Stoel Rives: IRS issues new guidance on ITC/PTC
The IRS has issued guidance that clarifies and modifies prior guidance regarding the “beginning of construction” requirement for qualifying for the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the Code) and the investment tax credit (ITC) under Section 48 of the Code. The American Taxpayer Relief Act of 2012 modified the PTC and ITC qualification requirement for certain types of renewable energy projects by replacing the previous “placed-in-service” requirement with a beginning of construction requirement. This new requirement generally requires that construction of an applicable facility began before January 1, 2014 to qualify for the PTC or ITC.
The IRS previously issued two notices providing guidance regarding the beginning of construction requirement. Notice 2013-29 provides two alternative methods for satisfying the beginning of construction requirement: (i) a physical work test and (ii) a five-percent safe harbor. A taxpayer satisfies the physical work test by beginning physical work of a significant nature before January 1, 2014. A taxpayer satisfies the five percent safe harbor with respect to a facility by paying or incurring five percent or more of the total cost of the facility before January 1, 2014. In addition, if construction is begun by virtue of the physical work test, the taxpayer generally must maintain a continuous program of construction. If construction is begun by virtue of the safe harbor, the taxpayer generally must make continuous efforts to advance toward completion of the facility.
In response to questions received after publication of Notice 2013-29, the IRS subsequently issued Notice 2013-60. Notice 2013-60 provides that a transfer of a facility after construction has begun will not prevent a facility from qualifying for the PTC or the ITC. Notice 2013-60 also establishes that a taxpayer will be deemed to satisfy the continuous construction test or the continuous efforts test, as applicable, if a facility is placed in service before January 1, 2016.
The newest guidance clarifies certain aspects of the physical work test and creates a new rule with respect to certain transfers after construction has begun. It also modifies the rules regarding the impact of cost overruns on the application of the five percent safe harbor.
Physical Work Test. The guidance clarifies that the physical work test focuses on the nature of the work performed, not the amount or cost of the work. The IRS notes that several examples of physical work set forth in Notice 2013-29, including beginning of the excavation for the foundation, the setting of anchor bolts into the ground, and the pouring of the concrete pads of the foundation at a wind facility, performing work on a custom-designed transformer, and starting construction on certain roads integral to a facility, were illustrative only and not meant to provide an exclusive list of the type of work that can satisfy the physical work test. The new guidance also makes clear that there is no specified minimum amount of work or monetary expenditure required to satisfy the physical work test.
Transfers with Respect to a Facility. The new IRS guidance notes, in general, that there is no statutory requirement that the taxpayer that places the facility in service also be the taxpayer that begins construction of the facility. Thus, with one exception, a fully or partially developed facility may be transferred without losing its qualification under the physical work test or the safe harbor. Furthermore, the guidance makes clear that a taxpayer that began construction of a facility in 2013 with the intent to develop the facility at a certain site, but thereafter transfers equipment and other components of the facility to a different site, completes its development, and places it in service, may take into account the work performed or amounts paid or incurred prior to January 1, 2014. One exception to these fairly liberal transfer rules is made for certain transfers of solely tangible property to unrelated parties. This exception appears designed to prevent trafficking in “safe-harbored” components. The exception provides that in the case of a transfer consisting solely of tangible personal property (including contractual rights to such property under a binding written contract) to a transferee that is not related to the transferor, any work performed or amount paid or incurred by the transferor with respect to the property transferred will not be taken into account with respect to the transferee for purposes of the Physical Work Test or the Safe Harbor.
Safe Harbor. The new guidance also modifies rules relating to the five percent safe harbor and the impact of cost overruns. Prior guidance provided that if cost overruns prevented a taxpayer from satisfying the five percent safe harbor with respect to a project consisting of multiple facilities, the taxpayer could still qualify for the ITC for a reduced number of facilities, such that the total amount paid or incurred before January 1, 2014 would equal five percent of the total cost of the qualified individual facilities. The new guidance limits the application of this rule to circumstances in which the taxpayer paid or incurred at least three percent of the total cost of the project before January 1, 2014. Under these circumstances, the taxpayer may claim the PTC or ITC on any number of individual facilities within the project as long as the total aggregate cost of those individual facilities at the time the project is placed in service is not greater than twenty times the amount the taxpayer paid or incurred before January 1, 2014.