IRS Issues Guidance For Energy Tax Credit Claimants
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By Tax News
The US Internal Revenue Service, in its Notice 2017-04, has updated and clarified the guidance provided in its prior notices regarding the extension, at the end of last year, of the dates by which facilities must begin construction to claim the renewable electricity production tax credit (PTC) and investment tax credit (ITC).
Under the Protecting Americans from Tax Hikes Act, taxpayers can now claim the PTC for certain renewable energy facilities if construction begins before January 1, 2017. The Act also renewed the PTC for wind facilities if construction begins before January 1, 2020 (with the credit being phased out over that period), and extended the ITC for solar energy facilities, if construction begins before January 1, 2022.
A taxpayer may establish that construction of a qualified facility has begun by starting physical work of a significant nature (“Physical Work Test”) or incurring at least five percent of the costs of the planned project (“Safe Harbor Provision”). Notice 2017-04 clarifies the costs that may be included in the Safe Harbor Provision for retrofitted renewable energy facilities.
A taxpayer is also required to make continuous progress towards completion, determined by the relevant facts and circumstances, once construction has begun. Previously, the IRS would agree that a project had satisfied the continuous construction test if the facility was placed in service and generated power within four calendar years after the calendar year during which construction of the facility began, or by December 31, 2016, whichever is later (“Continuity Safe Harbor”).
Under the new Notice, December 31, 2016, is now replaced by December 31, 2018. For example, if construction began on a facility on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will be considered to satisfy the Continuity Safe Harbor, as will a facility where construction began on January 15, 2016, and is placed in service by December 31, 2020.
The guidance confirms that taxpayers are prohibited from combining methods to satisfy the beginning of construction requirement. For example, a taxpayer may not rely upon the Physical Work Test and the Safe Harbor Provision in alternating calendar years to satisfy the beginning of construction requirement or the continuity requirement. The Notice confirms that this rule applies to facilities for which construction began after June 6, 2016.
The PTC and ITC are aimed at leveling the playing field between US-produced wind, solar, and geothermal energy and cheaper non-renewable alternatives, such as natural gas.
Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York. He provides guidance and strategies to improve clients’ financial well-being.
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