SECTION 7. OTHER RULES

APPLICABLE TO PHYSICAL WORK TEST AND FIVE PERCENT SAFE HARBOR

.01 Energy Property . (1) In general . An energy property generally includes all components of property that are functionally interdependent (unless such equipment is an addition or modification to an energy property). Components of property are functionally interdependent if the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate electricity. Functionally-interdependent components of

property that can be operated and metered together and can begin producing electricity separately from other components of property within a larger energy project will be considered an energy property. See Rev. Rul. 94–31, 1994–1 C.B. 16.

Generally, energy property is comprised of all components of property necessary to generate electricity up to and including the inverter. This may include PV panels (or other arrangements of solar cells), fiber-optics, fuel cells, turbines, boilers, mounting equipment, support structures, tracking equipment, monitoring equipment, transformers and other power conditioning equipment, and inverters. For rooftop solar energy property, property integral to the generation of electrical energy that is installed on a single rooftop is considered a single unit of property.

(2) Single project . Solely for purposes of determining whether construction of energy property has begun for purposes of the § 48 credit, multiple energy properties that are operated as part of a single project (along with any components of property, such as a computer control system, that serves some or all such energy properties) will be treated as a single energy property. Whether multiple energy properties are operated as part of a single project will depend on the relevant facts and circumstances.

(a) Factors of Single Project Determi- nation . Factors indicating that multiple energy properties are operated as part of a single project may include:

(i) the energy properties are owned by a single legal entity;

(ii) the energy properties are constructed on contiguous pieces of land;

(iii) the energy properties are described in a common power purchase agreement or agreements;

(iv) the energy properties have a common intertie;

(v) the energy properties share a common substation;

(vi) the energy properties are described in one or more common environmental or other regulatory permits;

(vii) the energy properties were constructed pursuant to a single master construction contract; or

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site, or roads used primarily for employee or visitor vehicles, are not integral to the activity performed by an energy property; therefore, physical work on, or costs paid or incurred for, these roads is not taken into account for purposes of determining whether a taxpayer has begun construction of the energy property.

(3) Fencing . Generally, fencing is not an integral part of an energy property because it is not integral to the activity performed by the energy property.

(4) Buildings . Generally, buildings are not integral parts of an energy property because they are not integral to the activity of the energy property. However, the following structures are not treated as buildings for this purpose: (a) a structure that is essentially an item of machinery or equipment, or (b) a structure that houses property that is integral to the activity of an energy property if the use of the structure is so closely related to the use of the housed energy property that the structure clearly can be expected to be replaced when the energy property it initially houses is replaced. See Treas. Reg. § 1.48–1(e).

.03 Construction by Contract . For components of energy property that are manufactured, constructed, or produced for the taxpayer by another person under a binding written contract (as described in section 7.03(1) of this notice), the work performed and amounts paid or incurred under the contract are taken into account in determining when construction begins, provided the contract is entered into prior to the work taking place or the amounts paid or incurred.

(1) Binding Written Contract . A written contract is binding only if it is enforceable under local law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount. For additional guidance regarding the definition of a binding written contract, see Treas. Reg. § 1.168(k)–1(b)(4)(ii)(A)–(D).

(2) Master Contract . If a taxpayer enters into a binding written contract for a specific number of components of property to be manufactured, con

(viii) the construction of the energy properties was financed pursuant to the same loan agreement.

(b) Example . A taxpayer is developing Project C, an energy property that will consist of 50 energy properties. Project C will connect to the power grid through a single intertie, and power generated by Project C will be sold to a local utility through a single power purchase agreement. In 2020, for 10 of the 50 energy properties, the taxpayer installs supporting structures to affix components of the energy property to the foundation. Thereafter, the taxpayer completes the construction of all 50 energy properties and related equipment pursuant to a continuous program of construction. For purposes of the § 48 credit, Project C is a single project that will be treated as a single energy property, and the taxpayer performed physical work of a significant nature that constitutes the beginning of construction of Project C in 2020.

(3) Timing of Single Project Determi- nation . The determination of whether multiple energy properties are operated as part of a single project and are therefore treated as a single energy property for purposes of the beginning of construction requirement of § 48 must be determined in the calendar year during which the last of the multiple energy properties is placed in service.

(4) Disaggregation . Multiple energy properties that are operated as part of a single project and treated as a single energy property under section 7.01(2) of this notice for purposes of determining whether construction of an energy property has begun may be disaggregated and treated as multiple separate energy properties for purposes of determining whether a separate energy property satisfies the Continuity Safe Harbor. Those disaggregated separate energy properties that are placed in service prior to the Continuity Safe Harbor Deadline will be eligible for the Continuity Safe Harbor. The remaining disaggregated separate energy properties may satisfy the Continuity Requirement under a facts and circumstances determination.

(a) Example . A taxpayer is developing Project D, an energy property that will consist of 50 separate energy properties. Project D will connect to the power grid through a single intertie, and power generated by Project D will be sold to a local utility through a single power purchase agreement. Under the single project rule in section 7.01(2) of this notice, Project D is a single project that will be treated as a single energy property. In 2020, for 10 of the 50 separate energy properties, the taxpayer installs racks and other supporting structures to affix components of the energy property to the foundation. Accordingly, the taxpayer has performed physical

work of a significant nature that constitutes the beginning of construction of Project D for purposes of § 48.

Thereafter, the taxpayer places in service only 40 of the 50 separate energy properties in 2024. The taxpayer disaggregates Project D under section 7.01(4) of this notice; 40 of the 50 separate energy properties satisfy the Continuity Safe Harbor. For the remaining 10 separate energy properties, the taxpayer may demonstrate that it satisfies the Continuous Construction Test described in section 6.01 of this notice based on the facts and circumstances.

.02 Property Integral to Energy Prop- erty . (1) In general . Only physical work of a significant nature on tangible personal property and other tangible property used as an integral part of the activity performed by an energy property will be considered for purposes of determining whether a taxpayer has begun construction of the energy property. This includes property integral to the production of electricity, but does not include property used for the transmission of electricity. For purposes of the Five Percent Safe Harbor, the cost of any property not integral to an energy property is not included in the total cost of the energy property under section 5.02 of this notice. Thus, physical work on, or costs paid or incurred for, a transmission tower located at the site where the energy property is located will not be considered for purposes of determining whether a taxpayer has begun construction because transmission is not an integral part of the activity performed by the energy property. However, physical work on, or costs paid or incurred for, a custom-designed transformer that steps up the voltage of electricity produced at an energy property to the voltage needed for transmission will be considered for purposes of determining whether a taxpayer has begun construction of the energy property because power conditioning equipment is an integral part of the activity performed by the energy property.

(2) Roads . Roads that are integral to an energy property are integral to the activity performed by the energy property; these include onsite roads that are used for equipment to operate and maintain the energy property. Starting construction on, or paying or incurring costs for, these roads will be taken into account for purposes of determining whether a taxpayer has begun construction of the energy property. Roads primarily for access to the

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erty the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer. A taxpayer that owns energy property on the date it is originally placed in service may elect to claim the § 48 credit with respect to the energy property even if the taxpayer did not own the energy property at the time construction began. Any § 48 credit claimed on energy property will be limited to the taxpayer’s basis in the energy property. Accordingly, except as provided in section 8.03 of this notice, a fully or partially developed energy property may be transferred without losing its qualification under the Physical Work Test or the Five Percent Safe Harbor for purposes of the § 48 credit.

(1) Example . In August 2018, a developer acquires a parcel of land on which it intends to build and operate Project H, an energy property. The developer contributes the land to its wholly-owned limited liability company (LLC), which is disregarded as an entity separate from its owner for federal tax purposes, to hold and develop the energy property. In November 2018, the developer incurs 5 percent of the total cost of Project H and thereafter maintains continuous efforts to advance towards the completion of Project H. In April 2019, to finance the development of Project H, the developer sells 95 percent of the interests in LLC to a group of investors who are not related to the developer, and the developer does not contribute sales proceeds to LLC.

Under Rev. Rul. 99–5, 1999–1 C.B. 434, the developer is treated as selling 95 percent of each of the assets of LLC to the investors, and immediately thereafter the developer and investors are treated as contributing their respective 5 percent and 95 percent interests in those assets to LLC, which is now a partnership and the owner of Project H for federal tax purposes. In October 2019, LLC places Project H in service. Because Project H satisfies the Five Percent Safe Harbor in November 2018 and assuming Project H otherwise satisfies the requirements of the § 48 credit, the LLC is eligible to claim the § 48 credit with respect to Project H.

(2) Example . A taxpayer acquires an energy property (that consists of land and components of energy property) from an unrelated developer that had begun construction of the energy property, and thereafter the taxpayer completes the development of that energy property and places it in service. The work performed or the amounts paid or incurred by the unrelated developer prior to the taxpayer’s acquisition of the energy property may be taken into account by the taxpayer for purposes of determining when the energy property satisfies the Physical Work Test or the Five Percent Safe Harbor.

.02 Relocation of Equipment by a Tax- payer . A taxpayer may begin construction

structed, or produced for the taxpayer by another person under a binding written contract (master contract), and then through a new binding written contract (project contract) the taxpayer assigns its rights to certain components of property to an affiliated special purpose vehicle that will own the energy property for which such components of property are to be used, work performed or amounts paid or incurred with respect to the master contract may be taken into account in determining when construction begins with respect to the energy property.

.04 Look-through Rule . (1) Physical Work Test . Both on-site and off-site work (performed either by the taxpayer or by another person under a binding written contract) may be taken into account for purposes of demonstrating that physical work of a significant nature has begun with respect to an energy property.

(a) Example . In the case of an energy property, on-site physical work of a significant nature may begin with the beginning of the installation of racks or other structures to affix components of the energy property to the foundation. If the energy property’s racks or other structures are to be assembled on-site from components of property manufactured off-site by a person other than the taxpayer and delivered to the site, physical work of a significant nature begins when the manufacture of the components of property begins at the off-site location, but only if (i) the manufacturer’s work is done pursuant to a binding written contract and (ii) these components of property are not held in the manufacturer’s inventory. If a manufacturer produces components of property for multiple energy properties, a reasonable method must be used to associate individual components of property with a particular purchaser.

(2) Five Percent Safe Harbor . For an energy property or components of energy property that are manufactured, constructed, or produced for the taxpayer by another person under a binding written contract with the taxpayer, amounts paid or incurred with respect to the energy property by the other person before the energy property is provided to the taxpayer are deemed paid or incurred by the taxpayer when the amounts are paid or incurred by the other person under the principles of § 461.

(a) Example . In 2018, an accrual-method taxpayer, E, enters into a binding written contract with F pursuant to which E will provide components of energy property to F in June 2020. In 2018, E pays G pursuant to a contract for G to provide parts to E (in March 2019) for use in the components of energy property. E’s employees provide E with services necessary to design and

plan for the production of the components of energy property in 2018 and with services to manufacture (assemble) the components of energy property in 2020. E incurs the cost to design and plan for the production of the components of energy property in 2018, incurs the costs for the components of energy property in March 2019 when G delivers the components of energy property to E (even though the components of energy property were paid for in 2018), and incurs the costs for E’s employees to manufacture the components of energy property in 2020. See Treas. Reg. §§ 1.461– 4(d) and 1.446–1(c)(1)(h). The costs E incurred in 2018 for its employees’ performance of design and planning activities with respect to the components of energy property are costs deemed incurred by F in 2018 for purposes of the Five Percent Safe Harbor. The other costs in this example were incurred by E in 2019 and 2020 and are costs that F includes in the total cost of the energy property.

.05 Application of 80/20 Rule to Retro- fitted Energy Property . (1) In general . Energy property may qualify as originally placed in service even though it contains some used components of property, provided the fair market value of the used components of property is not more than 20 percent of the energy property’s total value (the cost of the new components of property plus the value of the used components of property) (80/20 Rule). In the case of a single project comprised of multiple energy properties, the 80/20 Rule is applied to each energy property comprising the single project. For purposes of the 80/20 Rule, the cost of a new energy property includes all properly capitalized costs of the new energy property.

(2) Beginning of Construction . To satisfy the beginning of construction requirement of § 48, the Physical Work Test or the Five Percent Safe Harbor is applied only with respect to the work performed on, or amounts paid or incurred for, new components of property used to retrofit used components of property or an existing energy property. For the Five Percent Safe Harbor, all costs properly capitalized in the basis of the energy property are taken into account. The total cost of the energy property does not include the cost of land (including lease payments) or any property not integral to the energy property, as described in section 7.02 of this notice.