On June 22, the IRS issued Notice 2018-59, providing guidance to determine
when construction has begun on energy facilities, for purposes of the
Section 48 investment tax credit.
The long-awaited guidance follows changes made to the credit that were
enacted in the Consolidated Appropriations Act, 2016, and the Bipartisan
Budget Act of 2018. Prior to these changes, energy facilities were required
to be placed in service by a certain date to be eligible for the credit.
Following the changes, the placed-in-service requirement was replaced with
a requirement to begin construction by a certain, later date. This
begin-construction requirement applies to seven types of energy property:
(1) solar, (2) fiber-optic solar, (3) qualified fuel cell, (4) qualified
microturbine, (5) combined heat and power system, (6) qualified small wind,
and (7) geothermal heat pump.
This notice follows the existing IRS guidance on the begin-construction
requirement under the Section 45 production tax credit by providing two
alternative methods of satisfying the begin-construction requirement.
First, the begin-construction requirement may be satisfied by meeting the
physical-work test. Alternatively, the begin-construction requirement may
be satisfied by meeting the 5 percent safe-harbor test. Each of these tests
is further described below.
Under the physical-work test, a taxpayer satisfies the begin-construction
requirement when physical work of a “significant nature” begins. To further
assist taxpayers, this notice contains examples of what is and is not work
of a significant nature with respect to the energy properties. For example,
work of a significant nature on a solar energy property would be the
installation of racks or other structures to affix photovoltaic panels,
collectors or solar cells to a site. This test focuses on the nature of the
work performed; there is no fixed minimum amount of work or monetary
threshold that must be met to satisfy the physical-work test.
Under the 5 percent safe-harbor test, a taxpayer satisfies the
begin-construction requirement when the taxpayer pays or incurs 5 percent
or more of the total cost of the energy property. Total cost takes into
account all costs properly included in the depreciable basis of the energy
property but does not include the cost of land or property not integral to
the energy property.
Under both tests, a taxpayer must demonstrate continuous progress toward
completion once construction has begun. Under the physical-work test, a
taxpayer must maintain a “continuous program of construction.” Under the 5
percent safe-harbor test, a taxpayer must make “continuous efforts to
advance toward completion.” These continuity requirements are determined by
the relevant facts and circumstances. If, however, an energy property is
placed in service by the end of the calendar year that is no more than four
calendar years after the calendar year in which construction of the energy
property begins, the continuity requirements under either test will be
deemed to have been met pursuant to this continuity safe harbor. The
continuity safe harbor does not extend the statutory placed-in-service
deadlines or phase-out periods for certain energy property.
In addition to guidance on the begin-construction requirement, the notice
also provides guidance on transferring energy property. Specifically, the
notice states that energy property originally intended for a certain site
may be transferred to another site, and any work performed or amounts paid
or incurred at the initial site may be taken into account in determining
when the energy property satisfies the either of the two begin-construction
tests. While a transfer of energy property between taxpayers does not
necessarily disqualify the property, in the case of a transfer of only
tangible personal property between unrelated taxpayers, any work performed
or amounts paid or incurred by the transferor with respect to such
transferred property will not be taken into account with respect to the
transferee for purposes of the physical-work test or the 5 percent
safe-harbor test. The transferability provisions are similar to the IRS
guidance on the begin-construction requirement under the Section 45
production tax credit.
Also included in the notice is additional guidance on the treatment of
multiple energy properties as a single facility and the application of a
look-through rule allowing physical work or amounts paid or incurred, in
each case by another party pursuant to a binding written contract with the
taxpayer, to count toward satisfaction of the physical-work test or the 5
percent safe harbor.
Businesses and investors in the renewable energy sector have welcomed the
clarification provided in Notice 2018-59 and can find comfort in the fact
that the guidance is similar to existing guidance for the Section 45
production tax credit.