Energy Tax Law Alert: IRS Updates "Beginning of Construction" Guidance

The IRS today issued Notice 2015-25, updating its prior guidance in Notices 2013-29, 2013-60, and 2014-46, regarding the “beginning of construction” requirement for the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the Code) and the investment tax credit (ITC) under Section 48 of the Code.

The new notice clarifies certain issues in light of the legislative extension that allows a taxpayer to claim the PTC or ITC with respect to an otherwise qualified renewable energy facility if construction of the facility began before January 1, 2015 (formerly January 1, 2014). The IRS’s prior guidance provides that a taxpayer may begin construction by either (1) starting physical work of a significant nature (the “physical work test”) or (2) paying or incurring five percent or more of the total cost of facility (the “5% safe harbor”). Once construction begins, a taxpayer must maintain a continuous program of construction or make continuous efforts toward construction until the facility is placed in service. This requirement is commonly referred to as the “continuous construction” test in the case of the physical work test or as the “continuous efforts” test in the case of the 5% safe harbor. In Notice 2013-60, the Service provided that the continuous construction test and the continuous efforts test will be considered satisfied if the facility is placed in service before January 1, 2016. Today’s IRS notice extends that date, clarifying that if construction began with respect to a facility before January 1, 2015 and the facility is placed in service before January 1, 2017, the facility will be considered to satisfy the continuous construction test or continuous efforts test, as the case may be. This will provide some comfort with respect to projects the construction of which began in 2014.

If you have questions regarding the new guidance or any other issue regarding the PTC, the ITC or related matters, please contact one of the key contributors.