IRS Issues Notice 2017-04, Further Clarifying and Extending the "Begun Construction" Requirements for ITCs and PTCs

by Wilson Sonsini Goodrich & Rosati

On December 15, 2016, the IRS issued Notice 2017-04, which clarifies and extends certain "begun construction" requirements for facilities qualifying for the Section 45 production tax credit (PTC) for which construction must begin before a date certain—January 1, 2017, for certain facilities (e.g., solar, geothermal, and closed- or open-loop biomass) and January 1, 2020, for wind facilities. Notice 2017-04 clarifies guidance provided in Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25, and Notice 2016-31 (collectively, the "Begun Construction Guidance").1 A taxpayer who qualifies for PTCs may make an election to instead claim the Section 48 investment tax credit (ITC) with respect to the facility.

Under the Begun Construction Guidance, two alternative methods are provided to determine when construction has begun: (1) the physical work test (i.e., physical work of a significant nature has begun and the taxpayer maintains a continuous program of construction); and (2) the five percent safe harbor (i.e., at least five percent of the total cost of the eligible property has been paid or incurred and the taxpayer maintains continuous efforts to advance towards completion of the facility).

The IRS issued Notice 2017-04 to provide additional guidance with respect to the continuity safe harbor, the prohibition against combining methods, and the application of the five percent safe harbor to retrofitted facilities.

Extension and Modification of the Continuity Safe Harbor

To qualify as having begun construction, the "continuous construction test" (for purposes of satisfying the physical work test) or the "continuous efforts test" (for purposes of satisfying the five percent safe harbor) must be satisfied. Notice 2017-04 extends the safe harbor for satisfaction of the applicable test originally provided in Notice 2016-31. The extended "continuity safe harbor" established by Notice 2017-04 provides that either the "continuous construction test" or "continuous efforts test," as applicable, will be met if a facility is placed in service by the later of (1) the calendar year that is no more than four calendar years after the calendar year in which construction on the facility began and (2) December 31, 2018.

Prohibition on Combining Methods to Satisfy Begun Construction Requirement

Notice 2017-04 modifies the prohibition against combining methods to satisfy begun construction set forth in Notice 2016-31 by providing that this rule will only apply to facilities the construction of which begins after June 6, 2016 (the date on which Notice 2016-31 was published).

Costs Included in Five Percent Safe Harbor for Retrofitted Facilities

A project may be treated as newly placed in service (and qualify for PTCs or ITCs) even if it contains some used property as long as the fair market value of the used property is not more than twenty percent of the facility's total value (the "80/20 Rule"). In these circumstances, to satisfy the begun construction requirement, the five percent safe harbor is applied only to the cost of new property. Notice 2017-04 clarifies the 80/20 Rule, providing that the cost of new property includes all costs properly included in the depreciable basis of the new property.

1 See WSGR Alerts, "After Extension, IRS Clarifies 'Begun Construction' Guidance for PTCs," May 6, 2016; "Tax Extenders Signed into Law; Solar and Wind Tax Credits Extended," December 18, 2015; "IRS Extends 'Begun Construction' Guidance," March 11, 2015; "IRS Clarifies 'Begun Construction' Guidance," August 11, 2014; "IRS Issues Notice Clarifying Earlier Guidance on 'Beginning of Construction' Requirement for PTC and ITC Purposes," September 24, 2013; and "IRS Issues Notice on 'Beginning of Construction' Requirement for PTC and ITC Purposes,' April 18, 2013.

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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