The wind industry has been looking for clarity from the IRS about various requirements relating to its favorite federal incentives – the Production Tax Credit and Investment Tax Credit (the “PTC” and “ITC,” respectively) for qualified renewable energy projects. The IRS responded by releasing Notice 2013-60 late last week in order to provide further guidance.
The legislative package that averted last year’s “fiscal cliff” included an extension of the PTC and ITC for wind projects and a modification of the “placed in service” requirement for other qualified energy projects. In order to be eligible for the PTC or ITC, wind and other qualified energy projects must now “begin construction” before January 1, 2014. The industry has had major concerns that construction activity would dramatically decrease in 2014 because of the limitations and ambiguities of the extension.
The IRS published guidance in April that described two methods whereby a taxpayer can satisfy the new “begin construction” requirement. The first is satisfaction of a fact-specific “Physical Work Test” espoused by the IRS. The second is a more straightforward safe harbor whereby a taxpayer who has incurred 5% or more of total project costs (excluding the cost of land and various other non-integral components) will be deemed to have begun construction.
However, both the Physical Work Test and the safe harbor include a requirement that the taxpayer makes continuous progress towards completion once construction has begun. The Physical Work Test requires “Continuous Construction," and the safe harbor mandates “Continuous Efforts." These requirements added a new layer of ambiguity.
The IRS released Notice 2013-60 largely to address the confusion surrounding these Continuous Construction/Continuous Efforts requirements. The IRS has addressed the issue by essentially creating a safe harbor: A facility placed in service before January 1, 2016 will be considered to have satisfied the “Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the Safe Harbor).” Failure to meet this deadline will result in the IRS taking a broader look at the relevant facts and circumstances, as described in its original guidance on the subject.
This is a significant accommodation by the IRS and will hopefully have the effect of extending the robust wind construction activity all the way through 2015.