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.
