IRS Releases Notice Clarifying the Renewable Electricity Production Tax Credit and Beginning of Construction Test | Practical Law

IRS Releases Notice Clarifying the Renewable Electricity Production Tax Credit and Beginning of Construction Test | Practical Law

On May 5, 2016, the IRS issued a Notice to clarify what constitutes beginning construction for the purposes of the Internal Revenue Code Section 45 production tax credit (PTC).

IRS Releases Notice Clarifying the Renewable Electricity Production Tax Credit and Beginning of Construction Test

by Practical Law Real Estate
Published on 17 May 2016 • USA (National/Federal)
On May 5, 2016, the IRS issued a Notice to clarify what constitutes beginning construction for the purposes of the Internal Revenue Code Section 45 production tax credit (PTC).
On May 5, 2016, the IRS issued Notice 2016-31, which clarifies what constitutes beginning construction for the purposes of the Internal Revenue Code Section 45 renewable electricity production tax credit (PTC).

Background

Section 45 of the IRC offers a renewable electricity production tax credit for renewable energy facilities including wind, geothermal, biomass, landfill gas, and certain hydropower and marine hydrokinetic energy projects. In order to take advantage of this tax credit, a taxpayer must show that construction has begun on such projects by satisfying one of the following standards:
  • The Physical Work Test (the taxpayer must have begun physical construction of significant nature).
  • Five Percent Safe Harbor Test (the taxpayer must have incurred 5% of the total cost of the construction of the facility).
Under either test, the taxpayer must also make continuous progress towards completion, which can be satisfied by complying with a Continuity Safe Harbor. Currently, under the Continuity Safe Harbor, if a taxpayer began construction on a facility before January 1, 2015 and places the facility in service before January 1, 2017, the facility is deemed to satisfy the continuous progress requirement.

Notice 2016-31

The newly released notice makes several important updates to previous guidance surrounding the PTC. Importantly, the notice:
  • Extends the Continuity Safe Harbor to include a facility that is put into service during a calendar year that is no more than four calendar years after the calendar year in which construction began.
  • Stipulates that a taxpayer cannot rely on the Physical Work Test and 5% Safe Harbor Test in alternating years.
  • Allows multiple facilities that are treated as one facility for the purpose of the Physical Work Test or 5% Safe Harbor Test to be disaggregated and treated as separate facilities for the Continuity Safe Harbor.
  • Provides that retrofitted facilities that are comprised of used property may be deemed to be placed in service for the purpose of the PTC so long as the fair market value of the used property is not greater than 20% of the facility's total value.
For more information on these updates, see Notice 2016-31 here.