The IRS has released additional guidance (Notice 2014-46) on the “beginning of construction” requirement for the renewable energy production tax credit under Code Section 45 (PTC) and energy investment tax credit under Code Section 48 (ITC). The notice clarifies the application of the Physical Work Test and the effect that certain transfers of a facility after construction has begun will have on a taxpayer’s ability to qualify for the energy tax credits. The energy tax credits are available to a qualifying facility if construction of the facility began before January 1, 2014.
Notice 2014-46 clarifies issues left unresolved by the earlier guidance (IRS Notices 2013-29 and 2013-60). The earlier guidance provides two methods for establishing the beginning of construction of a qualified facility – by starting physical work of a significant nature (“Physical Work Test”) or satisfying a safe harbor (“Safe Harbor”).
1. Physical Work Test. Notice 2014-46 explains that the Physical Work Test focuses on the nature of the work performed, not the amount or cost of the work. To eliminate ambiguity created by an example in Notice 2013-29 that had led some to understand a minimum amount of work had to be completed to satisfy this test, the IRS clarified that the example was not so intended and that there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test
2. Transfers of a Facility
- General. Notice 2014-46 reiterates that there is no statutory requirement that the taxpayer that places a facility in service also be the taxpayer that begins the construction. Therefore, with one exception (noted below), a fully or partially developed facility may be transferred without losing its qualification under the Physical Work Test or the Safe Harbor.
- Relocation of a Facility. A taxpayer may begin construction of a facility with the intent to develop it at a certain site, but thereafter transfer equipment and other components of the facility to a different site, complete its development and place it in service. In that case, work performed and the amount paid or incurred before January 1, 2014 may be taken into account for purposes of determining whether the facility satisfies the Physical Work Test or the Safe Harbor.
- Disqualifying Transfer of a Facility. A transfer consisting solely of tangible personal property (including contractual rights to such property under a binding written contract) to a transferee not related to the transferor will not entitle the transferee to take into account any work performed or any amount paid or incurred by the transferor with respect to such property for purposes of the Physical Work Test or the Safe Harbor.
3. Single Project with Multiple Facilities. Notice 2014-46 provides limited relief to a taxpayer that pays or incurs by January 1, 2014 less than 5% of the total cost of a facility that is part of a single project comprised of multiple facilities. In that case, although the Safe Harbor is not fully satisfied, if the taxpayer has paid or incurred at least 3% of the total cost of such a facility before January 1, 2014, the Safe Harbor may be satisfied with respect to some, but not all of the individual facilities comprising the project. In this situation, the taxpayer may claim the PTC or the ITC on any number of individual facilities as long as the total aggregate cost of those individual facilities at the time the project is placed in services does not exceed 20-times the amount the taxpayer paid or incurred before January 1, 2014 and the “continuous efforts test” is satisfied. Note that this relief is not available to a project that consists of a single facility.