On December 15, 2016, the Internal Revenue Service (IRS) issued Notice 2017-04, which updates prior guidance regarding the beginning of construction requirement for renewable energy tax credits under IRC sections 45 and 48.1
Highlights of Notice 2017-04 include the following:
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Provides that the Continuity Safe Harbor (for deemed satisfaction of the continuous efforts/continuous construction tests to satisfy the beginning of construction requirement) will be available for projects placed in service by December 31, 2018, or, if later, by the end of the calendar year 4 years after the calendar year in which construction began.
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Clarifies for purposes of the “80/20 rule” for retrofitted/repowered facilities that the cost of new property includes all costs properly included in the depreciable basis of the new property.
Notice 2017-04 also reconfirms that (1) the IRS will not issue private letter rulings regarding the application of the beginning of construction requirement or the related Notices and (2) separate guidance will be issued addressing the extension and modification of the ITC for solar energy property included in the Protecting Americans from Tax Hikes Act of 2015.
Background
The American Taxpayer Relief Act of 2012, as amended by the Tax Increase Prevention Act of 2014, included a change in the deadlines for IRC section 45 production tax credit (PTC) eligible facilities that required a taxpayer to have begun construction of a qualifying facility by the end of 2014 to qualify for a section 45 PTC or section 48 investment tax credit (ITC) (generally referred to as the beginning of construction requirement).
The Protecting Americans from Tax Hikes Act of 2015: (1) extended the beginning of construction deadline for non-wind section 45 PTC-eligible facilities to the end of 2016; (2) provided for a long-term extension for wind facilities with a ramp-down of the credit amount based upon the year in which the taxpayer begins construction of the project; and (3) provided for a long-term extension for the ITC for solar energy facilities, with a ramp-down of the credit amount based upon the year in which the taxpayer begins construction of the project and the year in which the project is placed in service.2
Since enactment of the American Taxpayer Relief Act of 2012, and in response to subsequent legislation and taxpayer feedback, the IRS has released a series of Notices regarding the beginning of construction requirement: Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25 and Notice 2016-31.3
Continuity Safe Harbor
Under the prior Notices, in order to satisfy the beginning of construction requirement, a taxpayer that utilizes the physical work test with respect to a project must maintain a continuous program of construction (the continuous construction requirement) and a taxpayer that utilizes the 5% safe harbor must maintain continuous efforts to advance toward completion of the facility (the continuous efforts requirement). Generally, satisfaction of the continuous construction or continuous efforts requirement is evaluated under a “facts and circumstances” analysis. Before the issuance of Notice 2017-04, the continuous construction/continuous efforts requirement was deemed satisfied if a facility was placed in service by the end of 2016 or, if later, if placed in service by the end of the fourth calendar year after the calendar year in which construction began (generally referred to as the Continuity Safe Harbor). Notice 2017-04 extends the 2016 date to 2018 such that a facility will be deemed to satisfy the continuous construction/continuous efforts requirement if it is placed in service by the later of December 31, 2018, or the end of the fourth calendar year after the calendar year in which construction began (e.g., by the end of 2020 for projects with respect to which construction begins in 2016).
Retrofitted/Repowered Facilities
Under prior guidance, a facility may qualify as originally placed in service even if it contains used property if the fair market value of the used property is not more than 20% of the fair market value of the facility, such that the fair market value of the new property used in the facility is more than 80% of the fair market value of the facility (the 80/20 rule). Notice 2017-04 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.
1 Notice 2017-04
2 See our previous legal alert on PATH Act, Legal Alert: IRS Updates Beginning of Construction Guidance for Renewable Energy Tax Credits Extended by PATH Act
3 For legal alerts on prior Notices, see Legal Alert: Have You "Begun Construction"? IRS Issues Guidance for Renewable Energy Tax Credits, Legal Alert: IRS Clarifies "Binding Written Contract" Definition in Renewable Energy Tax Credit Begun Construction Guidance, Legal Alert: IRS Updates Renewable Energy Tax Credit Beginning of Construction Guidance, and Legal Alert: Are You Really Sure That Construction Began? IRS Issues Third Notice Regarding Renewable Energy Tax Credit Beginning of Construction Test
