As described in prior newsletters, a taxpayer is entitled to a production tax credit (PTC) with respect to sales of electricity from certain qualified facilities where construction of the facility began before January 1, 2014. The IRS had previously provided two methods to determine when construction began on a qualified facility – a physical work test and a 5 percent safe harbor test.
Recognizing that uncertainty as to whether particular projects will qualify for the PTC has delayed outside investment, the IRS has issued additional guidance. The new guidance clarifies that the physical work test focuses on the nature of the work performed, not the amount or cost. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold requirement.
The IRS also clarified that a taxpayer may begin construction of a facility with the intent to develop it at a certain site but thereafter transfer equipment and other components of the facility to a different site, where development is completed and the facility is placed in service. The work performed or amounts paid or incurred by the taxpayer before 2014 may be taken into account for purposes of determining when construction began with respect to the facility.
The IRS also clarified rules relating to transfers of equipment between unrelated parties. If a facility is transferred by a developer to an unrelated taxpayer, the work performed or amounts paid or incurred by the developer before 2014 are taken into account if the facility consists of more than just tangible personal property but not if it consists solely of tangible personal property (including contractual rights to the property under a binding written contract).
The new guidance adds another safe harbor in the case of a single project comprising multiple facilities. In this case, if the taxpayer paid or incurred at least 3 percent of the total cost of the project before January 1, 2014, the safe harbor will be deemed satisfied with respect to any number of individual facilities as long as the aggregate cost of those individual facilities at the time the project is placed in service is not more than 20 times the amount paid or incurred by the taxpayer before 2014 and the continuous efforts test is met (or deemed met) under prior guidance. For example, assume Developer incurs $30,000 in costs prior to January 1, 2014, to construct a five-turbine wind farm that will be operated as a single project. In October 2015, Developer places the project in service. The total cost of the project is $800,000, with each turbine costing $160,000. Since Developer incurred at least 3 percent (but less than 5 percent) of the total cost before 2014 and satisfied the continuous efforts test by placing the project in service before 2016, Developer may claim the PTC on electricity produced from three of the turbines ($480,000 cost of the three turbines is less than 20 x $30,000 incurred before 2014; that would not be the case based on four turbines).