On May 5, 2016, the Internal Revenue Service (IRS) issued Notice 2016-31, which updates prior guidance regarding the beginning of construction requirement for IRC sections 45 and 48 renewable energy tax credits following extensions of those credits in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). (See Sutherland’s December 17, 2015 Legal Alert regarding the PATH Act’s impact on the energy industry.)
Highlights of the Notice include the following:
- Confirms continuous construction/efforts safe harbor available if a project is completed within four years after the end of the calendar year in which construction begins.
- Prohibits taxpayers from relying on the Physical Work Test and the 5% Safe Harbor in alternating calendar years to satisfy the beginning of construction requirement or the continuous construction/efforts requirement.
- Includes additional “excusable disruptions” for use in evaluating whether a project may satisfy a “facts and circumstances” analysis of whether the continuous construction/ efforts requirement has been satisfied.
- Provides additional examples of work that will satisfy the Physical Work Test.
- Lists “preliminary activities” that cannot be used to satisfy the Physical Work Test.
- Allows a portion of a wind project (or other project) that consists of multiple facilities that are treated as a single project to satisfy the continuous construction/ efforts safe harbor (with the remainder of the project subject to a facts and circumstances analysis).
- Addresses the application of the 5% Safe Harbor to retrofitted facilities.
The Notice does not address the PATH Act’s section 48 extension for solar facilities. Separate guidance is expected to be issued with respect to that extension.
A more complete analysis of the Notice will follow.