On April 15, 2013, the Internal Revenue Service (IRS) provided guidance, (IRS 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 enables developers to plan and take sufficient actions by December 31, 2013 to qualify projects that will be completed during 2014 and beyond.
The IRS requirement is similar to the eligibility requirements that were relevant under the Treasury 1603 cash grant program. Two methods may be used by taxpayers to establish that construction has begun prior to January 1, 2014: starting physical work of a significant nature OR satisfying a 5% safe harbor test. One significant change is that the IRS requirement for 5% safe harbor now includes a stipulation that the taxpayer make continuous efforts to advance towards completion of the facility after making the initial safe harbor spend prior to January 1, 2014.
The taxpayer will satisfy the begun construction requirement if "physical work of a significant nature" has started on the facility. Both on-site and off-site work (performed either by the taxpayer or by another person under a binding written contract) may be taken into account for purposes of demonstrating that physical work of a significant nature has been done. Certain preliminary activities are excluded, as is off-site work to produce property that is either in existing inventory or is normally held in inventory. In addition, the project must maintain a "continuous program of construction." Certain disruptions (including financing delays) that are beyond the taxpayer’s control are disregarded.
5% safe harbor
Another way the begun construction requirement can be satisfied is if the taxpayer pays or incurs 5% of the total eligible project costs, and thereafter the taxpayer makes continuous efforts to advance towards completion of the facility. Whether a taxpayer meets the continuous efforts requirement depends on the facts and circumstances, including but not limited to, paying or incurring additional amounts included in the total cost of the facility, entering into binding written contracts for components or future work on construction of the facility, obtaining necessary permits, and performing physical work of a significant nature. Again, certain disruptions that are beyond the taxpayer’s control are disregarded – this is identical to the permitted disruptions under the "physical work" test.
For more information on the recently issued guidance, please contact our renewable energy team today.