Late last year, the American Taxpayer Relief Act of 2012 extended through 2013 the eligibility of newly placed in service wind facilities to claim a production tax credit (or an investment tax credit in lieu of the production tax credit). The Act also modified the definition of a qualified facility by replacing the requirement of placing such a facility in service before January 1, 2014, with the less stringent requirement of “beginning construction” of such a facility before such time. Qualified facilities include, and thus the begin construction standard was made applicable to, facilities producing energy from wind, closed- and open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic sources.
In Notice 2013-29, the IRS has provided two methods that a taxpayer may use to establish that construction of a qualified facility has begun. The guidance generally mimics prior guidance applicable to determining when construction began for purposes of the 1603 cash grant1 and provides that the begin construction standard can be met by either (1) beginning physical work of a significant nature or (2) paying or incurring 5% or more of the total costs of the qualifying facility.
Similar to the physical work test under the 1603 cash grant program, a taxpayer must maintain a continuous program of construction, based on all the facts and circumstances, in order to meet the physical work test. Also like the cash grant program, for purposes of this test, physical work does not include preliminary activities such as planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environmental and engineering studies, clearing a site, test drilling of a geothermal deposit, test drilling to determine soil condition, excavation to change the contour of the land, or removal of existing turbines and towers.
However, unlike the 5% safe harbor that was applicable to the 1603 cash grant program, a “continuous efforts” standard now applies to the 5% safe harbor test that appears to be the same as the “continuous construction” standard applicable to the physical work test. Facts and circumstances indicating continuous efforts to advance towards completion of a facility may include, but are not limited to, the following:
- 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.
Under both the “continuous construction” and “continuous efforts” standards, disruptions due to the following will not be considered as indicating that a taxpayer has failed to meet either of the “continuous” standards:
- Severe weather conditions;
- Natural disasters;
- Licensing and permitting delays;
- Delays at the written request of a state or federal agency regarding matters of safety, security, or similar concerns;
- Labor stoppages;
- Inability to obtain specialized equipment of limited availability;
- The presence of endangered species;
- Financing delays of less than six months; and
- Supply shortages.
Additional details of satisfying the begin construction standard that mirror the 1603 cash grant guidance can be found in Notice 2013-29.