On December 15, 2016, the US Internal Revenue Service (the “IRS”) released Notice 2017-4 (the “Notice”), which updates previous IRS “start of construction” guidance by extending the Continuity Safe Harbor (described below) to December 31, 2018, and modifying and clarifying Notice 2016-31.1 The Notice is good news for developers with projects for which physical construction started during 2013 in that the extension gives them five years to complete construction and have the project placed in service. The Notice also means they need not worry about whether minimal amounts of physical construction during 2013 would cause these projects to be ineligible for the extension if the extension was only available to projects that commenced construction during 2014.
As discussed in more detail below, the Notice provides that a facility will be deemed to automatically meet the continuous construction requirement if it is placed in service by the later of (i) December 31, 2018 (a two-year extension of the prior deadline) or (ii) the end of the calendar year that is four years after the year in which construction started (the “Continuity Safe Harbor”).
The Notice also provides that June 6, 2016 is the effective date for an anti-abuse rule added by Notice 2016-31, which applies to determine when a project is considered to have started construction for purposes of being eligible for the Continuity Safe Harbor. The anti-abuse rule provides that a taxpayer may not rely on the physical work test and the five percent safe harbor in alternating calendar years to extend the date by which a project must be placed in service to be eligible for the Continuity Safe Harbor. The Notice provides that this rule is only effective from the date Notice 2016-31 was published, which was June 6, 2016.
Finally, under prior guidance a facility that contains some used property can qualify as originally placed in service if the used property is not more than 20 percent of the total facility. To satisfy the five percent safe harbor for such a facility, which generally provides that construction is considered to have commenced if five percent of total project costs have been incurred (the “5% Safe Harbor”), only the new property is taken into account. The Notice clarifies that for purposes of satisfying the 5% Safe Harbor, the cost of the new property includes all costs properly included in the depreciable basis of the new property.
Background
On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”),2 extended the Section 45 production tax credit (the “PTC”) for two years with respect to certain qualified facilities that begin construction before January 1, 2017, and further extended the PTC for wind facilities that begin construction before January 1, 2020. The PATH Act also phased out the PTC for wind facilities over four years by providing that the amount of the credit will be 100 percent for facilities that begin construction in 2016 but be reduced by 20 percent for facilities that begin construction during 2017, 40 percent for facilities that begin construction during 2018 and 60 percent for facilities that begin construction during 2019.
On May 5, 2016, the IRS released Notice 2016-31, which updated the start of construction guidance to take into account the PATH Act extensions and phase-out. For detailed analysis of Notice 2016-23, see our May 5, 2016 Legal Update.
Continuity Safe Harbor
Under Notice 2013-29, the IRS had imposed a requirement that a project owner continuously advance the construction of the project from the time construction starts through the placed-in-service date. Subsequently, in Notice 2013-60, the IRS created the Continuity Safe Harbor to deem continuous construction to have occurred if the project was placed in service before January 1, 2016. Notice 2016-31 significantly expanded the Continuity Safe Harbor to deem a project to meet the continuous construction requirement if the project is placed in service by December 31 of the year that includes the fourth anniversary of the date of the start of construction and extended the date by which continuous construction will be deemed to have occurred to December 31, 2016.
The Notice further extends the date by which continuous construction will be deemed to have occurred to December 31, 2018. Thus, under the extended Continuity Safe Harbor, continuous construction will be deemed to have occurred if a taxpayer places a facility in service by the later of (1) December 31 of the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began or (2) December 31, 2018. As an example, the Notice provides that if the construction begins on a facility on January 15, 2013 and the facility is placed in service before December 31, 2018, then the facility will be considered to satisfy the Continuity Safe Harbor. Alternatively, if construction begins on a facility on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor.
This extension means that developers do not have to be concerned about construction being deemed to have started before 2014 so long as the project is placed in service by December 31, 2018. If the project will not be placed in service before December 31, 2018, the facility will need to be placed in service by the end of the calendar year that is no more than four years after the calendar year during which construction of the facility began. This change should be well-received by developers who might otherwise have been concerned whether it would be possible to “restart” construction on projects that might be considered to have started construction before 2014 in order to be eligible for the extended deadline under the Continuity Safe Harbor.
Other Clarifications to Notice 2016-31
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Notice 2016-31 provides that a taxpayer may not rely upon the physical work test and the 5% Safe Harbor in alternating calendar years. For example, if a taxpayer started physical work in 2015 and then incurs five percent of the total cost of the facility in 2016, the Continuity Safe Harbor will be applied beginning in 2015, not in 2016. The Notice clarifies that this restriction on combining methods only applies to facilities that began construction after June 6, 2016 (the date when Notice 2016-31 was published). While it is unclear how this will work in practice, facilities that began construction by June 6, 2016 are not subject to this rule. Thus, for example, a project owner that started physical work in 2015, and thus had until December 31, 2019 to place the project in service, may incur five percent of the cost of the project in 2016 and arguably take the position that it has until December 31, 2020 to place the project in service.
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Notice 2016-31 provides that a facility may qualify as originally placed in service even though it contains some used property, provided that the fair market value of the used property is not more than 20 percent of the facility’s total value (the cost of the new property plus the value of the used property) (the “80/20 rule”).3 Notice 2016-31 provides that, to satisfy the Start of Construction requirement for Sections 45 and 48, the 5% Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility (e.g., the repowering of an existing wind facility), and such costs would include only expenditures paid or incurred that relate to the new construction. The Notice clarifies that for purposes of the 80/20 rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.
Finally, the Notice confirmed that the IRS will not issue private letter rulings to taxpayers regarding the application of the Notice, the prior IRS guidance or the beginning-of-construction requirement.
1 This notice follows previous “start of construction” guidance provided in Notice 2013-29, 2013-1 C.B. 1085; Notice 2013-60, 2013-2 C.B. 431; Notice 2014-46, 2014-2 C.B. 520; Notice 2015-25, 2015-13 I.R.B. 814; and Notice 2016-31, 2016-23 I.R.B. 1025.
2 Pub. L. No. 114-113, Div. Q, 129 Stat. 2242.
3 Section 6.01 of Notice 2016-31.
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