When Construction Begins

Two methods can be used to establish that construction of a facility or equipment has begun.

1. Physical Work Test is satisfied when physical work of a significant nature begins and other requirements provided in Section 5 of Notice 2020-12, 2020-11 I.R.B. 495, available at IRS.gov/irb/2020-11_IRB#NOT-2020-12 , are met.

2. Five Percent Safe Harbor is satisfied when you pay or incur (within the meaning of Regulations section 1.461-1(a)(1) and (2)) 5% or more of the total cost of a facility or equipment and meets other requirements provided in Notice 2020-12, Section 6.

Although both methods can be used, only one method is needed to establish that construction of a facility or equipment has begun. If you began construction on a facility or equipment by satisfying either the Physical Work Test or the Five Percent Safe Harbor, or both, before the effective date of Notice 2020-12 (March 9, 2020), you may use March 9, 2020, as the date that construction began on such facility or equipment. Additionally, if you began construction on a facility or equipment before March 9, 2020, under both the Physical Work Test and the Five Percent Safe Harbor, you may choose either method (but not both) for the purpose of applying the beginning of construction rules. If you began construction on a facility or equipment on or after March 9, 2020, construction will be deemed to have begun on the date you first satisfy either the Physical Work Test or the Five Percent Safe Harbor. If you fail to satisfy the Five Percent Safe Harbor in 1 year due to cost overruns (as defined in Section 6.03 of Notice 2020-12), you won’t be prevented from using the Physical Work Test in a later year to establish beginning of construction, provided that occurs before January 1, 2033.