On September 20, 2013, the Internal Revenue Service (IRS) issued Notice 2013-60, which has updated prior guidance (Notice 2013-29) relative to the "begun construction" requirement for facilities producing electricity from wind, biomass, landfill gas, municipal solid waste, and certain other qualified energy sources to qualify for the Production Tax Credit (PTC) and Investment Tax Credit (ITC) under the American Taxpayer Relief Act of 2012. This guidance provides clarity and enables developers to take sufficient actions by December 31, 2013 to qualify projects that will be completed during 2014 and beyond.
Notice 2013-60 primarily deals with issues that have been brought to the IRS by developers since Notice 2013-29 was released, focusing on three general areas; Continuous Construction/Continuous Efforts, Master Contracts, and Transfer of a Facility.
Continuous Construction/Continuous Efforts Tests
Perhaps of most significance to developers and financing parties, Notice 2013-60 provides for a safe harbor under which the continuous construction requirement will be deemed satisfied with respect to a facility IF the facility has met the "begun construction test(s)" as described in Notice 2013-29 and is placed in service prior to January 1, 2016. If a facility has met the begun construction test(s) but is not placed in service prior to January 1, 2016, the IRS will analyze the circumstances related to the project in accordance with prior guidance to determine if the continuous construction requirement was met. Thus the continuous construction requirement is deemed to be met if the facility is placed in service before 2016.
Notice 2013-29 included a "master contract" rule for developers who satisfy the "begun construction" requirements by performing physical work of a significant nature, and subsequently assign its rights to an affiliated special purpose entity that will ultimately own the facility. Under this scenario, work performed under the original master contract will be taken into account relative to determination of whether physical work of a significant nature has occurred. Notice 2013-60 clarifies that this provision applies to the 5% safe harbor rule as well as the physical work test.
Transfer of a Facility
Notice 2013-60 clarifies that the taxpayer seeking to claim the PTC or ITC with respect to a particular facility need not be the same taxpayer that began construction. The IRS goes on to provide an example of one possible scenario in Section 5.02 of Notice 2013-60. This example shows a change in ownership occurring before the facility is placed in service. It shows the developer retaining a 5% ownership interest in the facility. One should not necessarily jump to the conclusion that the IRS is requiring developers to retain 5% ownership.
For more information on the recently issued guidance, please contact our renewable energy team today.