Last week the Internal Revenue Service (IRS) issued Notice 2017-04, which updates its prior guidance concerning the beginning of construction deadline for the PTC and ITC, which applies to wind and other facilities eligible for the PTC or the ITC in lieu of the PTC. Notice 2017-04 clarifies, modifies, and extends prior guidance in several respects:
- Continuity Safe Harbor – Deadline. Prior guidance provided that a facility would satisfy the Continuity Safe Harbor if a taxpayer places the facility in service by the later of (i) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began and (ii) December 31, 2016. Notice 2017-04 expands the Continuity Safe Harbor by extending the December 31, 2016, deadline to December 31, 2018. This change provides helpful relief for those projects that may have begun construction several years ago under either the Physical Work Test or the Five Percent Safe Harbor but otherwise stopped or delayed construction.
- Continuity Safe Harbor – Combination of Methods. Prior guidance provided that a taxpayer could not rely upon the Physical Work Test and the Five Percent Safe Harbor in alternating calendar years to extend the Continuity Safe Harbor deadline. Notice 2017-04 provides that this rule applies to facilities the construction of which begins after June 6, 2016. Accordingly, if construction on a facility began before June 6, 2016, solely under the Physical Work Test, it is possible for construction on the facility to begin again if the Five Percent Safe Harbor is satisfied after June 6, 2016. Similarly, if construction on a facility began before June 6, 2016, solely under the Five Percent Safe Harbor, it is possible for construction on the facility to begin again if the Physical Work Test is satisfied after June 6, 2016. Similar to the extension of the Continuity Safe Harbor deadline described above, this change allows projects that may have begun construction several years ago, but otherwise stopped or delayed construction, to trigger a new beginning of construction date for purposes of the four-year Continuity Safe Harbor.
- Retrofits. Under the 80/20 rule, a facility may qualify as originally placed in service even though it contains used property, as long as the fair market value of the used property is not more than 20 percent of the facility's total value (for this purpose, the cost of the new property plus the value of the used property). Prior guidance did not explicitly address what costs would be included for this purpose (e.g., installation and certain indirect costs). Notice 2017-04 clarifies that the cost of the new property includes all costs properly included in the depreciable basis of the new property.
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