The IRS has issued Notice 2014-46, which clarifies standards used to determine whether construction has begun on certain renewable energy facilities eligible for production tax credits under Internal Revenue Code Section 45 (PTC) or the investment tax credit under Section 48 of the Code (ITC). To qualify for the credits, construction on such facilities must have begun prior to January 1, 2014. On April 15, 2013, the IRS issued Notice 2013-29, which established two tests for determining when construction begins. Under the Physical Work Test, a taxpayer can establish the beginning of construction by starting “physical work of a significant nature.” The work may be performed by a taxpayer, or it may be performed for the taxpayer by another person pursuant to a written agreement entered into prior to the manufacture or construction of the property to be used by the taxpayer as part of the project. The work may be performed on site or off site (e.g., the manufacture of wind turbines). A contract with a third-party for the purchase of inventory (or property that would normally be held as inventory) will not be taken into account under the Physical Work Test. Preliminary activities, such as planning, design, environmental review, licensing and obtaining financing would not be taken into account under the Physical Work Test. Notice 2013-29 also established a Safe Harbor, under which construction would be deemed to have begun prior to January 1, 2014, if the taxpayer had paid or incurred at least 5% of the total costs of the project before that date. Under either test, the taxpayer must make continuous progress toward completion of the project once construction has begun.
In September 2013, in response to the many questions received on Notice 2013-29, the IRS issued Notice 2013-60 to clarify certain aspects of Notice 2013-29. Notice 2013-60 explained that a taxpayer will be deemed to satisfy the requirement to make continuous progress toward completion (under either test) if its project is placed in service before January 1, 2016. Notice 2013-60 also makes it clear that the requirement to begin construction prior to January 1, 2014 may be satisfied by a person other than the taxpayer claiming the credit. A taxpayer that acquires a qualifying project prior to placement in service may claim PTC , or ITC, as applicable, if the Physical Work Test or the Safe Harbor had been satisfied by the prior owner.
On August 8, 2014, the IRS issued Notice 2014-46, which attempts to clarify further the guidance provided in Notice 2013-29 and Notice 2013-60. Notice 2014-46 states that the Physical Work Test is focused on the nature of the work performed, not on the amount or the cost of that work. Consistent with this principle, Notice 2014-46 explains that an example used to illustrate the Physical Work Test in Notice 2013-29 (excavating foundations and pouring concrete pads for 20% of the wind turbines in a project) was not intended to establish any quantitative minimum that would be required to satisfy the test. If the work is of a significant nature , there is no minimum amount of expenditures or minimum percentage completion that must be reached to satisfy the test. Notice 2014-46 also notes that the various types of activities described in the prior Notices that would be considered physical work of a significant nature are representative examples of such work and not intended to provide an exhaustive list of the activities that would be taken into account under the Physical Work Test.
Notice 2014-46 also discusses the application of the Safe Harbor to single projects comprised of multiple facilities. If the costs paid or incurred with respect to the project prior to January 1, 2014 are less than 5% of the total cost of the project, the Safe Harbor will not be satisfied with respect to the entire project. However, if the taxpayer has paid or incurred at least 3% of the total cost of the project prior to January 1, 2014, the taxpayer may claim the credits with respect to some, but not all of the facilities comprising the project. In such a case, the taxpayer can claim credits with respect to any number of individual facilities within the project as long as the total cost of those facilities at placement in service does not exceed 20 times the costs paid or incurred prior to January 1, 2014.