The IRS on Friday clarified how it will evaluate companies hoping to take advantage of an expired renewable energy tax credit.
The IRS guidance is expected to increase the number of firms willing to move forward with projects comfortable they would be eligible for the production tax credit (PTC) or investment tax credit (ITC) for wind, geothermal, biomass and other projects. The credit expired at the end of last year, but developers are still eligible as long as they started construction or sufficiently invested in the project in 2013.
Friday’s guidance clarified the rules on what kind of “physical work of a significant nature” had to be performed or how much money had to be invested to achieve “safe harbor” and be able to claim the credit. It also clarified how the credit applies when equipment or development rights are transferred among firms after work on a project has begun.
The guidance came in response to questions industry officials raised following two other IRS publications last year clarifying a change in the tax credit law. When Congress last extended it as part of the “fiscal cliff” legislation in January 2013, the PTC was expanded to cover projects that had commenced construction by the end of that year, rather than requiring facilities to be complete as had earlier been the case.
In releasing the guidance, the Obama administration touted it as part of a broader strategy to address climate change and diversify the energy mix.
“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,” Emily McMahon, the Treasury Department’s deputy assistant secretary for tax policy, said in a news release. “With the support of these credits, growth in the production of renewable energy will help support a clean energy economy, reduce our reliance on oil and cut greenhouse gas pollution.”
Regarding the type of work required to qualify for a credit, IRS says it is concerned with the “nature of the work performed, not the amount or cost,” assuaging concerns that construction activity would have to meet specific quantitative benchmarks to qualify. “Significant” activities include, but are not limited to, excavating and other first steps in constructing wind turbine foundations, manufacturing specialized equipment such as a custom-designed transformer, or building roads integral to the overall operation of the facility, according to the IRS.
The guidance also lowers the threshold for what had to be spent last year to qualify for at least a partial tax credit, down from the 5 percent level established in earlier guidance documents. Now, developers who have paid at least 3 percent of a project’s costs can qualify, although the overall PTC value is prorated such that it is only applied to the portion of a wind farm or other facility that cost 20 times as much as was spent before last year’s deadline.
In example scenarios, the IRS explains that the change could allow developers to claim the PTC for electricity generated by some but not all of the turbines in a single wind farm, depending on how much cost was incurred last year.
“Although the notice is opaque in certain areas it should be welcomed by the wind industry,” observed a group of attorneys from the firm Akin Gump in a detailed blog post on the IRS guidance. “The notice should result in many wind projects that were on hold moving forward at an expedited pace.”
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