IRS Construction Deadline Guidance Highlights Disparate Treatment of Renewable Energy Technologies

by Ballard Spahr LLP

The IRS recently released guidance in the form of an IRS Notice implementing a rule change under the American Taxpayer Relief Act of 2012 concerning the construction deadline that renewable energy facilities must meet to qualify for the renewable electricity production tax credit (PTC) or the energy investment tax credit (ITC). Under the rule change, a qualified facility will be eligible to receive either tax credit so long as construction begins before January 1, 2014. PTC or ITC rules would otherwise typically require the project to be placed in service before that date.

This change only applies to renewable energy technologies described in Section 45(d) of the Internal Revenue Code. They include facilities generating electricity using certain wind, biomass, geothermal, landfill gas, trash, hydropower, marine, and hydrokinetic technologies, as shown in the table below.


Must Commence Construction or be Placed in Service to Qualify


Large Wind

Commence Construction

Prior to January 1, 2014


Placed in Service

Prior to January 1, 2017
(for 30% ITC – 10% thereafter)

Small Wind

Placed in Service

Prior to January 1, 2017


Commence Construction

Prior to January 1, 2014

Combined Heat & Power

Placed in Service

Prior to January 1, 2017

Landfill Gas / MSW

Commence Construction

Prior to January 1, 2014

Fuel Cell / Microturbines

Placed in Service

Prior to January 1, 2017


Commence Construction /
Placed in Service*

Prior to January 1, 2014 / No stated expiration

Geothermal Heat Pump

Placed in Service

Prior to January 1, 2017

Hydropower, Marine, Hydrokinetic

Commence Construction

Prior to January 1, 2014

*For a geothermal project to qualify for the credit under section 45 of the Internal Revenue Code (qualifying for either the PTC or a 30% ITC), the project must commence construction prior to January 1, 2014. A geothermal project may also qualify for a 10% ITC under section 48 of the Internal Revenue Code (with no stated expiration date).

As the table indicates, the change does not apply to facilities generating electricity using small wind, solar, or fuel cell technologies, combined heat and power systems, and geothermal heat pumps, all of which remain subject to the “placed in service” criterion.

This change may provide significant opportunities for projects with long development and construction schedules, such as utility scale biomass and wind projects. The guidance also imposes significant requirements in its definition of continuous construction or advancement toward completion.

The IRS Notice borrows heavily from similar commencement-of-construction rules related to the Section 1603 program for Treasury grants in lieu of tax credits, though there are several notable changes to those rules. We have previously addressed the 1603 rule here.

As with the 1603 Grant rules, under the IRS notice, a project may qualify as having begun construction by either beginning physical work of a significant nature, or meeting the safe harbor requirements by spending or incurring at least 5 percent of the total project cost in 2013. Under both methods of complying with the commencement-of-construction rules, continuous efforts are required either to continue the facility’s construction or advance toward its completion. The IRS Notice provides specific examples of circumstances beyond a project owner’s control in which a delay in the construction or completion process may be justified, such as severe weather conditions, natural disasters, licensing, permitting, and regulatory delays, labor stoppages, environmental issues, temporary financing delays, and supply shortages. Such “acceptable explanations” for a delay were not provided in the 1603 Grant rules.

As noted, the changes requiring continuous construction or advancement toward completion will introduce additional risks. Such risks may make these projects harder to finance than projects under the 1603 Grant program, since the 1603 Grant rules did not require continuous efforts under the safe harbor provisions. Nevertheless, the IRS Notice may make a larger number of projects (and especially projects with a relatively longer build cycle) eligible for the tax credits than would otherwise be the case.

Additional related alerts on the 1603 Grant program are available here and here.

If you have any questions or comments, please contact Charles S. Henck at or 202.661.2209, or Darin M. Lowder at or 202.661.7631.

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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