On August 8, 2014, the IRS released Notice 2014-46, which
provides additional guidance on the "start of construction"
requirements for the investment tax credit (ITC) and production tax
credit (PTC). As discussed below, Notice 2014-46 provides
additional guidance on satisfying the physical work test, the effect
of transfers of a facility after construction has begun, and also
modifies the five percent safe harbor.
As a result of the American Taxpayer Relief Act of 2012, to claim
ITC or PTC with respect to a renewable energy project, construction
must have begun before January 1, 2014. The IRS has previously
issued guidance on the start of construction requirements in Notices
2013-29 and 2013-60. Notice 2013-29 provides two methods by
which to satisfy the start of construction requirement. One
method is to perform physical work of a significant nature before
January 1, 2014. The other method is to pay or incur five
percent or more of the total cost of a facility before January 1,
2014 (the five percent safe harbor). In addition, work on the
project must be "continuous" in order for either method to be met
(by meeting a "continuous program of construction" test or a
"continuous efforts" test, as applicable).
In Notice 2013-60, the IRS clarified Notice 2013-29 by (i)
providing that the "continuous" work tests would be deemed met if a
facility is placed in service before January 1, 2016, (ii)
clarifying that a taxpayer could look through a master contract in
certain situations for purposes of both the physical work test and
the five percent safe harbor, and (iii) clarifying that the start of
construction requirement can be met with respect to a facility even
if the facility is later transferred to a different taxpayer
who then places the facility in service.
Notice 2014-46 clarifies that there is no fixed minimum threshold
amount of work that must be performed (or cost that must be paid or
incurred) to satisfy the physical work test. Notice 2013-29
provided an example in which a taxpayer met the physical work test
with respect to a 50 turbine wind farm by excavating foundations for
10 wind turbines (that is, 20% of the total turbines). Notice
2014-46 states that this example is not intended to indicate that
there is a 20% minimum threshold amount of work that must be
performed to satisfy the physical work test.
Notice 2014-46 also provides additional guidance with respect to
transfers of a facility after construction has begun. The
Notice provides that if a taxpayer begins construction of a facility
in 2013 with the intent to develop a facility at a certain site, but
thereafter transfers equipment and other components to a different
site, the work performed or costs paid or incurred with respect to
the first site will be taken into account in determining whether the
start of construction requirement is met with respect to the
facility placed in service at the second site. However, the
Notice also provides that, in the case of a transfer consisting
solely of tangible personal property between two unrelated parties,
work performed or costs paid or incurred by the transferor will not
be taken into account with respect to the transferee in determining
whether the start of construction requirement is met. However,
if the transferee is related to the transferor, the transferee can
"piggyback" on the costs paid or work performed by the
transferor. A transferor will be related to a transferee
partnership if it has a more than 20% capital or profits interest in
the transferee.
Finally, Notice 2014-46 modifies the five percent safe harbor by
providing an exception for single projects that are comprised of
multiple facilities which do not meet the overall five percent
requirement. If a single project is comprised of multiple
facilities (for example, a wind farm comprised of multiple wind
turbines), and a taxpayer has paid or incurred at least three
percent of the total cost of the facility before January 1, 2014,
then the taxpayer will be treated as satisfying the five percent
safe harbor with respect to some of the individual facilities so
long as the total aggregate cost of those individual facilities is
not greater than twenty times the amount the taxpayer paid or
incurred before January 1, 2014. The following example
illustrates this rule: A taxpayer incurs $30,000 in costs
prior to January 1, 2014 with respect to a five turbine wind
farm. The total cost of the wind farm is $800,000 and each
turbine costs $160,000. The five percent test is not met with
respect to the entire wind farm because the costs incurred prior to
January 1, 2014 ($30,000) are less than five percent of the total
cost of the wind farm ($40,000). However, under the modified
safe harbor rule in Notice 2014-46, the taxpayer is treated as
satisfying the five percent safe harbor with respect to three of the
turbines. The total cost of three turbines ($480,000) is less
than twenty times the amount of costs incurred prior to January 1,
2014 ($600,000).
For additional information, you may contact:
Greg
Riddle (415)-773-5533
Wolfram
Pohl (415)-773-4252 |