The Internal Revenue Service explained today what developers must do this year to be considered to have started construction of new renewable energy projects.

The IRS adopted roughly the same definition for start of construction as under the Treasury cash grant program.

Wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects that are under construction by December 2013 will qualify for 10 years of production tax credits on the electricity output or an investment tax credit upon project completion for 30% of the project cost.

There is no deadline to complete projects that start construction this year.

The IRS departed from the Treasury cash grant rules in one significant respect.

There are two ways to show that a project is under construction in time.

One is by showing that “physical work of a significant nature” commenced at the site or at a factory that is making equipment for the project. Work at the factory counts only if done after the project has placed a binding equipment order with the manufacturer.

The other is by showing that the developer “incurred” at least 5% of the total project cost. Costs are not usually “incurred” merely by spending money; the developer must take delivery or title to services or equipment.

Many developers gravitated toward the 5% test under the Treasury grant program because anyone relying on the physical work test had to show a continuous pattern of construction after work started. There was no similar requirement for the 5% test. This let tax equity investors and lenders determine with more certainty at the outset whether a project was under construction in time.

The IRS said it will require developers relying on the 5% test to show “continuous efforts” in the future on a project. Developers relying on the physical work test will have to show “continuous construction.”

The IRS guidance is in Notice 2013-29.

The IRS said that it will treat each wind farm as a single

project so that work on any part of the project will qualify as the start of construction of the entire project. This is good news for wind developers and was probably the largest open issue for that industry. The IRS has treated each turbine, pad and tower at a wind farm in the past as a separate power plant for production tax credit purposes.

Some renewable energy developers had urged the IRS to adopt a special rule under which anyone completing a project by a deadline would be considered automatically to have started construction in time. The IRS had signaled from the start that it did not feel it had the legal authority to adopt such a provision.

Developers of projects with long construction periods of two years or more had asked for a special rule under which their projects would be treated as under construction if they had obtained all the permits and entered into contracts to start construction, closed on the construction financing or paid at least a fixed dollar amount of costs. The IRS did not make any special provision for such projects.

The IRS addressed several issues that came up during the Treasury cash grant program.

A developer is considered to have started physical work of a significant nature if work is done at a factory on equipment for the project. However, the equipment must be custom made. The IRS said parts that are normally held in inventory will not count.

The IRS confirmed that a developer buying equipment under a master frame agreement can assign its contract rights to the equipment later to a special-purpose project subsidiary and still have the project qualify for tax credits.

The IRS changed the 5% test to “at least” 5% of the project cost. It was “more than” 5% under the Treasury cash grant program.