Yesterday, March 11, 2015, the Internal Revenue Service issued Notice 2015-25, which extends by one year certain tests taxpayers can use to establish that
a qualifying renewable energy facility is eligible for the production tax credit (PTC) or, alternatively, the investment tax credit (ITC).
Notice 2015-15 updates prior IRS guidance in response to a change made by
the Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, 128 Stat. 4010
(2014 Extenders Bill). The date by which construction must have begun for a
qualifying renewable energy facility to be eligible for the PTC or ITC was
extended from “before January 1, 2014,” to “before January 1, 2015.” Under
prior guidance, a taxpayer could establish the beginning of construction by
either starting physical work of a significant nature (Physical Work Test)
or paying or incurring 5 percent or more of the total cost of the facility
(Safe Harbor). Under either method, the taxpayer was required to make
continuous progress toward completion once construction began. Prior
guidance further provided that if a facility was placed in service before
January 1, 2016, the facility would be considered to satisfy the Continuous
Construction Test (for purposes of satisfying the Physical Work Test) or the
Continuous Efforts Test (for purposes of satisfying the Safe Harbor).
Under Notice 2015-25, taxpayers now have until January 1, 2017, to complete
construction of pre-2015 facilities. The IRS extension of the Continuous
Construction and Continuous Efforts tests does not apply to Section 1603
Grants, which have independent requirements to complete construction by a
certain date and, in many instances, dates that have already passed.
The PTC provides certain renewable-energy-electricity-producing projects
(including those involving wind, geothermal sources, biomass and municipal
solid waste, such as biomethane) with a tax credit of approximately
$0.023/kWh for energy generated and sold to a third party. The tax credit
can be claimed for the 10-year period following commercial operation of the
project and often is used in tax equity transactions to offset some of the
capital costs of constructing qualifying renewable energy facilities.
Alternatively, taxpayers can elect to take the ITC in lieu of the PTC for
certain qualifying facilities. The ITC provides a one-time tax credit equal
to 30 percent of the tax basis of the qualifying facility.
One-Year Extension of the PTC Drives IRS Extension of the Safe Harbor
The notice provides a one-year extension of the current Continuous
Construction Test and the Continuous Efforts Test provided in IRS Notice
2013-60. The PTC previously expired on January 1, 2014, but was extended
late last year. Under the 2014 Extenders Bill, a taxpayer would be eligible
to claim the PTC, or the ITC in lieu of the PTC, if construction began on
the qualifying renewable energy facility before January 1, 2015. As now
revised, the Continuous Construction and Continuous Efforts tests are
consistent with this one-year extension.
Prior IRS Guidance for Satisfying “Begin Construction” Requirement
As noted above, a taxpayer can satisfy the “begin construction” requirement
of Code Section 45(d) if it meets either the Physical Work Test or the
Expenditure Safe Harbor before January 1, 2015. In both cases, the taxpayer
must make continuous progress toward completion once construction has begun.
In an effort to provide clarity and certainty to the Continuous Construction
and Continuous Efforts tests, the IRS issued Notice 2013-60. The earlier,
2013 notice provided a useful safe harbor by deeming the continuous
construction or efforts requirement to be satisfied if the facility was
placed in service before January 1, 2016. Notice 2015-25 extends this date
to January 1, 2017.
At the time the IRS provided the initial safe harbor for satisfying the
continuous construction or efforts requirement, the PTC was set to expire on
December 31, 2013. This gave taxpayers two years after the scheduled PTC
expiration date to place facilities into service and still satisfy the
Continuous Construction or Continuous Effort Test without having to show
that they were making continuous progress toward completion once
construction began. As explained below, the extended date of January 1,
2017, is important to current projects.
2014 PTC Extension Created Construction Pressure and Questions
The passage of the 2014 Extenders Bill placed construction pressure on 2014
projects since they could rely on the safe harbor for satisfying the
continuous construction or efforts requirement only if their projects were
actually completed before the end of 2015. Tax practitioners also began
fielding questions from developers concerned that projects satisfying the
begin-construction requirement in 2014 would likely spill into 2016, given
construction schedules, financing considerations and other commercial
matters. Many developers had valid concerns about how to meet the Continuous
Construction or Continuous Efforts tests without a safe harbor, and how to
satisfy the conservative nature of tax equity investors or project lenders.
Safe Harbor Extension Relieves Construction Pressure for 2014 PTC
Fortunately, the IRS has now issued guidance allowing facilities that are
completed before January 1, 2017, to satisfy the Continuous Construction and
Continuous Efforts tests if construction of the facility began before
January 1, 2015. This extension of the safe harbor comes at a valuable time,
when 2014 projects still have sufficient opportunities to secure
construction contracts, financing and tax equity investments. Additionally,
the safe harbor extension creates IRS precedent to extend the safe harbor in
lockstep with any future extensions of the PTC. Clearly, the IRS intends to
allow a two-year window after the expiration of the PTC for taxpayers to
complete construction of a renewable energy facility without having to show
continuous progress toward completion once construction of a qualifying
facility has begun.