SECTION 5. PHYSICAL WORK

TEST

.01 In general . Construction of a qualified facility or carbon capture equipment will be considered as having begun when physical work of a significant nature (as determined under section 5.02 of this notice) begins, provided that the taxpayer maintains a continuous program of construction (as determined under section 7.01 of this notice). 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 components of a qualified facility or components of carbon capture equipment is taken into account to determine whether construction has begun. Whether and when a taxpayer has begun construction of a qualified facility or carbon capture equipment will depend on the relevant facts and circumstances.

.02 Physical Work of a Significant Nature . The Physical Work Test requires that a taxpayer begin physical work of a

March 9, 2020 496 Bulletin No. 2020–11

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.

(1) Off-Site Physical Work of a Signif- icant Nature . Generally, off-site physical work of a significant nature includes the manufacture of components. Examples illustrating off-site physical work of a significant nature with respect to a qualified facility or carbon capture equipment include, but are not limited to:

(a) the manufacture of mounting equipment and support structures such as racks, skids, and rails;

(b) the manufacture of components necessary for carbon capture processes such as membranes, sorbent vessels, adsorbers, compressors, engines, motors, power generators and regenerators, reboilers, turbines, pressure vessels and other vessels, piping and pipelines, pumps, heat exchangers, solvent pumps, filters, recycling units, electrostatic filtration, water wash equipment, lube oil systems, dehydration systems, glycol contractors, specially designed flue gas ducts, conditioners, cooling towers, absorber units, and other types of gas separation, liquification, or processing equipment;

(c) the manufacture of components necessary for disposal of qualified carbon oxide in secure geological storage (as described in § 45Q(a)(1)(B) and (a)(3)(B)) such as valves, specialized casing, or other components of a wellhead or well; and

(d) the manufacture of equipment necessary for disposal of qualified carbon oxide in secure geological storage (as described in § 45Q(a)(1)(B) and (a)(3)(B)) such as wellhead equipment, booster compressors, and monitoring equipment for a storage site.

(2) On-Site Physical Work of a Signifi- cant Nature . Examples illustrating on-site physical work of a significant nature with respect to a qualified facility or carbon capture equipment include, but are not limited to:

(a) the excavation for and installation of foundations (for the project as well as for buildings to house equipment necessary to the project) including the setting of anchor bolts into the ground and the pouring of the concrete pads of the foundation;

(b) the installation of a system of gathering lines necessary to connect the industrial facility to the carbon capture equipment or other equipment necessary to the qualified facility before transportation away from the qualified facility for disposal, utilization, or use as a tertiary injectant;

(c) the installation of components necessary for carbon capture processes such as membranes, sorbent vessels, adsorbers, compressors, engines, motors, power generators and regenerators, reboilers, turbines, pressure vessels and other vessels, piping and pipelines, pumps, heat exchangers, solvent pumps, filters, recycling units, electrostatic filtration, water wash equipment, lube oil systems, dehydration systems, glycol contractors, specially designed flue gas ducts, conditioners, cooling towers, absorber units, and other types of gas separation, liquification, or processing equipment; and

(d) the installation of equipment and other work necessary for the disposal of qualified carbon oxide in secure geological storage (as described in § 45Q(a)(1) (B) and (a)(3)(B)) at the geological storage site, which may be at a different location than the qualified facility or carbon capture equipment.

.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 qualified facility or carbon capture equipment. Generally, preliminary activities include, but are not limited to:

(1) securing financing; (2) exploring; (3) researching; (4) obtaining permits and licenses; (5) conducting test drilling to determine soil condition (including to test the strength of a foundation);

(6) clearing a site; (7) excavating to change the contour of the land (as distinguished from excavation for a foundation); and

(8) removing existing foundations or any components that are not part of the qualified facility or carbon capture equipment (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 a qualified facility or carbon capture equipment that are either in existing inventory or are normally held in inventory by a vendor.