January 17, 2017

January 17, 2017

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IRS Issues New Guidance on the Beginning of Construction Safe Harbor For Renewable Energy Projects

The IRS recently issued Notice 2017-4 (the “Notice”) which makes two important changes to its “beginning of construction” rules for taxpayers seeking to take advantage of the section 45 renewable electricity production tax credit (PTC) for wind and other renewable energy facilities including geothermal, biomass, landfill gas and certain hydropower and marine hydrokinetic energy projects. Under prior IRS guidance, including Notice 2016-31 discussed in our blog post here, taxpayers have two ways to establish that they started construction. They can either show that they began physical construction of a significant nature (the “Physical Work Test”), or incurred at least 5% of the total cost of the eligible facility (the “5% Safe Harbor”). However, once construction has begun or cost have been paid or incurred, the IRS requires taxpayers to make continuous progress towards completion to satisfy both the Physical Work Test and the 5% Safe Harbor (“Continuous Construction Requirement”). Taxpayers are deemed to satisfy the Continuous Construction Test provided they began construction on the facility prior to January 1, 2015, and place it in service prior to January 1, 2017 (the “Continuity Safe Harbor”).

The Notice now permits taxpayers to fall within the Continuity Safe Harbor provided that they place the facility in service by the later of (1) a calendar year that is no more than four calendar years after the construction of the facility began or (2) December 31, 2018. This provides additional time for developers that have satisfied the Physical Work Test or 5% Safe Harbor to complete construction and place the facility in service without having to demonstrate that the Continuous Construction Requirement was satisfied. For example, if construction begins on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will meet the Continuity Safe Harbor.

The Notice also provides that the prohibition on taxpayers using both the Physical Work Test and 5% Safe Harbor methods in alternating years to push forward the facility’s placed in service deadline does not apply to taxpayers that began construction on a project under either test prior to June 6, 2016. (The date that Notice 2016-31, which established this rule, was published.) Accordingly, taxpayers that began construction before this deadline can show that they have made continuous progress towards construction by relying on the Physical Work Test in one year and then relying on the 5% Safe Harbor the following year after they have paid enough costs to meet the 5% threshold. This is helpful because taxpayers acquiring projects may not have been satisfied with the manner in which the prior developer demonstrated the commencement of construction. The new rule permits them to “requalify” the project under a different method.

Last, the Notice provides guidance for developers using the 5% Safe Harbor for repowering and retrofitting existing projects. In order to take advantage of the tax credit, the facility must be “new” as determined by the 80/20 rule, which means that the cost of new parts must be four times the value of the used parts. The Notice clarifies that for purposes of satisfying the 5% Safe Harbor, the cost of the new property includes all costs properly included in depreciable basis, meaning that indirect costs that are allocated to the new property’s depreciable basis should count towards the 5% Safe Harbor.

© 2017 Foley & Lardner LLP

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About this Author

John A. Eliason, Foley Lardner, Tax Lawyer, Energy Industry Attorney
Partner

John A. Eliason is a partner and business lawyer at Foley & Lardner LLP. He provides tax, legal, and business advice to financial institutions, equity investors, manufacturers, and project developers in the energy sector and is co-chair of the firm’s Energy Industry Team.

Mr. Eliason regularly represents clients participating in wind, solar, and other renewable energy transactions that rely on tax and other federal and state incentives such as investment tax credits, production tax credits, bonus depreciation, and other government incentive...

202.295.4100
David B. Weisblat, Foley Lardner, Transactional Tax Lawyer, Project Finance Attorney,
Of Counsel

David Weisblat is of counsel and a transactional tax lawyer with Foley & Lardner LLP focusing on federal and state tax issues arising in representing financial institutions, developers, utilities and other participants in energy, project finance and leveraged lease transactions. Mr. Weisblat regularly advises clients on renewable energy projects, including solar, wind and biomass projects. He is familiar with current tax equity structures with an emphasis on sale-leaseback and partnership-flip transactions and advises on utility, commercial and residential projects.

Mr. Weisblat also structures domestic and cross-border energy and project finance transactions of power plants, aircraft, rail equipment and infrastructure assets. He also advises on tax issues associated with climate change policies, including carbon trading. Additionally, Mr. Weisblat represents clients in tax audit and controversy proceedings and advises corporations on tax issues in bankruptcy and restructuring. 

202.295.4176
Kurt R. Rempe, Foley Lardner, Energy, Tax Lawyer, Pipeline Industry
Associate

Kurt Rempe is an associate and business lawyer with Foley & Larder LLP where he focuses on energy and tax law. His experience includes representing clients in tax equity investments in renewable energy projects; and regulatory matters related to the electric, natural gas and oil pipeline industry. Mr. Rempe has electric experience in transmission service and interconnection agreements, power purchase agreements, open access requirements, market-based rates, qualifying facility certification, reliability rules, sales and acquisitions of electric generation assets,...

202.672.5326