Prior to the American Taxpayer Relief Act of 2012 (Act), qualified energy facilities needed to be placed in service before January 1, 2014 (or January 1, 2013 in the case of a wind facility) in order to qualify for the Tax Code Section 45 renewable electricity production credit (PTC), or the Section 48 energy investment tax credit (ITC). Under the Act, construction of the facility must simply begin before January 1, 2014 to be eligible to receive the PTC or the ITC. The IRS has issued guidance in Notice 2013-29 for purposes of determining when construction is deemed to begin.
Notice 2013-29 provides two methods that a taxpayer may use to establish that construction of a qualified facility has begun. First, a taxpayer may show that significant physical work has begun. Alternatively, a taxpayer may use a safe harbor method to establish the beginning of construction.
Construction of a qualified facility begins when significant physical work begins on a facility. Whether or not the taxpayer has begun construction would depend on all facts and circumstances. For purposes of this notice, the IRS would take into account work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in the taxpayer's trade or business. Additionally, the IRS will closely scrutinize a facility, and may determine that construction has not begun on a facility before January 1, 2014, if a taxpayer does not maintain a continuous program of construction.
The IRS noted that it would take into account both on-site and off-site work for purposes of demonstrating that physical work of a significant nature as begun. However, preliminary activities would not be included, even if the cost of those activities is properly included in the depreciable basis of the facility. Preliminary activities include:
- planning or designing;
- securing financing;
- obtaining permits;
- conducting surveys;
- environmental and engineering studies;
- clearing a site;
- test drilling of a geothermal deposit;
- test drilling to determine soil condition;
- excavation to change the contour of the land (as distinguished from excavation for footings and foundations); and
- removal of existing turbines and towers.
Under the safe harbor method, the IRS stated that construction will be deemed as having begun if a taxpayer pays or incurs 5% or more of the total cost of the facility before January 1, 2014 and makes continuous efforts to advance toward completion of the facility. All costs included in the depreciable basis of the facility are taken into account to determine whether the safe harbor test has been met.
If you or your business are planning on expanding to take advantage of these credits, contact your Marcum Tax Advisor.