On March 11, 2015, the Internal Revenue Service (IRS) issued Notice 2015-25, which provides further guidance to assist renewable energy facility developers and investors in evaluating whether such facilities satisfied 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. The beginning of construction requirement applies to wind, landfill gas, hydropower, geothermal and certain other renewable energy facilities, but not to solar energy facilities.
This latest guidance provides some additional certainty for renewable energy project developers and investors regarding tax credit eligibility by extending the continuous construction and continuous efforts safe harbor by one year: if a taxpayer begins construction on a qualified facility prior to January 1, 2015, and places the facility in service before January 1, 2017, the facility will be treated as satisfying the continuous construction/continuous efforts requirements “regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility after December 31, 2014 and before January 1, 2017.” Qualified facilities not placed in service before January 1, 2017, remain subject to a “facts and circumstances” analysis in regard to the continuous construction/continuous efforts requirements.
Background
The American Taxpayer Relief Act of 2012 (ATRA) (H.R. 8) included a change in the deadlines for PTC-eligible facilities that required a taxpayer to have begun construction before January 1, 2014, in order to qualify for a section 45 PTC or a section 48 ITC.1 The Tax Increase and Prevention Act of 2014 (TIPA), which was signed into law on December 19, 2014, extended the beginning of construction deadline by one year to January 1, 2015.
In 2013, the IRS issued Notice 2013-29, which provides two methods for establishing the beginning of construction: (1) starting physical work of a significant nature and (2) paying or incurring 5% or more of the total project cost.2 That Notice further provides that if a taxpayer avails itself of the physical work of a significant nature method, the IRS would closely scrutinize a facility, and may determine that construction did not timely begin, if a taxpayer does not maintain a “continuous program of construction” (continuous construction requirement). Similarly, if a taxpayer avails itself of the 5% safe harbor method, it must make “continuous efforts to advance towards completion of the facility” (continuous efforts requirement). Notice 2013-29 provides a list of delays that generally would not cause a taxpayer to fail the continuous construction/continuous efforts requirements; however, beyond that guidance, that Notice provided that the IRS would apply a facts and circumstances analysis to determine whether either requirement is satisfied. The uncertainty arising from the use of a facts and circumstances analysis was the subject of much discussion and uneasiness following the issuance of Notice 2013-29.
Later in 2013, in Notice 2013-60, the IRS relieved much of that uneasiness by providing a safe harbor for the continuous construction/continuous efforts requirements. Under that Notice, qualified facilities that are placed in service before January 1, 2016, would be deemed to have satisfied the continuous construction/continuous efforts requirements.3 For qualified facilities that were not placed in service before January 1, 2016, Notice 2013-60 provided that the IRS would continue to apply the facts and circumstances analysis described in Notice 2013-29 to determine whether the facility satisfied the continuous construction/continuous efforts requirements.
Following enactment of the TIPA, questions arose regarding whether the continuous construction/continuous efforts safe harbor provided in Notice 2013-60 would be extended by one year to facilities that are placed in service before January 1, 2017, in light of the one year extension of the beginning of construction requirement deadline from January 1, 2014, to January 1, 2015.
Notice 2015-25 confirms that a qualified facility that is placed in service before January 1, 2017, will be treated as satisfying the continuous construction/continuous efforts requirements under the safe harbor described in Notice 2013-60. Qualified facilities not placed in service before January 1, 2017, remain subject to a facts and circumstances analysis in regard to the continuous construction/continuous efforts requirements.
1 Prior to ATRA, all PTC-eligible facilities, other than wind facilities, were required to be placed in service (i.e., completed) before the end of 2013, and wind facilities were required to be placed in service by the end of 2012.
2 For our Legal Alerts on Notice 2013-29, See Legal Alert: Have You "Begun Construction"? IRS Issues Guidance for Renewable Energy Tax Credits and See Legal Alert: IRS Clarifies "Binding Written Contract" Definition in Renewable Energy Tax Credit Begun Construction Guidance.
3 For our Legal Alert on Notice 2013-60, See Legal Alert: IRS Updates Renewable Energy Tax Credit Beginning of Construction Guidance. Further IRS guidance was provided by Notice 2014-46. For our Legal Alert on Notice 2014-46, See Legal Alert: Are You Really Sure That Construction Began? IRS Issues Third Notice Regarding Renewable Energy Tax Credit Beginning of Construction Test.
