On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (the "Act") that extends and modifies the production tax credit (PTC) and reenacts bonus depreciation for property placed in service before January 1, 2014. President Obama signed the Act into law January 2.
Extension of Production Tax Credit
The production tax credit expired for wind projects that were not placed in service before January 1, 2013, and was scheduled to expire for biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities that were not placed in service before January 1, 2014. The Act extends PTC for such facilities if construction begins before January 1, 2014. The actual date the project is placed in service is not relevant; the key is whether construction begins during 2013.
Although the Act does not define what it means to begin construction, it is anticipated that the rules will be substantially similar to analogous rules under the now-expired 1603 cash grant program. In general, under these rules, a taxpayer can establish that it has begun construction of a project either by satisfying a physical work test or a 5 percent safe harbor.
Under the physical work test, the taxpayer must have begun physical work of a significant nature on specified energy property. The work must be reasonably continuous—it will not be sufficient to begin work during 2013 and then take a long hiatus and complete the project at a later date.
Under the 5 percent safe harbor, the taxpayer must pay (in the case of a cash method taxpayer) or incur (in the case of an accrual method taxpayer) 5 percent or more of the total cost of the specified energy property. A cost is generally incurred when: (i) the fact of the liability is fixed, (ii) the amount of the liability is determinable with reasonable accuracy, and (iii) the economic performance test of Treas. Reg. § 1.461-4 has been satisfied with respect to such cost.
The bonus depreciation rules, which generally expired at the end of 2011, are reenacted for property placed in service during 2013. The amount of bonus depreciation allowed will equal 50 percent of the cost basis of the qualifying property.
The determination of when property is placed in service is based on the totality of facts and circumstances. In general, property is considered to be placed in service when it is in a condition or state of readiness and is available for a specifically assigned function. Equipment that is operational but undergoing testing to eliminate defects is considered to be in a condition or state of readiness and availability for a specifically assigned function.
The Internal Revenue Service has stated that the following factors are to be considered in determining placed-in-service dates for power plants: approval of required licenses and permits; passage of control of the facility to the taxpayer; completion of critical tests; commencement of daily or regular operation; and synchronization into a power grid for generating electricity to produce income.
If you have any questions regarding the Act, or the tax treatment of renewable energy investments generally, please contact one of the authors of this Alert or the Reed Smith attorney with whom you regularly work.
To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Client Alert 2013-003