On December 19, 2014, the President signed the Tax Increase Prevention Act of 20141 that retroactively extended PTC eligibility under Section 45 of the Internal Revenue Code, as amended (the “Code”), to qualifying projects for which construction began prior to January 1, 2015.
Under prior law, in order to qualify for PTCs, the construction of a wind facility was required to have begun prior to January 1, 2014.2 Thus, the new legislation provides limited relief in certain circumstances to taxpayers seeking to qualify projects for PTC eligibility, but the timing of the legislation and the period of extension fell well short of what industry participants sought.
As discussed further below, two significant implications of the proposed legislation are that the legislation potentially allows (i) taxpayers to increase the total size of PTC qualifying projects because certain developers may have incurred a greater percentage of the total costs of projects started prior to January 1, 2014, that will not be completed prior to the extended January 1, 2015, begun construction deadline and (ii) developers to qualify a greater number of project components for use at projects to satisfy the begun construction requirement. Moreover, tax equity investors may take a second look at projects that had previously been viewed as having a less extensive set of pre-2014 facts to support the project’s qualification under the prior begun construction deadline.
As discussed in prior client alerts, the American Taxpayer Relief Act of 20123 replaced the requirement that PTC eligible projects be “placed in service” prior to the applicable deadline with a requirement that such projects had “begun construction” prior to January 1, 2014. This most recent legislation retains the same begun construction standard, but changes the deadline with respect to applicable projects where construction commenced on or prior to January 1, 2015.
An important question going forward will be if and when the Internal Revenue Service (the “IRS”) modifies the guidance the IRS has provided over the course of the prior two years to account for the new begun construction deadline (as tax practitioners expect). 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” or (ii) paying or incurring 5% or more of the total costs of the project, in each case, prior to January 1, 2014.4 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. However, the IRS later announced in Notice 2013-60 that a taxpayer would be deemed to satisfy this “continuous” progress requirement if the applicable project was placed in service prior to January 1, 2016.5
Given that the begun construction deadline has been extended by one year to projects qualifying prior to January 1, 2015 under the new legislation, this IRS guidance presumably should be extended by one year as well (including extending the deemed satisfaction of the “continuous” progress tests under Notice 2013-60 to include projects placed in service prior to January 1, 2017). However, because the tests contained in these IRS notices are not embodied in the Code itself, the IRS would have to modify the guidance in order to effectuate this change. Tax practitioners believe this is likely to occur, providing some additional time for project completion.
Furthermore, many developers had incurred costs prior to January 1, 2014 with respect to project components with the intent to allocate such components in 2014 or 2015 to specific projects (and, therefore, the costs incurred with respect thereto) at a later date. Assuming the IRS guidance is updated as expected, developers may be able to treat a greater number of components as “qualifying components” that can then be allocated in 2016 to projects in order to qualify the projects under the relevant IRS guidance tests. That is, developers can utilize components with respect to which the developer incurred costs in 2014 for purposes of qualifying projects under the new begun construction requirement with respect to the 5% cost safe harbor. In addition, physical work occurring in 2014 may make it clearer that certain projects relying on the physical work test satisfy such requirement, thus making the projects more attractive to financing and investment.
Finally, the safe harbor allowing taxpayers to satisfy the begun construction requirement by incurring 5% or more of the total costs of the project prior to the deadline keys off of the ratio of pre-deadline costs incurred to total project costs. Therefore, assuming the IRS guidance is extended by one year to include 2014 costs, developers can construct larger projects that qualify for begun construction because a larger amount of costs will be treated as incurred prior to the deadline (i.e., pre-2015 costs will now be included as pre-deadline costs in this ratio). Thus, the total costs of the project, as a whole, can be greater, while still qualifying under this requirement.