IRS Issues Fourth Production Tax Credit Guidance

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The Internal Revenue Service recently issued the expected Notice 2015-25, which supplements its earlier notices on the same subject and provides additional guidance to renewable energy facility developers and investors when evaluating whether their facilities satisfy the “beginning of construction” requirement for the Section 45 renewable energy production tax credit (PTC) and the Section 48 investment tax credit (ITC) in lieu of the PTC.  The notice follows in the wake of Congress’ enactment last December of the Tax Increase Prevention Act of 2014 (Pub. L. No. 113-295, 128 Stat. 4010), which extended the PTC and ITC for wind, landfill gas, hydropower, geothermal and certain other (excluding solar) renewable energy facilities, for which construction began before January 1, 2015.

Previously, the IRS issued three notices to provide guidance on the meaning of “beginning of construction” (Notice 2013-29, Notice 2013-60 and Notice 2014-46).  These notices follow similar concepts begun under the now lapsed Section 1603 cash-in-lieu-of-tax-credits program.  Notice 2013-29 offered that the IRS would not consider a project to have “begun construction” unless that project’s developer engaged in “continuous” activity intended to complete construction through the date that the project is placed in service. 

IRS Notice 2013-29 provided two methods for establishing the beginning of construction, specifically (a) starting “physical work of a significant nature;” and (b) a “safe harbor” by paying or incurring 5% or more of the total project cost.  This notice also provided that if the developer elects to embark on the “physical work of a significant nature” pathway, then the IRS would closely scrutinize the facility and may determine that construction did not timely begin, if a taxpayer does not maintain a “continuous program of construction.”  If the developer avails itself of the 5% safe harbor, the developer must thereafter make “continuous efforts to advance towards completion of the facility” (subject to tolling for certain causes of delay that are outside the developer’s control), which also is subject to IRS scrutiny. 

In Notice 2013-60, the IRS further clarified the 5% safe harbor, as well as the “continuous program of construction” and “continuous efforts” requirements under the two methods.  Under this notice, the IRS essentially provided another “safe harbor” to the effect that qualified facilities that are placed in service before January 1, 2016, would be deemed to have satisfied the “continuous” standard required under both methods.  In Notice 2014-46, the IRS further clarified that there is no minimum level of work that must be done to “begin construction” under the “physical work of a significant nature” method, so long as the work done is of the right nature, e.g., physical work for the project and not engineering or financial planning.

As anticipated following the enactment of the Tax Increase Prevention Act of 2014, Notice 2015-25 confirms that, consistent with the one year extension of the beginning of the construction date, a qualified facility that is placed in service before January 1, 2017, will be treated as satisfying the “continuous construction” and “continuous efforts” requirements under the safe harbor provided in Notice 2013-60.

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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