The IRS updated the deadlines and provided additional guidance (Notice 2016-31
) for projects to qualify for the renewable electricity production tax credit (PTC) under Section 45 and the energy investment tax credit (ITC) under Section 48.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended both the PTC and ITC credits.
Under the bill, construction on qualified PTC projects must now begin before the end of 2016 to be eligible for the full credit. The PTC will also be available at reduced rates for wind facilities if construction begins in 2017 (80% of normal credit), 2018 (60%) or 2019 (40%). Taxpayers may also elect to take the ITC in lieu of the PTC, but any PTC rate reductions will apply to the ITC.
In addition, the 30% ITC for commercial solar projects was extended. The rate was set to fall to 10% if construction began after 2016, but the full 30% rate will now be available if construction begins by the end of 2019. A 26% credit is available if construction begins in 2020, and a 22% credit is available if construction begins in 2021 and the facility is placed in service by the end of 2023. The credit is otherwise 10%.
Under guidance issued previously, in Notices 2013-29, 2013-60 and 2014-46, the IRS said that taxpayers can establish that construction has begun by either satisfying a test showing “physical work of a significant nature” has begun or by incurring 5% or more of the total cost of the facility under a safe harbor. Under either method, taxpayers must also make continual progress toward completion once construction has begun. The IRS offered a continuity safe harbor in Notices 2013-60 and 2015-25, and that generally provided that taxpayers are considered to have made continual progress on projects begun by the end of 2014 if the facility is placed in service by the end of 2016.
Notice 2016-31 provides additional guidance on the safe harbors, including extending the continuity safe harbor from two years to four years. Taxpayers will now be considered to have made continual progress toward completion if a facility is placed in service within four calendar years of the calendar year in which construction began. Taxpayers who don’t use the continuity safe harbor must generally use a facts-and-circumstances analysis to determine if construction is continual. Notice 2016-31 updates the nonexclusive list of allowable disruptions in Notice 2013-29. The following disruptions are excusable:
- Severe weather conditions
- Natural disasters
- Certain licensing and permitting delays
- Delays at the written request of government for safety, security or similar concerns
- Transmission interconnection issues (new)
- Labor stoppages
- Supply shortages
- Delays in manufacturing custom components (new)
- Inability to obtain specialized equipment
- Financing delays (six-month restriction removed)
- The presence of endangered species (new)
Notice 2016-31 makes several changes to the tests for establishing that construction has begun. The IRS updated the list of preliminary activities under Notice 2013-29 that don’t qualify as physical work of a significant nature. The following preliminary activities don’t qualify:
- Planning or designing
- Securing financing
- Conducting geologic mapping and modeling
- Obtaining permits and licenses
- Conducting geophysical, gravity, magnetic, seismic and resistivity surveys
- Conducing environmental and engineering studies
- Performing activities to develop a geothermal deposit prior to discovery
- Clearing a site
- Test drilling of a geothermal deposit
- Test drilling to determine soil condition
- Excavation to change the contour of the land (as distinguished from excavation for footings and foundations)
- Removing existing turbines, towers, panels or other components
The IRS also updated the determination for whether multiple facilities can be considered part of a single project for establishing that construction has begun. Under the new rules, taxpayers can aggregate multiple facilities based on the relevant facts and circumstances, but then disaggregate them for applying the placed-in-service deadline for the continuity safe harbor.
However, Notice 2016-31 doesn’t allow taxpayers to use two different beginning construction tests in alternate years to establish construction has begun in different years for the purpose of the separate begin-construction and continuity deadlines.
Please contact Dustin Stamper, +1 202 861 4144, for more information.
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