On April 15, 2013, the U.S. Internal Revenue Service issued Notice 2013-29, addressing the new requirement under Section 45 of the Internal Revenue Code that certain renewable energy projects must "begin construction" in 2013 to qualify for the Section 45 production tax credit ("PTC") or for the Section 48 investment tax credit ("ITC"). The IRS guidance closely follows the standards previously developed by the U.S. Department of Treasury for determining whether an eligible renewable energy project qualified for a cash grant (in lieu of tax credits) under the Section 1603 program that was part of 2009's American Recovery and Reinvestment Act.
While the similarities to the Treasury cash grant program will
bring much-needed certainty for project developers and investors,
there are also a number of new wrinkles in the Notice that will
raise interpretive questions for credit-eligible projects.
The American Taxpayer Relief Act, enacted in late December 2012,
modified the basis for qualifying for PTCs and ITCs (where the ITC
is available by election of the taxpayer pursuant to Section
48(a)(5)(C)). Previously, an otherwise eligible project was
required to be "placed in service" by a specified
date to earn the tax credit. The Act extended the credit expiration
deadline for wind energy facilities through 2013 (the deadline for
other eligible technologies remains 2014), but more significantly
changed the eligibility criteria so that qualifying projects need
not be "placed in service" by the end of 2013,
but instead need only "begin construction" this
year. This change was intended to address industry concerns that
the last-minute deadline extension would not allow enough time for
otherwise eligible wind projects to be completed before the end of
2013, given the lengthy development and construction schedule for
such projects.
Like the Section 1603 program guidance, the Notice provides two
methods by which a taxpayer can establish that it "began
construction" of an eligible renewable project in 2013. A
taxpayer may establish the start of construction on a project by
(i) performing "physical work of a significant
nature" on the project in 2013, or (ii) paying or
incurring at least 5 percent of the total costs of the project in
2013. In each case, the taxpayer must thereafter make a
"continuous effort to advance towards completion"
of construction of the project. Notably, the "continuous
construction" condition was not present in the Section
1603 guidance for use of that program's five
percent "safe harbor."
Whether a taxpayer makes continuous efforts to advance completion
of a renewable energy facility will depend on the relevant facts
and circumstances, and according to the Notice, the IRS will
"closely scrutinize" whether such a continuous
program has been maintained by the taxpayer. The Notice does
provide that events outside the developer's control that
impede construction, such as severe weather, permitting delays, or
equipment supply shortages, will be taken into account in
determining whether there was a continuous program of construction.
Financing delays may also be treated as outside the
developer's control, but only for delays of up to six
months. Nevertheless, this new condition injects an element of
subjectivity, and hence greater risk, into what was a
straightforward, bright-line test for the five percent
safe harbor as developed under the former cash grant program.
The Notice also includes a number of factors—most of
which were part of the Section 1603 guidance—that will
help clarify the kinds of off-site and on-site work that would
constitute "physical work of a significant
nature." For example, "preliminary
activities" such as permitting, testing, clearing or
grading the site, or removing existing turbines or towers do not
constitute "physical work" under the Notice, but
work on a step-up transformer or structures integral to the power
generation activity of the renewable project would qualify.
Similar to the Section 1603 program, a taxpayer may rely on
"physical work" performed by another person under
a "binding written contract" entered into before
such work commenced. As with the Section 1603 guidance, the Notice
states that such a contract may not limit damages to a specified
amount, such as by use of a liquidated damages provision, but a
provision limiting damages to at least five percent of the
contract price will not run afoul of this restriction.
The Notice also includes a special provision defining
"facility" that may benefit wind project
developers in particular. Specifically, the Notice states that
where multiple "facilities" (e.g., wind turbine
generators) are operated as part of a "single
project" (based on various factors spelled out in the
Notice), commencing construction on only a portion of such project
will be sufficient to qualify for the PTC, as long as the taxpayer
thereafter completes construction of the entire facility pursuant
to a continuous program of construction. Consequently, it is not
necessary, for example, for a wind project developer to excavate
foundations for each wind turbine generator and tower that
comprises a single project to have "commenced
construction" on the project.
These significant changes to the tax credit eligibility criteria
should provide an immediate boost to a wind power sector facing
uncertain growth prospects in an environment of low power prices.
Developers can take comfort that the IRS in its Notice has largely
mimicked the rules that governed the highly successful Treasury
cash grant program. However, by introducing a new requirement for
continuous construction of projects that seek to qualify for tax
credits under the five percent safe harbor, the Notice
adds a dose of uncertainty to the process for securing tax credits.
The potential risk of losing tax benefits could cause concerns for
project developers and especially their tax equity investors. It
may be possible to obtain clarification by seeking a private letter
ruling or additional public guidance from the IRS. Since either
type of IRS action can take three to six months on average,
developers and industry groups may need to act promptly to get
answers within a meaningful time frame.
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.
