United States

IRS issues notice extending and clarifying begun construction rules

Safe harbors for renewable energy production tax credit modified


In a recent notice (Notice 2017-04), the IRS extended and modified safe harbors provided in prior guidance for determining qualification for the renewable electricity production tax credit (PTC) under section 45 and the investment tax credit (ITC) under section 48. In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended the PTC for two years with respect to certain facilities that construction began before Jan. 1, 2017. The legislation also extended the PTC for wind facilities whose construction begins before Jan. 1, 2020, with the credit phasing out over four years. The PATH Act also extended the election to claim the ITC instead of the PTC for facilities whose construction began before Jan. 1, 2017 (or Jan. 1, 2020 for wind).

The PTC and ITC depend upon the dates that construction of the facilities is deemed to have begun. Therefore, determining the beginning of construction date is an area that has been subject to much confusion and debate. Prior notices (Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25 and Notice 2016-31) have supplied guidance and safe harbors to clarify the begun construction rules. The current notice was issued as a response to requests for further clarification regarding the extension and modification of the continuity safe harbor and costs that may be included in the 5 percent safe harbor for retrofitted renewable energy facilities. The current notice also includes a brief mention on the rule prohibiting the yearly alternation of methods (physical work test or 5 percent safe harbor) for determining the beginning of construction requirement, clarifying that the rule applies prospectively from the date of Notice 2016-31 (June 6, 2016).  

Continuity safe harbor

The continuity safe harbor allows for a taxpayer’s facility to be deemed to satisfy the continuous construction test or the continuous efforts test based on the date the facility is placed in service. If the safe harbor is not used, then the tests are applied using relevant facts and circumstances. Notice 2013-60 modified this continuity safe harbor by providing that a taxpayer can meet the requirements by placing a facility in service by the later of 1) a calendar year within four calendar years after the year when construction of the facility began, or 2) Dec. 31, 2016. The current notice modifies and extends the safe harbor allowing for a facility to be placed in service within four years of when construction began or by Dec. 31, 2018.

Costs allowable in computation of 5 percent safe harbor

Notice 2016-31 provides a 5 percent safe harbor allowing a facility to qualify as originally placed in service even though some of the property is used if the fair market value of the used property does not exceed 20 percent of the facility’s total value. This safe harbor applies only to the cost of new property used to retrofit an existing facility and as such, only expenditures that relate to new construction are taken into account. The current notice clarifies that for purposes of using the 20 percent rule, the cost of the new property includes all costs included in the depreciable basis of the new property.

Effect of the notice

Notice 2017-04 provides much needed guidance on the continuity rules and safe harbors provided in prior notices. The guidance in the prior notices still apply except as modified in the current notice. The IRS has stated that it will not issue private letter rulings on the application of the current or prior notices, nor will it issue private letter rulings on the begun construction requirement of section 45 or 48.


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