|  | | The IRS has issued highly anticipated guidance updating the "beginning of construction" requirement for the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the Code) and the investment tax credit (ITC) under Section 48 of the Code. Notice 2016-31 updates the IRS's prior guidance to reflect the extension of the PTC and ITC that was enacted at the end of 2015, and also addresses a number of other issues taxpayers may encounter when determining whether they qualify for the PTC or ITC.
Notice 2016-31 addresses certain issues raised by the extension of the PTC and ITC that was enacted as part of the Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act"). As we noted in our December 16, 2015 update, the legislation extended the availability of the PTC or ITC for wind facilities with respect to which construction begins before January 1, 2020, subject to a 20%-per-year reduction in the credit amount for facilities for which construction begins after December 31, 2016 (i.e., a 20% reduction for a facility the construction of which begins in 2017, a 40% reduction for a facility the construction of which begins in 2018, and a 60% reduction for a facility the construction of which begins in 2019). In the case of geothermal, landfill gas, trash, marine, and hydrokinetic facilities and certain closed-loop biomass, open-loop biomass, and qualified hydropower facilities, a taxpayer is eligible to claim the PTC or ITC if construction begins before January 1, 2017, with no phase-out.
In the case of solar facilities, the PATH Act extended the ITC for facilities beginning construction before January 1, 2022, providing a 30% credit for facilities beginning construction before 2020, a 26% credit for facilities beginning construction during 2020, and a 22% credit for facilities beginning construction during 2021. Notice 2016-31 indicates the Treasury Department and IRS will issue separate guidance to address the extension of the ITC for solar energy facilities.
Extension of Continuous Construction Test and Continuous Efforts Test
The IRS's prior guidance provides that a taxpayer may begin construction by either (1) starting physical work of a significant nature (the "physical work test") or (2) paying or incurring five percent or more of the total cost of facility (the "5% safe harbor"). Once construction begins, a taxpayer must maintain a continuous program of construction or make continuous efforts toward construction until the facility is placed in service. This requirement is commonly referred to as the "continuous construction" test in the case of projects satisfying the physical work test and as the "continuous efforts" test in the case of projects satisfying the 5% safe harbor (referred to collectively as the "Continuity Requirement" in Notice 2016-31).
In the prior guidance the IRS established a safe harbor (referred to as the "Continuity Safe Harbor" in Notice 2016-31) under which the Continuity Requirement would be deemed satisfied with respect to a project if the project were placed in service by a specified date. The new IRS notice extends that date, providing generally that if a taxpayer places a facility in service during a calendar year that is no more than four calendar years after the calendar year during which construction began, the facility will be considered to satisfy the Continuity Safe Harbor. Thus, as an example in Notice 2016-31 indicates, 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. Click here to continue reading related issues and additional examples regarding the "beginning of construction" guidance.
If you have any questions regarding these extensions or any other energy-related provisions of the Bill, please contact one of the attorneys listed below.
Greg Jenner at (202) 398-1794 or greg.jenner@stoel.com
Kevin Pearson at (503) 294-9622 or kevin.pearson@stoel.com
Adam Schurle at (612) 373-8814 or adam.schurle@stoel.com
Dustin Swanson at (503) 294-9262 or dustin.swanson@stoel.com
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