Editor’s note: This article is by a number of authors at McDermott Wind & Emery, including Gale E. Chan, Madeline Chiampou Tully, Heather Cooper, Martha Groves Pugh, Philip Tingle, and Bradford E. LaBonte. It was published in Windpower Engineering & Development’s February 2017 issue. A complete digital version of the issue is here.
In December 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the “beginning of construction” requirements for wind energy and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes.
The Notice extends the Continuity Safe Harbor’s placed-in-service date by which a facility can meet the beginning of construction tests for facilities that began construction before 2014.
A turbine blade is loaded onto a flatbed truck for transport to the construction site. There has been uncertainty about what qualifies as the “beginning of construction” requirements for wind-power projects. The IRS’ recently released Notice 2017-04 helps clarify what counts for tax credit eligibility.
Specifically, the Notice states that if a facility is placed in service:
- Later than a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or
- December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor.
Following prior IRS guidance, a facility was considered to have satisfied the Continuity Safe Harbor if the facility was placed in service within the four-year period following when construction commenced or December 31, 2016 — whichever is later. The change in the Notice provides welcome guidance for projects that began construction prior to 2014, and were unlikely to begin service within the four-year period, but are expected to be in service by the end of 2018.
The Notice also provides that the “combination of methods” rule set forth in Notice 2016-31 only applies to facilities where construction begins after June 6, 2016 (the publish date of Notice 2016-31). For example, it provides that if construction on a wind facility began 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.
Furthermore, Notice 2016-31 set forth a “combination of methods” rule under which a taxpayer cannot alternate between the Physical Work Test and the Five Percent Safe Harbor to satisfy the beginning of construction requirement or the Continuity Requirement.
So, if a taxpayer relied on the Physical Work Test (this test focuses on the nature of the work performed rather than the amount or cost of such work) to satisfy the beginning of construction rules in 2015, and then in 2016 incurred costs totaling five percent or more of the total cost of the facility, the taxpayer could not use the Safe Harbor rule to satisfy the beginning of construction requirement or the Continuity Requirement. Instead, the Continuity Safe Harbor is applied beginning in 2015.
Finally, 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.
Understanding Notice 2017-04
This Notice modifies the Continuity Safe Harbor by providing that if a taxpayer places a facility in service later than a calendar year (that is no more than four calendar years after the calendar year during which construction of the facility began) or by December 31, 2018, than the facility will be considered to satisfy the Continuity Safe Harbor.
By changing the date from December 31, 2016, to December 31, 2018, the Notice allows certain projects on which construction began prior to 2014 to qualify for the Continuity Safe Harbor. For example, if construction began on a facility on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor.
Under the Prior Guidance, this facility would not have been eligible for the Continuity Safe Harbor, and the taxpayer would have needed to demonstrate that the Continuity Requirement was met under the relevant facts and circumstances. 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.
The Notice also states that the “combination of methods” rule set forth in Notice 2016-31 only applies to facilities on which construction begins after June 6, 2016. Therefore, if a taxpayer meets the Physical Work Test with respect to a facility in 2014 and the Five Percent Safe Harbor test for the facility in 2015, the taxpayer can seemingly apply the Continuity Safe Harbor test from 2015. This means the taxpayer must place the facility in service by December 31, 2019 to satisfy the Continuity Safe Harbor.
However, taxpayers that begin construction on facilities after June 6, 2016 will be prevented from restarting the four-year window for placing the facility in service by using the other beginning of construction method to qualify the facility as having begun construction in the later year.
The Notice provides that, as indicated in the Prior Guidance, a retrofitted facility may qualify as originally placed in service for purposes of the PTC and ITC if the fair market value of used property does not constitute more than 20% of the facility’s total value. The cost of the facility’s new property must be at least 80% of the facility’s total value (the 80/20 Rule).
The Prior Guidance indicated that the Five Percent Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility, and that all costs properly included in the depreciable basis of the facility are taken into account to determine whether the Five Percent Safe Harbor has been met.
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. Taxpayers had questioned whether indirect costs that were allocable to the depreciable basis could be included for these purposes, and the Notice appears to affirmatively answer this question.
A quick guide to IRS Notices for wind facilities
- Notice 2013-29: A taxpayer may establish that construction has begun on a qualified facility by demonstrating “physical work of a significant nature” (the Physical Work Test), or by satisfying the Five Percent Safe Harbor. Some examples include the start of excavation for a project’s foundation, setting of anchor bolts into the ground, or the pouring of the foundation’s concrete pad. It is possible to site onsite and offsite work.
- Notice 2013-60: It is possible to claim the PTC or ITC even if the taxpayer was not the owner of the facility on the date construction began. A facility also satisfies the Continuity Requirement if it was placed in service before January 1, 2016 (the Continuity Safe Harbor).
- Notice 2014-46: The Physical Work Test can focus on the nature of the work performed rather than the amount or cost of such work. In regards to the Five Percent Safe Harbor rule, if a taxpayer incurred at least three percent of the total cost of such a facility before January 1, 2014, the Five Percent Safe Harbor may be satisfied with respect to some (although not all) of the individual facilities that are part of the larger project.
- Notice 2015-25: The Continuity Safe Harbor rule was extended to January 1, 2017, so that the beginning of construction guidance mirrored the statutory extension of the PTC and the ITC under the Tax Increase Prevention Act of 2014.
- Notice 2016-31: The Continuity Safe Harbor was extended to correspond with the extension and modification of the PTC by the PATH Act. Also, a “combination of methods” rule means a taxpayer cannot alternate between the Physical Work Test and the Five Percent Safe Harbor to satisfy the beginning of construction requirement or the Continuity Requirement. This Notice also revised and added to the list of excusable disruptions that will not be taken into account when determining the Continuity Requirement.
Filed Under: News, Policy, Projects
