Notice 2013-29: Beginning of Construction Requirements

IRS Notice 2013-29 defines the “beginning of construction” requirement for renewable energy projects to qualify for federal tax incentives. Before this notice, standards were less defined, creating uncertainty. The notice established a stable framework with two methods for taxpayers to prove work had officially started: the Physical Work Test and the Five Percent Safe Harbor.

Historically, these rules applied to the Production Tax Credit (PTC) and Investment Tax Credit (ITC). The Inflation Reduction Act of 2022 updated these incentives, adding prevailing wage and apprenticeship labor requirements for projects to receive their full value. For projects beginning construction in 2025 or later, the law replaces the PTC and ITC with new technology-neutral Clean Electricity Production and Investment Tax Credits.

The Physical Work Test

The Physical Work Test is one of two methods taxpayers can use to establish that construction has begun. This test is met when “physical work of a significant nature” has been performed on the project site or on project equipment at a factory. The focus is on the nature of the work itself, not its cost or the percentage of completion.

Qualifying work involves tangible, on-the-ground construction activities. For a wind farm, this could include starting the excavation for turbine foundations, setting anchor bolts, or pouring concrete pads. For a solar facility, it might involve installing racking systems or beginning foundation work for inverters and transformers.

Conversely, many preliminary activities do not meet the threshold for significant physical work. These non-qualifying activities include planning, design work, engineering studies, environmental reviews, or topographical surveys. Securing financing, negotiating power offtake agreements, or clearing and grading a site are also considered preparatory. Ordering standard equipment that is not custom-designed for the project does not count as starting physical work.

The test also allows for work performed off-site under a binding written contract to qualify. If a taxpayer enters into an agreement for the manufacture of custom-designed equipment, such as a specialized transformer or turbine components, the manufacturing process can satisfy the Physical Work Test. This provision recognizes that for many complex energy projects, a substantial portion of the initial effort occurs at a factory. The work must still be significant in nature to qualify.

The Five Percent Safe Harbor

As an alternative to the Physical Work Test, a taxpayer can establish the beginning of construction by satisfying the Five Percent Safe Harbor. This financial method provides a clear, quantitative benchmark and is met when a taxpayer pays or incurs five percent or more of the total cost of the energy facility.

Determining the “total cost” of the facility is a main component of this calculation. Includible costs are those directly related to the energy property itself, such as the price of wind turbines or solar panels, mounting equipment, inverters, and transformers. Costs for shipping the equipment to the site and fees for installation are also part of the total cost basis. The calculation is based on the reasonably expected total cost of the facility when it is ultimately placed in service.

Certain costs are excluded from this calculation to ensure the five percent threshold relates directly to the generating asset. The cost of acquiring land for the project is not an includible cost. Likewise, the costs of transmission equipment not owned by the facility, such as utility-owned substations or long-distance power lines, are excluded.

To meet the safe harbor, costs must be “paid or incurred.” An expense is considered incurred when the taxpayer is legally obligated to pay it, even if the cash payment happens later. This means entering into a binding written contract for equipment or services can allow the associated costs to be counted toward the five percent threshold.

The Continuous Efforts Requirement

After a project has met either the Physical Work Test or the Five Percent Safe Harbor, it must also satisfy the Continuous Efforts Requirement. This rule mandates that the taxpayer maintain a continuous program of construction or continuous efforts to advance toward completion. The IRS evaluates this based on the specific facts and circumstances of each case.

Factors that demonstrate continuous efforts include entering into binding contracts for equipment, obtaining necessary permits, and performing physical work on a consistent basis. Delays are permissible if they are outside the taxpayer’s control, such as severe weather, unforeseen regulatory hurdles, or supply chain disruptions. However, long periods of inactivity without a valid reason could cause a project to fail this test.

To provide greater certainty, the IRS established a continuity safe harbor. Originally, this rule deemed a project to have made continuous efforts if it was placed in service by the end of the fourth calendar year after construction began. However, subsequent guidance extended this timeline. For projects where construction began from 2016 through 2019, the safe harbor is six years, and for projects that began in 2020, it is five years.

For projects that fall outside this safe harbor window, the taxpayer must revert to the facts-and-circumstances analysis and be prepared to demonstrate their ongoing efforts to the IRS.

Required Documentation and Substantiation

Physical Work Test

To substantiate that the Physical Work Test has been met, taxpayers must maintain records as evidence that significant work occurred. Supporting documents include:

• Fully executed construction contracts detailing the scope and timing of the work.
• Building permits issued by local authorities.
• Invoices for services rendered and materials supplied.
• Proof of payment for invoices, such as canceled checks or bank transfer records.
• Dated photographic or video evidence of work in progress at the project site.

Five Percent Safe Harbor

For the Five Percent Safe Harbor, documentation is focused on financial proof. Taxpayers should maintain:

• Binding written contracts for equipment and services that establish a legal obligation to pay.
• Detailed accounting records that track all project costs, distinguishing between includible and excluded costs.
• Proof of payment, such as wire transfer confirmations, bank statements, and canceled checks.
• A comprehensive ledger or spreadsheet calculating the running total of costs paid or incurred as a percentage of the total estimated project cost.