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IRS Guidance on ‘Begin Construction’ Requirements for Solar Investment Tax CreditsAugust 6, 2018
On June 22, 2018, the IRS issued Notice 2018-59 (the “Notice”) addressing the application of the “begun construction” requirements for solar projects claiming the ITC. This guidance is essentially the same as the start of construction guidance the IRS issued in prior notices with respect to wind projects qualifying for the PTC1 (the “PTC Wind Guidance”). The Notice, consistent with the PTC Wind Guidance, provides two methods for satisfying the begun construction requirement: (1) “commencing physical work of a significant nature” (the “Physical Work Test”) and (2) incurring 5% or more of the total cost of the energy property that is integral to the production of electricity (the “5% Safe Harbor”). As is the case with the PTC Wind Guidance, the 5% Safe Harbor excludes the cost of property that is not integral to the production of electricity, such as costs incurred in connection with contouring or acquiring land or obtaining permits.
If either of these two tests are satisfied, then the taxpayer must be able to further show either (1) that it has maintained a continuous program of construction if relying on the Physical Work Test or (2) that it is has made continuous efforts to advance the project towards completion if relying on the 5% Safe Harbor.
Of significant benefit to solar developers is the Notice’s adoption/application of the four-year continuous construction safe harbor that was set forth in the PTC Wind Guidance. That is, as long as the project is placed in service within four years after construction has been deemed to commence, the continuous construction requirements set forth in the Notice will be deemed satisfied.2
Also of relief to the solar industry is the fact that the Notice confirms that a taxpayer that owns property on the date the property is placed-in-service may claim the ITC, even though such taxpayer did not own the property on the date that construction began, as long as such owner/transferee either (1) is related to the party from whom the project was acquired (as a general rule, there is at least 20% common ownership of both the transferor and the transferee) or (2) has acquired more than just tangible property from the party that began construction (that is, the transferee acquired other intangible assets that are a part of the project such as land rights, PPAs, etc).
As one last note, solar energy investors and developers will also be happy that the IRS confirmed that the so-called 80/20 rule regarding qualification for the PTC/ITC with respect to retrofitted/repowered wind facilities will also apply to retrofitted repowered solar facilities.3
1 Notice 2013-29, Notice 2013-60; Notice 2014-46; Notice 2015-25; Notice 2016-31 and Notice 2017-4.
2 We note, however, that in order for a solar project to qualify for the full 30% ITC, the project must be placed in service before January 1, 2024. If the project is not placed in service before this deadline, the ITC is reduced to 10%.
3 Consistent with the PTC Wind Guidance, the Notice provides that a solar facility may qualify as originally placed in service even if the facility contains some used property, provided that the fair market value of the used components of property is not more than 20% of the energy property's total value (the cost of the new components of property plus the value of the used components of property). The Physical Work Test or the 5% Safe Harbor is applied only with respect to the work performed on, or amounts paid or incurred for, new components of property used to retrofit used components of property or an existing energy property.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Junaid Chida, an O’Melveny partner licensed to practice law in California and New York, Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York, and Alexander Roberts, an O’Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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