Evidencing Beginning of Construction: The File You Assemble Years Before Anyone Asks

September 17, 2026 · Dezzmond Team

Tax & Policy Policy & Regulation Beginning of Construction

The facts that create a beginning-of-construction position happen on the project. The ability to rely on that position is tested later, often in a data room, through whatever records survived. Physical work either occurred or it did not; five percent of cost was either paid or incurred or it was not. But financing turns those facts into an evidence problem, and the evidence is created by people who may never see the later tax opinion.

The gap between having a position and being able to prove it is where financing friction appears. A tax investor, credit buyer, lender or insurer will ask for the record that supports the date, the continuity story and the amount at risk. A $75m credit can translate into a gross tax exposure well above $75m once interest, potential penalties and defence costs are considered, but the recoverable amount depends on the actual indemnity and insurance wording.

This is the third and last post on beginning of construction. You will get what diligence actually examines, what makes a contract binding for these purposes and why that interacts with your EPC liquidated damages cap, what evidence supports each pathway, what tax insurance covers and excludes, and how to size a policy against the real exposure rather than the credit.

ℹ️ Note: This is a practical diligence framework, not tax, legal or insurance advice. The June 2026 court order vacated Notice 2025-42; confirm the latest court and IRS position before relying on either beginning-of-construction pathway.

What Is Actually Being Diligenced?

Two things: the date, and whether progress continued from it. Everything else is evidence supporting one or the other.

That sounds narrow and is not. Establishing the date requires proving either that physical work of a significant nature occurred — a qualitative judgement — or that 5% of total facility cost was paid or incurred, which requires proving the spending, the delivery, and the eventual total cost. Establishing continuity requires a construction record spanning up to four years.

The mindset that produces a defensible file is evidentiary rather than administrative. The question is not merely "did we begin construction?" It is "could a reader with no project history reconstruct the answer from this file?" Records that satisfy the first question routinely fail the second because the people creating them already knew what happened and did not record the steps an outsider would need.

What Makes a Contract Binding for These Purposes?

Two requirements, and the second one has a trap in it that connects directly to the contracts series.

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 through a liquidated damages provision.

The guidance then provides the crucial exception: a contractual provision limiting damages to an amount equal to at least five percent of the total contract price is not treated as limiting damages to a specified amount for this purpose.

That is a tax-definition check on the relevant contract, not a statement about ordinary EPC market practice. The diligence team should therefore read the actual supply or construction agreement supporting the claimed work and confirm the enforceability and damages language against the IRS definition. A generic statement that the project has an EPC contract is not enough.

This is a cross-check almost nobody runs, because the two questions live in different teams. The commercial team negotiates the cap. The tax team relies on the contract. The five percent floor is the point where those two conversations should have met.

ℹ️ Note: When equipment is being used to support beginning of construction, check the damages limitation in the specific supply agreement — not automatically the EPC. The relevant contract is the one under which the qualifying work or cost was created, and that is often the agreement with the thinnest liability provisions.

Whose Work Counts?

Work performed by the taxpayer, and work performed for the taxpayer by other persons under a binding written contract — provided the contract was entered into prior to the manufacture, construction or production of the property or its components.

The sequencing requirement is absolute and is the most common documentary failure. A contract signed after manufacturing began does not pull that manufacturing into the position, however genuine the work was. Purchase orders issued against a master agreement, verbal instructions later papered, and amendments that expand scope after work started all create the same problem: work that happened outside a binding contract that predated it.

The evidence needed is therefore dated, not merely existent. Executed signature pages with dates, delivery records, and manufacturing progress reports that post-date the contract. A file containing a contract and a photograph of a completed transformer proves less than one containing the contract, the production schedule, and dated progress photographs showing the sequence.

What Does "Paid or Incurred" Actually Require?

More than a wire transfer. The 5% safe harbour is satisfied when a taxpayer pays or incurs five percent of total project cost, and for an accrual-method taxpayer — which most project companies are — "incurred" is a three-part test rather than a payment date.

A liability is incurred when all three are true:

all the events have occurred that establish the fact of the liability
the amount of the liability can be determined with reasonable accuracy
economic performance has occurred with respect to the liability

The third is where safe-harbour equipment orders require real accounting analysis. Where a liability arises from services or property, economic performance ordinarily occurs as those services or property are provided. The Treasury regulations also contain a special 3½ Month Rule that can allow payment itself to be treated as the economic-performance point when the taxpayer can reasonably expect the property or services to be provided within 3½ months after payment.

So “we wired the supplier before year end” is not, by itself, the conclusion. The file must show which economic-performance rule the taxpayer is using and the facts supporting it.

The 3½ month rule

Under Treasury Regulation §1.461-4(d)(6)(ii), a taxpayer may treat services or property as provided when it makes payment if, at the time of payment, it can reasonably expect the provider to furnish them within 3½ months after the payment date. Do not convert that formulation into a universal “105-day” rule; the regulation says 3½ months.

Notice 2020-41 makes the evidentiary point explicit: the relevant fact is the taxpayer’s reasonable expectation at the time of payment. The useful documents are therefore the contemporaneous delivery schedule, supplier correspondence, purchase terms and internal approval materials showing what was reasonably expected when the payment was made.

Where it fails

A later delivery delay does not automatically defeat the 3½ Month Rule. Notice 2020-41 states that if the expectation was reasonable when payment was made, subsequent events that prevent the expected timing from occurring do not by themselves undo the rule; the cost can still be treated as incurred when paid.

Three practical points follow.

“Reasonably expect” is judged at payment, not with hindsight. A supplier schedule and contemporaneous correspondence are much stronger evidence than an explanation written after diligence starts.

Do not confuse the rule with the temporary COVID-era safe harbor. Notice 2020-41 also created a special deemed-expectation safe harbor for specified 2019–2020 payments and receipts. That temporary relief is separate from the underlying 3½ Month Rule, which continues to turn on reasonable expectation.

If the 3½ Month Rule is not available, ordinary economic-performance timing still matters. Delivery, acceptance, title and the precise contractual facts can then determine when the cost is incurred.

ℹ️ Note: Keep a payment register and an economic-performance register. The first tells you cash timing; the second tells you which costs the tax analysis is actually counting and why.

What Evidence Supports Each Pathway?

They fail differently, so they need different files.

	Physical work position	5% safe harbour position
Core evidence	Dated work records, progress photographs, manufacturing reports	Invoices, proof of payment, delivery and title documentation
Contract evidence	Binding contract predating third-party work	Contract / purchase terms supporting the claimed cost; binding-contract timing is critical when using supplier look-through
The weak point	Whether the work was "significant in nature"	Whether total facility cost stayed low enough
Third-party support	Independent engineer confirmation	Cost accountant reconciliation
Fails because	Records were not kept contemporaneously	Costs overran and the denominator moved

The recurring diligence finding on the physical work side is reconstruction. A sponsor certain that qualifying work occurred assembles the proof afterwards — from memory, from invoices that show payment rather than work, from photographs with no metadata. The position may well be correct and it is materially harder to insure.

On the safe harbour side the recurring finding is the cost question covered in the first post in this sequence: the spending is documented perfectly and the denominator grew.

What Does the Tax Opinion Do?

It converts a legal judgement into a condition precedent. Tax equity investors engage outside counsel to opine that the tax benefits "should" or "will" be respected, and those opinions sit as conditions in the tax equity documents alongside, increasingly, tax credit insurance.

The distinction between opinion levels is commercial rather than academic. A "will" opinion is close to certainty and is rare on judgemental questions. "Should" indicates a high level of confidence and is the working standard for most positions. Anything weaker generally means the risk has to be allocated elsewhere — through indemnity, insurance, or a price adjustment — rather than absorbed.

Which is why the evidentiary file matters so much. Opinion terminology and required confidence levels are transaction-specific, but counsel can only analyze the legal consequences of facts that the project can substantiate. A technically sound position with a thin record creates more conditions, qualifications and residual sponsor risk.

If the Deal Uses Tax Insurance, Diligence the Policy Rather Than the Market Story

Tax insurance is a private commercial contract. It is not part of the IRS beginning-of-construction framework, and the IRS notices do not define what an insurer must cover, exclude, charge or pay.

That distinction matters. A sponsor should not turn "this position can be insured" into a tax conclusion.

If insurance is part of the financing package, the diligence exercise is the policy itself.

I would pull the following items onto one page:

Covered tax position
Insured amount / limit
Policy period
Representations made by the insured
Exclusions
Covenants / conduct conditions
Claim notice requirements
Control of defence / contest
Interest covered?
Penalties covered?
Professional / defence costs covered?
Tax gross-up covered, if relevant?
Other recourse: sponsor indemnity / seller indemnity

The legal tax position and the insurance recovery are two separate questions.

A project can have a strong beginning-of-construction position and a narrow policy.

It can also have a contested position and a policy that covers a defined adverse tax determination subject to exclusions.

The financing model should never collapse those into one cell called "insured."

The Exclusions Are Contract Terms, Not IRS Rules

There is no IRS-defined "standard exclusion list" for tax insurance.

So do not write assumptions such as "change in law is always excluded" or "seller covenant breaches are always excluded" into the model unless the actual policy says so.

Instead, test the events that matter to the project against the policy wording.

For a beginning-of-construction position, the review should specifically ask how the policy treats:

a later change in statute, regulation or published guidance;
an adverse IRS interpretation of the facts;
an inaccurate representation in the underwriting file;
failure to maintain required records;
a voluntary project restructuring;
transfer of the project or policy rights;
failure to satisfy a policy covenant;
settlement with the IRS without insurer consent;
defence and professional costs;
interest and penalties.

The point is not that all of these are excluded.

The point is that none of them should be assumed covered without reading the contract.

Size the Limit From the Exposure the Policy Actually Covers

Do not size insurance from a market premium rule of thumb.

Start with the covered loss.

Illustrative assumptions:

Credit at risk                         $75,000,000
Years to assumed resolution                     4
Assumed underpayment interest rate            7.0%
Potential accuracy-related penalty          20.0%
Professional / defence costs          $3,000,000

The 20% penalty is shown only as an illustrative exposure line. Section 6662 contains a 20% accuracy-related penalty for specified underpayments, but whether that penalty applies to a particular tax position — and whether a policy covers it — requires a separate analysis.

Using the assumptions above:

Credit at risk                         $75.0m
Illustrative interest                  $23.3m
Illustrative penalty                   $15.0m
Professional / defence costs            $3.0m

Illustrative gross exposure           $116.3m

That does not mean the policy should automatically be $116.3 million.

The next step is to compare each component with the actual covered-loss definition.

If the policy excludes penalties, remove $15 million.

If defence costs sit outside the limit, do not consume the limit with them.

If the policy contains a tax gross-up provision, model the actual wording and tax treatment rather than assuming every insurance payment is taxable.

If a sponsor indemnity sits above or beside the policy, model the order of recovery.

The useful schedule is therefore:

Exposure component	Amount	Covered by policy?	Inside limit?	Other recourse?
Credit	$75.0m	policy-specific	policy-specific	indemnity?
Interest	$23.3m	policy-specific	policy-specific	indemnity?
Penalty	$15.0m	policy-specific	policy-specific	indemnity?
Defence costs	$3.0m	policy-specific	policy-specific	sponsor?

That is a financing model.

A premium quote can then be added as an actual transaction input. There is no reason to hard-code a generic 2% or 3% market assumption into a permanent explainer.

ℹ️ Note: Treat the policy limit as a cap on recovery, not as proof that the tax position is good. Insurance can change who pays after an adverse outcome; it does not rewrite the IRS test.

What Do Lenders and Tax Equity Actually Check?

Is the contract that supports the position binding? Enforceable under local law, with any damages limitation at or above five percent of contract price.
Did the contract predate the work or the payment? Dated signature pages, not just executed ones.
Are the physical work records contemporaneous? The position is only as useful as the file that proves it.
What opinion level did counsel reach — "will" or "should"? And what risk remains with the sponsor if the opinion is weaker.
If there is insurance, what exact tax position is covered and what events are excluded? Read the policy rather than importing market assumptions.
Is the limit sized against the covered exposure? Test credit, interest, penalties, defence costs and any gross-up separately against the wording.
Does the policy sit beside a sponsor indemnity or replace it? The order of recourse changes the effective recovery ceiling.

Frequently Asked Questions

What makes a written contract binding for beginning-of-construction purposes?

It must be enforceable under local law against the taxpayer and must not limit damages to a specified amount. A provision limiting damages to at least five percent of the total contract price is not treated as a limitation.

Does work by a supplier count toward beginning of construction?

Yes, where it is performed under a binding written contract entered into before the manufacture or production began. A contract signed after work started does not bring that work into the position.

Can a beginning-of-construction position be insured?

Potentially. Tax insurance is a private insurance-market product, so availability and terms depend on the actual underwriting and policy. The existence of a policy does not change the IRS beginning-of-construction test.

What does tax credit insurance exclude?

There is no IRS-defined standard exclusion list. Review the actual policy for change-in-law language, representations, covenants, voluntary acts, claim-control provisions, defence costs, interest, penalties and transfer restrictions.

Why can a policy limit need to exceed the face credit?

Because the economic exposure can include interest, penalties and professional costs in addition to the credit itself. Whether those amounts are covered, and whether they sit inside or outside the limit, is policy-specific.

Closing: The Position Is the File

Across three posts this material has treated beginning of construction as a legal question. It is not, in practice. The law sets the test; the file decides the outcome.

That reframing changes what a development team should do. The physical work test rewards contemporaneous records — dated photographs, work logs, manufacturing schedules — created by people who will never see the tax opinion. The 5% safe harbour rewards a cushion sized against a cost distribution rather than a budget. Both reward a binding contract signed before the work, with a damages provision above five percent of its price.

None of that is expensive at the time. All of it is difficult or impossible to recreate cleanly years later, which is why the cost of a thin file can show up as a weaker opinion, more financing conditions, narrower insurance terms, or a credit the model assumed and the structure could not fund.

the next post opens the second sub-series in policy and regulation: the bonus adders, starting with domestic content — the percentage thresholds, the safe harbour cost tables, and where projects fail the test.

Sources: IRS Notice 2018-59 · IRS Notice 2020-41 · IRS Notice 2021-41 · 26 U.S.C. § 6662 · IRS Instructions for Form 3468 — Beginning of Construction