The IRS released Notice 2013-60 (the “Current Notice”) last week which clarifies the beginning of construction requirements for the renewable energy production tax credit (PTC) or the investment tax credit (ITC). A taxpayer will be eligible to receive the PTC under Section 45 of the Code, or the ITC under Section 48 of the Code in lieu of the PTC, with respect to a facility if construction of such facility begins before January 1, 2014. As you may know, the IRS released Notice 2013-29 in April, 2013 (the “Prior Notice”), which provides the taxpayer with two methods for establishing the beginning of construction: starting physical work of a significant nature (the “Physical Work Test”); or paying or incurring five percent or more of the total cost of the facility (the “Safe Harbor”).
The Current Notice provides a method for taxpayers to satisfy the continuous construction or continuous efforts tests, clarifies that the master contract rules apply to the Safe Harbor, and clarifies that a taxpayer may transfer a facility after construction has begun.
Deemed Satisfaction of the Continuous Construction and Continuous Efforts Tests
The Prior Notice provides that the IRS may determine that construction has not begun on a facility before January 1, 2014 for purposes of the Physical Work Test if a taxpayer does not maintain a continuous program of construction, and for purposes of the Safe Harbor, if a taxpayer does not maintain continuous efforts to advance towards completion of the facility. The IRS’ determination under either test will be determined by the relevant facts and circumstances, subject to certain exceptions for disruptions in construction or efforts which will not be considered as indicating that a taxpayer has failed to maintain continuous construction or continuous efforts to advance towards completion of the facility. The Current Notice provides that if a facility is placed in service before January 1, 2016, the facility will be deemed to satisfy the continuous construction test or the continuous efforts test. If a facility is not placed in service before January 1, 2016, whether the facility satisfies either test will be determined by the relevant facts and circumstances.
Master Contract Provision Applies for Purposes of Safe Harbor
The Prior Notice provides that if a taxpayer enters into a binding written contract for a specific number of components to be manufactured, constructed or produced for the taxpayer by another person under a “master contract”, and then through a new binding written contract the taxpayer assigns its rights to certain components to an affiliated special purpose vehicle that will own the facility for which such property is to be used, work performed under the master contract may be taken into account for purposes of satisfying the Physical Work Test. The Current Notice clarifies that the master contract provision also applies for purposes of the Safe Harbor.
Taxpayer May Transfer a Facility After Construction Has Begun
The Prior Notice did not address the effect of a transfer of a facility after construction has begun. The Current Notice clarifies that the construction does not need to be begun by the taxpayer claiming the credit. If the qualified facility satisfies either the Physical Work Test or the Safe Harbor, the taxpayer that owns the facility during the 10-year period beginning on the date the facility was originally placed in service may claim the PTC, or the ITC in lieu thereof, with respect to that facility even if the taxpayer did not own the facility at the time construction began. The Current Notice provides as an example of a transfer, the sale by a developer of 95 percent of the interests in a limited liability company that owns the facility to a group of unrelated investors.