The IRS released Notice 2013-29 (Notice) on April 15th providing much anticipated guidance on methods for establishing “Beginning Construction” for purposes of qualifying renewable facilities for the renewable electricity production tax credit (PTC) under Section 45 or the energy investment tax credit (ITC) under Section 48. The PTC is based on the amount of electricity sold to an unrelated taxpayer that is produced at a qualified renewable energy facility (including a wind facility) over a 10-year period beginning on the date the facility is placed in service. Over the 10 years, the owners of the qualified facilities are able to offset federal taxes due with the credits generated from the sale of this electricity. The ITC provides a tax credit equal to 30 percent of the qualified basis of the energy property. As discussed on January 2nd in this blog, the “American Taxpayer Relief Act of 2012” extended the provisions of the PTC and ITC for qualified facilities by requiring the facility to be placed in service or to have “begun construction” before January 1, 2014. The “beginning construction” language was new to the PTC and guidance from the IRS was needed in short order for developers to qualify this year.
The Notice provides two methods, similar to the language from the 1603 Treasury grant program, that a taxpayer may use to establish that construction has begun in order to qualify. The first method requires that physical construction of the property integral to the qualified facility has begun under relevant facts and circumstances, including maintaining a continuous program of construction (disruptions out of the taxpayer’s control may not cause the taxpayer to fail the test). The Notice permits both on-site and off-site work (performed either by the taxpayer or by another person under a written binding contract) be taken into account. But, it does not include preliminary activities such as planning, designing, securing financing, licensing, and other preliminary activities.
The second method under the Notice provides for a safe harbor if the taxpayer pays or incurs 5 percent or more of the total cost of the facility before January 1, 2014 and thereafter makes continuous efforts to advance toward completion. The Notice provides that a taxpayer may look through to another person who may be incurring qualifying costs if under a written binding contract. The Notice also defines continuous efforts to advance completion of the facility under the relevant facts and circumstances including some examples such entering into a written binding contract for future work and obtaining necessary permits. There is also a provision on how to handle cost overruns if the amount incurred before January 1, 2014 turns out to be less than 5 percent of the total costs.
Overall, the Notice should be welcome news to developers trying to qualifying under the “begun construction” provision this year. The lead time for some facilities, such as wind farms, can be significant and one would imagine that many developers would try and qualify for the second safe harbor method which includes permitting as a factor of continuous work. The Notice does leave open some questions such as how and if the safe harbor can be transferred to related or unrelated parties.