On April 15, 2013, the IRS released Notice 2013-29 (the “Notice”). The Notice provides guidelines and a safe harbor to determine when construction of a facility has begun for purposes of the Production Tax Credit (“PTC”) and the 30-percent Investment Tax Credit in lieu of the PTC (“ITC”).
The American Taxpayer Relief Act of 2012 (the “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. The ATRA modified these rules so that these facilities will be eligible for the PTC or ITC without regard to when the projects are placed in service so long as construction begins before the end of 2013. The ATRA did not provide guidance for determining when construction begins.
The Notice provides two alternative methods for establishing that construction has begun on a qualified energy facility. Both involve a facts and circumstances inquiry.
Taxpayers can show that physical work of a significant nature has started on the energy facility. Such physical work includes physical work performed on- and off-site (with some limitations) as well as physical work performed under binding written contract (although such contract cannot limit damages to a specified amount, which may cause many currently executed agreements to not satisfy the Notice’s requirements), but physical work excludes work to produce property that is either in existing inventory or is normally held in inventory. This test involves a determination of the relevant facts and circumstances, including whether the taxpayer has maintained a continuous program of construction after December 31, 2013. A “continuous program of construction” involves continuing physical work of a significant nature as determined by the facts and circumstances, although the Notice explains that certain acts disrupting such work that are beyond the taxpayer’s control will not adversely affect this determination.
Alternatively, a taxpayer can satisfy a “safe harbor” that requires the taxpayer (1) to have paid or incurred 5% or more of the total cost of the specified energy project before the deadline, and (2) thereafter, to make continuous efforts to advance towards completion of the facility. The total cost of the project includes all costs paid or incurred by the taxpayer (or by the taxpayer’s contractor in certain cases) properly included in the depreciable basis of the project, but does not include the cost of land or any property not integral to the activity performed by the facility. A taxpayer’s particular method of accounting can play a significant role in whether down payments made before the end of 2013 can qualify for the 5% threshold, and the “paid or incurred” requirement may mean that accrual method taxpayers may not meet the requirements of the Notice if their projects involve components with long lead times.
Whether a taxpayer has made “continuous efforts to advance towards completion” of the facility is determined by 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. As a result, although the Notice describes the 5% test as a “safe harbor,” the “continuous efforts” requirement can be expected to limit any efforts by taxpayers to “grandfather” future projects by “banking” qualified equipment before the deadline (a phenomenon seen at the end of 2011 when there was a run on solar panels to grandfather them under the 1603 grant program). While the safe harbor may not prove much more appealing than the physical work of a significant nature test, it does provide some flexibility by allowing consideration of activities other than physical work of a significant nature.
The Notice provides that multiple facilities can be treated as a single facility (e.g., a wind farm where each unit can separately qualify for the PTC or ITC but which is developed as a single project) for purposes of determining whether construction has begun. The Notice also permits allocating the PTC or ITC in the case of a single project comprising multiple facilities if the total cost of the project exceeds expectations so that 5% of the total cost of the project is not paid or incurred before January 1, 2014.