United States: IRS Issues Additional Guidance On Beginning Of Construction Rules For Renewable Projects - December 20, 2016

Summary

On December 15, 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the "beginning of construction" requirements for wind and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes. The Notice (1) extends the "Continuity Safe Harbor" placed in service date for projects that started construction before 2014; (2) provides that the "combination of methods" rule set forth in prior guidance only applies to facilities on which construction begins after June 6, 2016; and (3) clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.

In Depth

On December 15, 2016, the Internal Revenue Service (IRS) released Notice 2017-04 (the Notice). The Notice provides guidance on how to meet the "beginning of construction" requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). The Notice extends the Continuity Safe Harbor placed in service date by which a facility can meet the beginning of construction tests for facilities that began construction before 2014. Specifically, the Notice states that if a facility is placed in service by the later of (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor.

Following prior IRS guidance, a facility was considered to have satisfied the Continuity Safe Harbor if the facility was placed in service within the four-year period following when construction commenced or December 31, 2016, whichever is later. The change in the Notice provides welcome guidance for projects that began construction prior to 2014 and were unlikely to be placed in service within the four-year period, but are anticipated to be placed in service by the end of 2018.

The Notice also provides that the "combination of methods" rule set forth in Notice 2016-31 only applies to facilities on which construction begins after June 6, 2016 (the date on which Notice 2016-31 was published). The combination of methods rule prohibits a taxpayer from relying upon the Physical Work Test and the Five Percent Safe Harbor in alternating calendar years to satisfy the beginning of construction rules or the Continuity Requirement. Seemingly, this rule permits projects that met the Physical Work Test and the Five Percent Safe Harbor in different years prior to June 6, 2016, to rely on the method used in the most recent year. Finally, the Notice clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.

According to the Notice, the IRS will issue separate guidance addressing the extension and modification of the investment tax credit (ITC) for solar facilities under Section 48.

Background

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) amended the production tax credit (PTC) and the ITC. Specifically, the PATH Act included multi-year extensions of the PTC and the ITC for wind and solar projects, along with a gradual phase-out of the credit.

In the case of wind, the PATH Act extended the PTC through 2019 (including the corresponding election to take the ITC in lieu of the PTC for wind projects), such that wind projects that begin construction prior to the end of 2019 will be eligible for the PTC or ITC. Previously, the PTC for wind only applied to projects beginning construction before the end of 2014.

The PATH Act also reduced the PTC and ITC for wind by 20 percent for projects commenced in 2017, by 40 percent for projects commenced in 2018, and by 60 percent for projects commenced in 2019. For energy facilities other than wind, such as biomass and geothermal projects, the PATH Act extended the PTC through the end of 2016 and included a corresponding extension of the election to take the ITC in lieu of the PTC. For more information on the PATH Act's extension of renewable energy tax incentives, including the extension of the ITC for solar projects, click here.

The Notice updates the guidance provided in prior notices (Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25 and Notice 2016-31, together referred to herein as the Prior Guidance). The Notice explains that the IRS will not issue private letter rulings to taxpayers regarding the application of the Notice, the Prior Guidance or the beginning of construction requirement under Sections 45(d) and 48(a)(5).

Notice 2013-29

Under Notice 2013-29, a taxpayer may establish that construction has begun on a qualified facility by demonstrating that "physical work of a significant nature" has begun (Physical Work Test) or by satisfying a 5 percent safe harbor (Five Percent Safe Harbor). Notice 2013-29 lists several examples of work that meets the Physical Work Test, including, with respect to a wind energy facility, the beginning of the excavation for the foundation, the setting of anchor bolts into the ground or the pouring of the foundation's concrete pad. Both onsite and offsite work may be taken into account. The IRS also imposed a requirement that a "continuous program of construction," as defined in the Prior Guidance (Continuous Construction Test), be maintained after performance of physical work in 2013 until the relevant project is placed in service.

The Five Percent Safe Harbor set forth in Notice 2013-29 provides that the construction of a qualified facility is considered to begin before January 1, 2014, if a taxpayer pays or incurs (within the meaning of the accrual rules of Treasury Regulation Section 1.461-1(a)(1) and (2)) 5 percent or more of the total cost of the facility before such date. Thereafter, the taxpayer must make continuous efforts to advance toward completion of the facility (Continuous Efforts Test) in order to be deemed to have begun construction (the Continuous Construction Test and the Continuous Efforts Test are referred to herein collectively as the Continuity Requirement).  

For more information on these tests and their requirements, see McDermott's article on Notice 2013-29.

Notice 2013-60

In September 2013, the IRS issued Notice 2013-60, clarifying questions left outstanding by Notice 2013-29. Specifically, Notice 2013-60 provided that a facility was to be considered to satisfy the Continuity Requirement if it was placed in service before January 1, 2016 (the Continuity Safe Harbor). Notice 2013-60 also permitted a taxpayer to claim the PTC or ITC even if the taxpayer was not the owner of the facility on the date construction began. For more information, see McDermott's article on Notice 2013-60.  

Notice 2014-46

Notice 2014-46 clarified that the Physical Work Test focuses on the nature of the work performed rather than the amount or cost of such work. Notice 2014-46 also provided guidance regarding transfers of a facility by the taxpayer after construction has begun, but before that taxpayer placed the facility in service. Notice 2014-46 modified the Five Percent Safe Harbor rule set forth in earlier guidance by providing that, if a taxpayer incurred at least 3 percent of the total cost of such a facility before January 1, 2014, the Five Percent Safe Harbor may be satisfied with respect to some (although not all) of the individual facilities that are part of this larger project. For more information, see McDermott's article on Notice 2014-46.

Notice 2015-25

Notice 2015-25 extended the relevant Continuity Safe Harbor placed in service dates under the earlier notices so that the beginning of construction guidance mirrored the statutory extension of the PTC and the ITC under the Tax Increase Prevention Act of 2014 (TIPA). Prior to the extension under TIPA, Sections 45(d) and 48(a)(5) required that construction of a qualified facility begin before January 1, 2014, for the facility to be eligible for the PTC or the ITC. Based on the language of those sections as in effect before TIPA, the guidance prior to Notice 2015-25 provided advice on determining whether construction had begun on a qualified facility prior to January 1, 2014. Because TIPA extended the date by which construction of a qualified facility must begin to January 1, 2015, Notice 2015-25 extended the Continuity Safe Harbor placed in service date to meet the Continuity Requirement to January 1, 2017. For more information, see McDermott's article on Notice 2015-25.

Notice 2016-31

Notice 2016-31 extended the relevant Continuity Safe Harbor placed in service dates to correspond with the extension and modification of the PTC by the PATH Act. Specifically, Notice 2016-31 provided that a facility will be considered to satisfy the Continuity Requirement if the facility is placed in service by the later of (1) a calendar year that is no more than four calendar years after the calendar year during which construction on the facility began, or (2) December 31, 2016. As an example, Notice 2016-31 provides that if construction on a wind facility began on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor.    

Notice 2016-31 also set forth a "combination of methods" rule under which a taxpayer cannot alternate between the Physical Work Test and the Five Percent Safe Harbor to satisfy the beginning of construction requirement or the Continuity Requirement. For example, if a taxpayer relied on the Physical Work Test to satisfy the beginning of construction rules in 2015, and then in 2016 incurred costs totaling 5 percent or more of the total cost of the facility, the taxpayer could not then use the Five Percent Safe Harbor to satisfy the beginning of construction requirement or the Continuity Requirement. Instead, the Continuity Safe Harbor is applied beginning in 2015. 

Notice 2016-31 also (1) revised and added to the list of excusable disruptions that will not be taken into account when determining whether the Continuity Requirement has been met, (2) provided additional examples of work that meets the Physical Work Test for different types of renewable energy facilities, (3) revised the list of preliminary activities that do not constitute "physical work of a significant nature" for purposes of the Physical Work Test, (4) provided additional guidance on whether and how multiple facilities are treated as a single facility for beginning of construction purposes, and (5) provided additional guidance on the application of the Five Percent Safe Harbor to retrofitted facilities. 

For more information on these tests and their requirements, see McDermott's article on Notice 2016-31.

Notice 2017-04

The Notice modifies the Continuity Safe Harbor by providing that if a taxpayer places a facility in service by the later of (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor. By changing the date from December 31, 2016, to December 31, 2018, the Notice allows certain projects on which construction began prior to 2014 to qualify for the Continuity Safe Harbor. For example, if construction began on a facility on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor. Under the Prior Guidance, this facility would not have been eligible for the Continuity Safe Harbor, and the taxpayer would have needed to demonstrate that the Continuity Requirement was met under the relevant facts and circumstances. Alternatively, if construction begins on a facility on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor.    

The Notice also states that the "combination of methods" rule set forth in Notice 2016-31 only applies to facilities on which construction begins after June 6, 2016 (the date on which Notice 2016-31 was published in IRB 2016-23). Therefore, if a taxpayer meets the Physical Work Test with respect to a facility in 2014 and the Five Percent Safe Harbor test for the facility in 2015, the taxpayer seemingly can apply the Continuity Safe Harbor test from 2015, meaning that the taxpayer must place the facility in service by December 31, 2019, in order to satisfy the Continuity Safe Harbor. Taxpayers that begin construction on facilities after June 6, 2016, however, will be prevented from restarting the four-year window for placing the facility in service by using the other beginning of construction method to qualify the facility as having begun construction in the later year. 

The Notice provides that, as indicated in the Prior Guidance, a retrofitted facility may qualify as originally placed in service for purposes of the PTC and ITC if the fair market value of used property does not constitute more than 20 percent of the facility's total value. Thus, the cost of the facility's new property must be at least 80 percent of the facility's total value (the 80/20 Rule). The Prior Guidance indicated that the Five Percent Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility, and that all costs properly included in the depreciable basis of the facility are taken into account to determine whether the Five Percent Safe Harbor has been met. The Notice clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property. Taxpayers had questioned whether indirect costs that were allocable to the depreciable basis could be included for these purposes, and the Notice appears to affirmatively answer this question.      

Conclusion

The Notice provides much-needed guidance with respect to facilities on which construction began prior to January 1, 2014, that otherwise would not have been placed in service within the four-year Continuity Safe Harbor window. The Notice also provides useful clarity with respect to the "combination of methods" rule and the scope of eligible property under the 80/20 Rule.

IRS Issues Additional Guidance On Beginning Of Construction Rules For Renewable Projects - December 20, 2016

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions