“IRS Guidance Clarifies ‘Begun Construction’ Standard for Renewable Electricity Production Credit Property”

The Irs (IRS) has launched welcome new guidance regarding renewable electricity production and investment tax credits. A notice released on May 5, 2016, reflects changes towards the production tax credit (PTC) and investment tax credit (ITC) for several alternative energy facilities produced by the Safeguarding People in america From Tax Hikes (PATH) Act in December 2015. Qualified facilities include wind, closed-loop biomass, open-loop biomass, geothermal power, landfill gas, trash, hydropower, and marine and hydrokinetic. As described below in greater detail, the brand new guidance clarifies, modifies and stretches prior guidance associated with (i) the date through which a center should be put into service to be able to fulfill the continuous construction or continuous efforts safe harbor (with each other, the Continuity Requirement), (ii) the “physical work” test, and (iii) retrofitted facilities.


Generally, a citizen can claim a PTC under Section 45 from the Internal Revenue Code (the Code) regarding electricity created in a qualified facility or, instead thereof, may want to claim an ITC under Section 48 from the Code regarding that facility, however in either situation only when it’s “begun construction” from the facility before certain specified dates.

The Road Act extended the PTC for 2 years regarding certain qualified facilities, the making of which starts before The month of january 1, 2017. Additionally, it extended the PTC for wind facilities, the making of which starts before The month of january 1, 2020, susceptible to a phase-out during the last 3 years.

Notice 2016-31 stretches and modifies three earlier notices (Notices 2013-29, 2013-60 and 2014-46) to deal with whether construction of the facility has started through the deadlines established within the PATH Act, thus figuring out eligibility for that PTC or ITC, and modifies the Continuity Requirement.

  • Notice 2013-29 provides two methods to establish the beginning of construction for purposes of the PTC or ITC — a “physical work” test and a 5 percent safe harbor (i.e., 5 percent of total costs).
  • Notice 2013-60 clarifies the requirements outlined in Notice 2013-29, providing a safe harbor for meeting the Continuity Requirement, which was modified by Notice 2015-25 (the Continuity Safe Harbor).
  • Notice 2014-46 clarifies that, with respect to a project composed of multiple facilities (e.g., a multiple turbine wind farm), and provided the Continuity Requirement also is met, if a taxpayer has not fully satisfied the 5 percent safe harbor by the placed-in-service deadline but has paid or incurred at least 3 percent of the total cost of the project, the taxpayer may still claim the PTC or ITC on any number of individual facilities if the total aggregate cost of those individual facilities at the time the project is placed in service is not greater than 20 times the amount the taxpayer paid or incurred before the deadline.

Modifications to the Continuity Requirement

Underneath the Continuity Safe Harbor as formerly embodied in Notice 2013-60 and see 2015-25, a professional facility – the making of which started whenever just before The month of january 1, 2015, which was put into service before The month of january 1, 2017 – was thought to fulfill the Continuity Requirement. The notice provides the Continuity Safe Harbor now runs for four calendar years in the year by which construction from the facility started. For instance, if construction of the facility starts during 2016, as long as the ability is positioned operating by December 31, 2020, the ability is going to be thought to fulfill the Continuity Safe Harbor.

The notice further provides the Continuity Safe Harbor starts upon the sooner from the first performance of great physical work (the physical work test) or satisfaction from the five percent safe harbor, whether or not another standard is met inside a later year. Therefore, a citizen is precluded from depending around the physical work test in a single year and also the five percent safe harbor inside a later year to fulfill the Continuity Requirement. This, combined using the four-year Continuity Safe Harbor period described above, might be harmful to particular taxpayers who began physical work or satisfied the five percent safe harbor in earlier years. For instance, if your citizen began physical focus on a center in The month of january 2012, the citizen must still depend around the physical work make sure the ability should be put into service through the finish of the year to be able to depend around the Continuity Safe Harbor.

Under prior guidance, for reasons of the start of construction requirement, multiple facilities which are operated included in just one project (according to all of the relevant details and conditions) are treated like a single facility. The notice claims that this determination is created in the past year where the last from the multiple facilities is positioned operating. The notice also clarifies that the single project made up of multiple facilities might be disaggregated and treated as multiple separate facilities for reasons of figuring out whether any single facility satisfies the Continuity Safe Harbor. Individuals disaggregated facilities which are put into service before the Continuity Safe Harbor deadline is going to be qualified for that Continuity Safe Harbor. The rest of the disaggregated facilities, however, will have to depend on the details-and-conditions resolution of if the Continuity Requirement is met.

Finally, for reasons from the Continuity Requirement, the notice grows their email list of excusable disruptions for facilities that don’t entitled to the Continuity Safe Harbor. Accordingly, a task may now stop work without risking losing the PTC if, for instance, the delay is a result of (i) written demands of local or tribal government authorities regarding matters of public safety, (ii) interconnection-related delays, (iii) manufacturing of custom components, or (iv) financing issues (whatever the time period of such financing issues).

The Physical Work Test

The physical work test talked about above mandates that a citizen begin physical work of the significant nature to be able to establish the start of construction. The notice provides new good examples showing how this test might be met for various alternative energy facilities beyond just wind, for example hydropower, biomass and trash, and geothermal power facilities.

The notice also grows among the list of preliminary activities that don’t count as physical work of the significant nature. Particularly, this nonexclusive list now includes (i) performing geologic mapping and modeling, (ii) performing geophysical, gravity, magnetic, seismic and resistivity surveys, and (iii) getting rid of existing solar sections or other components that won’t participate the ability.

Retrofitted Facilities: A center may become qualified as initially put into service though it consists of some used property, provided the fair market price from the used rentals are only 20 % from the facility’s total value (the price of the brand new property plus the need for the used property) (the 80/20 rule). The notice clarifies that within the situation of the retrofitted facility, the five percent safe harbor is used only with regards to the price of new property incorporated within the facility.

Solar Energy Facilities

Finally, the PATH Act extended the ITC for solar energy facilities the construction of which begins before January 1, 2022, subject to a three-stage step-down in the amount of the credit:

  • For projects for which construction begins in 2020, the ITC will be reduced to 26 percent.
  • For projects for which construction begins in 2021, the ITC will be reduced to 22 percent.
  • For projects for which construction begins after 2021, the ITC will be reduced to 10 percent.

The notice states that the IRS anticipates issuing separate guidance addressing the PATH Act extension of the ITC for solar energy facilities.


Overall, the notice provides considerable new guidance that have a significant effect on the alternative energy industry. The guidance ought to provide greater certainty to designers along with other traders wishing to start and continue creating projects inside the long periods permitted through the PATH Act without worry about the projects’ eligibility of these tax credits.

Download PDF