On May 5, 2016, the Internal Revenue Service (IRS) issued Notice 2016-31, which updates its prior guidance to reflect the extension of the beginning of construction deadline for the PTC and ITC made by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).
The PATH Act extended the PTC and the ITC for wind facilities the construction of which begins before January 1, 2020 and for certain other facilities the construction of which begins before January 1, 2017. The PATH Act also modified the PTC for wind facilities by providing that the credit will phase out over the next four years. In addition, the PATH Act extended the 30% ITC (with a phase down) for solar facilities the construction of which begins before January 1, 2022, after which the credit becomes 10%.
Notice 2016-31 applies to wind and other facilities eligible for the PTC or the ITC in lieu of the PTC. Separate guidance will be issued to address the beginning of construction requirement for solar facilities.
Notice 2016-31 clarifies, modifies, and extends prior guidance in several respects:
- Continuity Safe Harbor.
- Extension and Modification. A facility will satisfy the Continuity Safe Harbor if a taxpayer places the facility in service during a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began.
- Combination of Methods. A taxpayer cannot rely upon the Physical Work Test or the Five Percent Safe Harbor in alternating calendar years to extend the Continuity Safe Harbor deadline.
- Excusable Disruptions. The Notice revises and updates the list of “excusable disruptions” that will not cause a taxpayer to fail the Continuity Requirement under the facts-and-circumstances test. Among other things, the Notice adds interconnection-related delays to the list of excusable disruptions.
- Physical Work Test. The Notice provides a non-exclusive list of examples of physical work of a significant nature for different types of facilities.
- Wind. Excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.
- Hydropower. Excavation for or construction of a penstock, power house, or retaining wall structure.
- Biomass and trash. Site improvements (as opposed to site clearing), such as filling or compacting soil, or installing stack piling.
- Geothermal. Physical activities undertaken at a project site after a valid discovery. Development activities undertaken before valid discovery are preliminary activities that do not constitute physical work of a significant nature.
- Single Project Rule. Under prior guidance, for purposes of determining whether construction of a facility has begun, multiple facilities and related property that are operated as part of a single project are treated as a single facility.
- Physical Work Test and Five Percent Safe Harbor. The Notice clarifies that the single project rule applies both to the Physical Work Test and Five Percent Safe Harbor.
- Timing. Whether multiple facilities are part of a single project is determined in the calendar year during which the last of the facilities is placed in service.
- Disaggregation. Multiple facilities that are part of a single project may be disaggregated for purposes of determining whether a particular facility has satisfied the Continuity Safe Harbor. Disaggregated facilities that are placed in service before the Continuity Safe Harbor deadline will be eligible for the Continuity Safe Harbor, and disaggregated facilities that are placed in service after the deadline may satisfy the Continuity Requirement under a facts and circumstances determination.
- Retrofits. Under the 80/20 rule, a facility may qualify as originally placed in service even though it contains used property, as long as the fair market value of the used property is not more than 20 percent of the facility’s total value (for this purpose, the cost of the new property plus the value of the used property). The Notice clarifies that the 80/20 rule is applied to each individual facility comprising a single project and the Five Percent Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility.