It’s official! On “tax day” (April 15, 2013), the IRS released Notice 2013-29 (revised on April 25) providing guidance regarding whether a “qualified facility” will be eligible for the renewable electricity production tax credit (PTC) under section 45 of the Tax Code or the energy investment tax credit (ITC) under section 48 in lieu of the ITC. This guidance has been highly anticipated by the wind industry as well as other applicable alternative energy industries ever since these tax credits were extended (and eligibility criteria were modified) at the end of 2012.
I released a detailed Client Alert discussing Notice 2013-29. Click here to access the Client Alert.
If you are familiar with the 1603 cash grant, you will recognize that Notice 2013-29 borrows liberally from the guidance issued by the U.S. Department of Treasury for purposes of that program.
Here is a brief summary:
- An otherwise eligible facility will qualify for the PTC or ITC if construction of the facility begins before the end of 2013.
- Sections 45 and 48 of the Tax Code (the applicable provisions in the Tax Code governing the PTC and ITC) do not define what it means to “begin construction.”
- Notice 2013-29 provides the guidance regarding what it means to begin construction. The taxpayer must either (A) perform “physical work of a significant nature” on the facility (the “Physical Work Method”), either directly or through another person under a binding written contract or (B) satisfy a safe harbor based on the amount of costs the taxpayer paid or incurred before the end of 2013 (the “5% Safe Harbor”).
- To satisfy the Physical Work Method, the work performed must be on property that an integral part of the activity performed by the facility (meaning, the production of electricity). Things like building roads or installing fencing will not be considered integral, unless, for example, the roads are used primarily for moving equipment to operate and maintain the facility, as opposed to being used primarily to access the site.
- In evaluating whether the Physical Work Method has been satisfied, the IRS will closely scrutinize a facility, and may determine that construction has not begun before the end of 2103, if a taxpayer does not maintain a “continuous program of construction” of the facility.
- To satisfy the 5% Safe Harbor, the taxpayer (A) must pay or incur (depending on whether the taxpayer is on the cash or accrual method of accounting) five percent or more of the total cost of the facility components that are integral to the facility and thereafter, (B) make “continuous efforts to advance towards completion” of the facility.
- Demonstrating making “continuous efforts to advance towards completion” of the facility for purposes of the 5% Safe Harbor is not as intense as demonstrating a “continuous program of construction” for purposes of the Physical Work Method, but nevertheless it introduces an unwelcome subjective component to the 5% Safe Harbor.
- Solely for purposes of determining whether construction of a facility has begun for purposes of the PTC and ITC, multiple facilities that are operated as a single project will be treated as a single facility. (Picture a wind farm with 50 turbines. Without this rule, a taxpayer would be required to satisfy the begin construction test 50 times, instead of once.)
- The Notice does not include any meaningful successor-in-interest rules. Without further guidance, this limits the ability to “grandfather” future projects.
Notice 2013-29 contains more information than I’ve outlined above, including some helpful examples to better understand the rules. Take a look at either my Client Alert for additional information or the Notice itself. I think you will agree with me that the Notice provides helpful guidance that will allow developers on the sidelines since the beginning of the year to more forward on otherwise eligible projects.