IRS Clarifies "Begun Construction" Guidance

by Wilson Sonsini Goodrich & Rosati

On August 8, 2014, the Internal Revenue Service (IRS) issued Notice 2014-46, which clarifies and modifies Notice 2013-29 and Notice 2013-60.

For purposes of the renewable energy production tax credit (PTC) under Section 45 of the Internal Revenue Code and the energy investment tax credit (ITC) under Section 48 of the Internal Revenue Code, Notice 2013-29 provides two methods for determining when construction has begun on a qualified facility: (i) a "physical work" test and (ii) a 5 percent safe harbor. Notice 2013-60 provides clarification to Notice 2013-29 with respect to the continuous construction requirement, the master contract provisions, and the ability to transfer a facility.

Notice 2014-46 responds to practitioner and taxpayer questions regarding the physical work test, the ability to transfer the facility, and whether a facility (or portion thereof) may still qualify for the ITC or PTC if it fails the safe harbor. As a general matter, Notice 2014-46 provides that the "begun construction" threshold may be lower than originally indicated in Notice 2013-29 and Notice 2013-60.

Physical Work Test

Notice 2014-46 provides that physical work of a significant nature will have begun if any one of the following activities has begun:

  • In the case of a facility for the production of electricity from a wind turbine, excavation for the foundation, the setting of anchor bolts to the ground, or the pouring of concrete pads of the foundation;
  • Physical work on a custom-designed transformer that steps up the voltage of electricity produced at the facility to the voltage needed for transmission; or
  • Construction on roads that are integral to the facility (i.e., onsite roads that are used for moving materials to be processed (for example, biomass) and roads for equipment to operate and maintain the qualified facility).

Notice 2014-46 provides that the above items are merely examples and emphasizes that, assuming the work is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test.

Transfers with Respect to a Facility

Notice 2014-46 provides that a fully or partially developed facility may be transferred without losing its qualification under the physical work test or the safe harbor for purposes of the PTC or the ITC. Specifically, Notice 2014-46 contemplates that a taxpayer may acquire a facility from an unrelated developer that had begun construction of the facility prior to January 1, 2014. Transfers consisting of solely tangible personal property (including contractual rights to such property) will not be taken into account for purposes of the physical work test or safe harbor. The notice also provides that a taxpayer may relocate a facility to a different site after construction has begun.

Safe Harbor

Notice 2014-46 provides that if a taxpayer did not meet the safe harbor, but paid or incurred at least 3 percent of the total cost of a facility that is a single project comprised of multiple facilities before January 1, 2014, the safe harbor may be satisfied and the PTC or ITC may be claimed with respect to some of the individual facilities as long as the total aggregate cost of those individual facilities at the time the project is placed in service is not greater than 20 times the amount the taxpayer paid or incurred before January 1, 2014.

Thus, in the case of a wind farm, some of the turbines may qualify for the PTC even though the taxpayer did not pay or incur 5 percent or more of the total cost of the facility. If, however, a project is not comprised of multiple facilities (e.g., a single loop biomass plant) then no part of the project will satisfy the safe harbor unless the taxpayer paid or incurred 5 percent or more of the total cost of the project.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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