The IRS today issued Notice 2013-60, which updates prior guidance, contained in Notice 2013-90, regarding the "begin-construction" requirement for the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the Code) and the investment tax credit (ITC) under Section 48 of the Code.
A taxpayer is eligible to claim the PTC or the ITC with respect to an otherwise qualified renewable energy facility if construction of the facility begins before January 1, 2014. The IRS's prior guidance provides two methods for meeting this begin-construction requirement—a taxpayer may satisfy the requirement by (i) beginning physical work of a significant nature before January 1, 2014 or (ii) paying or incurring 5% of the total cost of the facility before January 1, 2014. The prior guidance also requires that, once construction begins, the taxpayer must maintain a continuous program of construction until the facility is complete, subject to a number of exceptions for delays that are beyond the taxpayer's control.
For a more complete description of the prior guidance, click here.
Notice 2013-60 responds to a number of questions that were raised regarding application of the prior guidance. It addresses three general areas:
- Continuous Construction. The prior guidance requires that a taxpayer maintain a continuous program of construction after construction begins. The language of the prior guidance raised a number of questions regarding potential delays in construction and related issues. Notice 2013-60 addresses many of these questions by providing a safe harbor under which the continuous construction requirement will be deemed satisfied with respect to a particular facility if the facility is placed in service before January 1, 2016. Thus, a taxpayer that places a facility in service before January 1, 2016 will be treated as satisfying the continuous construction requirement regardless of any delays that may occur during construction. If a facility is not placed in service before January 1, 2016, the IRS will analyze all the relevant facts and circumstances in accordance with the prior guidance to determine whether the continuous construction requirement is satisfied.
- Master Contract Rule. The prior guidance included a "master contract" rule for taxpayers wishing to satisfy the begin-construction contract by engaging in physical work of a significant nature. That rule provides generally that if a taxpayer enters into a binding written contract for a specified number of components to be manufactured, constructed or produced for the taxpayer by another person, and then through a new binding written contract assigns its rights to an affiliated special purpose vehicle that will own the facility, work performed with respect to the master contract will be taken into account in determining when physical work begins with respect to the facility. The prior guidance did not expressly apply this special rule to taxpayers seeking to satisfy the 5% safe harbor. Notice 2013-60 makes clear that the master contract applies for purposes of both the physical work test and the 5% safe harbor.
- Transfers After Construction Begins. The prior guidance raised a number of questions regarding whether a transfer of a facility after construction begins would impact its qualification for the PTC or the ITC. Notice 2013-60 clarifies that the taxpayer seeking to claim the PTC or the ITC with respect to a particular facility need not be the same taxpayer that began construction. Thus, Notice 2013-60 makes clear that a taxpayer that owns a facility during the 10-year PTC period may claim the PTC even if the taxpayer did not own the facility when construction began, and a taxpayer that owns a facility when it is placed in service may elect to claim the ITC in lieu of the PTC with respect to the facility even if the taxpayer did not own the facility when construction began.
Notice 2013-60 answers a number of questions regarding the begin-construction requirement for qualifying for the PTC and the ITC and will be welcome news to many companies wishing to develop or invest in renewable energy projects. It does, however, leave some questions unanswered. If you have questions regarding the new guidance or any other issue regarding the PTC, the ITC or related matters, please contact a key contributor.