IRS Issues Guidance Regarding Beginning of Construction Requirement for ITC

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The IRS today issued guidance regarding the “beginning of construction” requirement as it related to the investment tax credit (ITC) under Internal Revenue Code Section 48. The guidance, Notice 2018-59, generally applies the same rules to ITC projects as previous IRS guidance regarding the beginning of construction requirement applicable to projects qualifying for the production tax credit (PTC) under Internal Revenue Code Section 45. While many practitioners and observers believed rules similar to those adopted for the PTC would also apply to the ITC, the IRS’s clarification is welcome news.

The notice 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 the energy property (the “5% safe harbor”) within the prescribed deadline. Both of these methods of beginning construction are nearly identical to the methods permitted by the IRS under the existing guidance related to PTC projects.

Notice 2018-59 also provides guidance, which is substantially identical to prior IRS guidance, related to:

  • the continuous construction requirement and safe harbor,
  • effects of cost overruns,
  • single project grouping and disaggregation to determine eligibility for the ITC,
  • beginning construction through binding written contracts,
  • application of the “80/20 Rule” to retrofitted energy property, and
  • transfers of energy property.

For summaries of past IRS guidance related to these issues, see our alerts and updates from:

If you have questions about the new guidance, the ITC, the PTC, or related matters, please contact one of the listed authors of this alert.

Key Contributors

Kevin T. Pearson
Adam D. Schurle
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