With the energy property ‘begun construction’ deadline just weeks away, are you prepared?

As the new year approaches, so does the upcoming “begun construction” deadline for the federal 30% Investment Tax Credit (ITC) for certain eligible energy projects. Your safe-harboring for the 30% ITC ends on New Year’s Eve. Therefore, to preserve the full 30% ITC, you must make your resolutions final before midnight Dec. 31, and complete all relevant transactions by then. 

What follows are a few things to consider as you prepare for developing projects in 2020 and beyond. 

Keep in mind that the rules can be complex, so the following isn’t a comprehensive list of all considerations. You should consult a tax advisor experienced in the commence construction rules before moving forward, and refer directly to IRS Notice 2018-59 (the ITC “Notice”) or the series of prior IRS notices that pertain to the Section 45 tax credit.

In general, for purposes of the 5% Safe Harbor:

1. The taxpayer generally must take delivery of equipment or materials by Dec. 31, 2019. Delivery can occur anywhere in the world, but the documentation around the delivery and the transfer of title and the risks and burdens of ownership are important indicia of delivery that should be backed up by solid business records.

2. There is a fallback to this delivery rule if one can’t take delivery until after Dec. 31, 2019. In that case, delivery must take place within 3½ months of the actual payment date. However, the taxpayer must be eligible to use this special 3½ month rule. Therefore, you must confirm your eligibility for use of this method before assuming it will apply to your situation. Merely assuming you can proceed under this rule can lead to tragic tax results and cause a loss of the safe harbor altogether.

3. Vendor financing doesn’t work for the 3½ month rule.

4. Third-party financing can work. For example, a project can use $500,000 of cash on hand and $500,000 borrowed from an unrelated bank to acquire eligible equipment by Dec. 31, 2019, and thus leverage a 30% ITC on $20 million of eligible energy property costs.

5. Nonrefundable deposits on purchases will only get you credit up to the amount of the deposit. Again, deposits won’t work for the 3½ month rule.

6. Plan for a buffer amount over the 5%; we think tax equity investors will closely scrutinize projects that barely make the hurdle. Also, plan for cost overrun; adding to the buffer will protect against loss of the safe harbor due to a watering down of the safe harbor percentage.

7. Don’t assume that you can off-load extra equipment (above what you need for 5%) to third parties as freely as you’d like. There are certain prohibitions around transferring equipment and still preserving the right to a 30% ITC. There are some workarounds, but you must know and follow the rules.

For purposes of the “physical work of a significant nature” test: 

8. There is no percentage or dollar minimum that must be spent to meet this requirement, theoretically lowering the amount required to be spent but still leveraging it for an entire project. This is probably more important for larger projects.

9. Work can be on-site or off-site. But the terms of the contracts matter, so be careful. Offsite work, including construction of equipment by a vendor, will be closely scrutinized.

10. There are certain preliminary activities that don’t count toward the physical work requirement, but it’s not intuitive which costs don’t count. Refer to the Notice and discuss with an advisor.

As it relates to both tests:

If a project meets both tests, only the first test you qualify under counts, preventing a project from dragging out the four-year deemed Continuity Safe Harbor.

Pay very close attention to the Continuity Requirements and the statutory 2023 end date for the rules under Section 48. Just achieving the 5% or the physical work test alone does not preserve the higher ITC in all possible scenarios.

The costs for site access roads and roads or parking primarily for employees or visitors don’t qualify. In general, the ITC doesn’t apply to land, nor to buildings, structural components of buildings, transmission assets, or intangibles. 

Some practitioners take a dim view of costs for temporary roads, so carefully consider this in your analysis.

Don’t mix up the rules in Notice 2018-59 to any property on which you intend to take the Production Tax Credit (PTC), which has other IRS notices that must be followed.

Document. Document. Document. Prepare comprehensive records of these transactions and then keep and retain those records for current and future use. Consider that as of now you may not know who your tax equity investor is, or who a future owner might be, so you should prepare for the most detailed and critical review of a project’s qualification and backup documentation.


Joel Cohn, CPA, Partner


Lee Peterson, Senior Manager – Tax


Subject matter expertise

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    Contact Joel Joel+Cohn joel.cohn@cohnreznick.com
    Joel Cohn

    CPA, Partner, Project Finance & Consulting

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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.