The IRS has issued rules (Notice 2013-29) for establishing that construction has started on a facility eligible for the renewable electricity production tax credit (PTC) under Section 45. The guidance generally follows earlier rules used to establish the start of construction for obtaining grants in lieu of the PTC and energy investment tax credit (ITC) under section 1603 of the American Recovery and Reinvestment Act of 2009.
The PTC was originally set to expire for property placed in service after 2013 (2012 for wind property), but the American Taxpayer Relief Act of 2012 extended the credit so that it applies to any facility for which construction has begun by the end of 2013. Taxpayers may also elect to take the 30% ITC under Section 48 in lieu of the PTC.
To meet the new deadline, taxpayers may use one of two tests to establish that construction has begun. They can either establish that "physical work of a significant nature" has begun before Jan. 1, 2013, or use a safe harbor that requires 5% of the total cost of the facility to be incurred before Jan. 1, 2014. There is no deadline for actually placing the property in service, but taxpayers using the general rules must maintain a "continuous program of construction" and taxpayers using the safe harbor must make "continuous efforts to complete the facility." The guidance allows for disruptions under certain circumstances, such as for weather, permit delays, financing problems, labor stoppages or supply shortages.
The taxpayer can perform construction work pursuant to a binding written contract, but the guidance provides that a contract is binding only if it can be enforced under local law and does not limit damages to a specified amount. Physical work of a significant nature does not include removing existing towers or turbines, and does not include the following preliminary activities:
- 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 (as distinguished from excavation for footings and foundations)
The guidance does include favorable rules for grouping multiple facilities as part of a single project. Whether multiple facilities are operated as part of a single project will depend on the relevant facts and circumstances, and the IRS will consider whether the facilities:
- are owned by a single legal entity,
- are constructed on contiguous pieces of land,
- are described in a common power purchase agreement or agreements,
- have a common intertie,
- share a common substation,
- are described in one or more common environmental or other regulatory permits,
- are constructed pursuant to a single master construction contract, or
- are constructed pursuant to the same loan agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.