On May 5, 2016, the Internal Revenue Service ("IRS")
updated guidance regarding the "beginning of
construction" requirement for renewable energy facilities
seeking to qualify for the production tax credit ("PTC")
and the investment tax credit ("ITC") (Sections 45 and 48
of the Internal Revenue Code, 26 U.S.C. §§ 45, 48).
Notice 2016-31 ("Notice") extends, from two years to four
years, the deadline for developers seeking credits to commence
construction of an eligible facility ("Continuity Safe
Harbor"), giving windpower developers twice as much time to
qualify for credits. The Notice was issued pursuant to the
Protecting Americans from Tax Hikes Act of 2015 ("PATH
Act") (Pub. L. No. 114-113, Div. Q, 129 Stat. 2242), which
extended the PTC for two years with respect to certain facilities
whose construction begins before January 1, 2017, and further
extended the PTC for wind facilities whose construction begins
before January 1, 2020.
Generally, a windpower facility may satisfy the "beginning of
construction" test either by: (i) satisfying the Physical Work
Test, by beginning physical work on a facility of a significant
nature; or (ii) meeting the Five Percent Safe Harbor, by incurring
five percent or more of the total eligible cost of the facility.
Both of these methods require that the developer make continuous
progress toward completion once construction has begun.
(See Notice 2013-29, 2013-1 C.B. 1085.)
Previously, the IRS established that the Continuity Safe Harbor
would be deemed satisfied if the facility was placed in service
within two calendar years subsequent to the year in which
construction commenced, irrespective of the amount of physical work
performed or costs incurred after satisfying either the Physical
Work Test or the Five Percent Safe Harbor. The Notice modifies the
Continuity Safe Harbor by extending the amount of time windpower
developers have to show they are continuously making progress
toward completing the project, from two years to four years, with
no particular date by which the facility must be placed in service.
Therefore, a taxpayer is deemed to satisfy the continuity
requirement if the taxpayer places a facility in service within
four calendar years after the calendar year in which the taxpayer
began construction.
Additionally, the Notice: (i) modifies the list of "excusable
disruptions" to a project, which are barriers to construction
that will not be considered as indicating that a taxpayer has
failed to maintain a continuous program of construction or
continuous efforts to advance toward completion of the facility;
(ii) provides that multiple facilities that are operated as part of
a single project and treated as a single facility may be
disaggregated and treated as separate facilities for purposes of
determining whether a facility satisfies the Continuity Safe
Harbor; and (iii) that a retrofitted facility can be treated as
originally placed in service if the fair market value of the used
property is not more than 20 percent of the facility's total
value.
The extension is a boon to windpower developers and windpower
development generally, as it provides two additional years to
qualify for the PTC without establishing a particular date by which
an eligible facility must be placed in service. The extension also
provides greater certainty with respect to windpower projects
seeking to qualify for the credits. Additionally, although the
Notice does not provide guidance regarding the PATH Act's
extension of the ITC for solar energy facilities, it is expected
that a similar notice will be issued for solar energy developers
with respect to the ITC.
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.
