Renewable Energy Tax Credits: When Does Construction Begin?December 27, 2016
Guidance to help you determine when construction begins.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 revived valuable tax credits for qualifying wind, solar and other renewable energy projects. To qualify for these credits, taxpayers must, among other things, produce electricity at a “qualified facility,” construction of which begins by a specified deadline. Here’s guidance from a recent IRS notice to help you determine when construction begins.
The PATH Act extended the production tax credit (PTC) — as well as the investment tax credit (ITC) in lieu of the PTC — for wind and other qualified facilities. For wind facilities, the full credit is available if construction begins before January 1, 2017. The credit is reduced by 20% if construction begins in 2017, 40% if construction begins in 2018 and 60% if construction begins in 2019. After 2019, the credit is eliminated.
Other types of facilities — such as hydropower, biomass, trash and geothermal — are eligible for the credit only if construction begins before January 1, 2017. The PATH Act also extended the ITC for eligible solar facilities, but this tax break will be phased out by the end of 2021.
Start Date for Construction
IRS Notice 2016-31 is helpful to determine when construction begins for purposes of the PTC and the ITC in lieu of the PTC. It doesn’t cover the ITC for solar facilities, which will be addressed by separate guidance.
Consistent with previous guidance, construction begins when a taxpayer either:
- Performs physical work of a significant nature (the physical work test), or
- Pays or incurs 5% or more of the facility’s total cost (the 5% safe harbor).
Both tests also include a “continuity” requirement. That is, the taxpayer must make continuous progress toward completion once construction has begun. Whether work is continuous depends on the facts and circumstances. Under the recent notice, the continuity requirement is deemed to be met if a facility is placed in service by the later of:
- A calendar year that’s no more than four calendar years after the calendar year during which construction began, or
- December 31, 2016.
So, if construction began on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will satisfy the continuity requirement. Taxpayers that fail the four-year test can still demonstrate continuity under relevant facts and circumstances. The notice also adds to the existing guidance regarding application of the physical work test, the 5% safe harbor and the continuity requirement.
If you believe you’re eligible for renewable energy tax credits, give us a call. Our team of tax specialists can help ensure that you receive the maximum credit available.