Real estate developers and property owners seeking to take advantage of Section 45 production tax credits and Section 48 investment tax credits under the U. S. Internal Revenue Code need to be mindful of the date fixed under the IRS rules as the “beginning of construction.” IRS Notice 2017-4, issued December 16, 2016, clarifies the calculation of the date when construction begins. Two tests may be used to define “beginning of construction:” 1) starting physical work of a significant nature, and 2) paying or incurring 5% or more of the total cost of the facility under construction.
However, “beginning of construction” under either test depends on construction work proceeding “continuously” from the start date. Earlier IRS guidance defined “continuous” as putting the facility in service during a calendar year no more than four calendar years after the calendar year of beginning construction. Notice 2017-4 extends the continuity deadline to December 31, 2018 for all construction begun before June 6, 2016, whether or not the project would otherwise meet the four calendar year test.
Notice 2017-4 also refines the determination of the 5% of construction cost start date when the project involves retrofitting of an existing facility. If the fair market value of used property in the retrofitted facility does not exceed 20% of the total market value of the retrofitted facility when complete, the “cost of construction” will include all costs properly included in the depreciable basis of the retrofitted facility.
Developers and owners with projects currently under construction who expect to take advantage of Section 45 or Section 48 credits, or both, should review their project schedules and expenditures to make certain they are in compliance with the new guidance.