IRS Issues Clarification on Begin Construction for Purposes of PTC and ITC
On August 8, 2014, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued a notice (2014-46) clarifying what it means to “begin construction” on a project for the purposes of the renewable electricity production tax credit (PTC) or the energy investment tax credit (ITC). Under the American Taxpayer Relief Act of 2012, taxpayers can claim the PTC or the ITC for certain renewable energy facilities if construction began before January 1, 2014.
Previous guidance provided two methods to determine when construction of a facility begins: the Physical Work Test or the Safe Harbor. This new guidance provides further clarification in response to stakeholder feedback.
This notice further clarifies Notices 2013-29 and 2013-60 regarding (i) how to satisfy the physical work test and (ii) the effect of various types of transfers with respect to a facility after construction has begun and modifies the application of the 5% safe harbor.
More specifically, the notice:
- Clarifies that the Physical Work Test relates to the nature of the work, not the amount or cost. (Work of a significant nature includes, for example, any of the following activities: beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation).
- Clarifies that a fully or partially developed facility may be transferred without losing its qualification under the Physical Work Test or the Safe Harbor for purposes of the PTC or the ITC. The only exception to this provision is transfers consisting solely of tangible personal property between unrelated parties.
- Provides that the Safe Harbor may be used by taxpayers that have paid or incurred less than 5%, but at least three percent, of the total cost of a facility before January 1, 2014. These taxpayers may claim a reduced credit proportional to the amount paid or incurred before January 1, 2014.
In response to a significant number of questions received after the publication of Notice 2013-29, the Treasury Department and the IRS issued Notice 2013-60, which in part clarifies that the transfer of a facility after construction has begun will not necessarily prevent a facility from qualifying for the PTC or the ITC. Additionally, section 3.02 of Notice 2013-60 provided a method for taxpayers to satisfy either the Continuous Construction Test or the Continuous Efforts Test. If a taxpayer places a facility in service before January 1, 2016, the facility will be considered to satisfy the Continuous Construction Test or the Continuous Efforts Test, regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility between December 31, 2013 and January 1, 2016.
However, after the publication of Notice 2013-60, the Treasury Department and the IRS received requests for further clarification regarding how to satisfy the Physical Work Test as well as questions regarding the effect of various types of transfers with respect to a facility after construction has begun.
This new notice clarifies the application of the Physical Work Test and the effect that certain transfers with respect to a facility after construction has begun will have on a taxpayer’s ability to qualify for the PTC or the ITC.
In addition, this notice modifies the application of the Safe Harbor for certain facilities with respect to which a taxpayer paid or incurred less than 5%, but at least 3%, of the total cost of the facility before January 1, 2014,
This notice modifies the application of the Safe Harbor for certain facilities with respect to which a taxpayer paid or incurred less than 5%, but at least 3%, of the total cost of the facility before January 1, 2014, but only as long as the total aggregate cost of those individual facilities at the time the project is placed in service is not greater than 20 times the amount the taxpayer paid or incurred before January 1, 2014. Note, this only applies for projects comprised of multiple facilities that can be placed in service separately. Also, the Continuous Efforts Test of section 5.02 of Notice 2013-29 must also be met to qualify for the Safe Harbor.
Therefore, if a taxpayer paid or incurred at least 3% of the total cost of such a facility before January 1, 2014, the Safe Harbor may be satisfied and the PTC or ITC may be claimed with respect to some, but not all, of the individual facilities (as described in section 4.04(1) of Notice 2013-29) comprising the project.
The 20% example in Notice 2013-29 and is not intended to indicate that there is a 20% threshold or minimum amount of work required to satisfy the Physical Work Test.
According to the new notice, assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.
Transfers of Projects vs. Equipment Transfers
Except as provided, a fully or partially developed facility may be transferred without losing its qualification under the Physical Work Test or the Safe Harbor for purposes of the PTC or the ITC.
However, mere equipment, alone, will not remain eligible for the safe harbor if it alone is transferred.
For example, a taxpayer may acquire a facility (that consists of more than just tangible personal property) from an unrelated developer that had begun construction of the facility prior to January 1, 2014, and thereafter the taxpayer may complete the development of that facility and place it in service. The work performed or amount paid or incurred prior to January 1, 2014, by the unrelated transferor developer may be taken into account for purposes of determining whether the facility satisfies the Physical Work Test or Safe Harbor.
Relocation of equipment by a taxpayer. A taxpayer also may begin construction of a facility in 2013 with the intent to develop the facility at a certain site, but thereafter transfer equipment and other components of the facility to a different site, complete its development, and place it in service. The work performed or amount paid or incurred prior to January 1, 2014, by such a taxpayer may be taken into account for purposes of determining whether the facility satisfies the Physical Work Test or the Safe Harbor. CAUTION: Relocation is not the same as sale of equipment only.
Transfers of equipment between unrelated parties. In the case of a transfer consisting solely of tangible personal property (including contractual rights to such property under a binding written contract) to a transferee not related (defined for these purposes by reference to section 197(f)(9)(C)) to the transferor, any work performed or amount paid or incurred by the transferor with respect to such property so transferred will not be taken into account with respect to the transferee for purposes of the Physical Work Test or the Safe Harbor.
What Does CohnReznick Think?
The new 3% safe harbor rule will help those who had begun development earlier than others, even before these rules went into effect, and thus, should help to keep alive some long lived development work that otherwise might have been left out. While we can't say what percentage of those with concerns under the prior Notices will now feel relief, clarifying that the prior notices 20% example was merely an example should help. We also note that "significance" of the work is still the standard, thus, some may still not find that clear enough if they outside the existing 2016 automatic safe harbor date. There is so much diversity amongst projects, each with its own facts, and so many reasonable business variables, so that it's a herculean task to get guidance that covers every scenario with absolute clarity. However, the IRS should be commended for continuing to help clarify what Congress intended.
For more information, please contact Timothy Kemper, Partner and Renewable Energy Industry Practice Co-National Director, at email@example.com or 404-847-7786; Anton Cohen, Partner and Renewable Energy Industry Practice Co-National Director, at firstname.lastname@example.org or 301-280-1822; or Lee Peterson, Senior Manager, at email@example.com or 404-847-7744.
To learn more about CohnReznick’s Renewable Energy Industry Practice, please visit our webpage.
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