Editor: Michael Dell, CPA
Credits Against Tax
In Notice 2013-60, the IRS clarified Notice 2013-29 defining the beginning of construction for purposes of the Sec. 45 renewable electricity production tax credit (PTC) and the Sec. 48 energy investment tax credit (ITC).
The American Taxpayer Relief Act of 2012, P.L. 112-240, extended the Sec. 45 PTC and the Sec. 48 ITC in lieu of the PTC to facilities on which construction began before Jan. 1, 2014. Notice 2013-29 permitted taxpayers to establish that construction had begun by either (1) starting “physical work of a significant nature” (the physical work test) or (2) meeting a safe harbor by paying or incurring 5% or more of the total cost of the facility (the safe harbor).
Continuous construction/continuous efforts tests: Notice 2013-29 provides that the IRS may determine that the physical work test is not satisfied if the taxpayer does not maintain a continuous program of construction (the continuous construction test). Similarly, the safe harbor under Notice 2013-29 applies only if the taxpayer maintains continuous efforts to advance toward completion of the facility (the continuous efforts test). Notice 2013-60 states that a facility placed in service before Jan. 1, 2016, will be considered to satisfy either test. Whether a facility that is not placed in service before Jan. 1, 2016, satisfies the continuous construction and continuous efforts tests will continue to be determined by the relevant facts and circumstances as described in Notice 2013-29.
Master contract: Notice 2013-29 states that, if a taxpayer enters into a “master contract” (a binding written contract for a specific number of components to be manufactured, constructed, or produced for the taxpayer) and then enters into a new binding, written project contract assigning its rights to certain components under the master contract to an unaffiliated special-purpose vehicle that will own the facility for which the components will be used, work performed under the master contract may be taken into account in determining whether the physical work test is satisfied. Notice 2013-60 extends that treatment to the safe harbor. Thus, costs paid or incurred under the master contract may be taken into account in determining whether the safe harbor is satisfied.
Transfer of a facility: Notice 2013-29 did not address the effect of a transfer of a facility after construction has begun, leading to concerns that the rule for pretransfer expenditures that applied to the 5% safe harbor in the American Recovery and Reconciliation Act of 2009, P.L. 111-05, Section 1603 grant program might also apply to the Notice 2013-29 safe harbor. Under that rule, pretransfer expenditures were disregarded for purposes of the safe harbor unless the transferor and transferee were related.
Notice 2013-60 notes that the Code does not require construction to be begun by the taxpayer claiming the credit. Accordingly, Notice 2013-60 clarifies that it does not matter whether the taxpayer claiming the credit or a person other than that taxpayer began construction of the facility. Under the notice, if a qualified facility satisfies either the physical work test or the safe harbor, a taxpayer that owns the facility during the 10-year period beginning on the date the facility was originally placed in service may claim the PTC for that facility even if the taxpayer did not own the facility at the time construction began. Alternatively, a taxpayer that owns the facility on the date it is originally placed in service may elect to claim the ITC in lieu of the PTC for that facility even if the taxpayer did not own the facility at the time construction began. Any ITC claimed on a facility will be limited to the taxpayer’s basis in qualified property (as defined in Sec. 48(a)(5)(D)). Notice 2013-60 also includes an example illustrating this treatment.
Overall, Notice 2013-60 is quite helpful, as many industry participants were concerned about how the IRS would define continuous construction/continuous efforts and whether small, uncontrollable delays in the construction process would result in loss of eligibility for the PTC and ITC. The additional comfort should make it easier for developers to obtain debt and tax equity on their projects.
The date-specific safe harbor for continuous construction or efforts clearly benefits projects with shorter construction periods. A 24-month cushion offers sufficient comfort to a developer of a medium-size wind farm, but it might leave a developer of a hydropower facility or a utility-scale solar facility very nervous, as it will need to meet the continuous construction/continuous efforts tests based on facts and circumstances.
It is worth noting that the transfer-of-a-facility rule follows the IRS’s long-standing ruling position on Sec. 45. It is important to follow developments to see whether the IRS will continue issuing comfort rulings on such transfers in light of the current notice.
Caution: One must also note that this rule includes a potential trap for the unwary. The safe harbor for beginning construction is determined by taking into account all costs properly included in the depreciable basis of the facility. Thus, a facility that would have satisfied the safe harbor in the hands of the transferor will not satisfy the safe harbor in the hands of the transferee if it is sold at a premium and the costs paid or incurred before Jan. 1, 2014, are less than 5% of the transferee’s increased depreciable basis.
Michael Dell is a partner at Ernst & Young LLP in Washington, D.C.
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