On September 20, 2013, the IRS released Notice 2013-60, which clarifies the IRS’s original guidance regarding the eligibility requirements for the production tax credit (PTC) and investment tax credit (ITC) for certain renewable and alternative energy facilities. Click here to view the new Notice. You can also take a look at Notice 2013-29 and my last post on it.
The IRS released Notice 2013-60 in response to questions regarding the following:
The determination of whether a taxpayer satisfies the Physical Work Test or the 5% Safe Harbor, as described below;
The applicability of the “master contract” provision; and
The effect of a transfer of the facility after construction has begun
The American Taxpayer Relief Act of 2012 (ATRA) modified the definition of a qualified facility under section 45(d) of the Internal Revenue Code by replacing the placed in service requirement with a begin construction requirement. With this statutory change, a taxpayer will be eligible to receive the production tax credit (PTC) or the investment tax credit (ITC) with respect to a qualified facility if construction of the facility begins before January 1, 2014.
Notice 2013-29 provides two methods that a taxpayer may use to establish that construction of a qualified facility has begun. A taxpayer may establish the beginning of construction by starting physical work of a significant nature as described in section 4 of the notice (the Physical Work Test). Alternatively, the taxpayer may establish beginning of construction by paying or incurring (under the taxpayer’s method of accounting) at least 5% of qualified facility costs as provided in section 5 of the notice (the 5% Safe Harbor).
Both the Physical Work Test and the 5% Safe Harbor require the taxpayer to make continuous progress towards completion of the facility by satisfying either a “continuous construction” requirement (in the case of the Physical Work Test) or a “continuous efforts” requirement (in the case of the 5% Safe Harbor). Notice 2013-29 provides some helpful guidance regarding how the continuous construction/continuous efforts requirements may be satisfied. However, Notice 2013-29 makes clear that this determination is based on the project’s specific facts and circumstances.
Continuous Construction/Continuous Efforts Requirements
After the IRS released Notice 2013-29, it received several questions regarding satisfying the continuous construction/continuous efforts requirements. Taxpayers basically wanted to know the minimum amount of activity that must be conducted after either the Physical Work Test or the 5% Safe Harbor is satisfied in order to preserve PTC/ITC eligibility for a qualified facility.
In the new Notice, the IRS addresses this question by creating another safe harbor. As provided by the new Notice, the continuous construction/continuous efforts requirements will be deemed satisfied if the facility is placed in service before January 1, 2016. If the facility is not placed in service by this date, then this determination is once again relegated to a subjective determination based of the project’s specific facts and circumstances.
Notice 2013-29 provided a taxpayer the ability to satisfy the Physical Work Test through a master supply agreement. Specifically, a taxpayer can enter into a binding written contract for a specific number of components to be manufactured, constructed, or produced for the taxpayer by another person (a “master contract”) and then, through a new binding written contract (a “project contract”) the taxpayer may assign its rights to certain components to an affiliated entity that will own the facility for which such property is to be used. In this scenario, the work performed under the master contract is taken into account in determining when physical work of a significant nature begins with respect to the facility.
The new Notice clarifies that the master contract provision also applies to the 5% Safe Harbor. In other words, costs incurred under the master contract will be taken into account in determining whether costs have been incurred with respect to a facility constructed under the project contract.
Transfer of a Facility
Notice 2013-29 did not address the effect of a transfer of a facility after construction has begun (meaning, after either the Physical Work Test or the 5% Safe Harbor has been satisfied). This absence of guidance has been particularly troubling for developers seeking to begin construction prior to the end of 2013 and before having their tax equity ownership structures in place.
The new Notice correctly states that the relevant statutory language enacted as part of ATRA requires only that construction of a facility begins before January 1, 2014. It does not require the construction to be begun by the taxpayer claiming the credit. As provided in the new Notice, if a qualified facility satisfies either the Physical Work Test or the 5% Safe Harbor, then eligibility for PTC or ITC is preserved even if the taxpayer that ultimately owns the facility (and claims the credit) did not own the facility at the time of construction. The transfer provision should provide developers the flexibility they need to preserve PTC/ITC eligibility for projects on the drawing board.
For those readers that may be wondering…Yes, the transfer provision included in the new Notice is a departure from the guidance published by the Department of Treasury regarding transfers of grandfathered property under the Section 1603 cash grant program. The new Notice is much more taxpayer-favorable than the FAQs published by Treasury in interpretation of Section 1603. It remains to be seen whether Treasury will relax its view of transfers of grandfathered property under Section 1603. (I’ve already asked.)