IRS Provides Additional Guidance for Renewable Energy Credits
Issuance of Notice 2014-46
The IRS has clarified the rules for tax credits relating to renewable energy projects by issuing new guidance regarding pre-2014 qualification requirements for production tax credits (“PTC”) and investment tax credits (“ITC”). On August 8, 2014, the IRS issued Notice 2014-46 (the “Notice”), which addressed requirements to satisfy the “physical work” test set out in previous guidance and the effect of various types of transfers of ownership after the construction of a facility has begun. The Notice also expands and modifies the five percent safe harbor test that previous notices discussed.
The American Taxpayer Relief Act of 2012 modified the eligibility of projects creating PTCs or ITCs by changing the qualifying date of a project from a “placed in service” deadline to a “begun construction” deadline for all renewable energy facilities. Provided a taxpayer had “begun construction” of an eligible facility by December 31, 2013, the taxpayer could subsequently claim PTCs and ITCs when the facility went into service.
IRS Notice 2013-29 provided guidance related to the PTC and the ITC, including standards related to the two methods for proving a taxpayer had begun construction on a facility—the “Physical Work Method” and the “Safe Harbor Method.” (Our prior Dirt Alert on Notice 2013-29 is available here.) Notice 2013-60 further clarified certain aspects of the “begun construction” test and provided additional guidance on transfers of PTC and ITC projects. Despite this guidance, developers, lenders, and investors of renewable energy projects continued to have questions about qualification of projects for the PTC and the ITC.
Physical Commencement Method
Notice 2014-46 states that it is the nature of the work, rather than the amount or cost of the work, which controls for purposes of the Physical Commencement Method. The IRS clarified that while Notice 2013-29 described several activities that constitute physical work, that list was not exclusive or exhaustive. The Notice also provides that meeting any one of the activities that constitutes physical work is sufficient.
Based on the Notice, any one of the following activities appears to satisfy the Physical Commencement Method, provided the activities are substantial:
- the beginning of the excavation for the foundation for a wind turbine;
- the setting of anchor bolts into the ground;
- the pouring of the concrete pads of the foundation;
- work on a custom-designed transformer that steps up the voltage of a facility’s production of electricity to the voltage necessary for transmission; or
- starting construction on roads integral to the operation of the project.
Notice 2014-46 confirms that these examples are not exhaustive of the kinds of work that would satisfy the Physical Commencement Method.
Safe Harbor Method
The Notice adds a new three percent safe harbor threshold for certain facilities. For a facility comprised of multiple independent units (such as a wind farm), if the taxpayer did not meet the five percent safe harbor threshold Notice 2013-29 required, but did meet at least three percent of the total project costs, then the IRS deems the taxpayer to have properly safe harbored an amount not to exceed 20 times the three percent amount.
Notice 2014-46 clarifies that work performed or amounts paid or incurred before 2014 by a taxpayer may be taken into account for purposes of determining whether the facility satisfies the Physical Work Method or the Safe Harbor Method, even if the location of a facility changes after construction has begun.
Transfers of Projects
The Notice states that generally, an owner may transfer a fully or partially developed project to a new unrelated owner without the project losing its qualification under either the Physical Work Method or the Safe Harbor Method. The one exception to the general rule is if the transferor transfers only tangible personal property (or contractual rights to the property under a binding written contract) to an unrelated transferee. In that case, the transferee cannot take into account any work performed or amounts paid or incurred by the transferor with respect to the property for purposes of the Physical Work Method or the Safe Harbor Method. This limitation is similar to the limitation that the U.S. Department of the Treasury applied to transfers of “safe harbored” assets for Section 1603 “cash grant” purposes.
The Notice provides greater clarity to wind projects concerning pre-2014 qualification for PTCs and ITCs. The Notice is generally quite beneficial to the qualification of renewable energy projects for PTCs and ITCs and should provide investors, lenders, and developers with more certainty for projects that started work before 2014.
A full copy of Notice 2014-46 is available here.