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IRS Issues Guidance on Production Tax Credit Eligibility Requirements

on Monday, 29 April 2013 in Dirt Alert: David C. Levy, Editor

On April 15, 2013, the Internal Revenue Service issued much-anticipated guidance on the eligibility requirements for the renewable energy Production Tax Credit.  IRS Notice 2013-29 comes nearly four months after Congress extended the Production Tax Credit for one year to December 31, 2013.  A project that begins construction in 2013 qualifies for the Production Tax Credit.  This marked a change in direction from the prior requirements which required the project to be placed into service before the tax credit expired.  The revision aims to allow developers to maximize the tax incentive in what many believe is the last extension of the credit.


This recent IRS guidance clarifies what activities constitute beginning construction.  As expected, the guidance largely mirrors the rules and guidance the U.S. Department of the Treasury issued for the Section 1603 cash grant program.  Like the cash grant program, a developer can establish it has begun construction by either starting physical work of a significant nature or by satisfying a 5% safe harbor provision.  In addition, wind developers may treat multiple turbines as a single project so they do not have to satisfy the requirements for each individual turbine location.


The guidance provides a broad view as to what constitutes “physical work of a significant nature”.  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.  Significant work, however, must be integral to the project.  Preliminary development activities do not qualify as work of a significant nature.  Preliminary activities include: planning or designing, securing financing, obtaining permits, licensing, conducting surveys, test drilling, environmental and engineering studies, construction of transmission towers or fencing, or clearing a site.  Once physical work of a significant nature begins, the taxpayer must maintain a continuous program of construction, however, the IRS will allow disruptions due to factors outside the developer’s control.


To satisfy the 5% safe harbor provision, a developer must demonstrate payment or incurrence (depending on its method of accounting) of at least 5% of total project costs before January 1, 2014, and, thereafter, the developer must make continuous efforts towards project completion.  Such efforts include incurring additional costs, entering into construction contracts, obtaining necessary permits, and performing work of a significant nature .  The IRS will allow flexibility for certain disruptions that are outside of a developer’s control, such as delays due to severe weather, licensing or permitting, labor disputes, the presence of endangered species, financing, and supply or equipment shortages.  


With regard to cost overruns, developers will not satisfy the safe harbor rule if the total cost of a wind energy project comprised of multiple turbines exceeds the initial anticipated cost of the project so that the amount the developer paid or incurred before January 1, 2014 is less than 5% of the total actual project cost.  Developers may still satisfy the safe harbor rule with regard to individual turbines as long as the total aggregate cost of those individual turbines is not more than twenty times greater than the amount the developer paid or incurred before January 1, 2014.  


Despite restrictions on qualifications for the Production Tax Credit, proponents credit the most recent extension for creating jobs, reviving businesses across the country and allowing continued growth of wind energy in both community and offshore projects.  The short extension, however, seems to proliferate the boom-bust cycle of the wind energy development.


Read the Full Newsletter: Dirt Alert April 29, 2013

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