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Renewable Energy: 5% Production Tax Credit Safe Harbor Opportunity Expiring December 31, 2013


12/12/13

Synopsis:
 
Unless taxpayers act before year end, critical tax credits may be lost. Under current tax law, a taxpayer is eligible to receive the renewable electricity Production Tax Credit (PTC) under Internal Revenue Code §45, or the energy investment tax credit (ITC) under Internal Revenue Code §48 in lieu of the PTC beyond its current December 31, 2013 expiration date. These credits are available for an eligible §45 facility only if construction of the facility begins before January 1, 2014. Consequently, time is running out for some taxpayers.

Per IRS guidance, one of the two available methods that can be used by taxpayers to establish that construction has begun is a 5% spending safe harbor. Although the Treasury 1603 grant program provides for a similar 5% safe harbor, it is important to note that merely satisfying the 5% safe harbor for the 1603 grant program does not mean that a project will automatically satisfy the PTC 5% safe harbor. There are a number of differences in the rules. 

What Does CohnReznick Think?
Careful attention must be paid to the requirements imposed by IRS rather than Treasury if taxpayers intend to follow the 5% safe harbor rules for the PTC.

Issue:
 
The American Taxpayer Relief Act of 2012 extended and modified the rules with respect to the PTC. It substituted the placed in service requirement for certain qualified facilities (e.g. wind, open-loop biomass, etc.) with a requirement to begin construction of a facility before January 1, 2014. With this change, projects wishing to utilize the PTC, or electing the ITC in lieu of the PTC, must satisfy this new requirement.
 
The IRS has since released two notices providing taxpayers with guidance on these rules (Notice 2013-29 and 2013-60). This guidance provides two methods that a taxpayer may use to establish that construction of a qualified facility has begun. One method is a 5% safe harbor. To establish that construction has begun under the 5% safe harbor, a taxpayer must pay or incur 5% or more of the total costs included in depreciable basis, excluding the cost of land or any property not integral to the facility before January 1, 2014. The taxpayer must also make continuous efforts to advance toward completion of the facility.
 
This safe harbor method of demonstrating that construction has begun is similar to that used for the Treasury 1603 grant program. However, the 1603 grant rules are, in some situations, more liberal than the tax credit rules with respect to costs included for purposes of the 5% 1603 safe harbor calculation. Therefore, merely satisfying the 1603 grant 5% safe harbor will not automatically satisfy the 5% PTC safe harbor in every case. 
 
Because of this, a separate PTC 5% analysis is necessary in order to determine whether a project satisfies the 5% PTC safe harbor. Though no advance filing is currently required, the IRS will require taxpayers to maintain records or evidence of 5% compliance if they ultimately claim the PTC or elect ITC in lieu thereof. Many financiers and investors also seek similar records or evidence.
 
Contact:
 
For more information, please contact Anton Cohen, Partner and Renewable Energy Industry Practice Co-National Director, at 301-280-1822.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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