The Internal Revenue Service on Aug. 8 released new guidance on qualifying for the production tax credit’s “physical work” test with a memo indicating that the agency will evaluate projects with an eye toward the nature of work developers completed before the end of 2013, rather than the amount of work or its cost.
The IRS in September 2013 said projects that are placed in service by the end of 2015 would qualify for the PTC as long as construction started before the credit expired at the end of 2013. Developers could start construction either by beginning “physical work of a significant nature” or by qualifying for financial safe harbor, which required them to incur at least 5% of project costs.
The financial community was comfortable with the safe harbor standard, but lenders said it was unclear whether developers had to complete a certain amount, or percentage, of work to qualify. The uncertainty held up project financing and jeopardized up to 40% of the wind projects that were under construction at the end of 2013.
Citing examples such as digging foundations, pouring concrete pads and building roads that are “integral” to a facility, the IRS answered industry calls for clarity with the directive that, “assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test.”
David Burton, a partner at Akin Gump Strauss Hauer & Feld LLP, said the wind industry “got what it asked for” in the physical work clarification and “is in no position to complain.” The guidance “will get projects going – things should get kick-started,” he said.
Emily McMahon, deputy assistant secretary for tax policy at the U.S. Department of the Treasury, said in a news release that “with today’s guidance, businesses that are investing in renewable energy projects have the clarity they need to qualify for important tax credits designed to help spur innovation in this sector.”
The American Wind Energy Association “appreciates the IRS providing an additional round of guidance on the rules surrounding start construction,” AWEA Vice President of Federal Regulatory Affairs Tom Vinson said in an emailed statement. “With a record number of wind energy megawatts under construction, the guidance should provide more certainty to help get projects to the finish line.”
Lee Peterson, a senior manager in CohnReznick LLP’s renewable energy group, said the guidance “helps” but added that the continued reference to “significant” work could leave lingering doubts. “So there may still be some handwringing by some folks, even after this ruling,” Peterson said in an email. “There is so much diversity amongst projects, each with its own facts, and so many reasonable business variables, that it’s a herculean task to get guidance that covers every scenario with absolute clarity.”
Of some surprise, the IRS weighed in on the financial safe harbor standard, even though it was not asked to do so. The developer of a single project made up of multiple facilities can qualify a portion of the project by spending at least 3% of project costs, the government said, as long as the aggregate costs of the individual facilities is not greater than 20 times the amount the taxpayer incurred before the end of 2013.
For example, the developer of a five-turbine wind farm valued at $800,000 incurred $30,000 in costs before the end of 2013. Each turbine costs $160,000. Though the developer did not incur 5% of total project costs, it can claim tax credits for the output from three of the turbines, the IRS said.
Peterson called that portion of the guidance “an important improvement” on the rules. “That 2% can make a significant difference on wind projects, which typically have large overall capital costs,” he said. “The 3% rule will help those folks who had begun development earlier than others, before these rules went into effect, and thus will keep alive some long-lived development work that otherwise might have gotten left out.”
Burton, on the other hand, said the additional safe harbor guidance does not differ from the standard he said was effectively provided in prior notices.
The IRS also addressed equipment transfers. A developer may transfer equipment between projects, and there is “no statutory requirement that the taxpayer that places the facility in service also be the taxpayer that begins construction of the facility,” the IRS said. However, like the Section 1603 grant provisions, Peterson said, “no ‘mere equipment’ sales or equipment ‘trafficking’ will be allowed in order to meet or bootstrap your way into safe harbor.”
Viewed as a whole, Peterson said the IRS should be commended for “continuing to help clarify what Congress intended. It beats being left forever in the dark.”
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