In 2013, the Internal Revenue Service established two “beginning construction” tests – a physical work test and a 5% safe harbor test – to determine eligibility for the production tax credit (PTC) and investment tax credit (ITC) under Sections 45 and 48 of the Internal Revenue Code. To receive the PTC or the ITC, the eligible facility must begin construction before January 1, 2014. The initial tests were set out in IRS Notice 2013-29, and later clarified in IRS Notice 2013-60. On August 8, 2014, in response to requests for further clarity as to the two tests, the IRS issued Notice 2014-46.

The physical work test requires that a taxpayer begin “physical work of a significant nature” prior to January 1, 2014. In this notice the IRS states that this test focuses on the nature of the work performed, not the amount or cost. Beginning work on any one of a number of enumerated activities will constitute “physical work of a significant nature,” including beginning excavation for a foundation for a wind turbine, setting anchor bolts into the ground for a wind turbine, or pouring concrete pads of the foundation; starting construction on roads that are integral to the activity being performed by the facility; and beginning physical work on custom-designed transformers to step up the voltage of electricity produced at a facility.

Additionally, the IRS clarified that the example provided in Notice 2013-29, which stated that a 50-turbine wind farm where 10 turbines had foundations excavated and concrete poured, was not intended to indicate that there is a 20% threshold or minimum amount of work required to satisfy the physical work test. Instead the IRS explained: “Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test.”

The IRS also clarified several scenarios involving transfers with respect to a facility eligible for the PTC or ITC, including stating or clarifying the following:

• There is no statutory requirement that the taxpayer who places the facility in service also be the taxpayer who began construction of the facility. 
• Relocation of equipment by a taxpayer where construction was begun at a different site will not disqualify the work performed or the amount paid or incurred prior to January 1, 2014.
• The taxpayer may take into account the work performed or amount paid or incurred for purposes of determining whether the facility satisfies the work test or the safe harbor.
• In the case of a transfer consisting of solely tangible personal property between unrelated parties, the transferee party will not be able to take into account any work performed or amount paid or incurred by the transferor with respect to such property for purposes of the physical work test or the 5% safe harbor test.

Finally, the IRS expanded the terms of the 5% safe harbor test which may have a positive impact for larger projects. Where a single project is comprised of multiple individual facilities, and a taxpayer pays or incurs more than 3% but less than 5% of the total cost of the facility prior to January 1, 2014, the safe harbor may be satisfied for the PTC or the ITC with respect to some, but not all, of the individual facilities comprising the project.

The claim to a PTC or ITC for individual facilities will be limited so long as the total aggregate cost of those individual facilities at the time the project is placed into service is not greater than 20x the amount the taxpayer paid or incurred before January 1, 2014. The IRS did not expand the safe harbor to cover a single facility that is not a single project comprised of multiple individual facilities.