Tax Credits: Notice 2016-31, 2016-23 IRBMay 19, 2016 | By Erik Lincoln
The IRS in Notice 2016-31 provides guidance on the date by which facilities must begin construction to qualify for the IRC §45 renewable electricity production tax credit (production credit) or the IRC §48 energy investment tax credit (investment tax credit). This Notice reflects extensions and modifications under the Protecting American from Tax Hikes Act of 2015 (PATH, P.L. 114-113).
Background. Under IRC §45, a credit for electricity produced from certain renewable resources is available for such electricity produced at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service. The credit, i.e., the renewable electricity production credit, is allowed for electricity produced by taxpayers from: (1) wind, (2) closed-loop biomass, (3) open-loop biomass, (4) geothermal energy, (5) municipal solid waste, (6) marine and hydrokinetic renewables (e.g., waves and tides), (7) qualified hydropower production, (8) small irrigation power, and (9) solar power.
Prior to the American Taxpayer Relief Act of 2012 (“ATRA”), IRC §45(d) required a facility to be placed in service before Jan. 1, 2014 in order to be a qualified facility, except for qualified wind facilities which had to be placed in service before Jan. 1, 2013. ATRA modified the definition of “certain qualified facilities” under Code Sec. 45(d) by replacing the placed in service requirement with a beginning of construction requirement. The date by which construction of a qualifying facility must begin was then extended for one year, to Jan. 1, 2015, by the Tax Increase Prevention Act of 2014 (“TIPA”).
Under prior IRS notices, a taxpayer could establish the beginning of construction by either (1) starting physical work of a significant nature (the “Physical Work Test”); or (2) paying or incurring 5% or more of the total cost of the facility (the “5% Safe Harbor”). Both methods require that a taxpayer make continuous progress towards completion once construction has begun (as set out in Notice 2013-29, Sec. 4.06 (the “Continuous Construction Test”) and Notice 2013-29, Sec. 5.02 (the “Continuous Efforts Test”), respectively). Notice 2013-60, Sec. 3.02, further provides that if a facility is placed in service before Jan. 1, 2016, the facility will be considered to satisfy the Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the 5% Safe Harbor).
On Dec. 18, 2015, the PATH Act extended the production tax credit for two years with respect to certain facilities the construction of which begins before Jan. 1, 2017, and further extended the production tax credit for wind facilities the construction of which begins before Jan. 1, 2020. The PATH Act also modified the credit for wind facilities by providing that the credit will phase out over the next four years. Further, the PATH Act also extended the investment tax credit for solar energy facilities the construction of which begins before Jan. 1, 2022.
Notice 2016-31 corrects recent guidance. Notice 2016-31 was originally issued earlier this month in response to a significant number of questions received after the extension of the production credit and the investment tax credit by the PATH Act. In it, the IRS, among other things, extended and modified the Continuity Safe Harbor and provided additional guidance on the 5% Safe Harbor.
The IRS has now made a number of corrections and changes to Notice 2016-31, including:
- A modified deadline for the Continuity Safe Harbor. Under Notice 2016-31, as corrected, if a taxpayer places a facility in service by the later of (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) Dec. 31, 2016, the facility will be considered to satisfy the Continuity Safe Harbor.
- A correction to a math error. The original version of Notice 2016-31, in Section 6, contained an example with a math error.
- Additional effective date language. The newly modified version of Notice 2016-31 states that the guidance provided in it is applicable to any project for which a taxpayer claims the production credit or the investment tax credit, as modified by ATRA, which is placed in service after Jan. 2, 2013.