In response to numerous questions regarding the application of the continuous construction and continuous efforts tests set out in Notice 2013-29, the IRS has released Notice 2013-60 in which it provides that a qualifying renewable energy facility will be deemed to meet such tests if it is placed in service prior to January 1, 2016 provided that either the Physical Work Test or the 5% Safe Harbor (as defined below) is met. This objective safe harbor is welcome news for developers and investors who were dealing with the uncertainty of interpreting the parameters of the subjective facts and circumstances based tests and should lead to increased investments in such projects as year-end approaches. For such facilities, the main hurdle will now be to begin construction by the end of the year by either (1) beginning physical work of a significant nature (the "Physical Work Test") or (2) paying or incurring 5% or more of the total costs of the qualifying facility (the "5% Safe Harbor").
As detailed in our prior alert related to Notice 2013-29,1 qualified facilities include, and thus the begin construction standard applies to, facilities producing energy from wind, closed- and open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic sources.
Notice 2013-60 also contains two other items of significance. First, the Service clarified that work performed under a master contract can be taken into account in determining whether the 5% Safe Harbor is met. A master contract is described as a situation where 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 (the "master contract"), and then through a new binding written contract (a "project 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. This provision will allow developers flexibility in deciding which projects to assign "grandfathered" components to.
Lastly, the guidance clarifies that as long as a facility meets either the Physical Work Test or the 5% Safe Harbor, a taxpayer that owns such facility on the placement in service date may claim the production tax credit or investment tax credit with respect to the facility even if the taxpayer did not own the facility at the time construction began. In other words, the incentives will attach to the qualifying facility rather than to the taxpayer who was the owner of such property when either the Physical Work Test or 5% Safe Harbor was met. The flexibility provided by Notice 2013-60 is a welcome relief for an industry faced with uncertainty over the expiration of these valuable incentives.