United States: IRS Notice 2016-31: Beginning Construction Under The PATH Act

On May 5, 2016, the IRS released Notice 2016-31 (the "Notice"), which clarifies the circumstances under which a taxpayer will be treated as having begun construction for purposes of qualifying for the production tax credit ("PTC") under section 45 of the Internal Revenue Code (the "Code").


On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act"),1 which extended the PTC for certain eligible facilities the construction of which begins before January 1, 2017, and in the specific case of wind facilities, the construction of which begins before January 1, 2020. In the case of wind facilities the construction of which begins after December 31, 2016 and before January 1, 2020, the PTC will be phased out (i.e., the PTC will be reduced by 20% if construction begins in 2017, 40% if construction begins in 2018 and 60% if construction begins in 2019). The PATH Act also extended the investment tax credit ("ITC") for solar energy facilities, the construction of which begins before January 1, 2022.

On April 15, 2013, the Internal Revenue Service (the "IRS") published Notice 2013-29,2 providing guidance on what it means to "begin construction" under the American Taxpayer Relief Act of 2012 (the "ATRA"), the original legislation that introduced the "begun construction" requirement.3 Under the ATRA, a taxpayer was required to begin construction of a qualified facility before January 1, 2014. (A copy of Notice 2013-29 can be found here.) Notice 2013-29 provided two alternative ways to demonstrate that construction had begun: (1) by beginning physical work of a significant nature before January 1, 2014 (the "physical work test") and (2) by paying or incurring at least 5% of the total cost of the eligible property before January 1, 2014 (the "5% safe harbor").4 Among other requirements, the physical work test requires that the taxpayer maintain a continuous program of construction and the 5% safe harbor requires that the taxpayer maintain continuous efforts to advance towards completion of the project, in each case after construction has begun (or, in the case of the 5% safe harbor, after 5% of the total costs have been paid or incurred).

On September 20, 2013, the IRS published Notice 2013-60 clarifying certain aspects of the guidance provided in Notice 2013-29.5 (A copy of Notice 2013-60 can be found here.) Specifically, Notice 2013-60: (1) provided a "safe harbor" in applying the "continuous efforts" and "continuous construction" requirements (collectively, the "continuity safe harbor"), (2) addressed the applicability of costs incurred under a master supply contract to the 5% safe harbor, and (3) clarified that a facility remained eligible even if transferred after construction had begun. On August 8, 2014, the IRS released Notice 2014-46 ("Notice 2014-46"), clarifying and modifying Notices 2013-29 and 2013-60.6 (A copy of Notice 2014-46 can be found here.) (Our prior Client Alerts on the ATRA, Notice 2013-29, Notice 2013-60 and Notice 2014-46 can be found here, here, here and here.)

On December 19, 2014, the Tax Increase Prevention Act of 2014 (the "TIPA") extended by one year, to January 1, 2015, the date by which construction of a qualified facility must begin.7 On March 30, 2015, the IRS released Notice 2015-25 ("Notice 2015-25"), extending by one year the continuity safe harbor described in Notice 2013-60. (A copy of Notice 2015-25 can be found here.) Under Notice 2015-25, if a taxpayer began construction on a facility before January 1, 2015, and places the facility in service before January 1, 2017, the facility will be considered to satisfy the continuity safe harbor regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility after December 31, 2014 and before January 1, 2017.

To address the latest extension of the begun construction requirement provided for in the PATH Act, the IRS has now released Notice 2016-31. The Notice (1) further extends and modifies the continuity safe harbor, (2) provides additional guidance regarding the application of the continuity safe harbor and the physical work test and (3) clarifies the application of the 5% safe harbor to retrofitted renewable energy facilities. The Notice also provides that unless otherwise specified, the guidance provided in Notice 2013-29, Notice 2013-60, Notice 2014-46 and Notice 2015-25 continues to apply, The Notice does not provide guidance with respect to the extension of the ITC for solar energy facilities. Separate guidance addressing the ITC for solar facilities is expected to follow.


The Notice extends the continuity safe harbor provided in Section 3.02 of Notice 2013-60 by providing that the continuity safe harbor will be satisfied as long as a taxpayer places a facility in service during a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began.8 To illustrate, the Notice provides that if construction begins on January 15, 2016 and the facility is placed in service by December 31, 2020, the continuity safe harbor will have been satisfied.

The Notice specifies that a taxpayer may not rely upon the physical work test and 5% safe harbor in alternating calendar years. The Notice provides the example that if a taxpayer performs physical work of a significant nature on a facility in 2015, and then pays or incurs five percent or more of the total cost of the facility in 2016, the continuity safe harbor will be applied beginning in 2015, not in 2016. The facility in this example will have to be placed in service no later than December 31, 2019 in order to satisfy the continuity safe harbor.

In addition, the Notice revises and expands the non-exclusive list of construction disruptions specified in Notice 2013-29 that will not be indicative of a taxpayer's failure to maintain a continuous program of construction or make continuous efforts towards completion of a facility.9 Specifically, the Notice includes as additional excusable disruptions (1) interconnection-related delays (e.g., those relating to the completion of construction on a new transmission line or necessary transmission upgrades to resolve grid congestion issues that may be associated with a project's planned interconnection) and (2) delays in the manufacture of custom components.10 In addition, with respect to delays in obtaining permits or licenses, the Notice includes as examples FERC, EPA, BLM and FAA licenses and permits,11 and with respect to permissible financing delays, the Notice removes the qualification that the financing delay be less than six months.12


In the Notice, the IRS reiterates that as provided in Section 3 of Notice 2014-46, the physical work test focuses on the nature of the work performed, not the amount of work or the cost. The Notice goes on to provide that if the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required under the physical work test.13

To illustrate physical work of a significant nature for different renewable energy facilities, the following non-exclusive examples are provided in the Notice14:

  1. Wind Facilities. The excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of concrete pads of the foundation.
  2. Hydropower Facilities. The excavation for or construction of a penstock, power house, or retaining wall structure.
  3. Biomass and Trash Facilities. The performance of site improvements (as opposed to site clearing), such as filling or compacting soil, or installing stack piling.
  4. Geothermal Facilities. Physical activities that are undertaken at a project site after a valid discovery.

The IRS also reiterates that as provided in Section 4.02(1) of Notice 2013-29, physical work of a significant nature does not include preliminary activities, even if the cost of those preliminary activities is properly included in the depreciable basis of the facility.

The Notice includes a non-exclusive list of preliminary activities, substantially identical to the list provided in Notice 2013-29.15

With respect to the definition of a "facility" for purposes of the Notice, and consistent with Notice 2013-29, the Notice provides:

  1. That a facility generally includes all components of property that are functionally interdependent (i.e., the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate electricity).16
  2. Multiple facilities that are operated as a part of a single project will be treated as a single facility and this single-project rule may be applied whether a facility is relying on the physical work test or 5% safe harbor. Further, whether multiple facilities are operated as a single project and therefore treated as a single facility will depend on the relevant facts and circumstances and the determination must be made in the calendar year during which the last of the multiple facilities is placed in service.17

Under the Notice, whether relying upon the physical work test or the 5% safe harbor, multiple facilities that are treated as a single facility for purposes of determining whether construction of a facility has begun may be disaggregated and treated as multiple separate facilities for purposes of determining whether a facility satisfies the continuity safe harbor.18 The disaggregated facilities that are placed in service by the continuity safe harbor deadline will be eligible for the continuity safe harbor and those that are not may satisfy the continuity safe harbor under a facts and circumstances determination.

To illustrate how the disaggregation rule is intended to work, the following example is provided in the Notice:

Example. X is developing a wind farm that will consist of 50 turbines, associated towers and supporting pads, a computer system that monitors and controls the turbines, and associated power conditioning equipment. The entire wind farm will be connected to the power grid through a single intertie, and power generated by the wind farm will be sold to a local utility through a single power purchase agreement. Using the single project rule in Section 5.04(2), the entire wind farm is a single project that will be treated as a single facility. On June 1, 2018, X excavates the site for the foundations of 10 of the 50 turbines and pours concrete for the supporting pads. Accordingly, X has performed physical work of a significant nature that constitutes the beginning of construction of the single facility for purposes of Code sections 45 and 48.

Thereafter, X places in service only 40 of the 50 turbines and related facilities before January 1, 2023. X disaggregates the 50 turbines under Section 5.04(4). Forty of the 50 turbines satisfy the continuity safe harbor. For the remaining 10 turbines, X may demonstrate that it satisfies the continuous construction test described in Section 4.06 of Notice 2013-29 based on the facts and circumstances.19


Finally, the Notice provides that a facility comprised in part of used property may qualify as originally placed in service, provided that the fair market value of the used property is not more than 20% of the facility's total value (the "80/20 rule").20 In the case of a single project comprised of multiple facilities, the 80/20 rule is applied to each individual facility. Further, the 5% safe harbor is applied only with respect to the cost of new property (i.e., only expenditures paid or incurred that relate to new construction are taken into account).21

To illustrate the application of the 5% safe harbor to retrofitted facilities, the following example is provided in the Notice:

Example. Taxpayer owns an existing wind farm comprised of 13 turbines, pads, and towers for which the eligibility periods for the PTC or the ITC have elapsed. Each facility has a fair market value of $1 million. Taxpayer replaces components worth $900,000 at each of 11 of the facilities at a cost of $1.4 million for each facility. Two of the 13 facilities are not upgraded. The fair market value of the remaining original components at each of the upgraded facilities is $300,000. The total expenditure to retrofit the 11 facilities is $15.4 million ($1.4 million x 11). Taxpayer applies the single project rule provided in Section 5.04(2).

The fair market value of the remaining original components of each individual upgraded facility ($300,000) is not more than 20% of each facility's total value of $1.7 million (the cost of the new components ($1.4 million) plus the value of the remaining original components ($300,000)). Thus, each upgraded facility will be considered newly placed in service for purposes of Code sections 45 and 48. Accordingly, if the taxpayer pays or incurs at least $770,000 (5% of $15.4 million) of qualified expenditures in 2016, construction of the single facility will be considered to have begun in 2016, and if the taxpayer also satisfies the continuous efforts test, each of the 11 upgraded facilities will be a qualified facility within the meaning of Code section 45(d). No additional PTC will be allowed with respect to energy produced by the taxpayer at the two facilities that were not upgraded. Nor will those two facilities qualify for additional ITC.22


1 Pub. L. No. 114-113, Div. Q, 129 Stat. 2242 (2015).

2 I.R.S. Notice 2013-29 (Apr. 15, 2013).

3 Pub. L. No. 112-240, 126 Stat. 2313 (2013).

4 Notice 2013-29, § 3.

5 Notice 2013-60 (Sept. 20, 2013).

6 I.R.S. Notice 2014-46 (Aug. 8, 2014).

7 Pub. L. No. 113-295, 128 Stat. 4021 (2014).

8 Notice 2016-31, § 3.

9 Notice 2016-31, § 3.02(2).

10 Notice 2016-31, § 3.02(2)(e) and (f).

11 Notice 2016-31, § 3.02(2)(c).

12 Notice 2016-31, § 3.02(2)(j).

13 Notice 2016-31, § 5.01.

14 Notice 2016-31, § 5.02.

15 Notice 2016-31, § 5.03.

16 Notice 2016-31, § 5.04(1).

17 Notice 2016-31, § 5.04(2) and (3).

18 Notice 2016-31, § 5.04(4).

19 Notice 2016-31, § 5.04(a).

20 Notice 2016-31, § 6.01.

21 Notice 2016-31, § 6.02.

22 Notice 2016-31, § 6.02(1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.