United States: Renewable Energy Tax Credits: Recent IRS Notice Favorable To The Renewable Energy Industry

On May 5, 2016, the IRS released new guidance regarding the renewable energy production tax credit ("PTC") and energy investment tax credit ("ITC") which most in the renewable energy industry will find favorable.

As enacted, the PTC and the ITC presently are subject to a sunset and will expire. Eligibility for either credit hinges on the date on which construction of the facility begins. As part of the Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act"), Congress extended the PTC for two years, extending the date before which construction must begin for certain facilities to January 1, 2017, and extended the PTC for five years with respect to wind facilities by providing that construction must begin before January 1, 2020. Congress also modified the PTC for wind facilities by providing that the credit will phase out over the next four years. In addition, the ITC has been extended for solar energy facilities the construction of which begins before January 1, 2022.

In Notice 2016-31 (the "2016 Notice"), the IRS has updated its prior administrative guidance in order to implement the recent extensions of the PTC and the ITC. In response to a significant number of questions received after the extensions of these tax credits by the PATH Act, the 2016 Notice further extends and modifies the Continuity Safe Harbor (described below), and provides additional guidance regarding the application thereof as well as the Physical Work Test (also described below).

Tax Credit Eligibility

In general, a taxpayer producing electricity at a qualified facility may be eligible to receive the PTC, or, in lieu of the PTC (if the taxpayer so elects), the ITC. For purposes of these tax credits, examples of "qualified facilities" include wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, hydropower facilities, and marine and hydrokinetic facilities.

When Does Construction "Begin"?

Prior administrative guidance was originally released on May 13, 2013 in IRS Notice 2013-29 (the "2013 Notice"). This guidance provides two methods by which a taxpayer may establish that construction of a qualified facility has begun: the "physical work" test and a "5% safe harbor."

Physical Work Test

As set forth in the 2013 Notice, a taxpayer may establish the beginning of construction by starting physical work of a significant nature (the "Physical Work Test"). The "significant nature" determination focuses on the nature of the work performed, not the amount or cost (i.e., there is no fixed minimum amount of work or monetary or percentage threshold), and will depend on the relevant facts and circumstances (the 2013 Notice provides some guidelines and a nonexclusive list of examples in this regard, which have been supplemented by the 2016 Notice).

The IRS made explicit in the 2013 Notice that it will closely scrutinize a facility, and may determine that construction has not begun on a facility if the taxpayer does not maintain a continuous program of construction (the "Continuous Construction Test"). The 2013 Notice explains that a "continuous program of construction" involves continuing physical work of a significant nature, and will be determined by the relevant facts and circumstances (certain disruptions in the taxpayer's construction of a facility that are beyond the taxpayer's control will not be considered as indicating that a taxpayer has failed to maintain a continuous program of construction).

5% Safe Harbor

Alternatively, a taxpayer may establish the beginning of construction by meeting the 5% safe harbor provided in the 2013 Notice (the "5% Safe Harbor"). To qualify for the 5% Safe Harbor, construction of a facility will be considered as having begun if:

  1. The taxpayer pays or incurs 5% or more of the total cost of the facility before the applicable deadline for satisfying the "beginning of construction" requirement (this 5% requirement is reduced to 3% in the case of a facility that is a single project comprised of multiple facilities, in which case special rules apply); and
  2. Thereafter, the taxpayer makes continuous efforts to advance towards completion of the facility (the "Continuous Efforts Test").

For purposes of the first element of the 5% Safe Harbor, the "total cost of the facility" does not include the cost of land or any property not integral to the facility. For purposes of the second element, whether a taxpayer makes "continuous efforts to advance towards completion of the facility" will, again, be determined by the relevant facts and circumstances (the 2013 Notice provides a nonexclusive list of certain facts and circumstances that would indicate the requisite continuous efforts). Similar to above in the context of the Physical Work Test, certain disruptions in the taxpayer's continuous efforts to advance towards completion of the facility that are beyond the taxpayer's control will not be considered as indicating that a taxpayer has failed to make the requisite continuous efforts (the 2013 Notice provides a nonexclusive list of examples of such disruptions, and the 2016 Notice has supplemented that list).

Establishing Continuous Construction and Continuous Efforts

As described above, the two methods for establishing that construction of a facility has begun, for the purpose of qualifying for the PTC or ITC, require that a taxpayer make continuous progress towards completion once construction has begun, whether pursuant to the Continuous Construction Test or Continuous Efforts Test (as applicable). Following release of the 2013 Notice, the Treasury Department and IRS received a significant number of questions regarding the application of these tests. In response, the IRS issued Notice 2013-60 on October 28, 2013, which provided a method by which taxpayers may be deemed to satisfy both the Continuous Construction Test and the Continuous Efforts Test.

A facility will be considered to satisfy the Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the 5% Safe Harbor) if the facility is placed in service before January 1, 2017 (the "Continuity Safe Harbor"), regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility between December 31, 2014 and January 1, 2017.

The 2016 Notice extended the Continuity Safe Harbor from two years to four years from the end of the year in which construction began, such that if a taxpayer places a facility in service during a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, the facility will be considered to satisfy the Continuity Safe Harbor. The 2016 Notice provides the following helpful example: If construction begins on a facility on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor.

Observation: The failure to satisfy the Continuity Safe Harbor does not mean that a facility has not satisfied the requisite continuity. It means only that the determination will be based on the relevant facts and circumstances, as described above.

Prohibition Against Alternating Methods

Although a taxpayer may be able to satisfy both the Physical Work Test and the 5% Safe Harbor, it need only satisfy one method to establish that construction of a facility has begun for the purpose of qualifying for the PTC or ITC. However, the IRS stated in the 2016 Notice that a taxpayer may not rely upon the Physical Work Test and the 5% Safe Harbor in alternating calendar years to satisfy the beginning of construction requirement or the continuity requirement. The 2016 Notice provides the following example in this regard: If a taxpayer performs physical work of a significant nature on a facility in 2015, and then pays or incurs 5% or more of the total cost of the facility in 2016, the Continuity Safe Harbor will be applied beginning in 2015, not in 2016. The effect of this rule is to prevent a taxpayer from extending the four-year safe harbor period by relying on another method in a subsequent year. The taxpayer is essentially bound by whichever method is satisfied first.

Disaggregation

The 2016 Notice clarifies that multiple facilities that are part of a single project may be disaggregated for purposes of determining whether a specific facility satisfies the Continuity Safe Harbor or the continuity requirement under a facts and circumstances analysis (as applicable), such that each facility may be able to take advantage of the tax credit.

5% Safe Harbor & Retrofitted Facilities

Generally, under an "80/20 rule," a facility may qualify as originally placed in service (and thereby qualify for the tax credit) even if it contains used property, as long as the fair market value of the used property is not more than 20% of the facility's total value. Under the 2016 Notice, this "80/20 rule" is applied to each individual facility comprising a single project, and the 5% Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility.

Takeaways

The 2016 Notice is good news for the renewable energy industry. The extension of the Continuity Safe Harbor from two to four years should benefit taxpayers developing larger projects, some of whom had commented that the two-year window was not feasible. This extension generally gives taxpayers more than four years to complete their renewable energy projects once physical work of a significant nature has commenced or once 5% or more of the total cost of the project has been incurred, since the four-year clock begins at the end of the year in which construction began.

Furthermore, the IRS's addition of several new excusable disruptions that will not be taken into account in determining whether the Continuity Safe Harbor is satisfied will allow projects that experience certain delays (e.g., due to delays in obtaining permits or licenses, or due to severe weather conditions or natural disasters) to still qualify even if placed in service outside the four-year period.

Taxpayers should consider how the new guidance impacts their renewable energy development plans, and should consult with their tax advisors regarding whether they may qualify for the PTC or ITC in light of the new rules. The IRS will not issue private letter rulings to taxpayers regarding the application of the 2016 Notice or the application of the "beginning of construction" requirement. Renewable energy developers are encouraged to plan accordingly and begin construction on projects that are part of their four-year development pipeline if they intend to claim the tax credits.

Finally, taxpayers should continue to monitor additional guidance that may be issued by the IRS and the Treasury Department. IRS personnel have stated publicly that the rule preventing use of the Physical Work Test and the 5% Safe Harbor in alternating calendar years may be reconsidered. Additionally, the 2016 Notice indicates that the Treasury Department and the IRS anticipate issuing separate guidance addressing the extension of the ITC for solar energy facilities.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Sohail Itani
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.