IRS Tax Credit Guidance Is Welcome News to Renewable Energy Industry

“The American Taxpayer Relief Act of 2012 extended the eligibility of these [energy tax] credits for projects that begin construction before January 1, 2014. The types of projects included in this extension are wind, open-loop biomass, closed-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities.” (Leonard, Street and Deinard)

Earlier this month, the Internal Revenue Service published its long-awaiting guidance on the rules for obtaining the renewable electricity production tax credit (PTC) under regulations set forth in the American Taxpayer Relief Act of 2012. From John Eliason of law firm Foley & Lardner:

“The eligibility to qualify for federal tax credits for facilities producing energy from wind, biomass, municipal solid waste, and certain other qualified energy sources changed at the end of 2012 with the passage of the American Taxpayer Relief Act of 2012 (ATRA). Prior to the enactment of ATRA, to qualify for PTC, an otherwise eligible facility was required to be ‘placed in service’ (meaning, completed) before January 1, 2014, except for qualified wind facilities, which had to be placed in service before January 1, 2013…

As a nod to the lengthy development schedule for wind and other qualifying facilities, ATRA changed the eligibility criteria by replacing the placed-in-service standard with the requirement that the taxpayer must ‘begin construction’ of its otherwise qualifying facility before January 1, 2014.”

The extension was welcome news for the industry, write attorneys at Sutherland Asbill & Brennan:

“Changing the deadline to a begun construction requirement was highly favorable for the renewable energy industry and a change that had been sought for some time. First, this change obviates concerns regarding potential and unexpected construction delays that would result in a failure to meet the placed in service deadline for the PTC or the ITC. Second, the change allows projects with longer construction schedules to be built even if construction does not begin until later in 2013.”

But ATRA did not provide any detail on the “begun construction” requirement, leaving that to the IRS, which took more than three months to issue its guidance.

So how to qualify? There are two ways, explains Allison Woodbury Leppert of law firm Leonard, Street and Deinard:

“The IRS identified two standards that establish the start of construction of a qualified facility: safe harbor and significant physical work. Under the safe harbor standard, construction will be considered as having begun if: (1) a taxpayer pays or incurs 5% or more of the total cost of the facility before January 1, 2014, and (2) thereafter makes continuous efforts to advance toward completion of the facility.

Under the significant physical work standard, the IRS will take into account (1) work performed by the taxpayer and (2) work performed for the taxpayer by other persons under a binding written contract entered into prior to the manufacture, construction or production of the property for use by the taxpayer in the taxpayer’s trade or business. The taxpayer must also maintain a continuous program of construction under this standard.”

Sound straightforward? Not so much, perhaps. Of particular note:

1. Not all construction qualifies as “physical work:”

“Physical work of a significant nature does not include preliminary activities such as planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environmental and engineering studies, clearing a site, test drilling of a geothermal deposit, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations). Removal of existing turbines and towers is preliminary work and does not constitute physical work of a significant nature with respect to the facility. (Foley & Lardner)

2. You can’t spend 5% then put the project on hold:

“… the 5 percent safe harbor in the Notice requires that after incurring 5 percent or more of the total cost of a facility, the taxpayer must make continuous efforts to advance towards completion of the facility. The determination of whether a taxpayer maintains a continuous program of construction or makes continuous efforts to advance a facility to completion is generally based on the applicable facts and circumstances, taking into account several new factors contained in the Notice for determining whether certain disruptions are ignored for these purposes. The new continuous efforts requirement will make it more difficult to meet the safe harbor test and likely is intended to prevent the purchase of credit-eligible property for resale to another taxpayer.” (Skadden Arps)

3. You may get a break for acts of God and other uncontrollable delays:

“Certain disruptions in a taxpayer’s construction of a facility that are ‘beyond the taxpayer’s control’ will not be considered as indicating that a taxpayer failed its post-2013 requirement for either method. Those disruptions include, but are not limited to: (a) severe weather conditions; (b) natural disasters; (c) licensing and permitting delays; (d) delays at the written request of a state or federal agency regarding matters of safety, security or similar concerns; (e) labor stoppages; (f) inability to obtain specialized equipment of limited availability; (g) the presence of endangered species; (h) financing delays of less than six months; and (i) supply shortages.” (Sutherland Asbill & Brennan)

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