IRS Provides Tax-Day Gift to Renewable Energy Producers, Providing Guidance on Production Tax Credit Eligibility
While many of us were scrambling to finish our tax returns on April 15, the Internal Revenue Service ("IRS") was also busy, issuing long-anticipated guidance of critical importance for renewable energy developers. The new IRS guidance, Notice No. 2013-29, provides standards for determining whether the "beginning of construction" of a renewable energy facility has occurred by January 1, 2014, the deadline for the facility to be eligible for the Production Tax Credit ("PTC"). Eligible generation owners may opt to take the energy investment tax credit ("ITC") in lieu of the PTC. The new IRS guidance is of great importance to renewable energy developers because the availability of PTCs or ITCs is often critical to project economics.
Congress extended the deadlines for PTC eligibility as part of the 2012's American Taxpayer Relief Act. Before that law was enacted, a facility was required to be "placed in service" before January 1, 2014, to be eligible for the PTC. Wind facilities were required to be "placed in service" by January 1, 2013. The new legislation makes all types of eligible renewable energy facilities eligible for the PTC if they "begin construction" before January 1, 2014. The legislation left open the question of what it means to "begin construction." IRS's new Notice provides some specific parameters to answer than question.
Under the new guidance, the IRS provides two alternative paths for a facility to demonstrate that construction has begun. First, the new guidance defines construction to begin when "physical work of a significant nature" related to the facility's construction has occurred. This may include both on-site work, such as the laying of foundations and construction of on-site roads, as well as off-site work, such as construction of turbines under a specific written contract. Preliminary work such as planning, design, permitting, and geophysical testing, however, does not qualify. Nor does work on general-use facilities such as transmission towers. And off-site work must be specific to the project, such as constructing wind turbines to order, and not simply the purchase of equipment from a manufacturer's inventory. The guidance also requires a "continuous program of construction" to maintain PTC/ITC eligibility, although delays beyond the control of the taxpayer are allowed. Notably, allowable delays include those related to licensing and permitting.
The guidance also provides a "safe harbor" for PTC/ITC eligibility if the taxpayer pays or incurs more than five percent of the total cost of the facility. Total cost includes all costs included in the depreciable basis of the facility. The "safe harbor" also includes a requirement for continuous construction similar to that discussed in the previous paragraph. Of note, the safe harbor places an important limitation related to cost overruns. If construction costs meeting five percent the estimated of total costs of the project are incurred by January 1, 2014, but the facility when constructed actually costs more than that estimate, the availability of PTCs for the costs above the estimate may be compromised.
If you have any questions about the IRS notice, PTCs, ITCs, or other incentives available to renewable energy producers, please contact a member of GTH's Energy, Telecommunications, and Utilities