The IRS recently issued Notice 2018-59 (the “Notice”) which provides clarification to “beginning of construction” for taxpayers seeking to take advantage of the section 48 renewable electricity investment tax credit (ITC) for solar and other renewable energy facilities including qualified fuel cell, combined heat and power, qualified small wind and geothermal heat pump. The Notice largely follows the “begun construction” guidance that the IRS has previously issued for energy facilities that qualify for the production tax credit (PTC), discussed in our blog post here (“Notice 2016-31”), and the follow up guidance that clarifies the beginning construction safe harbor for those facilities, discussed in our blog post here (“Notice 2017-4”).
Here, as in Notice 2016-31 and Notice 2017-4, taxpayers have two ways to establish start of construction. They can either show that they (i) began physical construction of a significant nature (the “Physical Work Test”), or (ii) incurred at least 5% of the total cost of the eligible facility (the “5% Safe Harbor”). The Physical Work Test does not consider the amount of work or its cost but only focuses on the nature of the work performed being significant. Both off-site (including the manufacture of components, mounting equipment, and support structures) and on-site work (including the installation of racks and other structures to affix PV panels, collectors, or solar cells) may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. However, physical work that constitutes a preliminary activity, such as planning, designing, or researching, and physical work that produces components of energy property that are held in inventory do not qualify for the Physical Work Test. Once construction has begun or costs have been paid or incurred, taxpayers must make continuous progress towards completion to satisfy both the Physical Work Test and the 5% Safe Harbor (“Continuous Construction Requirement”). Continue reading this entry