alerts & publications

New Guidance Clarifies Beginning of Construction Requirements for Production Tax Credit and Investment Tax Credit Eligibility

On September 20, 2013, the Internal Revenue Service (the "IRS") made available Notice 2013-60 (the "September Notice")[1] providing additional guidance regarding the methods that taxpayers may use to satisfy the "beginning of construction" requirement set forth in the American Taxpayer Relief Act of 2012 (the "ATRA")[2] with respect to eligibility for the production tax credit (the "PTC") under section 45 of the Internal Revenue Code of 1986, as amended (the "Code"), and the investment tax credit (the "ITC") under section 48 of the Code expanding upon the initial guidance provided earlier this year in Notice 2013-29 (the "April Notice")[3]. In particular, the September Notice provides (i) a bright-line test that treats a taxpayer as satisfying the "program of continuous construction" and "continuous efforts" requirements set forth in the April Notice if the qualified facility is placed in service prior to January 1, 2016, (ii) clarification that a qualified facility transferred to another taxpayer is not required to be constructed by the transferee taxpayer claiming the PTC or ITC, and (iii) clarification that the "master contract rule" articulated in the April Notice applies to the "5%" safe harbor as well as the "physical work" safe harbor described below. We note that with respect to both the "5%" safe harbor and the "physical work" safe harbor, the qualified facility must be under construction prior to January 1, 2014.

The ATRA modified the definition of a qualified facility for purposes of PTC and ITC eligibility such that a qualified facility is eligible if construction of the facility begins prior to January 1, 2014. Prior to this legislation, a qualified facility was required to have been placed in service by the applicable deadline. The April Notice set forth two methods taxpayers may use to satisfy the ATRA beginning of construction requirement: (i) by starting physical work of a significant nature prior to January 1, 2014 (the "Physical Work Test"), or (ii) by paying or incurring 5% or more of the total cost of the facility and thereafter making continuous efforts to advance toward completion of the facility (the "5% Safe Harbor"). The IRS noted in the April Notice that it would closely scrutinize a taxpayer seeking to utilize the Physical Work Test if the taxpayer did not maintain a "program of continuous construction." Under the April Notice, the "program of continuous construction" and "continuous efforts" tests were based on a facts and circumstances analysis.

The September Notice clarifies several issues raised by the April Notice. First, the September Notice states that a facility will be deemed to satisfy the "program of continuous construction" (in the case of the Physical Work Test) and "continuous efforts" (in the case of the 5% Safe Harbor) requirements if the facility is placed in service prior to January 1, 2016. If a facility is not placed in service prior to January 1, 2016, the facility's satisfaction of these tests will be based on the facts and circumstances analysis set forth in the April Notice. This new bright-line test allows developers and investors in projects expected to be completed prior to January 1, 2016 to proceed with greater certainty as to the project's qualification for the PTC and ITC.

The September Notice also makes clear that eligibility for the PTC and ITC requires only that construction of a qualifying facility begin prior to January 1, 2014 and does not require that construction of the facility be begun by the taxpayer that claims the applicable credit. Thus, the September Notice clarifies an ambiguity in the April Notice regarding the effect of a transfer of a facility during its construction to another taxpayer. Under the September Notice, as long as the qualified facility itself satisfies the Physical Work Test or the 5% Safe Harbor, a taxpayer that owns a qualified facility during the 10-year period beginning with the date the facility is originally placed in service may claim the PTC and, alternatively, a taxpayer that owns a qualified facility on the date the facility is originally placed in service may claim the ITC. Thus, although many practitioners believed that a taxpayer should not be deemed required to have owned a qualified facility at the time construction of the facility began in order to claim the PTC or ITC under the April Notice, the September Notice's express statement from the IRS provides greater clarification on the issue.

In addition, the April Notice provided that, with respect to the Physical Work Test, if a taxpayer enters into a binding written contract for a specific number of components (a master contract) and then assigns its right to certain such components to an affiliate under a new binding written contract (a project contract), the work performed under the master contract may be included in determining whether "physical work of a significant nature" has begun. However, the April Notice did not apply this "master contract" concept to taxpayers seeking to satisfy the 5% Safe Harbor. The September Notice specifies that this provision also applies for purposes of the 5% Safe Harbor.

The September Notice provides welcome guidance to developers and investors with respect to facilities' qualification under the beginning of construction requirement by clarifying several outstanding ambiguities in the April Notice. The new guidelines should give parties to renewable energy transactions greater certainty as they develop protocols and guidelines to ensure a facility's qualification for the PTC or ITC with respect to facilities placed in service prior to January 1, 2016.

[1] 2013-42 IRB 1. The text of the September Notice is available here.
[2] Pub. L. No. 112-240.
[3] 2013-20 IRB 1085. The April Notice is available here. Our prior client alert on this topic is available here.