Yesterday, the IRS issued Notice 2016-31 (the “Notice”) which revises previous guidance on satisfying the “beginning of construction” test in order to take advantage of the section 45 renewable electricity production tax credit (PTC) for wind and other renewable energy facilities including geothermal, biomass, landfill gas and certain hydropower and marine hydrokinetic energy projects. The Notice is in response to the recent 5-year extension (with phasedowns) of the PTC for wind projects that begin construction before January 1, 2020, which we discussed in prior blog posts here and here.
In order to establish that construction has begun, the IRS issued a series of notices (2013-29, 2013-60, 2014-46, and 2015-25) which permit a taxpayer to show either that it has: (1) begun physical construction of a significant nature (“Physical Work Test”), or (2) incurred at least 5% of the total cost of the eligible facility (“5% Safe Harbor”). Both tests also require that the taxpayer make continuous progress towards completion once construction has begun or costs have been incurred (the Continuous Construction Test in the case of the Physical Work Test and the Continuous Efforts Test in the case of the 5% Safe Harbor). However, the IRS grants a safe harbor that so long as the taxpayer (1) “begins construction” on the facility prior to January 1, 2015, and (2) places that facility in service prior to January 1, 2017, the facility will be deemed to satisfy the Continuous Construction Test or the Continuous Efforts Test, regardless of the actual amount of physical work performed or costs paid or incurred through December 31, 2016 (“Continuity Safe Harbor”). (For more information on the Physical Work Test, 5% Safe Harbor, and Continuity Safe Harbor see our prior blog posts here, here, here, and here.)
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