IRS Notice Expands the Safe Harbor for Claiming Production Tax Credits

Internal Revenue Service (IRS) Notice 2016-31, released initially in May 2016, clarifies and expands previous IRS guidance on satisfying the “beginning of construction” requirement for renewable energy facilities to qualify for production tax credits (PTC), reflecting the extensions of the PTC under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).


Prior to the PATH Act, a taxpayer was eligible to receive the PTC under Section 45 of the Internal Revenue Code (Code) with respect to certain renewable energy facilities if the construction of such facilities began before Jan. 1, 2015. A taxpayer can establish the beginning of construction by satisfying either the “physical work test” or the “five percent safe harbor”. Both tests require “continuous progress” toward completion once construction has begun. The IRS has generally allowed developers two years to complete the construction of a facility (Continuity Safe Harbor).

In December 2015, the PATH Act extended the PTC (or the ITC in lieu of the PTC) for two years with respect to qualified energy facilities (closed-loop biomass, open-loop biomass, geothermal or solar energy, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy) the construction of which begins before Jan. 1, 2017, and further extended the PTC (or the ITC in lieu of the PTC) for wind facilities, with the full PTC available for wind facilities the construction of which begins before Jan. 1, 2017, and a phase-out of the PTC over four years for wind facilities the construction of which begins in 2017, 2018, or 2019. If construction begins in 2017, 80 percent of the PTC will be available, in 2018, 60 percent of the PTC will be available and in 2019, 40 percent of the PTC will be available. The PTC will be phased out completely for wind facilities the construction of which begin after Dec. 31, 2019.

The Notice

Extension of the Continuity Safe Harbor

Consistent with the PATH Act’s extension of the renewable energy credits generally, the Notice extends the Continuity Safe Harbor such that if a facility is placed in service by the later of (i) a calendar year that is no more than four years after the year during which construction of the facility began or (ii) Dec. 31, 2016, the facility will be considered to satisfy the Continuity Safe Harbor. For example, if construction on a facility begins on Jan. 15, 2016, and the facility is placed in service by Dec. 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor. However, the Notice further provides that a taxpayer may not rely on the “physical work test” and the “five percent safe harbor” in alternating calendar years to establish the “beginning of construction” or satisfy the “Continuity Safe Harbor”. Taxpayers are advised to carefully plan projects to achieve certainty as to when the facility must be placed in service to satisfy the Continuity Safe Harbor.

Disruption to Continuous Construction or Continuous Efforts Tests

The Notice expands the list of “non-exclusive” excusable disruptions in the taxpayer’s construction of a facility that will not be considered as failing to meet the “continuous progress” requirement. The non-exclusive list includes severe weather conditions; natural disasters; delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments; delays at the written request of a federal, state, local or Indian tribal government regarding matters of public safety, security, or similar concerns; interconnection-related delays; delays in the manufacture of custom components; labor stoppage; inability to obtain specialized equipment of limited availability; the presence of endangered species; financing delays; and supply shortages.

Physical Work Test

The Notice reiterates that the physical work test focuses on the nature of the work performed, not the amount or the cost. If the work performed is of a significant nature, there is no fixed minimum amount of work, or monetary or percentage threshold required to satisfy the physical work test. The Notice also provides non-exclusive examples to illustrate physical work of a significant nature for various types of renewable energy facilities.

For wind facilities, this may include excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of concrete pads. For hydropower facilities, it may mean excavation for or construction of a penstock, power house or retaining wall structure. For biomass and trash facilities, it could include site improvements, (as opposed to site clearing), such as filling or compacting soil, or installing stack piling. For geothermal facilities, it could mean physical activities that are undertaken at a project site after a valid discovery. Physical work of a significant nature does not include preliminary activities, such as planning and designing, securing financing, exploring, researching, conducting geologic mapping and modeling, and obtaining permits and licenses.

Aggregation and Disaggregation

The Notice provides that solely for purposes of determining the “beginning of construction” date, multiple facilities that are operated as part of a single project may be aggregated and treated as a single facility. Thus a wind farm with multiple wind turbines may satisfy the “physical work test” by the performance of physical work of a significant nature for a portion of the wind turbines that constitute the wind farm.

For purposes of determining when a facility is placed in service and whether a facility satisfies the Continuity Safe Harbor, the Notice provides that multiple facilities that are aggregated as described in the previous paragraph may be disaggregated and treated as multiple separate facilities. Thus in the example above, if some turbines in the wind farm are placed in service within the Continuity Safe Harbor but other turbines are not, the turbines that are placed in service before such deadline will be treated as having satisfied the Continuity Safe Harbor. The other turbines may satisfy the continuity requirement under the facts and circumstances determination.

Retrofitted Facilities

A retrofitted facility may qualify as originally placed in service, even though it contains some used property, if the fair market value of the used property is not more than 20 percent of the facility’s total value, equal to the cost of the new property plus the value of the used property (the 80/20 Rule). The Notice clarifies that (i) this 80/20 Rule is applied to each individual facility comprising the project, and (ii) only expenditures paid or incurred that relate to new construction should be taken into account for purposes of the “five percent safe harbor” discussed above.

Practical Considerations

The extension of the continuity safe harbor is a welcome relief to the renewable energy industry. Instead of two years, developers now have four years to place a project into service once construction has begun. The extension also provides incentives to resuscitate projects that have been suspended or delayed over two years after construction has begun. The provisions allowing retrofitted facilities provide significant opportunities for refurbishing or expanding existing facilities.

Currently, the PTCs are 2.3 cents for every kilowatt-hour of electricity generated for the power grid by wind, closed-loop biomass, and geothermal energy resources; and 1.2 cents for every kilowatt-hour of electricity generated by open-loop biomass, landfill gas, municipal solid waste, qualified hydroelectric, and marine and hydrokinetic energy resources.

Taxpayers can claim the PTC with respect to renewable energy generated for 10 years after the facility is placed into service. The extension of the PTC by the PATH Act, followed by the extension of the Continuity Safe Harbor and other helpful clarifications from the IRS in the Notice are expected to provide incentives for more renewable energy projects in the coming years. The Notice does not address the extension of the “beginning of construction” date for the investment tax credits (the ITC) for solar energy facilities. The Treasury Department and the IRS anticipate issuing separate guidance addressing the extension of the ITC for solar energy facilities.

Vivian Ouyang (left) is senior counsel at Bracewell LLP in New York where she focuses on federal tax issues in mergers; acquisitions; divestitures; joint ventures; project finance; partnerships; and cross-border transactions, with a particular focus in the energy sector.

Curt Beaulieu (center) is Senior Counsel in the firm’s Washington, D.C. office. He focuses on tax policy, providing advice on federal legislation and regulations. Prior to joining Bracewell, Mr. Beaulieu served for a decade on Capitol Hill and was Tax Counsel for the leaders of both tax-writing committees in Congress — the House Ways and Means Committee and the Senate Finance Committee.

Anne Holth (right) is an associate in the firm’s New York office where she represents clients in a range of industries on federal, state, and international tax matters.

Lead image credit: Siemens

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Jennifer Runyon has been studying and reporting about the world's transition to clean energy since 2007. As editor of the world's largest renewable energy publication, Renewable Energy World, she observed, interviewed experts about, and reported on major clean energy milestones including Germany's explosive growth of solar PV, the formation and development of the U.S. onshore wind industry, the U.K. offshore wind boom, China's solar manufacturing dominance, the rise of energy storage, the changing landscape for utilities and grid operators and much, much, more. Today, in addition to managing content on POWERGRID International, she also serves as the conference advisory committee chair for DISTRIBUTECH, a globally recognized conference for the transmission and distribution industry. You can reach her at

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