Doug Jones and Jacob Stephens | Husch Blackwell
Under the Senate Finance Committee’s June 28th version of the One, Big, Beautiful Bill (the “Bill”), there are several limitations and requirements that would take effect based on the date a project begins construction. For solar and wind projects, unless construction begins prior to enactment of the Bill, the production tax credit and investment tax credit under section 45Y and 48E will terminate for projects that are placed in service after 2027. Additionally, certain restrictions on material assistance from prohibited foreign entities would apply to solar and wind projects which begin construction after June 16th and most other projects that begin construction after 2025. The provisions of the Bill are still being negotiated in the Senate. However, establishing the beginning of construction will almost certainly remain important for developers of renewable energy projects.
The IRS has issued a series of Notices (e.g., Notice 2013-29, Notice 2018-59) which provide guidance for establishing when a project begins construction. The Bill adopts the guidance from such Notices. Under the Notices, there are two methods for establishing the beginning of construction: the Physical Work Test and the Five Percent Safe Harbor. Under the Physical Work Test, the beginning of construction can be established through onsite work or offsite work. This blog post focuses on establishing the beginning of construction through the Physical Work Test via onsite work.
Under the Physical Work Test, a taxpayer can establish the beginning of construction by beginning physical work of a significant nature with respect to property that is an integral part of the activity to be performed by the energy facility. The focus is on the nature of the work performed and not the amount or the cost. The Notices provide that a taxpayer can establish the beginning of construction by excavating for foundations or building roads integral to the energy property or the activity performed by the energy property. Roads used primarily for access to the site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by the energy property and therefore do not qualify as physical work of a significant nature. Preliminary activities, such as designing, removing existing property, or excavating to change the contour of the land, do not count as physical work of a significant nature. Likewise, drain tile work and grading (common onsite preconstruction work for solar projects) and tree clearing (common onsite preconstruction work for all types of energy projects) would not constitute start of construction for tax purposes.
Below are examples of onsite physical work of a significant nature with respect to wind, solar, and clean fuel projects.
Wind Projects. For wind projects, the Notices have indicated that onsite physical work may include excavation for the foundation of a turbine, the setting of anchor bolts into the ground, or the pouring of concrete pads of the foundation. Often, the fastest method for establishing the beginning of construction for wind projects is by beginning excavation for the foundation of a turbine. A taxpayer can also establish the beginning of construction by beginning construction on a road that will be used for equipment to operate and maintain the energy property (e.g., roads that provide maintenance access to turbines, roads used for construction of the wind project).
Solar Projects. For solar projects, the Notices have indicated that onsite physical work may include the installation of racks, collectors, or solar cells. As noted above, a taxpayer can also establish the beginning of construction by building roads integral to the solar project or the activity performed by the solar project. Often, the fastest method for establishing the beginning of construction for solar projects is by beginning construction on a road that will be used to operate and maintain the energy property (e.g., roads that provide maintenance access to solar panels or other equipment, roads used for construction of the solar project). Typically, these are roads that will run between solar panel arrays within the fenced area of the solar project.
Clean Fuel Projects. Similar to solar projects, a taxpayer can establish the beginning of construction for clean fuel projects by beginning excavation activity for a foundation or beginning construction on a road that is integral to the clean fuel project or the activity performed by the clean fuel project. This includes roads used for equipment to operate and maintain the energy property (e.g., roads that provide maintenance access to the facility, roads used for construction of the clean fuel project). This also includes roads used for moving materials to be processed (e.g., biomass).
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.