On August 8, 2014, the Internal Revenue Service (“IRS”) issued Notice 2014-46, which provides further guidance intended to assist developers and purchasers of renewable energy facilities evaluate whether such facilities satisfied the beginning of construction requirement for the renewable energy section 45 production tax credit (“PTC”) and the section 48 investment tax credit (“ITC”) in lieu of PTC (collectively, the “Tax Credits”).
Highlights of Notice 2014-46 include:
- For purposes of the Physical Work Test, the Notice provides written confirmation that there is no fixed minimum amount of work or monetary or percentage threshold required.
- For purposes of the 5% Safe Harbor, the Notice modifies the rules regarding qualification of a single project comprised of multiple facilities where the taxpayer does not pay or incur 5% of the total project costs.
- The Notice confirms that there is no statutory requirement that the taxpayer that begins construction of a facility also must be the taxpayer that places that facility in service and claims the Tax Credits. But, the Notice provides certain limitations on transfers of renewable energy equipment between unrelated parties and relocations of such equipment.
Notice 2014-46 follows two earlier IRS Notices regarding the beginning of construction requirement -- Notice 2013-29 and Notice 2013-60.
In January 2013, the American Taxpayer Relief Act of 2012 (“ATRA”) (H.R. 8), also known as the Fiscal Cliff bill, was enacted. Prior to ATRA, renewable energy facilities were required to be placed in service (i.e., completed) by the end of either 2012 or 2013 to qualify for the Tax Credits. ATRA provided a taxpayer favorable rule that extended eligibility for the Tax Credits to renewable energy facilities for which construction began before January 1, 2014. ATRA did not provide any guidance regarding when a renewable energy facility would be treated as having begun construction, instead leaving that guidance to the IRS.
In April 2013, the IRS issued Notice 2013-29.1 That Notice provided two methods for establishing the beginning of construction: (1) starting physical work of a significant nature (“Physical Work Test”) and (2) paying or incurring 5% or more of the total project cost (“5% Safe Harbor”). Under either method, the Notice required that, after 2013, the taxpayer must maintain a “continuous program of construction” for the Physical Work Test (“Continuous Construction Test”) or “make continuous efforts to advance toward completion of the facility” for the 5% Safe Harbor (“Continuous Efforts Test”). The Notice also provided that if a taxpayer entered into a binding written contract for project components and then, through a new binding written contract, assigned its rights to certain components to affiliated special purpose entities, work performed under the initial master contract may be taken into account in determining whether the Physical Work Test was satisfied (“Master Contract Provision”).
In September 2013, the IRS issued Notice 2013-60.2 That Notice provided that: (1) a facility placed in service before the end of 2015 will be deemed to satisfy the Continuous Construction Test or the Continuous Efforts Test; (2) the transfer of a facility after construction has begun will not prevent a facility from qualifying for the Tax Credits; and (3) the Master Contract Provision in regard to the Physical Work Test also applies for purposes of the 5% Safe Harbor.
Physical Work Test Update
Notice 2014-46 confirms that the Physical Work Test “focuses on the nature of the work performed, not the amount or cost.” In addition, it further confirms that there is “no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.”
Sutherland Observation: Some confusion regarding whether there was a minimum percentage threshold for satisfaction of the Physical Work Test arose due to similar, but slightly different, examples for satisfaction of the Physical Work Test provided in Notice 2013-29 and in guidance for a grant program under section 1603 of the American Recovery and Reinvestment Act (“1603 Grant”). In an example from the 1603 Grant guidance, the Physical Work Test would be satisfied if certain work was done with respect to “1 of the 50 turbines” of a 50 turbine wind farm, whereas in a substantially similar example, Notice 2013-29 referred to work with respect to “10 of the 50 turbines.” In oral statements, Treasury and IRS officials repeatedly stated that nothing was intended by that difference. Notice 2014-46 memorializes that view.
5% Safe Harbor Update
Notice 2014-46 provides a new safe harbor for certain projects that exceed cost expectations. Notice 2013-29 provides that if the total costs of a facility that is a single project comprised of multiple facilities exceeds its anticipated costs such that the 5% threshold for paying or incurring costs prior to January 1, 2014 is not satisfied, the 5% Safe Harbor will not be fully satisfied, but may be satisfied with respect to some, but not all, of the individual facilities. Notice 2014-46 includes a safe harbor that provides that if the 5% threshold is not satisfied, but the taxpayer paid or incurred at least 3% of the total cost of the facility, the 5% Safe Harbor may be satisfied with respect to some, but not all, of the individual facilities. An amount that is 20 times the amount paid or incurred prior to January 1, 2014 becomes a ceiling. The taxpayer in that case may claim the Tax Credits with respect to the number of facilities of the project the aggregate cost of which is no greater than that ceiling (such that the amount paid or incurred prior to January 1, 2014 would equal 5% of the cost of the selected facilities).
Sutherland Observation: Prior to the issuance of Notice 2014-46, there was some question as to which pre-January 1, 2014 project costs could be used in calculating whether the 5% Safe Harbor was satisfied when (1) the taxpayer constructed a single project comprised of multiple facilities and (2) less than 5% of the total project costs had not been paid or incurred. Notice 2013-29 confirmed that part of the project may be treated as having satisfied the Beginning of Construction Test, but left open some questions regarding the calculation of the 5% Safe Harbor. Notice 2014-46 provides a favorable safe harbor on a multiple project facility. Under that safe harbor, if at least 3% of the total project costs are incurred, a portion of the project qualifies for the Tax Credits such that the costs incurred prior to January 1, 2014 will equal 5% of the total cost of the portion of the project that qualifies.Notice 2014-46 confirms prior transferability rules, but leaves open some questions. Notice 2013-60 provides that if a qualified facility satisfies either the Physical Work Test or the 5% Safe Harbor, (1) a 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 with respect to the facility even if the taxpayer did not own the facility at the time construction began, and (2) a taxpayer that owns the facility on the date it is originally placed in service may elect to claim the ITC in lieu of PTC with respect to that facility even if the taxpayer did not own the facility at the time construction began. The Notice did not include any specific limitations on the transferability of a qualified facility.
Notice 2014-46 confirms prior transferability rules, but leaves open some questions. Notice 2013-60 provides that if a qualified facility satisfies either the Physical Work Test or the 5% Safe Harbor, (1) a 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 with respect to the facility even if the taxpayer did not own the facility at the time construction began, and (2) a taxpayer that owns the facility on the date it is originally placed in service may elect to claim the ITC in lieu of PTC with respect to that facility even if the taxpayer did not own the facility at the time construction began. The Notice did not include any specific limitations on the transferability of a qualified facility.
Notice 2014-46 confirms the transferability rules of Notice 2013-60, but includes certain additional language that may give rise to further questions for the IRS. Such language includes the following:
- “For example, a taxpayer may acquire a facility (that consists of more than just tangible personal property) from an unrelated developer that had begun construction of the facility prior to January 1, 2014, and thereafter the taxpayer may complete the development of that facility and place it in service.” (Emphasis added.)
- “In the case of a transfer consisting solely of tangible personal property(including contractual rights to such property under a binding written contract) to a transferee not related … to the transferor, any work paid or incurred by the transferor with respect to such property so transferred will not be taken into account with respect to the transferee for purposes of the Physical Work Test or Safe Harbor.” (Emphasis added.)
- “Example. … Prior to January 1, 2014, Developer D pays or incurs $60,000 to have tangible personal property integral to Facility K manufactured…. Thereafter Developer D incurs no further development costs and engages in no further development with respect to Facility K. In January 2014, Developer D sells the tangible personal property to Developer E, a party unrelated to Developer D…. Amounts paid or incurred by Developer D prior to January 1, 2014 will not be taken into account for purposes of satisfying the safe harbor with respect to the facility.” (Emphasis added.)
- “A taxpayer also may begin construction of a facility in 2013 with the intent to develop a facility at a certain site, but thereafter transfer equipment and other components of the facility to a different site, complete its development and place it in service.” (Emphasis added.)
The multiple references to “tangible personal property” (first three bullets above), the statement in the example provided in Notice 2014-46 (third bullet above) regarding the developer undertaking no further development, and the “intent” language in the relocation discussion (fourth bullet above) may require taxpayers with factual patterns potentially implicated by these transfer provisions of Notice to 2014-46 to seek further clarification from the IRS.
Sutherland Observation: The transfer and relocation provisions of Notice 2014-46 appear to be intended to stop the trafficking of Tax Credit eligible parts by taxpayers that seek to qualify equipment for the Tax Credits with no real intention of constructing a renewable energy property, but rather for the purpose of marketing such equipment as Tax Credit eligible. Further IRS direction may be required, including in regard to the questions of whether:
- such provisions are inapplicable if in addition to tangible personal property, some (perhaps minimal) intangible is provided;
- the import of the reference to the fact that the developer engages in “no further development” if the project is transferred very early in 2014 and/or if the project satisfies the Continuous Construction/Continuous Efforts safe harbor provided in Notice 2013-60 by project completion prior to the end of 2015; and
- the extent to which a taxpayer must have had an “intent” prior to January 1, 2014 to construct the facility at a specified site.
Ultimately, these issues should not be problematic if proper planning is undertaken. However, given the substantial economic impact of a failure to satisfy the beginning of construction requirement, further IRS guidance (even if just informal) may be desirable to obtain greater comfort prior to making substantial investments in renewable energy facilities the construction of which began with another taxpayer.