On September 20, 2013, the Internal Revenue Service (IRS) issued Notice 2013-60, which provides additional guidance that will help developers and purchasers of renewable energy facilities meet the beginning of construction requirement for the renewable energy section 45 production tax credit (PTC) and the section 48 investment tax credit (ITC) in lieu of PTC. Notice 2013-60 provides that:
A facility placed in service before the end of 2015 will be deemed to satisfy the Continuous Construction Test (for purposes of the Physical Work Test) or the Continuous Efforts Test (for purposes of the 5% Safe Harbor);
The transfer of a facility after construction has begun will not prevent a facility from qualifying for the PTC or the ITC in lieu of PTC; and
The master contract provision, as described in Notice 2013-29 in regard to the Physical Work Test, also applies for purposes of the 5% Safe Harbor.
In guidance issued earlier this year in Notice 2013-29,1 the IRS explained that taxpayers would be eligible for the PTC, or the ITC in lieu of PTC,2 if construction of a qualified facility begins before the end of 2013 under either (or both) of two tests: starting physical work of a significant nature (Physical Work Test), or paying or incurring 5% or more of the total project cost (5% Safe Harbor). Notice 2013-60 responds to numerous questions and comments raised by taxpayers and practitioners regarding Notice 2013-29.
Bright-Line Rule for Projects Placed in Service Before January 1, 2016
Notice 2013-29 provides that for purposes of the Physical Work Test, taxpayers must maintain a “continuous program of construction” (Continuous Construction Test) and for purposes of the 5% Safe Harbor, taxpayers must make “continuous efforts to advance toward completion of the facility” (Continuous Efforts Test). Notice 2013-29 provides a list of delays that generally would not cause a taxpayer to fail the Continuous Construction Test or the Continuous Efforts Test; however, beyond that guidance, the IRS indicated that it would apply a facts and circumstances test to determine whether either test is satisfied. The uncertainty arising from the use of a facts and circumstances test was the subject of much discussion and uneasiness since the issuance of Notice 2013-29.
Notice 2013-60 relieves much of that uneasiness by providing a safe harbor for the Continuous Construction Test and the Continuous Efforts Test. Under that Notice, facilities that are placed in service before January 1, 2016, will be deemed to have satisfied the applicable Continuous Construction Test or the Continuous Efforts Test. For facilities that are not placed in service before January 1, 2016, the IRS will continue to apply the facts and circumstances test described in Notice 2013-29 to determine whether the facility satisfies the applicable Continuous Construction Test or Continuous Efforts Test.
Sutherland Observation: This bright-line rule is a favorable addition to the begun construction rules because many projects that intend to qualify as having begun construction by the end of 2013 will be placed in service by the end of 2015. For facilities that are not placed in service before January 1, 2016, it will be important to demonstrate that significant work and/or efforts have been undertaken with respect to the project between 2013 and the placed in service date of the project.
Effect of a Facility Transfer on Begun Construction Determination
Notice 2013-60 provides that the transfer of a facility after construction has begun will not prevent a facility from qualifying for the PTC or the ITC in lieu of PTC. Because Notice 2013-29 did not address the effect of a transfer of a facility after construction has begun, taxpayers and practitioners have since been questioning what effect a transfer of a facility after construction begins would have on qualifying for the PTC or the ITC in lieu of PTC.
In Notice 2013-60, the IRS notes that IRC Section 45(d)(1), which codified the begun construction requirement, does not require that construction is begun by the taxpayer claiming the credit. In addition, the IRS notes that if a qualified facility satisfies either the Physical Work Test or the 5% Safe Harbor, a taxpayer that owns the facility during the 10-year period beginning on the date the facility was originally placed in service may claim the PTC with respect to that facility even if the taxpayer does not own the facility at the time construction began. Moreover, the IRS provides that a taxpayer that owns the facility on the date it is originally placed in service may elect to claim the ITC in lieu of the PTC with respect to that facility even if the taxpayer does not own the facility at the time construction began.
Sutherland Observation: Taxpayers familiar with the Section 1603 Treasury grant program may recall that Treasury provided two Frequently Asked Questions addressing transferability of projects that were treated as having begun construction for purposes of that program. The IRS appears to have taken a more industry-favorable approach regarding transferability in Notice 2013-60 with regard to the PTC and ITC in lieu of PTC.
Master Contract Provision Extended to 5% Safe Harbor
Notice 2013-29 provides that if a taxpayer enters into a master contract for a number of components to be manufactured by another person for use by the taxpayer, and then through a new written binding contract, the taxpayer assigns its rights to certain components to an affiliated special purpose entity that will own the facility, work performed under the master written contract may be taken into account in determining whether the Physical Work Test has been met. Notice 2013-60 extends this rule regarding master contracts to the determination of whether the 5% Safe Harbor has been met.
1Notice 2013-29 was issued following the passage of The American Taxpayer Relief Act of 2012 (ATRA) (signed into law in January 2013) to provide guidance regarding the ATRA requirement that construction of projects must begin by the end of 2013 in order to qualify for the PTC or ITC in lieu of PTC. For our Legal Alerts on Notice 2013-29, click here and here.
2Taxpayers that are entitled to claim a PTC with respect to a renewable energy project generally may elect to claim an ITC with respect to that project. ATRA did not alter the rules for projects that are entitled only to an ITC. A chart regarding the eligibility of projects for the PTC and ITC is provided in a prior Legal Alert (see links at note 1).