Definition of Binding Contract in IRS "Start of Construction" PTC Guidance a "Big Surprise"

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* UPDATE: IRS Issues Clarification Regarding "Binding Written Contract" in its "Start of Construction" Guidance

Stoel Rives tax attorney Greg Jenner discussed in today's Tax Notes Today newsletter the new IRS guidance regarding the "start of construction" requirement for energy projects to qualify for the renewable energy production tax credit or investment tax credit extended by Congress in the American Taxpayer Relief Act in January. Congress changed the definition of a qualified facility under section 45(d) from a facility that must be placed in service before January 1, 2014, to one in which construction must begin before January 1, 2014. The guidance provides two methods to establish whether construction has begun: (1) taxpayer has begun physical work of a significant nature, or (2) has paid or incurred 5 percent or more of total facility costs.

Jenner noted that on a superficial level the tests are virtually the same as under section 1603, a program of the American Recovery and Reinvestment Act of 2009 that provided payments from the government in lieu of tax credits. However, Jenner said the guidance contained a "big surprise" in its definition of a binding contract. Unlike previous incentive programs, the guidance excludes contracts that limit damages to a specified amount, such as by use of a liquidated damages provision. Binding written contracts for work performed on behalf of the taxpayer are taken into account for purposes of satisfying the test for significant physical work.

"For purposes of the section 1603 grant, you could have liquidated damages so long as they equaled or exceeded 5 percent of the total contract price," said Jenner. He added that the revised standard means that many contracts already signed (such as turbine frame agreements) will be out of compliance with the IRS guidance.

"Definition of Binding Contract in Tax Credit Guidance Raises Concerns" was published by Tax Notes Today (a taxanalysts.com publication), April 17, 2013. (subscription required)

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Kevin T. Pearson
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