualified rehabilitation expenditures will not be treated as placed in service until the building with respect to which the expenditures are made meets the definition of a qualified rehabilitated building (as defined in section 48(g)(1) and paragraph (b) of this section) for the taxable year. Accordingly, in the first taxable year for which the building becomes a qualified rehabilitated building, the property described in section 48(a)(1)(E) attributable to expenditures described in paragraph (c) of this section, shall be considered to be placed in service, if such property was considered placed in service under section 46(c) and the regulations thereunder without regard to this paragraph (f)(2)(i) in that taxable year or a prior taxable year. For purposes of the preceding sentence, the requirement of section 48(g)(1)(A)(iii) and paragraph (b)(3) of this section, relating to the definition of a qualified rehabilitated building shall be deemed to be met if the taxpayer reasonably expects that no rehabilitation work undertaken during the remainder of the rehabilitation process will result in a failure to satisfy the requirements of paragraph (b)(3) of this section. If the requirements of paragraph (b)(3) of this section, are not satisfied, however, the credit shall be disallowed for the taxable year in which it was claimed. If a taxpayer fails to complete physical work on the rehabilitation prior to the date that is 30 months after the date that the taxpayer filed a tax return on which the credit is claimed, the taxpayer must submit a written statement to the District Director stating such fact prior to the last day of the 30th month, and shall be requested to consent to an agreement under section 6501(c)(4) extending the period of assessment for any tax relating to the item for which the credit was claimed.
(ii) Section 38 property described in section 48(a)(1)(E). In the case of section 38 property described in section 48(a)(1)(E), the section 38 property is not the building. Instead, the section 38 property is the portion of the basis of the building that is attributable to qualified rehabilitation expenditures. Therefore, for example, for purposes of the determination of when such section 38 property is placed in service, a determination must be made regarding when property attributable to the portion of the basis of the building attributable to qualified rehabilitation expenditures is placed in service. The issue of when the building is placed in service is thus not relevant. In fact, under this test, the building itself may never have been taken out of service during the rehabilitation process. If the building is rehabilitated over several years in stages (e.g., by floors), section 38 property attributable to qualified rehabilitation expenditures to a qualified rehabilitated building placed in service in each taxable year shall, generally, be treated as a separate item of section 38 property.
(iii) Example. The application of this paragraph (f)(2) may be illustrated by the following example:
(3) Coordination with section 47. If property described in section 48(a)(1)(E) is disposed of by the taxpayer, or otherwise ceases to be “section 38 property,” section 47 may apply. Property will cease to be section 38 property, and therefore section 47 may apply, in any case in which the Department of Interior revokes or otherwise invalidates a certification of rehabilitation after the property is placed in service or a building (other than a certified historic structure) is moved from the place where it is rehabilitated after the property is placed in service. If, for example, the taxpayer made modifications to the building inconsistent with Department of Interior standards, the Secretary of the Interior might revoke the certification. In addition, if all or a portion of a substantially rehabilitated building becomes tax-exempt use property (see paragraph (c)(7)(vi) of this section) for the first time within five years after the credit is claimed, the credit will be recaptured under section 47 at that time as if the building or portion of the building which becomes tax-exempt use property had then been sold.
(g) Effective/applicability date. This section applies on and after January 19, 2017. For rules before January 19, 2017, see § 1.48-12 as contained in 26 CFR part 1 revised as of April 1, 2016.
§ 1.48-13   Rules relating to the increased credit amount for prevailing wage and apprenticeship.
(a) In general. If a qualified energy project satisfies the requirements in paragraph (b) of this section, the amount of the credit determined under section 48(a) of the Internal Revenue Code (Code), after the application of section 48(a)(1) through (8), and (15), is equal to the credit determined under section 48(a) (section 48 credit) multiplied by five.
(b) Requirements. A qualified energy project satisfies the requirements of this paragraph (b) if it is one of the following—
(1) A project with a maximum net output of less than one megawatt (MW) of electrical (as measured in alternating current) or thermal energy determined based on the nameplate capacity as provided in paragraph (e) of this section (One Megawatt Exception);
(2) A project the construction of which began prior to January 29, 2023; or
(3) A project that meets the prevailing wage requirements of section 48(a)(10)(A), § 1.45-7(a)(2) and (3) and (b) through (d), and paragraph (c) of this section, the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12.
(c) Special rule applicable to general prevailing wage requirements —(1) In general. In addition to satisfying the prevailing wage requirements under § 1.45-7(a)(2) and (3) and (b) through (d), a taxpayer must ensure that any laborers and mechanics employed (within the meaning of § 1.45-7) by the taxpayer or any contractor or subcontractor in the construction of such energy project, and for the five-year period beginning on the date such project is placed in service, the alteration or repair of such project, are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor, in accordance with 40 U.S.C. chapter 31, subchapter IV. Subject to section 48(a)(10)(C) and this paragraph (c), for purposes of determining the increased credit amount under section 48(a)(9)(B)(iii), the taxpayer is deemed to satisfy the prevailing wage requirements of section 48(a)(10)(A)(ii) at the time such project is placed in service.
(2) Transition waiver of penalty for prevailing wage requirements. For purposes of the transition waiver described in § 1.45-7(c)(6)(iii), the penalty payment required by § 1.45-7(c)(1)(ii) to cure a failure to satisfy the Prevailing Wage Requirements in paragraph (b)(3) of this section is waived with respect to a laborer or mechanic who performed work in the construction, alteration, or repair of an energy project on or after January 29, 2023, and prior to December 12, 2024, if the taxpayer relied upon Notice 2022-61, 2022-52 I.R.B. 560, or the Proposed Regulations (REG-132569-17) (88 FR 82188), corrected in 89 FR 13293 (Feb. 22, 2024), to determine when the activities of any laborer or mechanic became subject to the prevailing wage requirements, and the taxpayer makes the correction payments required by § 1.45-7(c)(1)(i) with respect to such laborer and mechanics within 180 days of December 12, 2024.
(3) Exception. For purposes of satisfying the prevailing wage requirements of paragraph (b)(3) of this section, § 1.45-7(a)(1) does not apply.
(4) Recapture —(i) In general. In the case of an energy project that receives the increased credit amount under paragraph (a) of this section by reason of satisfying the requirements of paragraph (b)(3) of this section, the increased credit amount is subject to recapture for any project that does not satisfy the prevailing wage requirements in § 1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to an alteration or repair of such project during the five-year period beginning on the date such project is originally placed in service (five-year recapture period) (but that does not cease to be investment credit property within the meaning of section 50(a) of the Code).
(ii) Recapture event —(A) In general. Any failure to satisfy the prevailing wage requirements in § 1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the five-year recapture period is a recapture event. Any failure to satisfy the prevailing wage requirements in § 1.45-7(b) through (d) and paragraph (c)(1) of this section with respect to the alteration or repair of any project during the five-year recapture period described in paragraph (c)(6) of this section remains subject to the correction and penalty provisions in § 1.45-7(c), including the waiver provisions in § 1.45-7(c)(6). Subject to § 1.45-7(c)(5) and (6), if the correction and penalty payments described in § 1.45-7(c) are not made by the taxpayer on or before the date that is 180 days after the date of a final determination by the IRS (as defined in § 1.45-7(c)(4)(ii)), the cure provision described in § 1.45-7(c) does not apply and the increased credit amount is subject to recapture.
(B) Yearly determination. A determination of whether a recapture event has occurred under paragraph (c)(3)(ii) of this section must be made for each taxable year (or portion thereof) occurring within the five-year recapture period, beginning with the taxable year ending after the date the energy project is placed in service. Thus, for each taxable year beginning or ending within the five-year recapture period, the taxpayer must determine whether the prevailing wage requirements of section 48(a)(10)(A), § 1.45-7(b) through (d), and paragraph (c)(1) of this section are satisfied for the recapture year(s) occurring during each taxable year. If no alteration or repair work occurs during the five-year recapture period, the taxpayer is deemed to satisfy the Prevailing Wage Requirements described in paragraph (b)(3) of this section with respect to such taxable year.
(C) Carrybacks and carryforward adjusted. In the case of any recapture event described in paragraph (c)(3)(ii)(A) of this section, the carrybacks and carryforwards under section 39 of the Code must be adjusted by reason of such recapture event.
(iii) Correction and penalty payments not required if taxpayer is subject to recapture under section 48(a)(10)(C). If the IRS determines that a taxpayer that claimed the increased credit amount under section 48(a)(9)(B)(iii) or transferred a specified credit portion under section 6418 of the Code that includes the increased credit amount under section 48(a)(9)(B)(iii) failed to satisfy the prevailing wage requirements in § 1.45-7(b) through (d) and paragraph (c)(1) of this section for any period with respect to the alteration or repair of any project during the five-year recapture period and the taxpayer does not make the correction and penalty payments provided in § 1.45-7(c), then no penalty is assessed under § 1.45-7, and the increased credit amount is subject to recapture. Taxpayers whose increased credit amount is subject to recapture under this section may retain the amount of the section 48(a) credit (base credit) determined under section 48(a) of this section provided all requirements were met in the year of determination.
(5) Recapture amount —(i) In general. If a recapture event has occurred as described in paragraph (c)(3)(ii) of this section, the tax under chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by the applicable recapture percentage multiplied by the increased credit amount allowed to the taxpayer pursuant to paragraphs (a) and (b)(3) of this section.
(ii) Applicable recapture percentage. If the recapture event occurs:
(A) Within one full year after the property is placed in service, the recapture percentage is 100;
(B) Within one full year after the close of the period described in paragraph (c)(4)(ii)(A) of this section, the recapture percentage is 80;
(C) Within one full year after the close of the period described in paragraph (c)(4)(ii)(B) of this section, the recapture percentage is 60;
(D) Within one full year after the close of the period described in paragraph (c)(4)(ii)(C) of this section, the recapture percentage is 40; or
(E) Within one full year after the close of the period described in paragraph (c)(4)(ii)(D) of this section, the recapture percentage is 20.
(6) Recapture period. The five-year recapture period begins on the date the project is placed in service and ends on the date that is five full years after the placed-in-service date. Each 365-day period (366-day period in case of a leap year) within the five-year recapture period is a separate recapture year for recapture purposes.
(7) Increase in tax for recapture. The increase in tax under chapter 1 of the Code for the recapture of an increased credit amount claimed under paragraph (a) of this section occurs in the year of the recapture event.
(8) Annual prevailing wage compliance report. In addition to the general reporting requirements in § 1.45-12, a taxpayer that has claimed an increased credit amount under paragraph (a) of this section or transferred a specified credit portion under section 6418 that includes an increased credit amount under paragraph (a) of this section is required to provide to the IRS, information on the payment of prevailing wages with respect to any alteration or repair of the project during the recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter.
(9) Transferred specified credit portions. In the case of a transferred specified credit portion under section 6418, to which recapture of an increased credit amount under this paragraph (c) applies, the eligible taxpayer is required to notify the transferee taxpayer of the recapture event in accordance with the provisions of § 1.6418-5(f)(2) and the transferee taxpayer is responsible for any amount of increase in tax under section 48(a)(10)(C) and this paragraph (c) in accordance with the provisions of § 1.6418-5(f)(3).
(d) Energy project defined —(1) In general. For purposes of the increased credit amount provided by section 48(a)(9) and paragraphs (b) and (c) of this section, the domestic content bonus credit amount provided by section 48(a)(12), and the increase in credit rate for energy communities provided in section 48(a)(14), the term energy project means one or more energy properties (multiple energy properties) that are operated as part of a single energy project. Multiple energy properties will be treated as one energy project if they are owned by a taxpayer (subject to the related taxpayer rule provided in paragraph (d)(2) of this section) and any four or more of the following factors are present:
(i) The energy properties are constructed on contiguous pieces of land;
(ii) The energy properties are described in a common power purchase, thermal energy, or other off-take agreement or agreements;
(iii) The energy properties have a common intertie;
(iv) The energy properties share a common substation, or thermal energy off-take point;
(v) The energy properties are described in one or more common environmental or other regulatory permits;
(vi) The energy properties are constructed pursuant to a single master construction contract; or
(vii) The construction of the energy properties is financed pursuant to the same loan agreement.
(2) Time of determination —(i) Energy project. A taxpayer may make the determination that multiple energy properties are an energy project either—
(A) At any point during the construction of the multiple energy properties, or
(B) During the taxable year in which the last such energy property is placed in service.
(ii) Placed in Service. An energy project (as defined in § 1.48-13(d)) is considered placed in service on the date the last of the energy properties within the energy project is placed in service.
(3) Related taxpayers —(i) Definition. For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).
(ii) Related taxpayer rule. For purposes of this section, related taxpayers are treated as one taxpayer in determining whether multiple energy properties are treated as an energy project with respect to which a section 48 credit may be determined.
(4) Separate reporting for energy properties within an energy project —(i) In general. While multiple energy properties may be treated as a single energy project for specified purposes, this information must be separately reported for each energy property within an energy project on Form 3468, Investment Credit, or any successor form(s), and such form must be filed with the taxpayer's timely filed (including extensions) Federal income tax return for the taxable year in which the energy property is placed in service.
(e) Nameplate capacity for purposes of the One Megawatt Exception —(1) In general. For purposes of paragraph (b)(1) of this section, whether an energy project has a maximum net output of less than 1 megawatt (MW) of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capacity. If an energy project is comprised of more than one energy property, the energy project's maximum net output is calculated as the sum of the nameplate capacity of each energy property. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy project. Paragraphs (e)(2) through (7) of this section provide rules for measuring output for different types of energy properties to determine whether the One Megawatt Exception (as provided in paragraph (b)(1) of this section) applies. Because electrochromic glass property (as defined in § 1.48-9(e)(2)(ii)), fiber-optic solar energy property (as defined in § 1.48-9(e)(2)(i)), and microgrid controllers (as defined in § 1.48-9(e)(12)) do not generate electricity or thermal energy, these energy properties are not eligible for the One Megawatt Exception.
(2) Nameplate capacity for energy properties that generate in direct current for purposes of the One Megawatt Exception. Only for energy properties that generate electricity in direct current, the taxpayer may choose to determine the maximum net output (in alternating current) of each energy property that is part of the energy project by using the lesser of:
(i) The sum of the nameplate generating capacities within the unit of energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating current; or
(ii) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
(3) Electrical generating energy property. In the case of an electrical generating energy property, the One Megawatt Exception is determined by using maximum electrical generating output in megawatts that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202.
(4) Electrical energy storage property. In the case of electrical energy storage property (as defined in § 1.48-9(e)(10)(ii)), the One Megawatt Exception is determined by using the storage device's maximum net output. If the output of electrical energy storage property is in direct current, apply the rules of paragraph (2) of this section.
(5) Thermal energy storage property and other property generating or distributing thermal energy. In the case of thermal energy storage property (as defined in § 1.48-9(e)(10)(iii)) and other energy property that generates or distributes thermal energy for productive use (for example, geothermal energy property, GHP property, solar process heat property), the One Megawatt Exception is determined by using the property's maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu per hour/3,412,140 = MW). The maximum net output is the maximum instantaneous rate of discharge and is determined based on the nameplate capacity of the equipment that generates or distributes thermal energy for productive use (including distributing the thermal energy from the storage medium). For purposes of determining the maximum net output of thermal energy storage property, if the nameplate capacity of the thermal energy storage is not available, the nameplate capacity of the equipment delivering thermal energy to the thermal energy storage may be used. For thermal energy storage property and other energy property distributing thermal energy to a building or buildings, the nameplate capacity can be assessed as either the aggregate maximum thermal output of all individual heating or cooling elements within the building or buildings, or as the maximum thermal output that the entire project is capable of delivering to a building or buildings at any given moment. The maximum thermal output an entire project is capable of delivering at any given moment does not take into account the capacity of redundant equipment if such equipment is not operated when the system is at maximum output during normal operation. For thermal energy storage property and other energy property that generates or distributes thermal energy for a productive use, the maximum thermal output that the entire system is capable of delivering is considered to be the greater of the rate of cooling or the rate of heating of the aggregate of the nameplate capacity of the equipment distributing energy for productive use, including distributing the thermal energy from the thermal energy storage medium to the building or buildings. If such nameplate capacity is unavailable, in the case of thermal energy storage property only, the maximum thermal output may instead be considered to be the greater of the rate of cooling or the rate of heating of the aggregate of the nameplate capacity of all the equipment delivering energy to the thermal energy storage property in the project.
(6) Hydrogen energy storage property and specified clean hydrogen production facilities. In the case of a hydrogen energy storage property (as defined in § 1.48-9(e)(10)(iv)) or a specified clean hydrogen production facility (as defined in section 48(a)(15)(C)), the One Megawatt Exception is determined by using the property's or facility's maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per hour of hydrogen.
(7) Qualified biogas property. In the case of qualified biogas property, the One Megawatt Exception is determined by the property's maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour. Taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the Environmental Protection Agency (EPA) Greenhouse Gas Reporting Rule (GHGRR) at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known.
(f) Applicability date. This section applies to energy projects placed in service in taxable years ending on or after December 12, 2024, and the construction of which begins after December 12, 2024.
§ 1.48-14   Rules applicable to energy property.
(a) Retrofitted energy property —(1) In general. For purposes of section 48(a)(3)(B)(ii), (5)(D)(iv), and (8)(B)(iii) of the Internal Revenue Code (Code), a retrofitted energy property may be originally placed in service even though it contains some used components of the unit of energy property only if the fair market value of the used components of the unit of energy property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of the unit of energy property (80/20 Rule). Only the cost of new components of the unit of energy property is taken into account for purposes of computing the credit determined under section 48 (section 48 credit) with respect to the unit of energy property. The cost of new components of the unit of energy property includes all costs properly included in the depreciable basis of the new components. If the taxpayer satisfies the 80/20 Rule with regard to the unit of energy property and the taxpayer pays or incurs new costs for property that is an integral part of the energy property (as defined in § 1.48-9(f)(3)(i)), then the taxpayer may include the new costs paid or incurred for property that is an integral part of the energy property (as defined in § 1.48-9(f)(3)(i)) in the basis of the energy property for purpose of the section 48 credit. In the case of an energy project (as defined in § 1.48-13(d)), the 80/20 Rule is applied to each unit of energy property comprising an energy project.
(2) Excluded costs. Costs incurred for new components of property added to used components of a unit of energy property may not be taken into account for purposes of the section 48 credit unless the taxpayer satisfies the 80/20 Rule (as provided in paragraph (a)(1) of this section) by placing into service a unit of energy property for which the fair market value of the used components of property is not more than 20 percent of the total value of the unit of energy property taking into account the cost of the new components of property plus the value of the used components of property.
(3) Examples. This paragraph (a)(3) provides examples illustrating the provisions of this paragraph (a):
(i) Example 1. Retrofitted solar energy property that satisfies the 80/20 Rule. Z owns an existing solar energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. Z replaces used components of the solar energy property with new components of property at a cost of $1.4 million. The retrofitted solar energy property constitutes a unit of energy property. The fair market value of the remaining original components of the retrofitted solar energy property is $100,000, which is not more than 20 percent of the retrofitted solar energy property's total value of $1.5 million (that is, the cost of the new components ($1.4 million) + the value of the remaining original components ($100,000)). The value of the old components of the retrofitted solar energy property is 7 percent of the value of total value of the retrofitted solar energy property ($100,000/$1.5 million), thus the retrofitted solar energy property will be considered newly placed in service for purposes of section 48, and Z will be able to claim a section 48 credit based on the cost of the new components ($1.4 million).
(ii) Example 2. Capital improvements to an existing energy property that do not satisfy the 80/20 Rule. X owns an existing unit of energy property for which the section 48 credit has been claimed and the recapture period for the section 48 credit has elapsed. The fair market value of the unit of energy property is $1 million. During the tax year, X makes capital improvements to the unit of energy property. The expenditures for such capital improvements total $300,000. X may not claim a section 48 credit for the $300,000 spent on capital improvements during the tax year because the capital improvements did not satisfy the 80/20 Rule.
(iii) Example 3. Upgrades to a qualified hydropower production facility that satisfies the 80/20 Rule: Y owns a qualified hydropower production facility (hydropower facility) as defined under section 45 and no taxpayer, including Y, has ever claimed a section 45 credit for the hydropower facility. The hydropower facility consists of a unit of energy property including water intake, water isolation mechanisms, turbine, pump, motor, and generator. The associated impoundment (dam) and power conditioning equipment are integral parts of the unit of energy property. Y makes upgrades to the unit of energy property by replacing the turbine, pump, motor, and generator with new components at a cost of $1.5 million. Y does not make any upgrades to the property that is an integral part of the unit of energy property. The remaining original components of the unit of energy property have a fair market value of $100,000, which is not more than 20 percent of the retrofitted hydropower facility's total value of $1.6 million (that is, the cost of the new components ($1.5 million) + the value of the remaining original components ($100,000)). Thus, the retrofitted hydropower facility will be considered newly placed in service for purposes of section 48, and Y will be able to make a valid section 48(a)(5) election and claim a section 48 credit based on the cost of the new components ($1.5 million).
(b) Dual use property —(1) Definition. For purposes of section 48, the term dual use property means property that uses energy derived from both a qualifying source (that is, from an energy property defined in § 1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f)(2) of this section)) and from a non-qualifying source (that is, sources other than an energy property defined in § 1.48-9(a) (including a qualified facility for which an election has been made as provided by paragraph (f)(2) of this section)).
(2) Qualification as energy property —(i) In general. Dual use property qualifies as energy property if its use of energy from non-qualifying sources does not exceed 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(ii) of this section) during an annual measuring period (as defined in paragraph (b)(2)(iii) of this section). If the energy used from qualifying sources is between 50 percent and 100 percent, only a proportionate amount of the basis of the energy property will be taken into account in computing the amount of the section 48 credit (for example, if 80 percent of the energy used by a dual use property is from qualifying sources, 80 percent of the basis of the dual use property will be taken into account in computing the amount of the section 48 credit).
(ii) Aggregation of energy inputs. The measurement of energy use required for purposes of paragraph (b)(2)(i) of this section may be made by comparing, on the basis of British thermal units (Btus), energy input to dual use property from all qualifying sources with energy input from all non-qualifying sources. To convert the energy inputs for CHP into Btus, the lower heating value of the fuel is used for CHP property and the higher heating value of the hydrogen is used for fuel cells. The Commissioner may also accept any other method that accurately establishes the relative annual use of energy derived from all qualifying sources and of energy input from all non-qualifying sources by dual use property.
(iii) Annual measuring period. For purposes of paragraph (b)(2)(i) of this section, the term annual measuring period means with respect to an item of dual use property the 365-day period (366-day period in case of a leap year) beginning with the day the dual use property is placed in service (initial annual measuring period) or a 365-day period (366-day period in case of a leap year) beginning the day after the last day of the immediately preceding annual measuring period (subsequent annual measuring period).
(iv) Recapture. If, for any subsequent annual measuring period (within the recapture period specified in section 50(a) of the Code, the equipment's use of energy from all qualifying sources is reduced below 50 percent of its total energy input (as determined under the rules of paragraph (b)(2)(i) of this section), then recapture of the section 48 credit is required under section 50(a).
(v) Example. On October 1, 2021, X, a calendar year taxpayer, places in service a unit of energy property that includes a system that heats its office building by circulating hot water heated by energy derived from a geothermal deposit through the building. The water heated by energy derived from a geothermal deposit is not hot enough to provide sufficient heat for the building. The circulation system includes an electric boiler in which the water is further heated before being circulated in the heating system. Energy from the electric boiler is not from a qualifying source and therefore the system is dual use property. On a Btu basis, sixty percent of the total energy input to the circulating system during the initial annual measuring period (the 365-day period beginning on October 1, 2021) is energy derived from a geothermal deposit. Accordingly, the circulation system, including the pumps and pipes that circulate the hot water through the building, are part of the unit of energy property and eligible for a section 48 credit. Sixty percent of the basis of the circulation system is taken into account in determining the section 48 credit for X's unit of energy property. During the 365-day period beginning on October 1, 2023, forty-five percent of the total energy input to the circulating system (on a Btu basis) is energy derived from a geothermal deposit. X's section 48 credit is therefore subject to recapture under section 50.
(c) Energy property eligible for multiple Federal income tax credits —(1) In general. The basis of energy property may be eligible for calculating both the section 48 credit and another Federal income tax credit, subject to the limitation provided in paragraph (c)(2) of this section.
(2) Limitation. Except as provided in paragraph (g) of this section, a taxpayer may not claim both a section 48 credit and another Federal income tax credit with respect to the same basis in an energy property. See paragraph (e) of this section for special rules regarding ownership of energy property.
(d) Incremental cost —(1) In general. For purposes of section 48, if a component of energy property is also used for a purpose other than the intended function of the energy property, only the incremental cost of a component of energy property is included in the basis of the energy property. The term incremental cost means the excess of the total cost of a component over the amount that would have been expended for the component if that component were used for a non-qualifying purpose.
(2) Example. A installs solar energy property above the surface of an existing roof of a building that A owns. The solar energy property uses bifacial panels that convert to energy the light that strikes both the front and back of the panels. Therefore, along with installing the bifacial panels, A is reroofing their building with a reflective roof that has a highly reflective surface. Because the reflective roof enables the panels' generation of significant amounts of electricity from reflected sunlight, when installed in connection with the solar energy property, it constitutes part of that energy property to the extent that the cost of the reflective roof exceeds the cost of reroofing A's building with a non-reflective roof. The cost of reroofing with the reflective roof is $15,000 whereas the cost of a reroofing with a standard roof for the building would be $10,000. The incremental cost of the reflective roof is $5,000, and that amount is included in A's basis in the solar energy property for purposes of the section 48 credit.
(e) Special rules concerning ownership —(1) Basis. For purposes of section 48, a taxpayer that owns an energy property is eligible for the section 48 credit only to the extent of the taxpayer's basis in the energy property. In the case of multiple taxpayers holding direct ownership in an energy property, each taxpayer determines its basis based on its fractional ownership interest in the energy property.
(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of energy property for a section 48 credit to be determined with respect to such taxpayer's interest. No section 48 credit may be determined with respect to a taxpayer's ownership of one or more separate components of an energy property if the components do not constitute a unit of energy property. However, the use of property owned by one taxpayer that is an integral part of an energy property owned by a second taxpayer will not prevent a section 48 credit from being determined with respect to the second taxpayer's energy property (though neither taxpayer would be eligible for a section 48 credit with respect to the first taxpayer's property).
(3) Related taxpayers —(i) Definition. For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).
(ii) Related taxpayer rule. For purposes of this section, related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an investment in an energy property with respect to which a section 48 credit may be determined.
(4) Examples. The following examples illustrate the rules in this paragraph (e). In each example, X and Y are unrelated taxpayers.
(i) Example 1. Fractional ownership required to satisfy section 48. X and Y own fractional ownership interests in a GHP property that is a unit of energy property. Because X and Y each own a fractional ownership interest in a unit of energy property, a section 48 credit may be determined with respect to X's and Y's fractional ownership interests in the unit of energy property.
(ii) Example 2. Separate ownership of GHP property. A GHP property is comprised of coils in the ground and several individual heat pumps used in conjunction with those coils. X owns both the coils in the ground and one of the individual heat pumps used in conjunction with the coils. Y owns one or more of the individual heat pump(s) used in conjunction with the coils. No section 48 credit may be determined with respect to Y because Y owns merely a component of energy property rather than a unit of energy property as defined in § 1.48-9(f)(2). However, while X does not own all of the individual heat pumps used in conjunction with the coils, X does own both the coils in the ground and one heat pump used in conjunction with the coils and thus owns an entire unit of energy property. Accordingly, X may compute a section 48 credit with respect to this unit of energy property.
(iii) Example 3. Shared ownership of property that is an integral part of separate energy properties. X owns a wind energy property that is a unit of energy property and Y owns a solar energy property that is a unit of energy property that are co-located. Both X's wind energy property and Y's solar energy property connect to a substation that houses a step-up transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. X and Y each own a 50 percent fractional ownership interest in the step-up transformer. The step-up transformer is an integral part of both the wind energy property and the solar energy property (as defined in § 1.48-9(f)(3)(i)). As a result, X and Y may both compute a section 48 credit for their respective energy properties by including their respective bases in the step-up transformer.
(iv) Example 4. Separate ownership of property that is an integral part of separate energy property. X owns a wind energy property that is a unit of energy property and property that is an integral part of the wind energy property, specifically a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a solar energy property that is a unit of energy property that connects to X's transformer. X and Y are not related persons within the meaning of paragraph (e)(3)(i) of this section. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48 credit for its solar energy property, but it cannot include any basis relating to the transformer.
(v) Example 5. X owns a wind energy property that is a unit of energy property and a solar energy property that is a unit of energy property. Both the wind energy property and the solar energy property are connected to a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. The transformer is an integral part of both the wind energy property and the solar energy property (within the meaning of § 1.48-9(f)(3)(i)) and is owned by Y. X and Y are related persons within the meaning of paragraph (e)(3)(i) of this section. X and Y are treated as one taxpayer under paragraph (e)(3)(ii) of this section. X may include the basis of the transformer in computing its section 48 credit with respect to the wind energy and the solar energy property (but may not include more than 100% of that basis in the aggregate).
(f) Election to treat qualified facilities as energy property —(1) In general. If a taxpayer makes an election under section 48(a)(5)(C) (pursuant to paragraph (f)(5) of this section) to treat qualified property that is part of a qualified investment credit facility as energy property with respect to which a section 48 credit may be determined, such property will be treated as energy property for purposes of section 48. No section 45 credit may be determined with respect to any qualified investment credit facility and the requirements of section 45 are not imposed on a qualified investment credit facility.
(2) Qualified investment credit facility. The term qualified investment credit facility means any facility—
(i) That is a qualified facility (within the meaning of section 45) described in section 45(d)(1) through (4), (6), (7), (9) or (11);
(ii) That meets the placed in service and beginning of construction requirements (if any) provided in section 48;
(iii) With respect to which no credit has been allowed under section 45; and
(iv) For which the taxpayer makes an irrevocable election under section 48(a)(5) and paragraph (f)(5) of this section.
(3) Qualified property. The term qualified property means property that meets each of the requirements of paragraphs (f)(3)(i) through (iv) of this section. Regardless of where qualified property is located, any qualified property that meets the requirements of this paragraph (f)(3) is part of a qualified investment credit facility with respect to which a section 48 credit may be determined.
(i) The property is tangible personal property or other tangible property (not including a building or its structural components), but only if such other tangible property is an integral part of the qualified investment credit facility.
(ii) Depreciation (or amortization in lieu of depreciation) is allowable (as defined in § 1.48-9(b)(4)) with respect to the property.
(iii) The taxpayer constructs, reconstructs, or erects the property (as defined in § 1.48-9(b)(1)) or acquires the property (as defined in § 1.48-9(b)(2)) if the original use of the property (as defined in § 1.48-9(b)(3)) commences with the taxpayer.
(iv) The property is not intangible property.
(4) Definitions related to requirements for qualified property —(i) Tangible personal property. The term tangible personal property means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) that is contained in or attached to a building. Further, all property that is in the nature of machinery (other than structural components of a building or other inherently permanent structure) is considered tangible personal property even though located outside a building. Local law is not controlling for purposes of determining whether property is or is not tangible property or tangible personal property. Thus, tangible property may be personal property for purposes of the section 48 credit even though under local law the property is considered to be a fixture and therefore real property.
(ii) Other tangible property. The term other tangible property means tangible property other than tangible personal property (not including a building and its structural components), that is used as an integral part of furnishing electrical energy by a person engaged in a trade or business of furnishing any such service.
(iii) Integral part —(A) In general. Property owned by a taxpayer is an integral part of a qualified investment credit facility owned by the same taxpayer if it is used directly in the intended function of the qualified investment credit facility and is essential to the completeness of the intended function of the qualified investment credit facility. A taxpayer may not claim the section 48 credit for any property that is not owned by the taxpayer, regardless of whether that property is otherwise an integral part of the taxpayer's qualified investment credit facility.
(B) Power conditioning and transfer equipment. Property that is an integral part of a qualified investment credit facility includes power conditioning equipment and transfer equipment used to perform the intended function of the qualified investment credit facility. Power conditioning equipment includes, but is not limited to, transformers, inverters, and converters, which modify the characteristics of electricity or thermal energy into a form suitable for use or transmission or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes equipment that permits the aggregation of energy generated by components of energy properties and equipment that alters voltage in order to permit transfer to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers, fuses, and other switches), and hardware used to monitor, operate, and protect transfer equipment.
(C) Roads. Roads that are an integral part of a qualified investment credit facility are integral to the activity performed by the qualified investment credit facility; these include onsite roads that are used for equipment to operate and maintain the qualified investment credit facility. Roads primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by a qualified investment credit facility.
(D) Fences. Fencing is not an integral part of a qualified investment credit facility because it is not integral to the activity performed by the energy property.
(E) Buildings. Generally, buildings are not integral parts of a qualified investment credit facility because they are not integral to the activity of the qualified investment credit facility. However, the structures described in paragraphs (f)(4)(iii)(F) and (G) of this section are not treated as buildings for this purpose.
(F) Structures essentially items of machinery or equipment. A structure that is essentially an item of machinery or equipment is not treated as a building for purposes of paragraph (f)(4)(iii)(E) of this section.
(G) Structures that house certain property. A structure that houses property that is integral to the activity of a qualified investment credit facility is not treated as a building for purposes of paragraph (f)(4)(iii)(E) of this section if the use of the structure is so closely related to the use of the housed qualified investment credit facility that the structure clearly can be expected to be replaced if the qualified investment credit facility it initially houses is replaced.
(5) Time and manner of making election —(i) In general. To make an election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility as a qualified investment credit facility, a taxpayer must claim the section 48 credit with respect to such qualified investment credit facility on a completed Form 3468, Investment Credit, or any successor form(s), and file such form with the taxpayer's timely filed (including extensions) Federal income tax return for the taxable year in which the qualified investment credit facility is placed in service. The taxpayer must also attach a statement to its Form 3468, or any successor form(s), filed with its timely filed Federal income tax return (including extensions) that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified investment credit facility subject to an election under section 48(a)(5) and paragraph (f) of this section. A separate election must be made for each qualified facility that meets the requirements provided in paragraph (f)(5)(v) of this section to be treated as a qualified investment credit facility. If any taxpayer owning an interest in a qualified facility makes an election with respect to such qualified facility, that election is binding on all taxpayers that directly or indirectly own an interest in the qualified facility.
(ii) Special rule for partnerships and S corporations. In the case of a qualified facility owned by a partnership or an S corporation, the election under paragraph (f) of this section is made by the partnership or S corporation and is binding on all ultimate credit claimants (as defined in § 1.50-1(b)(3)(ii)) of a section 48 credit. The partnership or S corporation must file a Form 3468, Investment Credit, or any successor form(s), with its timely filed partnership or S corporation return (including extensions) with respect to Federal income tax for the taxable year in which the qualified investment credit facility is placed in service to indicate that it is making the election and attach a statement that includes all of the information required by the instructions to Form 3468, or any successor form(s) for each qualified facility subject to the election. The ultimate credit claimants must claim the section 48 credit on a completed Form 3468, or any successor form(s), and file such form with a timely filed (including extensions) Federal income tax return for the taxable year in which the ultimate credit claimant's distributive share or pro rata share of the section 48 credit is taken into account under section 706(a) of the Code or section 1366(a) of the Code, respectively. The partnership or S corporation making the election must provide the ultimate credit claimants with the necessary information to complete Form 3468, or any successor form(s), to claim the section 48 credit.
(6) Election irrevocable. The election under section 48(a)(5) and paragraph (f) of this section to treat a qualified facility as an energy property is irrevocable.
(g) Coordination rule for sections 42 and 48 credits. As provided under section 50(c)(3)(C), in determining eligible basis for purposes of calculating a section 42 credit, a taxpayer is not required to reduce its basis in an energy property by the amount of the section 48 credit determined with respect to the property. The basis of an energy property may be used to determine a section 48 credit and may also be included in eligible basis to determine a section 42 credit. See paragraph (e) of this section for special rules regarding ownership of energy property.
(h) Qualified interconnection costs included in certain lower-output energy properties —(1) In general. For purposes of determining the section 48 credit, energy property includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (h)(2) of this section), in connection with the installation of energy property (as defined in § 1.48-9(a)) that has a maximum net output of not greater than five megawatts (MW) (as measured in alternating current) (as described in paragraph (h)(3) of this section). The qualified interconnection property must provide for the transmission or distribution of the electricity produced or stored by such energy property and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (h)(6) of this section. If the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal income tax principles may require the taxpayer to reduce the amounts of costs treated as paid or incurred for qualified interconnection property to determine a section 48 credit.
(2) Qualified interconnection property. The term qualified interconnection property means, with respect to an energy project that is not a microgrid controller, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the energy project interconnects to such transmission or distribution system in order to accommodate such interconnection; is either constructed, reconstructed, or erected by the taxpayer, (as defined in § 1.48-9(b)(1)), or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer; and the original use (as defined in § 1.48-9(b)(3)), of which, pursuant to an interconnection agreement (as defined in paragraph (h)(4) of this section), commences with a utility (as defined in paragraph (h)(5) of this section). For purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) must be taken into account, as applicable, with such original use determined on the date of the sale-leaseback or lease. Qualified interconnection property is not part of an energy property. As a result, qualified interconnection property is not taken into account in determining whether an energy project satisfies the prevailing wage and apprenticeship requirements in section 48(a)(10)(A) and (11), the requirements for the domestic content bonus credit amount referenced in section 48(a)(12), or the increase in credit rate for energy communities provided in section 48(a)(14).
(3) Five-Megawatt Limitation —(i) In general. The Five-Megawatt Limitation is measured at the level of the energy property in accordance with section 48(a)(8)(A). The maximum net output of an energy property is measured only by nameplate generating capacity (in alternating current) of the unit of energy property, which does not include the nameplate capacity of any integral property, at the time the energy property is placed in service. The nameplate generating capacity of the unit of energy property is measured independently from any other energy properties that share the same integral property.
(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. For purposes of paragraph (h)(1) of this section, the determination of whether an energy property has a maximum net output of not greater than five MW (as measured in alternating current) is based on the nameplate capacity for purposes of paragraph (h)(1) of this section. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy property. Paragraphs (h)(3)(iv) and (v) of this section provide rules for applying the Five-Megawatt Limitation (as provided in paragraph (h)(1) of this section) to electrical generating energy property and electrical energy storage property, respectively.
(iii) Nameplate capacity for energy properties that generate in direct current for purposes of the Five-Megawatt Limitation. For energy properties that generate electricity in direct current, the taxpayer may choose to determine whether an energy property has a maximum net output of not greater than five MW (in alternating current) by using the lesser of:
(A) The sum of the nameplate generating capacities within the unit of energy property in direct current, which is deemed the nameplate generating capacity of the unit of energy property in alternating current; or
(B) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
(iv) Electrical generating energy property. In the case of an electrical generating energy property, the Five-Megawatt Limitation is determined by using the maximum electrical generating output in megawatts that the unit of energy property is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output of a unit of energy property.
(v) Electrical energy storage property. In the case of electrical energy storage property (as defined in § 1.48-9(e)(10)(ii)), the Five-Megawatt Limitation is determined by using the energy storage property's maximum net output as its nameplate capacity.
(4) Interconnection agreement. The term interconnection agreement means an agreement with a utility for the purposes of interconnecting the energy property owned by such taxpayer to the transmission or distribution system of the utility. In the case of the election provided under section 50(d)(5) (relating to certain leased property), the term includes an agreement regarding energy property leased by such taxpayer.
(5) Utility. For purposes of section 48(a)(8) and this paragraph (h), the term utility means the owner or operator of an electrical transmission or distribution system that is subject to the regulatory authority of a State or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative.
(6) Reduction to amounts chargeable to capital account —(i) In general. In the case of costs paid or incurred for qualified interconnection property as defined in paragraph (h)(2) of this section, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules similar to the rules of section 50(c) (including section 50(c)(3)).
(7) Examples. This subparagraph provides examples illustrating the application of the general rules provided in paragraph (h)(1) of this section and Five-Megawatt Limitation provided in this paragraph (h).
(i) Example 1. Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by taxpayer. X places in service two solar energy properties (Solar Properties) each with a maximum net output of 4 MW (as measured in alternating current by using the nameplate capacity of an inverter, which is the first component of property attached to each of the Solar Properties that inverts the direct current electricity into alternating current). Each inverter is integral property to each Solar Property but is not shared by the Solar Properties. The Solar Properties share a step-up transformer, which is integral property to both Solar Properties. As part of the development of the Solar Properties, payment of qualified interconnection costs is required by the utility to modify and upgrade the utility's transmission system at or beyond the point of interconnection to accommodate such interconnection. X has an interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost to X of the qualified interconnection property. X may include the costs X paid or incurred for qualified interconnection property subject to the terms of the interconnection agreement, to calculate X's section 48 credits for each of the Solar Properties because each has a maximum net output of not greater than five MW (alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48 credit amount for both Solar Properties.
(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for energy properties owned by separate taxpayers. X places in service a solar energy property (Solar Property) with a maximum net output of 3 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Solar Property that inverts the direct current electricity into alternating current). Y places in service a wind facility (Wind Facility), for which Y has made a valid election under section 48(a)(5), with a maximum net output of 4 MW (as measured in alternating current). The Solar Property and the Wind Facility share a step-up transformer, which is integral to both facilities. As part of the development of the Solar Property and the Wind Facility, payment of qualified interconnection costs is required by the utility to modify and upgrade the transmission system at or beyond the point of interconnection to accommodate that interconnection. X and Y are party to the same interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost of the qualified interconnection property to X and Y. X and Y may include the costs paid or incurred by X and Y, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, to calculate their respective section 48 credits for the Solar Property and the Wind Facility because each has a maximum net output of not greater than five MW (in alternating current).
(iii) Example 3. Application of Five-Megawatt Limitation to an interconnection agreement for a single energy property. X develops three solar properties (Solar Properties) located in close proximity. The Solar Properties are not considered an energy project pursuant to the definition in § 1.48-13(d). Each of the Solar Properties is a unit of energy property that has a maximum net output of 4 MW. The nameplate capacity of each Solar Property is determined by using the sum of the nameplate generating capacities within the unit of each Solar Property in direct current, which is deemed the nameplate generating capacity of each Solar Property in alternating current. Electricity from the three Solar Properties feeds into a single gen-tie line and a common point of interconnection with the transmission system. X is party to a separate interconnection agreement with the utility for each of the Solar Properties and each interconnection agreement allows for a maximum output of 10 MW (as measured in alternating current). X may include the costs it paid or incurred for qualified interconnection property for each of the Solar Properties to calculate its section 48 credit for each of the Solar Properties, subject to the terms of each interconnection agreement, because each of the Solar Properties has a maximum net output of not greater than five MW (in alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48 credit amount for both Solar Properties.
(iv) Example 4. Application of Five-Megawatt Limitation to a single interconnection agreement for multiple energy properties. The facts are the same as in paragraph (h)(7)(iii) of this section ( Example 3 ), except that X is party to one interconnection agreement with the utility with respect to the three solar energy properties (Solar Properties) and the interconnection agreement allows for a maximum output of 12 MW (as measured in alternating current). With respect to each of the three Solar Properties, X may include the costs it paid or incurred for qualified interconnection property for each Solar Property to calculate its section 48 credit for each Solar Property, subject to the terms of the interconnection agreement, because each Solar Property has a maximum net output of not greater than five MW (in alternating current).
(v) Example 5. Application of Five-Megawatt Limitation to an Energy Project. The facts are the same as in paragraph (h)(7)(iv) of this section ( Example 4 ), except that the three solar energy properties (Solar Properties) are also subject to a common power purchase agreement and as a result, are considered an energy project (as defined in § 1.48-13(d)). With respect to each of the three Solar Properties, X may include the costs it paid or incurred for qualified interconnection property to calculate its section 48 credit for each of the three Solar Properties, subject to the terms of the interconnection agreement, because each of the Solar Properties has a maximum net output of not greater than five MW (in alternating current).
(vi) Example 6. Utility payment reducing costs borne by taxpayer. In year 1, X places in service a solar energy property (Solar Property) with a maximum net output of 3 MW (as measured in alternating current by using the nameplate capacity of the inverter attached to the solar energy property, which is the first component of property attached to each of the Solar Properties that inverts the direct current electricity into alternating current). X is party to an interconnection agreement with a utility for the purpose of connecting the Solar Property to the transmission or distribution system of the utility. Pursuant to the interconnection agreement, X pays $1 million to the utility, and the utility places in service qualified interconnection property. In year 1, X had no reasonable expectation of any payment from the utility or other parties with respect to the qualified interconnection property. The $1 million is properly chargeable to the capital account of X, subject to paragraph (h)(6) of this section. X properly includes the $1 million paid to the utility in determining its credit under section 48 for Year 1. In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays the utility $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. The utility pays $100,000 to X. Under these circumstances, the payment from the utility in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48 credit in year 1.
(vii) Example 7. Non-utility payment reducing costs borne by taxpayer. The facts in year 1 are the same as in paragraph (h)(7)(vi) of this section ( Example 6 ). In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays X $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. Y pays $100,000 to X. In year 1, X had no reasonable expectation of any payment from Y for subsequent agreements with Y or other parties with respect to the qualified interconnection property. Under these circumstances, the payment from Y in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48 credit in year 1.
(i) Cross references. (1) For rules regarding the coordination of the section 42 credit and section 48 credit, see section 50(c)(3).
(2) For rules regarding the denial of double benefit for qualified biogas property, see section 45(e).
(3) For applicable recapture rules, see section 50(a).
(4) For rules regarding the credit eligibility of property used outside the United States, see section 50(b)(1).
(5) For rules regarding the credit eligibility of property used by certain tax-exempt organizations, see section 50(b)(3). See section 6417(d)(2) of the Code for an exception to this rule in the case of an applicable entity making an elective payment election.
(6) For application of the normalization rules to determine the section 48 credit taken by certain regulated companies, including rules regarding the election not to apply the normalization rules to energy storage technology (as defined in section 48(c)(6)), see section 50(d)(2).
(j) Applicability date. This section applies with respect to property placed in service after December 31, 2022, and during a taxable year beginning after December 12, 2024.
§ 1.48-15   Election to treat clean hydrogen production facility as energy property.
(a) In general. Under section 48(a)(15) of the Internal Revenue Code (Code), a taxpayer that owns and places in service a specified clean hydrogen production facility (as defined in section 48(a)(15)(C) and paragraph (b) of this section) can make an irrevocable election under section 48(a)(15)(C)(ii)(II) to treat any qualified property (as defined in section 48(a)(5)(D)) that is part of the facility as energy property for purposes of section 48.
(b) Specified clean hydrogen production facility. The term specified clean hydrogen production facility means any qualified clean hydrogen production facility—
(1) That is placed in service after December 31, 2022;
(2) With respect to which no credit has been allowed under section 45V or 45Q of the Code, and for which the taxpayer makes an irrevocable election to have section 48(a)(15) apply; and
(3) For which an unrelated party has verified in the manner specified in paragraph (e) of this section that such facility produces hydrogen through a process or processes that results in lifecycle GHG emissions that are consistent with the hydrogen that such facility was designed and expected to produce under section 48(a)(15)(A)(ii) and paragraph (c) of this section.
(c) Energy percentage —(1) In general. In the case of a specified clean hydrogen production facility that is designed and reasonably expected to produce qualified clean hydrogen through a process or processes that results in a lifecycle GHG emissions rate of:
(i) Not greater than 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen, and not less than 2.5 kilograms of CO2e per kilogram of hydrogen, the energy percentage is 1.2 percent;
(ii) Less than 2.5 kilograms of CO2e per kilogram of hydrogen, and not less than 1.5 kilograms of CO2e per kilogram of hydrogen, the energy percentage is 1.5 percent;
(iii) Less than 1.5 kilograms of CO2e per kilogram of hydrogen, and not less than 0.45 kilograms of CO2e per kilogram of hydrogen, the energy percentage is 2 percent; and
(iv) Less than 0.45 kilograms of CO2e per kilogram of hydrogen, the energy percentage is 6 percent.
(2) Designed and reasonably expected to produce. Hydrogen that a facility is designed and reasonably expected to produce means hydrogen produced through a process or processes that result in the lifecycle GHG emissions rate specified in the annual verification report described in paragraph (e)(2) of this section for the taxable year in which the election is made. In the case of a facility that is designed and reasonably expected to produce hydrogen through multiple processes, the lifecycle GHG emissions rate must be determined using the weighted average of the lifecycle GHG emissions rates of all hydrogen production processes.
(d) Time and manner of making the election —(1) In general. To make an election under section 48(a)(15)(C)(ii)(II), a taxpayer must claim the section 48 credit with respect to a specified clean hydrogen production facility on a completed Form 3468, Investment Credit, or any successor form(s), and file the form with the taxpayer's Federal income tax return or information return for the taxable year in which the specified clean hydrogen production facility is placed in service. The taxpayer must also attach a statement to its Form 3468, or any successor form(s), filed with its Federal income tax return or information return that includes the information required by the instructions to Form 3468, or any successor form(s), for each specified clean hydrogen production facility subject to an election. A separate election must be made for each specified clean hydrogen production facility that meets the requirements provided in section 48(a)(15) to treat the qualified property that is part of the facility as energy property. If any taxpayer owning an interest in a specified clean hydrogen production facility makes an election under section 48(a)(15)(C)(ii)(II) with respect to the specified clean hydrogen production facility, then that election is binding on all taxpayers that directly or indirectly own an interest in the specified clean hydrogen production facility.
(2) Special rule for partnerships and S corporations. In the case of a specified clean hydrogen production facility owned by a partnership or an S corporation, the election under section 48(a)(15)(C)(ii)(II) is made by the partnership or S corporation and is binding on all ultimate credit claimants (as defined in § 1.50-1(b)(3)(ii)). The partnership or S corporation must file a Form 3468, or any successor form(s), with its partnership or S corporation return for the taxable year in which the specified clean hydrogen production facility is placed in service to indicate that it is making the election, and attach a statement that includes all the information required by the instructions to Form 3468, or any successor form(s), for each specified clean hydrogen production facility subject to the election. The ultimate credit claimant must claim the section 48 credit on a completed Form 3468, or any successor form(s), and file such form on a timely filed (including extensions) Federal income tax return for the taxable year in which the ultimate credit claimant's distributive share or pro rata share of the section 48 credit is taken into account under section 706(a) of the Code or section 1366(a) of the Code, respectively. The partnership or S corporation making the election must provide the ultimate credit claimants with the necessary information to complete Form 3468, or any successor form(s), to claim the section 48 credit.
(3) Election irrevocable. The election to treat qualified property that is part of a specified clean hydrogen production facility as energy property is irrevocable.
(4) Election availability date. The election to treat qualified property that is part of a specified clean hydrogen production facility as energy property is available for property placed in service after December 31, 2022. In the case of any property placed in service after December 31, 2022, for which construction began before January 1, 2023, the election under section 48(a)(15)(C)(ii)(II) applies only to the extent of the basis of such property that is attributable to construction, reconstruction, or erection occurring after December 31, 2022.
(5) Beginning of construction safe harbor —(i) In general. A taxpayer may, in its discretion, make an irrevocable election effective for the remaining taxable years within the period described in paragraph (f)(3) of this section, to treat the latest version of 45VH2-GREET that was publicly available on the date when construction of the specified clean hydrogen facility began as the 45VH2-GREET Model. In the case of a facility owned by a taxpayer that began construction prior to December 26, 2023, such taxpayer may, in its discretion, make an irrevocable election effective for the remaining taxable years within the period described in paragraph (f)(3) of this section, to treat the first publicly-available version of 45VH2-GREET (that is, the version of 45VH2-GREET that was released in December 2023) as the 45VH2-GREET Model. For purposes of this paragraph (d)(5), in the case of a facility that is modified to produce qualified clean hydrogen under section 45V(d)(4) or a facility that is retrofitted in a manner that entitles the facility to a new placed in service date under § 1.45V-6(b), the date when construction of the facility began is the date when construction of such modification or retrofit began. An election under this paragraph (d)(5)(i) relates to the version of 45VH2-GREET and does not alter any other rules provided in this section.
(ii) Time and manner of making election —(A) In general. The taxpayer makes the election described in paragraph (d)(5)(i) of this section with respect to a specified clean hydrogen production facility by attaching a statement to the Form 3468 or any successor form(s). The taxpayer must make the election by no later than the due date for filing its Federal income tax return or information return (including extensions) for the taxable period in which such facility is placed in service.
(B) Special rule for facilities placed in service prior to January 1, 2024. In the case of a taxpayer that places in service a specified clean hydrogen production facility prior to January 1, 2024, the taxpayer must make the election described in paragraph (d)(5)(i) of this section by no later than the period of limitation on filing a claim for credit or refund under section 6511(a) for the taxable period in which such facility is placed in service.
(6) Provisional emissions rate —(i) In general. A taxpayer files a petition with the Secretary for a provisional emissions rate (PER) by following the procedures stated in § 1.45V-4(c)(3) through (5), except, in lieu of attaching the PER petition to the Form 7210 in the first taxable year of production as specified in § 1.45V-4(c)(3), the taxpayer must attach the PER petition to the Form 3468, or a successor form(s), attached to the taxpayer's Federal income tax return for the taxable year in which the specified clean hydrogen production facility is originally placed in service. A taxpayer may use such PER to calculate the amount of the section 48 credit with respect to a specified clean hydrogen production facility, provided—
(A) The lifecycle GHG emissions rate of the hydrogen produced at the specified clean hydrogen production facility has not been determined (for purposes of section 45V(c)(2)(C)) under the 45VH2-GREET Model;
(B) There are no material changes to the information about the taxpayer's hydrogen production process from the information provided to the DOE to obtain an emissions value pursuant to § 1.45V-4(c)(5); and
(C) All other requirements of section 48(a)(15) are met.
(ii) Material change. For purposes of paragraph (d)(6)(i)(B), a material change means any change that would cause a qualified verifier (as defined in § 1.45V-5(h)) to be unable to complete a verification under paragraph (e) of this section.
(iii) Subsequent inclusion safe harbor —(A) In general. The taxpayer may, in its discretion, make an irrevocable election, effective for the remaining taxable years within the period described in paragraph (f)(3) of this section, to treat the first version of 45VH2-GREET that includes the taxpayer's specified clean hydrogen production facility's hydrogen production pathway, as described in § 1.45V-4(c)(2)(i), as the 45VH2-GREET Model.
(B) Time and manner of making election. The taxpayer makes the election described in paragraph (d)(6)(iii) of this section with respect to a specified clean hydrogen production facility by attaching a statement to the Form 3468 or any successor form(s). The taxpayer must make the election by no later than the due date for filing its Federal income tax return or information return (including extensions) for the taxable period in which such facility is placed in service.
(C) Special rule for facilities placed in service prior to January 1, 2024. In the case of a taxpayer that places in service a specified clean hydrogen production facility prior to January 1, 2024, the taxpayer must make the election described in paragraph (d)(6)(iii)(A) of this section by no later than the close of the period of limitation for filing a claim for credit or refund under section 6511(a) for the taxable period in which such facility is placed in service.
(iv) Special rule for facilities that receive an emissions value prior to the beginning of construction. Notwithstanding the requirement of paragraph (d)(6)(i)(A) of this section, a taxpayer who received an emissions value from the DOE with respect to a specified clean hydrogen production facility (pursuant to § 1.45V-4(c)(5)) before the date when construction of the facility began, may, in its discretion, continue to use the PER determined by the Secretary and the associated emissions value to calculate the lifecycle GHG emissions rate of the hydrogen produced at the specified clean hydrogen production facility for the remainder of the period described in paragraph (f)(3) of this section, provided that the taxpayer continues to satisfy the requirements of paragraphs (d)(6)(i)(B) and (C) of this section.
(v) Not an examination of books and records. The Secretary's PER determination is not an examination or inspection of books of account for purposes of section 7605(b) of the Code and does not preclude or impede the IRS (under section 7605(b) or any administrative provisions adopted by the IRS) from later examining a return or inspecting books or records with respect to any taxable year for which the section 48 credit is claimed. For example, the annual verification report submitted under section 48(a)(15)(C)(iii) and paragraph (e)(2) of this section and any information, representations, or other data provided to the DOE in support of the request for an emissions value are still subject to examination. Further, a PER determination does not signify that the IRS has determined that the requirements of section 48(a)(15), including the cross-references to section 45V, have been satisfied for any taxable year.
(e) Third-party verification —(1) In general. In the case of a taxpayer that makes an election under section 48(a)(15)(C)(ii)(II) to treat any qualified property that is part of a specified clean hydrogen production facility as energy property for purposes of the section 48 credit, the taxpayer must obtain an annual verification report for the taxable year in which the election under section 48(a)(15)(C)(ii)(II) is made for the facility and for each taxable year thereafter during the recapture period specified in paragraph (f)(3) of this section. The taxpayer must also submit the annual verification report as an attachment to the Form 3468, or any successor form(s), for the taxable year in which the election under section 48(a)(15)(C)(ii)(II) is made for the facility.
(2) Annual verification report —(i) In general. For purposes of paragraph (e)(1) of this section, the annual verification report must be signed under penalties of perjury by a qualified verifier (as defined in § 1.45V-5(h)) and contain an attestation providing all of the following—
(A) The information specified in § 1.45V-5(b) and (d) through (h);
(B) A statement attesting to the lifecycle GHG emissions rate of the hydrogen produced through a process (determined under section 45V(c) and § 1.45V-4), or the weighted average of the lifecycle GHG emissions rate of the hydrogen produced through processes, by which all hydrogen was produced at the specified clean hydrogen production facility for the taxable year to which the annual verification report relates and that the operation, during such taxable year, of the specified clean hydrogen production facility, and any qualifying energy attribute certificates applied pursuant to § 1.45V-4(d) for the purpose of accounting for such facility's emissions, are accurately reflected in the data that the taxpayer entered into the 45VH2-GREET Model (as defined in § 1.45V-1(a)(9)(ii)) (or that the taxpayer provided to the Department of Energy (DOE) in support of the taxpayer's request for an emissions value), to determine the lifecycle GHG emissions rate of the hydrogen undergoing verification; and
(C) A statement attesting that the facility produced hydrogen through a process or processes that results in a lifecycle GHG emissions rate that is consistent with, or lower than, the lifecycle GHG emissions rate of the hydrogen that such facility was designed and expected to produce.
(ii) Inconsistent lifecycle GHG emissions. In the event the facility produces hydrogen through a process (or processes) that results in a lifecycle GHG emissions rate that is greater than the lifecycle GHG emissions rate that such facility was designed and expected to produce (and thus the qualified verifier cannot provide the attestation specified in paragraph (e)(2)(i)(C) of this section), resulting in a reduced energy percentage under section 48(a)(15)(A)(ii) with respect to such facility, an emissions tier recapture event under paragraph (f)(2) of this section will occur.
(iii) Designed and expected to produce. Hydrogen that the facility was designed and expected to produce means hydrogen specified in paragraph (c)(2) of this section.
(iv) Timely annual verification report. The annual verification report must be signed and dated by the qualified verifier no later than the due date, including extensions, of the Federal income tax return for the taxable year in which the hydrogen undergoing verification was produced.
(v) Records retention. In addition to the recordkeeping requirements set forth in paragraph (g) of this section, the taxpayer must retain the annual verification report for at least six years after the due date, with extensions, for filing the Federal income tax return for the taxable year in which the hydrogen undergoing verification was produced.
(f) Recapture —(1) In general. Pursuant to of section 48(a)(15)(E), in any taxable year of the recapture period specified in paragraph (f)(3) of this section in which an emissions tier recapture event (as defined in paragraph (f)(2) of this section) occurs, the tax imposed on the taxpayer under chapter 1 of the Code for the taxable year of the emissions tier recapture event is increased by the recapture amount specified in paragraph (f)(4) of this section.
(2) Emissions tier recapture event. For purposes of paragraph (f)(1) of this section, an emissions tier recapture event is any of the following occurrences—
(i) The taxpayer fails to obtain an annual verification report by the deadline for filing its Federal income tax return or information return (including extensions) for any taxable year in which an annual verification report is required under paragraph (e)(1) of this section;
(ii) The specified clean hydrogen production facility actually produced hydrogen through a process (or processes) that results in a lifecycle GHG emissions rate that can only support a lower energy percentage than the energy percentage used to calculate the amount of the section 48 credit for the facility for the taxable year in which the facility is placed in service; or
(iii) The specified clean hydrogen production facility actually produced hydrogen through a process (or processes) that results in a lifecycle GHG emissions rate of greater than 4 kilograms of CO2e per kilogram of hydrogen.
(3) Recapture period. For purposes of paragraph (f) of this section, the recapture period begins on the first day of the taxable year after the taxable year in which the facility was placed in service and ends on the close of the fifth taxable year following the close of the taxable year in which the facility was placed in service.
(4) Recapture amount —(i) In general. In the case of an emissions tier recapture event under paragraph (f)(2) of this section, the recapture amount for the taxable year in which the emissions tier recapture event occurred is equal to 20 percent of the excess of the section 48 credit allowed to the taxpayer for the specified clean hydrogen production facility for the taxable year in which the facility was placed in service, over the section 48 credit that would have been allowed to the taxpayer for the facility if the taxpayer had used the energy percentage supported by the actual production to calculate the amount of the section 48 credit.
(ii) Carrybacks and carryovers. In the case of any emissions tier recapture event described in paragraph (f)(2) of this section, the carrybacks and carryovers under section 39 must be adjusted by reason of the emissions tier recapture event.
(iii) Recapture amount in case of recapture events under paragraph (f)(2)(i) or (iii) of this section. For purposes of paragraph (f)(4)(i) of this section, in the case of an emissions tier recapture event under paragraph (f)(2)(i) or (iii) of this section, the amount of the section 48 credit that would have been allowed to the taxpayer for the specified clean hydrogen production facility if the taxpayer had used the energy percentage supported by the actual production is zero. Accordingly, the recapture amount in the taxable year of an emissions tier recapture event under paragraph (f)(2)(i) or (iii) of this section, is 20 percent of the section 48 credit allowed to the taxpayer for such specified clean hydrogen production facility.
(5) Example. The following example illustrates the application of paragraphs (f)(1) through (4) of this section.
(i) Facts. On June 1, 2024, Taxpayer, a calendar-year taxpayer, originally places in service Facility X, a specified clean hydrogen production facility. At such time, Taxpayer's basis in qualified property that is part of Facility X is $100,000,000. In the taxable year in which Facility X was originally placed in service (taxable year 2024), Facility X produces qualified clean hydrogen through a process that results in a lifecycle GHG emissions rate of 0.44kg of CO2e per kilogram of hydrogen. Taxpayer submits with its 2024 Federal income tax return an annual verification report attesting that, for the taxable year 2024, Facility X produced hydrogen through a process that resulted in a lifecycle GHG emissions rate of 0.44kg of CO2e per kilogram of hydrogen, which is consistent with the lifecycle GHG emissions rate of the hydrogen that the facility was designed and expected to produce. Taxpayer makes a valid election under section 48(a)(15)(C)(ii)(II) with respect to Facility X on its Federal income tax return for the taxable year 2024. In the first year of the recapture period (taxable year 2025), Taxpayer fails to obtain an annual verification report by the deadline (including extensions) for filing its 2025 Federal income tax return. In the second year of the recapture period (taxable year 2026), Facility X produces qualified clean hydrogen through a process that results in a lifecycle GHG emissions rate of 1.4kg of CO2e per kilogram of hydrogen and obtains an annual verification report attesting to such lifecycle GHG emissions rate. In the third, fourth, and fifth years of the recapture period (taxable years 2027, 2028, and 2029), Facility X produces qualified clean hydrogen through a process that results in a lifecycle GHG emissions rate of 0.44kg of CO2e per kilogram of hydrogen and obtains an annual verification report attesting to such lifecycle GHG emissions rate, and attesting that such lifecycle GHG emissions rate is consistent with the lifecycle GHG emissions rate of the hydrogen that the facility was designed and expected to produce, by the deadline (including extensions) for filing its 2027, 2028, and 2029 Federal income tax returns, respectively.
(ii) Analysis. Facility X is designed and reasonably expected to produce hydrogen through a process that results in a lifecycle GHG emissions rate of 0.44kg of CO2e per kilogram of hydrogen, which is the rate specified in Taxpayer's annual verification report submitted with Taxpayer's Federal income tax return for the taxable year in which the election under section 48(a)(15)(C)(ii)(II) with respect to Facility X was made. Under paragraph (c)(1)(iv) of this section, Facility X's energy percentage is therefore 6 percent. For the taxable year 2024, the year in which Taxpayer places in service Facility X, Taxpayer claims a section 48 credit for its basis in qualified property that is part of Facility X in the amount of $6,000,000 (6 percent of $100,000,000). In taxable year 2025 there is an emissions tier recapture event under paragraph (f)(2)(i) of this section because Taxpayer failed to obtain an annual verification report. Under paragraph (f)(4)(i) of this section, the amount of the section 48 credit recaptured in 2025 is $1,200,000. This reflects 20 percent of the section 48 credit allowed ($6,000,000) for Facility X. In taxable year 2026, there is an emissions tier recapture event under paragraph (f)(2)(ii) of this section because Facility X produced hydrogen through a process that resulted in a lifecycle GHG emissions rate that could only support an energy percentage of 2 percent, which is lower than the energy percentage used to calculate the amount of the section 48 credit for Facility X. Under paragraph (f)(4)(i) of this section, the amount of the section 48 credit recaptured in 2026 is $800,000. This reflects 20 percent of the difference between the amount of the section 48 credit allowed ($6,000,000) and the amount of the section 48 credit that would have been allowed for Facility X if Taxpayer had used the energy percentage supported by the actual production ($2,000,000). There is no emissions tier recapture event in taxable years 2027, 2028, or 2029 because, in those years, Facility X produced hydrogen through a process that resulted in a lifecycle GHG emissions rate that was consistent with the lifecycle GHG emissions rate of the hydrogen that Facility X was designed and expected to produce, and Taxpayer obtained an annual verification report attesting to such by the deadline (with extensions) for filing its Federal income tax return for each of those taxable years.
(6) Coordination with sections 50(a) and 48(a)(10)(C) of the Code —(i) In general. In each taxable year of the recapture period specified in paragraph (f)(3) of this section for any credit allowed under section 48 with respect to a specified clean hydrogen production facility, the recapture rules, if applicable, apply in the following order:
(A) Section 50(a);
(B) Section 48(a)(10)(C), as provided in § 1.48-13; and
(C) Section 48(a)(15)(E).
(ii) The following examples illustrate the application of paragraph (f)(6) of this section.
(A) Example 1 —( 1 ) Facts. The facts are the same as in paragraph (f)(5)(i) of this section ( Example ), except that, in addition to failing to obtain an annual verification report by the deadline (including extensions) for filing its 2025 Federal income tax return, on August 1, 2025, Taxpayer disposes of Facility X. Taxpayer has not been allowed any other credits under section 38.
( 2 ) Analysis. For taxable year 2025, under section 50(a)(1)(B)(ii), because the period of time between when Facility X was placed in service is more than 1, but less than 2 full years, the applicable recapture percentage is 80 percent. Taxpayer has an increase in tax for taxable year 2025 under section 50(a) of $4,800,000 ($6,000,000 aggregate decrease in credit allowed multiplied by 0.80). Under paragraph (f)(6) of this section, because the credit was recaptured under section 50(a), no further amounts would be recaptured under either section 48(a)(10)(C) (had Taxpayer claimed the increased credit amount under section 48(a)(9)) or section 48(a)(15)(E) (on account of Taxpayer's failure to obtain an annual verification report).
(B) Example 2 —( 1 ) Facts. The facts are the same as in paragraph (f)(5)(i) of this section ( Example ), except that, in taxable year 2025, Facility X produces qualified clean hydrogen through a process that results in a lifecycle GHG emissions rate of 1.4 kilograms of CO2e per kilogram of hydrogen and obtains an annual verification report attesting to such lifecycle GHG emissions rate. On August 1, 2026, Taxpayer disposes of Facility X. Taxpayer has not been allowed any other credits under section 38.
( 2 ) Analysis. In taxable year 2025, there is an emissions tier recapture event under paragraph (f)(2)(ii) of this section because Facility X produced hydrogen through a process that resulted in a lifecycle GHG emissions rate that could only support an energy percentage of 2 percent, which is lower than the energy percentage used to calculate the amount of the section 48 credit for Facility X. Under paragraph (f)(4)(i) of this section, the amount of the section 48 credit recaptured in 2025 is $800,000. In taxable year 2026, under section 50(a)(1)(B)(iii), because the period of time between when Facility X was placed in service is more than 2, but less than 3 full years, the applicable recapture percentage is 60 percent. Taxpayer has an increase in tax under section 50(a) of $3,120,000 ($5,200,000 aggregate decrease in credit allowed ($6,000,000 credit allowed minus $800,000 amount recaptured under paragraph (f)(2)(ii) of this section in taxable year 2025) multiplied by 0.60).
(g) Recordkeeping. Consistent with section 6001 of the Code, a taxpayer making the election under section 48(a)(15)(C)(ii)(II) with respect to a specified clean hydrogen production facility must maintain and preserve records sufficient to establish the amount of the section 48 credit claimed by the taxpayer. At a minimum, those records include the annual verification report required under paragraph (e)(2) of this section, records to substantiate the information required to be included in the annual verification report, records establishing that the facility meets the definition of a specified clean hydrogen production facility under section 48(a)(15)(C) and paragraph (b) of this section, records of past credit claims under section 45Q by any taxpayer with respect to carbon capture equipment included at the facility, and records establishing the date the specified clean hydrogen production facility was placed in service. If the increased section 48 credit amount was allowed under section 48(a)(9), then the taxpayer must also maintain records in accordance with § 1.45-12. Taxpayers must also retain all raw data used for submission of a request for an emissions value to the DOE for at least six years after the due date (including extensions) for filing the Federal income tax return or information return to which the provisional emissions rate (PER) (as defined in § 1.45V-4(c)(1)) petition is ultimately attached.
(h) Applicability date. This section applies to taxable years beginning after December 26, 2023.
§§ 1.48C-1-1.48C-2   [Reserved]
§ 1.48C-3   Rules relating to the increased credit amount for prevailing wage and apprenticeship.
(a) In general. If any qualifying advanced energy project (as defined in section 48C(c)(1)(A)) satisfies the prevailing wage requirements of section 45(b)(7) and § 1.45-7, the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12, with respect to the re-equipping, expansion, or establishment of a qualifying advanced energy project within the meaning of section 48C, the qualifying advanced energy project credit determined under section 48C(a) for any taxable year with respect to credits allocated pursuant to section 48C(e) is an amount equal to 30 percent of the qualified investment for the taxable year. For purposes of this section, the term re-equipping, expansion, or establishment means those activities described in §§ 1.45-7(d)(3) and 1.45-8(g)(1) that are performed with respect to a qualifying advanced energy project within the meaning of section 48C before such project is placed in service.
(b) Applicability date. This section applies to qualifying advanced energy projects placed in service in taxable years ending after June 25, 2024, and the re-equipping, expansion, or establishment of which begins after June 25, 2024. Taxpayers may apply this section to qualifying advanced energy projects placed in service in taxable years ending on or before June 25, 2024, and qualifying advanced energy projects placed in service in taxable years ending after June 25, 2024, the re-equipping, expansion, or establishment of which begins before June 25, 2024, provided that taxpayers follow this section in its entirety and in a consistent manner.
§ 1.48D-0.   Table of contents.
This section lists the table of contents for §§ 1.48D-1 through 1.48D-6.
(a) Overview.
(b) Determination of credit.
(c) Coordination with section 47.
(1) In general.
(2) Example.
(d) Applicability date.
(a) In general.
(b) Applicable transaction.
(c) Basis.
(1) In general.
(2) Transition rule.
(d) Beginning of construction.
(e) Eligible taxpayer.
(f) Foreign entities.
(1) Foreign entity.
(2) Foreign entity of concern.
(g) Manufacturing of semiconductors.
(h) Manufacturing of semiconductor manufacturing equipment.
(i) Placed in service.
(j) Qualified investment.
(1) In general.
(2) Special rules for certain passthrough entities.
(i) Partnership.
(ii) S corporation.
(iii) Estate or trust.
(3) Qualified progress expenditures election.
(i) In general.
(ii) Special rules for certain passthrough entities.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(k) Section 48D credit.
(l) Section 48D regulations.
(m) Semiconductor.
(n) Semiconductor manufacturing.
(1) Semiconductor wafer production.
(2) Semiconductor fabrication.
(3) Semiconductor packaging.
(4) Assembly.
(5) Testing.
(6) Advanced packaging.
(o) Semiconductor manufacturing equipment.
(p) Statutory references.
(1) Chapter 1.
(2) Code.
(3) Subtitle A.
(q) Applicability date.
(a) In general.
(b) Qualified property.
(c) Tangible depreciable property.
(1) In general.
(2) Exception.
(3) Buildings or portions of a building not excluded by section 48D(b)(2)(B)(ii).
(d) Constructed, reconstructed, or erected by the taxpayer.
(e) Original use.
(1) In general.
(2) Treatment of inventory.
(f) Part of an advanced manufacturing facility.
(1) In general.
(2) Property that is not located or co-located at an advanced manufacturing facility or on a contiguous piece of land to the advanced manufacturing facility.
(g) Integral to the operation of an advanced manufacturing facility.
(1) In general.
(2) Vertically integrated manufacturers.
(3) Specific examples of integral property.
(4) Research or storage facilities.
(5) Examples.
(i) Example 1.
(ii) Example 2.
(h) Applicability date.
(a) In general.
(b) Advanced manufacturing facility.
(c) Primary purpose.
(1) In general.
(2) No primary purpose.
(3) Examples.
(i) Example 1: Primary purpose; in general.
(ii) Example 2: Primary purpose; semiconductor wafer production.
(iii) Example 3: Primary purpose; vertically integrated manufacturer.
(iv) Example 4: No primary purpose; vertically integrated manufacturer.
(d) Applicability date.
(a) Termination of credit.
(1) In general.
(2) Property.
(3) Single advanced manufacturing facility project.
(i) In general.
(ii) Related taxpayers.
(A) Definition.
(B) Related taxpayer rule.
(iii) Example.
(iv) Timing of single advanced manufacturing facility project determination.
(v) Disaggregation.
(vi) Example.
(b) Beginning of construction.
(1) In general.
(2) Continuity requirement.
(c) Physical work test.
(1) In general.
(2) Physical work of significant nature.
(i) In general.
(ii) Exceptions.
(d) Five percent safe harbor.
(1) In general.
(2) Costs.
(3) Cost overruns.
(i) Single advanced manufacturing facility project.
(ii) Example.
(iii) Single property.
(iv) Example.
(e) Continuity requirement.
(1) In general.
(2) Continuous construction.
(3) Continuous efforts.
(4) Excusable disruptions to continuous construction and continuous efforts tests.
(i) In general.
(ii) Effect of excusable disruptions on continuity safe harbor.
(iii) Non-exclusive list of construction disruptions.
(5) Timing of excusable disruption determination.
(6) Continuity safe harbor.
(i) In general.
(ii) Example.
(f) Applicability date.
(a) Elective payment election.
(1) In general.
(2) Partnerships and S corporations.
(3) Irrevocable.
(b) Pre-filing registration required.
(1) In general.
(2) Manner of registration.
(3) Members of a consolidated group.
(4) Timing of pre-filing registration.
(5) Each qualified investment in an advanced manufacturing facility must have its own registration number.
(6) Information required to complete the pre-filing registration process.
(7) Registration number.
(i) In general.
(ii) Registration number is only valid for one year.
(iii) Renewing registration numbers.
(iv) Amendment of previously submitted registration information if a change occurs before the registration number is used.
(v) Registration number is required to be reported on the return for the taxable year of the elective payment election.
(c) Time and manner of election.
(1) In general.
(2) Limitations.
(d) Special rules for partnerships and S corporations.
(1) In general.
(2) Election.
(i) Time and manner of election.
(ii) Effect of election.
(iii) Coordination with sections 705 and 1366.
(iv) Partner's distributive share.
(A) In general.
(B) Interim rule.
(C) Partnership requirements.
(v) S corporation shareholder's pro-rata share.
(vi) Timing of tax exempt income.
(3) Disregarded entity ownership.
(4) Electing partnerships in tiered structures.
(i) In general.
(ii) Electing partnerships in tiered structures; interim rule.
(5) Character of tax exempt income.
(6) Determination of amount of the section 48D credit.
(i) In general.
(ii) Application of section 49 at-risk rules to determination of section 48D credit for partnerships and S corporations.
(iii) Changes in at-risk amounts under section 49 at partner or shareholder level.
(7) Partnerships subject to subchapter C of chapter 63 of the Code.
(8) Example.
(e) Denial of double benefit.
(1) In general.
(2) Application of the denial of double benefit rule.
(3) Use of the section 48D credit for other purposes.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(iii) Example 3.
(iv) Example 4.
(f) Excessive payment.
(1) In general.
(2) Reasonable cause.
(3) Excessive payment defined.
(4) Example.
(g) Basis reduction and recapture.
(1) In general.
(2) Basis adjustment.
(i) In general.
(ii) Basis adjustment by partnership or S corporation.
(iii) Basis adjustment of partners and S corporation shareholders.
(3) Recapture reporting.
(h) Applicability dates.
(1) In general.
(2) Prior taxable years.
§ 1.48D-1   Advanced manufacturing investment credit determined.
(a) Overview. For purposes of section 46 of the Code, the amount of the advanced manufacturing investment credit under section 48D of the Code determined for any taxable year is the amount determined under section 48D and this section and §§ 1.48D-2 through 1.48D-6 and 1.50-2 (the section 48D regulations) (subject to any applicable provisions of the Code that may limit the amount determined under section 48D), for such taxable year with respect to any advanced manufacturing facility of an eligible taxpayer. Paragraph (b) of this section provides the general rules for determining the amount of a taxpayer's section 48D credit for a taxable year. Paragraph (c) of this section provides rules coordinating the section 48D credit with the rules of section 47 of the Code (relating to the rehabilitation credit). Section 1.48D-2 provides definitions that apply for purposes of section 48D and the section 48D regulations. Section 1.48D-3 provides rules relating to the definition of qualified property for purposes of the section 48D credit. Section 1.48D-4 provides rules relating to the definition of an advanced manufacturing facility of an eligible taxpayer for purposes of the section 48D credit. Section 1.48D-5 provides rules regarding the beginning of construction of property for purposes of the section 48D credit. Section 1.48D-6 provides rules related to the elective payment election of the section 48D credit. See § 1.50-2 for additional rules under section 50(a)(3) and (6) of the Code relating to applicable transactions that result in the recapture of section 48D credits.
(b) Determination of credit. Subject to any applicable sections of the Code that may limit the credit determined under section 48D, the section 48D credit for any taxable year of an eligible taxpayer with respect to any advanced manufacturing facility is an amount equal to 25 percent of the taxpayer's qualified investment for the taxable year with respect to that advanced manufacturing facility. A section 48D credit is available only with respect to qualified property that a taxpayer places in service after December 31, 2022, and, for any qualified property the construction of which began prior to January 1, 2023, only to the extent of the basis of that property attributable to the construction, reconstruction, or erection of that property occurring after August 9, 2022. Under section 48D(e), no section 48D credit is allowed to a taxpayer for placing qualified property in service in any taxable year if the beginning of construction of that qualified property as determined under § 1.48D-5 begins after December 31, 2026 (the date specified in section 48D(e)).
(c) Coordination with section 47 —(1) In general. The qualified investment with respect to any advanced manufacturing facility of an eligible taxpayer for any taxable year does not include that portion of the basis of any property that is attributable to qualified rehabilitation expenditures, as defined in section 47(c)(2) and § 1.48-12(c), with respect to a qualified rehabilitated building, as defined in section 47(c)(1) and § 1.48-12(b).
(2) Example: Coordination with section 47. X Corp, a calendar-year C corporation, owns Building A, a certified historic structure. X Corp's adjusted basis in Building A is $100,000. Between August 1, 2024, and October 31, 2024, X Corp incurs $1 million to reconstruct, within the meaning of section 48D(b)(2)(A)(iii)(I) and § 1.48-12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a qualified rehabilitated building, in service on November 15, 2024. Of the $1 million of capitalized expenditures incurred to reconstruct Building A (all of which would meet the definition of qualified investment), $250,000 also meets the definition of qualified rehabilitation expenditures (QREs). As such, X Corp's qualified investment in Building A is $750,000 ($1 million−$250,000). X Corp's qualified investment in Building A remains $750,000 even if X Corp does not determine a rehabilitation credit with respect to the $250,000 of QREs.
(d) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
§ 1.48D-2   Definitions.
(a) In general. The definitions in paragraphs (b) through (p) of this section apply for purposes of sections 48D and 50 of the Code and § 1.48D-1, this section and §§ 1.48D-3 through 1.48D-6 and 1.50-2 (the section 48D regulations).
(b) Applicable transaction. The term applicable transaction has the meaning provided in section 50(a)(6) and § 1.50-2.
(c) Basis —(1) In general. With respect to any qualified property, the term basis has the same meaning as provided in § 1.46-3(c). Thus, the basis of the qualified property generally is determined in accordance with the general rules of subtitle A for determining the basis of property (see subtitle A, subchapter O, part II of the Code). As such, the basis of qualified property would generally be the cost of that qualified property ( see section 1012 of the Code) unreduced by any adjustments to basis and would include all items properly included by the taxpayer in the depreciable basis of the qualified property.
(2) Transition rule. For property the construction of which began prior to January 1, 2023, and is placed in service after December 31, 2022, the portion of the basis of such property attributable to construction, reconstruction, or erection after August 9, 2022, must be allocated using any reasonable method, including by applying the principles of section 461 of the Code. Rules similar to the rules in §§ 1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are applicable.
(d) Beginning of construction. The term beginning of construction has the meaning provided in § 1.48D-5.
(e) Eligible taxpayer. The term eligible taxpayer means any taxpayer that—
(1) Is not a foreign entity of concern; and
(2) Has not made an applicable transaction during the taxable year.
(f) Foreign entities —(1) Foreign entity. The term foreign entity has the same meaning as provided in 15 CFR 231.103.
(2) Foreign entity of concern. The term foreign entity of concern has the same meaning as provided in 15 CFR 231.104.
(g) Manufacturing of semiconductors. The term manufacturing of semiconductors and the term semiconductor manufacturing are synonymous.
(h) Manufacturing of semiconductor manufacturing equipment. The term manufacturing of semiconductor manufacturing equipment means the physical production (in a manufacturing facility) of semiconductor manufacturing equipment, which is used by an advanced manufacturing facility engaged in the manufacturing of semiconductors as defined in paragraph (g) of this section.
(i) Placed in service. The term placed in service has the same meaning as provided in § 1.46-3(d).
(j) Qualified investment —(1) In general. Except as provided in paragraph (j)(2) and (3) of this section, the term qualified investment with respect to an advanced manufacturing facility means, for any taxable year, the basis of any qualified property that is part of an advanced manufacturing facility and placed in service by the taxpayer during the taxable year.
(2) Special rules for certain passthrough entities. In the case of any qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service by an entity described in paragraphs (j)(2)(i) through (iii) of this section during a taxable year, the rules of this paragraph (j)(2) apply to determine the qualified investment for the taxable year with respect to the advanced manufacturing facility.
(i) Partnership. In the case of a partnership that places in service qualified property that is part of an advanced manufacturing facility of an eligible taxpayer, each partner in the partnership must take into account separately the partner's share of the basis of the qualified property placed in service by the partnership during the taxable year as provided in § 1.46-3(f).
(ii) S corporation. The basis of qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service during the taxable year by an S corporation (as defined in section 1361(a) of the Code) must be apportioned pro rata among the S corporation's shareholders on the last day of the S corporation's taxable year as provided in section 1366.
(iii) Estate or trust. The basis of qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service during the taxable year by an estate or trust must be apportioned among the estate or trust and its beneficiaries on the basis of the income of the estate or trust allocable to each for that taxable year.
(3) Qualified progress expenditures election —(i) In general. A taxpayer may elect, as provided in § 1.46-5, to increase the qualified investment with respect to any advanced manufacturing facility of an eligible taxpayer for the taxable year, by any qualified progress expenditures made after August 9, 2022.
(ii) Special rules for certain passthrough entities. Notwithstanding the provisions of § 1.46-5, relating to elections of progress expenditure property being constructed by or for a partnership or S corporation, the rules of § 1.46-5(o)(1) and (p) do not apply to prohibit a partnership or S corporation from making a progress expenditure election under § 1.46-5 with respect to qualified property if the partnership or S corporation intends to make an elective payment election under section 48D(d) and § 1.48D-6 with respect to a section 48D credit determined with respect to such qualified property.
(4) Examples. The provisions of this paragraph (j) are illustrated by the following examples.
(i) Example 1: Advanced manufacturing investment credit: qualified investment in general. On November 1, 2024, X, a calendar-year C corporation, places in service qualified property with a basis of $200,000, and on December 1, 2024, X places in service qualified property with a basis of $300,000. X's qualified investment for the taxable year is $500,000 ($200,000 + $300,000).
(ii) Example 2: Advanced manufacturing investment credit: qualified investment for partnerships. A, B, C, and D, all calendar-year C corporations, are partners in the ABCD partnership. Partners A, B, C, and D share partnership profits equally. On November 1, 2024, the ABCD partnership placed in service qualified property with a basis of $1 million. Each partner's share of the basis of the qualified property, as determined in § 1.46-3(f)(2), is $250,000 ($1m × 0.25) and each partner's qualified investment is $250,000.
(k) Section 48D credit. The term section 48D credit means the advanced manufacturing investment credit determined under section 48D and the section 48D regulations.
(l) Section 48D regulations. The term section 48D regulations means §§ 1.48D-1 through 1.48D-6 and 1.50-2.
(m) Semiconductor. The term semiconductor means, consistent with 15 CFR 231.115, an integrated electronic device or system most commonly manufactured using materials such as, but not limited to, silicon, silicon carbide, or III-V compounds, and processes such as, but not limited to, lithography, deposition, and etching. Such devices and systems include, but are not limited to, analog and digital electronics, power electronics, and photonics, for memory, processing, sensing, actuation, and communications applications.
(n) Semiconductor manufacturing. The term semiconductor manufacturing and the term manufacturing of semiconductors are synonymous and mean, consistent with 15 CFR 231.116, semiconductor wafer production, semiconductor fabrication, or semiconductor packaging. The following terms have the following meanings in connection with semiconductor wafer production, semiconductor fabrication, and semiconductor packaging for purposes of section 48D and the section 48D regulations:
(1) Semiconductor wafer production includes the processes of growing single-crystal ingots and boules, wafer slicing, etching and polishing, bonding, cleaning, epitaxial deposition, and metrology.
(2) Semiconductor fabrication includes the process of forming devices such as transistors, poly capacitors, non-metal resistors, and diodes, as well as interconnects between such devices, on a wafer of semiconductor material.
(3) Semiconductor packaging means the process of enclosing a semiconductor in a protective container (package) and providing external power and signal connectivity for the assembled integrated circuit and includes the process of assembly and testing of semiconductors and advanced packaging of semiconductors.
(4) Assembly includes, but is not limited to, wafer-dicing, die-bonding, wire bonding, solder bumping, and encapsulation.
(5) Testing includes, but is not limited to, probing, screening, and burn-in work.
(6) Advanced packaging means a subset of packaging technologies that uses novel techniques and materials to increase the performance, power, modularity, and/or durability of an integrated circuit. Advanced packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking, fan-out and fan-in, and embedded die/system-in-package (SiP).
(o) Semiconductor manufacturing equipment. The term semiconductor manufacturing equipment means the highly engineered and specialized equipment used in the manufacturing of semiconductors as defined in paragraph (g) of this section and the subsystems that enable or are incorporated into the manufacturing equipment. Specific examples of semiconductor manufacturing equipment and subsystems that enable semiconductor manufacturing equipment include but are not limited to:
(1) Deposition equipment, including, Chemical Vapor Deposition (CVD), Physical Vapor Deposition (PVD), Electrodeposition, and Atomic Layer Deposition (ALD);
(2) Etching equipment (wet etch, dry etch);
(3) Equipment for epitaxial growth of transistor features;
(4) Chemical-mechanical polishing equipment to planarize layers through the semiconductor fabrication process;
(5) Lithography equipment (steppers and scanners of various light wavelengths, such as deep UV, extreme ultraviolet (EUV), photoresist coating, and developer tracks);
(6) Equipment for producing ingots and boules, wafer growth equipment, wafer slicing equipment, wafer dicing equipment, and wire bonders;
(7) Inspection and measuring equipment, including scanning electron microscopes, atomic force microscopes, optical inspection systems, wafer probes and optical scatterometer, EDS (Energy Dispersive Spectroscopy);
(8) Certain metrology and inspection systems to measure critical dimensions of the integrated circuit features throughout the fabrication process, detection and measurement of defects on the wafers during the fabrication process;
(9) Ion implantation and diffusion/oxidation furnaces;
(10) Specialty glass components including EUV mirrors and optical pathways, lenses and mirrors used in inspection equipment and other fabrication processes, and lens assemblies for wafer defect inspection;
(11) Electrostatic chucks;
(12) High performance pumps;
(13) High purity quartz devices;
(14) Ultra-high vacuum chamber components; and
(15) Photomasks and light sources used in photolithography.
(p) Statutory references —(1) Chapter 1. The term chapter 1 means chapter 1 of the Code.
(2) Code. The term Code means the Internal Revenue Code.
(3) Subtitle A. The term subtitle A means subtitle A of the Code.
(q) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.