United States

IRS issues favorable energy tax credit ”begun construction” guidance


Over the past few years, taxpayers scrambled to develop, construct and place in service renewable energy projects by Jan. 1, 2014, in order to qualify for the section 45 renewable electricity production tax credit (PTC) or the section 48 energy investment tax credit (ITC) in lieu of the PTC. The American Taxpayer Relief Act of 2012 modified the placed-in-service requirement, adopting a more generous “begun construction” requirement. The IRS issued two notices (Notice 2013-29 and 2013-60) to clarify the definition and treatment of begun construction, establishing either a physical work test or a 5 percent safe harbor that must be met to qualify for the credit. However, even with the guidance of two issued notices, many questions remained. The IRS recently issued Notice 2014-46 to provide additional clarification on the previously issued notices and a modification to the 5 percent safe harbor.

Methods for establishing beginning of construction

The physical work test under Notice 2013-29 for establishing the beginning of construction states that work of a significant nature must take place, based on facts and circumstances, in order for a facility to qualify for the PTC or ITC. Additionally, a continuous program of construction must continue through the facility’s placed in service date, which must be before Jan. 1, 2016. While Notice 2013-29 provides examples of what may constitute work of a significant nature, many taxpayers questioned if a dollar threshold of expenditures was necessary to meet the physical work test. Addressing these concerns, Notice 2014-46 clarifies that the physical work test focuses on the qualitative nature of the work being performed, not the quantitative amount or cost of the work.

Alternatively, if physical work of a significant nature cannot be shown to substantiate the beginning of construction, taxpayers can rely on a quantitative safe harbor to qualify. The safe harbor states that if 5 percent of the total cost of the facility is paid or incurred before Jan. 1, 2014, construction will be considered to have commenced. Similar to the physical work test, continuous efforts to advance towards completion of the facility must occur, and the facility must be placed in service before Jan. 1, 2016. Notice 2014-46 modifies the safe harbor for single projects that consist of multiple facilities. Typically, these projects are treated as a single facility, even though the project involves multiple facilities. If the 5 percent safe harbor is not met for a project that involves multiple facilities, but rather 3 percent of costs are paid or incurred on the aggregate of some, but not all, of the facilities, the PTC or ITC may still be claimed for those facilities in the project as long as the aggregate cost of the individual facilities is not more than 20 times the amount paid or incurred by Jan. 1, 2014, and the continuous efforts test is still met.

Facility relocations and transfers

Many taxpayers questioned the consequences of transferring a facility (typically from a developer to an unrelated investor or user) while the facility was under construction. Notice 2014-46 describes the result of such transfer, highlighting the fact that the taxpayer that begins construction does not have to be the taxpayer that claims the credit. Quoting the definition of qualified property for purposes of the ITC, the notice adds emphasis to qualified property that is “constructed, reconstructed, erected, or acquired by the taxpayer.” Taxpayers may also relocate the physical location of a facility without effecting the physical work test or safe harbor. However, if physical assets are transferred from the taxpayer to an unrelated transferee, any costs incurred by the taxpayer cannot be taken into account by the transferee for purposes of the physical work test or safe harbor.


Notice 2014-46 provides additional clarity and new guidance on the existing methods used to determine when construction has begun on a qualified facility for PTC or ITC purposes. This guidance should eliminate many taxpayers’ concerns over the application of the physical work test and safe harbor, as well as the appropriate treatment of relocations and transfers of in-progress projects. Furthermore, this recent guidance is favorable for projects with multiple facilities that may not have met the 5 percent safe harbor for the entire project but paid or incurred at least 3 percent of the costs for at least some of the individual facilities. Impacted taxpayers should consult with a tax advisor regarding this notice and its applicability to energy tax credit investments.




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