SECTION 8. OTHER GUIDANCE

APPLICABLE TO PHYSICAL WORK TEST AND FIVE PERCENT SAFE HARBOR

.01 Single project . Solely for purposes of determining whether construction of a qualified facility or carbon capture equipment has begun for purposes of the Section 45Q Credit, multiple qualified facilities or units of carbon capture equipment that are operated as part of a single project (along with any components of property that serve some or all such qualified facilities or units of carbon capture equipment) may be treated as a single qualified facility or unit of carbon capture equipment. Whether multiple qualified facilities or units of carbon capture equipment are operated as part of a single project will depend on the relevant facts and circumstances.

(1) Factors for Single Project Deter- mination . Factors indicating that multiple qualified facilities or units of carbon capture equipment are operated as part of a single project include, but are not limited to:

(a) the qualified facilities or units of carbon capture equipment are owned by a single legal entity;

(b) the qualified facilities or units of carbon capture equipment are constructed in the same general geographic location or on adjacent or contiguous pieces of land;

(c) a single system of gathering lines or a single off-take operation is used to collect and deliver carbon oxide to a transportation pipeline;

(d) carbon oxide captured from the qualified facilities is disposed of, utilized, or used as a tertiary injectant pursuant to a shared contract;

(e) the qualified facilities or units of carbon capture equipment are described in one or more common environmental or other regulatory permits or are required to collectively report their activities;

(f) the qualified facilities or units of carbon capture equipment were constructed pursuant to a single contract providing

FEED or similar services covering the full scope of the single project;

(g) the qualified facilities or units of carbon capture equipment were constructed pursuant to a single master construction contract; and

(h) the construction of the qualified facilities or units of carbon capture equipment was financed pursuant to the same loan agreement.

(2) Example . A taxpayer is developing 5 separate units of carbon capture equipment that will be constructed adjacent to and connected to multiple industrial facilities. These industrial facilities are located within the same general geographic location. All 5 units of carbon capture equipment are described in common environmental and other regulatory permits. Pursuant to a single contract, carbon oxide captured from all 5 units of carbon capture equipment will be transported to a single off-taker that will use that carbon oxide as a tertiary injectant. In 2022, the taxpayer manufactures 1 of the 5 units of carbon capture equipment. Thereafter, the taxpayer completes the construction of all 5 units of carbon capture equipment pursuant to a continuous program of construction and connects them to industrial facilities. The taxpayer may treat the 5 units of carbon capture equipment as a single project (Project E). For purposes of the Section 45Q Credit, the taxpayer has performed physical work of a significant nature that constitutes the beginning of construction of Project E in 2022.

(3) Timing of Single Project Determi- nation . The determination of whether multiple qualified facilities or units of carbon capture equipment are operated as part of a single project and are therefore treated as a single qualified facility or unit of carbon capture equipment for purposes of the beginning of construction requirement of § 45Q must be determined in the calendar year during which the last of the multiple qualified facilities or units of carbon capture equipment is placed in service.

(4) Disaggregation for Continuity Safe Harbor . Multiple qualified facilities or units of carbon capture equipment that are operated as part of a single project and treated as a single qualified facility or carbon capture equipment under section 8.01 of this notice for purposes of determining whether construction of a qualified

Bulletin No. 2020–11 499 March 9, 2020

facility or carbon capture equipment has begun may be disaggregated and treated as multiple separate qualified facilities or units of carbon capture equipment for purposes of determining whether a separate qualified facility or unit of carbon capture equipment satisfies the Continuity Safe Harbor. Those disaggregated separate qualified facilities or units of carbon capture equipment that are placed in service prior to the Continuity Safe Harbor Deadline will be eligible for the Continuity Safe Harbor. The remaining disaggregated separate qualified facilities or units of carbon capture equipment may satisfy the Continuity Requirement under a facts and circumstances determination.

(5) Example . A taxpayer is developing Project F that will consist of 5 qualified facilities. Carbon oxide captured from Project F will be collected and delivered to a transportation pipeline through a single system of gathering lines and disposed of through a single contract for secure geological storage. Project F will be treated as a single project under section 8.01 of this notice.

In 2022, the taxpayer performs physical work of a significant nature on Project F that satisfies the Physical Work Test. Thereafter, the taxpayer places in service only 4 of the 5 separate qualified facilities comprising Project F in 2028. The taxpayer disaggregates Project F under section 8.01(4) of this notice; 4 of the 5 separate qualified facilities satisfy the Continuity Safe Harbor. For the remaining qualified facility, the taxpayer may demonstrate that it satisfies the Continuous Construction Test described in section 7.01 of this notice based on the facts and circumstances.

.02 Construction by Contract . For components of qualified facility or carbon capture equipment that are manufactured, constructed, or produced for the taxpayer by another person under a binding written contract (as described in section 8.02(1) of this notice), the work performed and amounts paid or incurred under the contract are taken into account in determining whether the Physical Work Test or Five Percent Safe Harbor Test is met, 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 § 1.168(k)-1(b)(4)(ii) (A)-(D) of the Income Tax Regulations.

(2) Master Contract . If a taxpayer enters into a binding written contract for a specific number of components of property to be manufactured, constructed, 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 qualified facility or carbon capture equipment 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 whether the Physical Work Test or Five Percent Safe Harbor Test is met with respect to the qualified facility or carbon capture equipment.

.03 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 a qualified facility or carbon capture equipment. For example, in the case of a qualified facility or carbon capture equipment, on-site physical work of a significant nature may begin with the installation of piping and pipelines, including to connect an industrial facility to carbon capture equipment. If the qualified facility or carbon capture equipment’s piping and pipelines 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 the piping and pipelines begin at the off-site location, but only if (i) the manufacturer’s work is performed

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 qualified facilities or units of carbon capture equipment, a reasonable method must be used to associate individual components of property with a particular purchaser.

(2) Five Percent Safe Harbor . For a qualified facility or carbon capture equipment or components of a qualified facility or carbon capture equipment 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 qualified facility or carbon capture equipment by the other person before the qualified facility or carbon capture equipment 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 for purposes of the Five Percent Safe Harbor Test.

(a) Example . In 2023, an accrual-method taxpayer, G, enters into a binding written contract with H. Under the contract, G will provide components of carbon capture equipment to H in June 2025. In 2023, G pays J pursuant to a contract for J to provide parts to G (in March 2024) for use in the components of carbon capture equipment. G’s employees provide G with services necessary to design and plan for the production of the components of carbon capture equipment in 2023 and with services to manufacture (assemble) the components of carbon capture equipment in 2025.

G incurs the cost to design and plan for the production of the components of carbon capture equipment in 2023, incurs the costs for the components of carbon capture equipment in March 2024 when J delivers the components of carbon capture equipment to G (even though the components of carbon capture equipment were paid for in 2023), and incurs the costs for G’s employees to manufacture the components of carbon capture equipment in 2025. For purposes of determining whether H has satisfied the Five Percent Safe Harbor in 2023, H may only include the costs G incurred for its employees’ performance of design and planning activities for the

March 9, 2020 500 Bulletin No. 2020–11

components of carbon capture equipment in 2023. The other costs in this example are treated as incurred by H in 2024 and 2025, and are included in the total cost of the carbon capture equipment.

.04 Retrofitted Qualified Facility or Carbon Capture Equipment .

(1) In general . A qualified facility or carbon capture equipment 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 qualified facility or carbon capture equipment’s total value (the cost of the new components of property plus the value of the used components of property) (80/20 Rule). See Rev. Rul. 94-31, 1994-1 C.B. 16; Notice 2008-60, 2008-2 C.B. 178. In the case of a single project comprised of multiple qualified facilities or units of carbon capture equipment , the 80/20 Rule is applied to each qualified facility or unit of carbon capture equipment comprising the single project. For purposes of the 80/20 Rule, the cost of a new qualified facility or carbon capture equipment includes all properly capitalized costs of the new qualified facility or carbon capture equipment.

(2) Beginning of Construction . To satisfy the beginning of construction requirement of § 45Q, 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 qualified facility or carbon capture equipment. For the Five Percent Safe Harbor, all costs properly capitalized in the basis of the qualified facility or carbon capture equipment are taken into account.