On March 11, 2015, the Internal Revenue Service (the “IRS”) made available Notice 2015-25 (the “2015 Notice”), which updates prior IRS guidance concerning satisfaction of the “begun construction” requirement for production tax credit (“PTC”) eligibility under Section 45 of the Internal Revenue Code (the “Code”) (and eligibility to claim the investment tax credit (the “ITC”) in lieu of the PTC). The 2015 Notice generally extends the relevant deadlines set forth in the prior IRS guidance by one year to reflect the new statutory begun construction deadline of December 31, 2014, enacted by the Tax Increase Prevention Act of 2014 (the “TIPA”).
On December 19, 2014, the TIPA retroactively extended the date by which projects must have begun construction in order to qualify for the PTC (or the ITC in lieu of the PTC) by one year to December 31, 2014. Thus, in order to qualify for the credit, construction of the project must have begun on or before December 31, 2014. The IRS had previously released guidance setting forth circumstances in which the IRS would deem this begun construction requirement met under the prior December 31, 2013 deadline. However, because the tests described in the prior IRS guidance were not embodied in the Code itself, the guidance was not directly applicable unless updated to apply to the new statutory deadline. The 2015 Notice effectuates the application of the prior IRS guidance to the new deadline by extending the relevant dates in the prior IRS guidance by one year.
In particular, Notice 2013-29 provided that a taxpayer could satisfy the begun construction requirement by (i) engaging in “physical work of a significant nature” (the “Physical Work Test”) or (ii) paying or incurring 5% or more of the total costs of a project (the “5% Safe Harbor”), in each case, on or before December 31, 2013. Under either test, Notice 2013-29 generally required taxpayers to show that there was “continuous” progress toward the completion of the project after such date (i.e., the “continuous program of construction” and “continuous efforts” tests). However, the IRS later announced in Notice 2013-60 that a taxpayer would be deemed to satisfy these tests if the project was placed in service on or before December 31, 2015.
As was anticipated, the 2015 Notice simply extends the deadlines described above by one year. That is, the 2015 Notice provides that a project (i) satisfies the Physical Work Test if physical work of a significant nature began with respect to the project on or before December 31, 2014 or (ii) satisfies the 5% Safe Harbor if 5% or more of total project costs were incurred on or before December 31, 2014 (and certain other requirements are satisfied). Likewise, a project is deemed to satisfy the ”continuous program of construction” or “continuous efforts” tests, as applicable, if the project is placed in service on or before December 31, 2016.
Although the updates set forth in the 2015 Notice were consistent with expectations, the update nonetheless provides welcome guidance to industry participants and allows tax equity investors and sponsors to plan current and future projects with greater certainty that the familiar guidance issued under the prior begun construction deadline will apply consistently to projects for which construction began in 2014.