Energy Alert: IRS Identifies Two "Begun Construction" Standards To Qualify For Two Tax Credit Opportunities


The renewable electricity production tax credit and the energy investment tax credit currently offer taxpayers a tax credit for energy produced from qualified facilities. For the PTC, the tax credit covers a ten-year period. For the ITC, there is a one-time tax credit ranging from 10% to 30% of the basis of energy property once a facility is placed in service.

The American Taxpayer Relief Act of 2012 extended the eligibility of these credits for projects that begin construction before January 1, 2014. The types of projects included in this extension are wind, open-loop biomass, closed-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities.

Shortly after this extension, the IRS announced it would issue guidance on when construction must begin for a facility to qualify for the tax credits. In Notice 2013-29, released this past Monday, the IRS identified two standards that establish the start of construction of a qualified facility: safe harbor and significant physical work.

Under the safe harbor standard, construction will be considered as having begun if: (1) a taxpayer pays or incurs 5% or more of the total cost of the facility before January 1, 2014, and (2) thereafter makes continuous efforts to advance toward completion of the facility.

Under the significant physical work standard, the IRS will take into account (1) work performed by the taxpayer and (2) work performed for the taxpayer by other persons under a binding written contract entered into prior to the manufacture, construction or production of the property for use by the taxpayer in the taxpayer's trade or business. The taxpayer must also maintain a continuous program of construction under this standard.

The IRS will take into account both on-site and off-site work. However, preliminary activities do not count, even if the cost of those activities is properly included in the depreciable basis of the facility. Preliminary activities include:

  • Planning or designing
  • Securing financing
  • Exploring
  • Researching
  • Obtaining permits
  • Licensing
  • Conducting surveys
  • Environmental and engineering studies
  • 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)
  • Removal of existing turbines and towers


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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