SECTION 4. PHYSICAL WORK

TEST

.01 In general . Construction of energy property begins when physical work of a significant nature begins. Work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the energy property or components of energy property for use by the taxpayer in the taxpayer’s trade or business (or for the taxpayer’s production of income) is taken into account to determine whether construction has begun. Whether and when a taxpayer has begun construction of energy property will depend on the relevant facts and circumstances. The Service will closely scrutinize energy property and may determine that construction has not begun on that property if a taxpayer does not maintain a continuous program of construction (as determined under section 6.01 of this notice).

.02 Physical Work of a Significant Na- ture . The Physical Work Test requires that a taxpayer begin physical work of a significant nature. This test focuses on the nature of the work performed, not the amount or the cost. Assuming that physical work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test. Both off-site and on-site work may be taken into account for purposes of demonstrating that physical work of a significant nature has begun (see section 7.04 of this notice).

(1) Off-Site Physical Work of a Signif- icant Nature . Generally, off-site physical work of a significant nature may include the manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment.

(2) On-Site Physical Work of a Signif- icant Nature . This non-exclusive list of

examples is intended to illustrate on-site physical work of a significant nature for different types of energy property:

(a) Solar Energy Property . On-site physical work of a significant nature may include the installation of racks or other structures to affix photovoltaic (PV) panels, collectors, or solar cells to a site.

(b) Fiber-Optic Solar Energy Property . On-site physical work of a significant nature may include the installation of collectors, concentrators, tracking systems, bundles of optical fibers, or fixtures within a structure.

(c) Geothermal Property . On-site physical work of a significant nature may include physical activities that are undertaken at a project site after a valid discovery such as the installation of piping, turbines, generators, flash tanks, or heat exchangers.

(d) Qualified Fuel Cell Property . Onsite physical work of a significant nature may include the installation of components of a fuel cell stack assembly such as electrodes, gas diffusion layers, membranes, gasketing, or plates.

(e) Qualified Microturbine Property . On-site physical work of a significant nature may include the installation of a gas turbine engine, combustor, recuperator, regenerator, generator, alternator, or other plant components.

(f) CHP Property . On-site physical work of a significant nature may include the installation of a heat engine, generator, heat recovery components, or electrical interconnections.

(g) Qualified Small Wind Energy Prop- erty . On-site physical work of a significant nature may include the installation of a foundation, tower, wiring, or grounding systems.

(h) Geothermal Heat Pump Property . On-site physical work of a significant nature may include the installation of ground heat exchangers, heat pump units, or air delivery systems (ductwork).

.03 Preliminary Activities . Physical work of a significant nature does not include preliminary activities, even if the cost of those preliminary activities is properly included in the depreciable basis of the energy property. Generally, preliminary activities include, but are not limited to:

(a) planning or designing;

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(b) securing financing; (c) exploring; (d) researching; (e) conducting mapping and modeling to assess a resource;

(f) obtaining permits and licenses; (g) conducting geophysical, gravity, magnetic, seismic and resistivity surveys;

(h) conducting environmental and engineering studies;

(i) performing activities to develop a geothermal deposit prior to valid discovery;

(j) clearing a site; (k) conducting test drilling to determine soil condition (including to test the strength of a foundation);

(l) excavating to change the contour of the land (as distinguished from excavation for a foundation); and

(m) removing existing foundations, turbines, and towers, solar panels, or any components that will no longer be part of the energy property (including those on or attached to building structures).

.04 Inventory . Physical work of a significant nature does not include work (performed either by the taxpayer or by another person under a binding written contract) to produce components of energy property that are either in existing inventory or are normally held in inventory by a vendor.