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A Blueprint For Production And Investment Credits
Law360, New York (December 17, 2013, 8:12 AM ET) -- The IRS recently provided additional certainty for taxpayers seeking to claim the expanded production tax credit (“PTC”) or investment tax credit (“ITC”), and we expect that investors will be more willing to finance renewable energy projects because of this greater certainty. Background The American Taxpayer Relief Act of 2012 (“ATRA”) extended and modified the PTC and ITC. Under prior law, renewable energy facilities must have been “placed in service” before the applicable expiration date, which effectively required these facilities to have achieved commercial operation prior to that date. ATRA modified these rules so that renewable energy facilities will be eligible for the PTC or ITC without regard to when the facilities are placed in service so long as “construction begins” before Jan. 1, 2014. ATRA, however, did not explain when construction begins. On April 15, 2013, the IRS issued Notice 2013-29, which provided two alternatives for establishing that construction has begun. Both alternatives involved a facts and circumstances inquiry, creating the potential for substantial uncertainty in the renewable energy community. Physical Work Test The first alternative for establishing that construction has begun is the “physical work test.” Under this facts and circumstances test, construction has begun if physical work of a significant nature has started on the energy facility and if the taxpayer has maintained a continuous program of construction. Such physical work includes physical work performed on- and off-site (with some limitations) as well as physical work performed under binding written contract. Physical work excludes preliminary activities and work to produce property that is either in existing inventory or is normally held in inventory. A continuous program of construction involves continuing physical work of a significant nature as determined by the facts and circumstances. Safe Harbor Under a purported “safe harbor” alternative, Notice 2013-29 provided that construction has begun if the taxpayer (1) has paid or incurred 5 percent or more of the total cost of the specified energy facility before Jan. 1, 2014, and (2) thereafter, has made continuous efforts to advance toward completion of
the facility. Despite being a safe harbor, whether a taxpayer has made “continuous efforts to advance towards completion” of the facility was to be determined by all the facts and circumstances, including paying or incurring additional amounts included in the total cost of the facility, entering into binding written contracts for components or future work on construction of the facility, obtaining necessary permits, and performing physical work of a significant nature. This continuous efforts requirement was presumably originally intended to limit any efforts by taxpayers to grandfather future projects by satisfying the safe harbor in 2013 (e.g., by buying up wind turbines) but not constructing such projects until a later time period. This phenomenon was seen at the end of 2011 when there was a run on solar panels to grandfather them under the Troubled Asset Relief Program in 2008. This continuous efforts requirement generated a good deal of commentary, as it appeared to eviscerate the benefits of any safe harbor. Notice 2013-60 Notice 2013-60 resolved the substantial uncertainty arising from the purported safe harbor by providing a bright-line test for satisfying the continuous efforts requirement. Notice 2013-60 provided that if a facility is placed in service (that is, it effectively achieves commercial operation) before Jan. 1, 2016, the facility will be considered to satisfy the continuous construction requirement (for purposes of satisfying the physical work test) or the continuous efforts requirement (for purposes of satisfying the safe harbor). Taxpayers will likely take advantage of this bright-line test because the construction horizon for most projects is considerably shorter than two years. In particular, we expect that this bright-line test will ease the financing process because taxpayers no longer need to rely on the unpredictable “facts and circumstances” test in order to qualify for the PTC or ITC. Additional Clarification Notice 2013-60 provided additional clarification on certain other ambiguities with respect to claiming the expanded PTC or ITC. Master Contracts Notice 2013-29 provided that use of a master contract in connection with the development of a project may be counted for purposes of satisfying the physical work test. For example, a developer could enter into a master contract for the purchase of wind turbines and subsequently assign the rights to certain wind turbines under the master contract to a project-specific special purpose vehicle. The work performed under the master contract prior to such assignment could count toward satisfaction of the physical work test for the applicable project. Notice 2013-60 clarified that the foregoing analysis also applies for purposes of satisfying the safe harbor. Transferability of Facility Notice 2013-60 also clarified that the transfer of a facility after construction has begun will not prevent that facility from qualifying for the PTC or ITC. This differs from the Troubled Asset Relief Program in
2008, in which the IRS placed various limits on the ability of taxpayers to transfer facilities without disqualifying them from the ITC or PTC. —By Jon Nelsen and Kathryn McEvilly, Baker Botts LLP Jon Nelsen is a senior associate in Baker Botts' Austin and Houston, Texas, offices. Katie McEvilly is an associate in the firm's Houston office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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