12 March 2015
The US Internal Revenue Service (the IRS) has released Notice 2015-25 (the Notice), which updates previously issued guidance to reflect the recent one-year extension of the renewable electricity production tax credit (the PTC) under Section 45 of the Internal Revenue Code of 1986 (the Code).
Until the recent extension of the PTC, Section 45 of the Code provided that a qualified facility, such as a wind facility, will be eligible to receive the PTC if construction of the facility began before January 1, 2014. The IRS also had issued guidance in the form of a series of notices (the Prior Guidance) to clarify when construction of a facility was deemed to have begun.
Under Notice 2013-29, a taxpayer can establish that construction has begun by starting physical work of a significant nature prior to January 1, 2014 (the Physical Work Test) or by paying or incurring at least 5 percent of the total cost of the facility before January 1, 2014 (the Safe Harbor). In addition, under the Physical Work Test, the taxpayer is required to maintain a continuous program of construction, while the Safe Harbor requires that the taxpayer make continuous efforts to advance toward completion of the facility (for a more detailed analysis of Notice 2013-29, see our April 16, 2013, Legal Update). Subsequently, in Notice 2013-60, the IRS clarified that the continuous program of construction and continuous efforts requirements would be deemed satisfied if the facility is placed in service before January 1, 2016 (for more complete coverage of Notice 2013-60, see our September 23, 2013, Legal Update). Finally, the IRS issued Notice 2014-46 to further clarify and modify Notices 2013-29 and 2013-60 (for a discussion of Notice 2014-46, see our August 8, 2014, Legal Update).
On December 19, 2014, President Obama signed into law H.R. 5771, the Tax Increase Prevention Act (TIPA), which extended the PTC until December 31, 2014 (see our December 24, 2014, Legal Update). Thus, under current law, a wind facility will be eligible to receive the PTC if construction of such facility began before January 1, 2015.
Until the issuance of the Notice, there was some uncertainty as to whether the Prior Guidance would continue to apply with respect to the one-year extension. Of particular concern was whether the IRS would roll forward the date by which a facility would have to be placed in service to be deemed to satisfy the continuous program of construction and continuous efforts requirements.
In accordance with TIPA, the Notice replaces all references to “January 1, 2014” in the Prior Guidance as they relate to the beginning of construction date with “January 1, 2015.” Thus, the Prior Guidance has been modified to take into account the one-year extension of the PTC, and a taxpayer may use the methods set forth in the Prior Guidance to establish that construction of a facility began in 2014. Furthermore, consistent with the one-year extension of the beginning of construction date, the Notice extends the placed in service date for the deemed satisfaction of the continuous program of construction and continuous efforts requirements to January 1, 2017.
The Notice is welcome guidance that removes the uncertainty about whether a developer that began construction of a facility before January 1, 2014, must place the facility in service before January 1, 2016, in order to avoid having to demonstrate that the developer maintained a continuous program of construction or made continuous efforts to advance toward completion of the facility. Thus, if a developer began construction of a facility before January 1, 2015, and places the facility in service before January 1, 2017, the continuous program of construction and continuous efforts requirements will be deemed satisfied, regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility after December 31, 2014, and before January 1, 2017.