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April 25, 2013
Qualifying for the production tax credit

The Internal Revenue Service (IRS) has issued guidance on when a renewable energy facility qualifies for the production tax credit (PTC) extended by the American Taxpayer Relief Act of 2012 (ATRA). 

Before ATRA, a facility qualified for the PTC once it was placed into service, i.e., stated generating electricity.  ATRA substantially modified that requirement by allowing the PTC to take effect for facilities for which construction begins before January 1, 2014. 

PTC-qualifying facilities include wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, hydropower facilities, and marine and hydrokinetic facilities.

In its guidance, the IRS provides two methods a taxpayer may use to establish that construction of a qualified facility has begun.

  1. Physical work
  2. Safe harbor

Physical work

Construction of a qualified facility begins when “physical work of a significant nature” begins.  The work may be either on-site or off-site and may be performed by either the taxpayer or another person under a binding written contract.  For example, in the case of a wind facility, on-site physical work of a significant nature begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of concrete pads for the foundation.

If the facility’s wind turbines and tower units are to be assembled on-site from components manufactured off-site by a person other than the taxpayer and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location, but only if the manufacturer’s work is done pursuant to a binding written contract and these components are not held in the manufacturer’s inventory.  Further, the IRS states that construction has begun only if there is a “continuous program of construction.”

Starting construction on roads that are integral to the facility constitutes physical work of a significant nature.  However, access roads and roads used primarily for employee or visitor vehicles are not considered integral to the facility and would not qualify.  Other nonintegral structures include fencing and buildings.

In addition, physical work of a significant nature does not include preliminary activities such as planning or designing, securing financing, exploring, research, obtaining permits, licensing, conducting surveys, environmental and engineering studies, clearing a site, test drilling of a geothermal deposit, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations).

Certain construction disruptions beyond the taxpayer’s control (e.g., natural disasters and labor stoppages) will not lead the IRS to conclude that a program of continuous construction has not been maintained.

Safe harbor

Construction of a facility will be considered as having begun before January 1, 2014, if a taxpayer pays or incurs 5 percent or more of the total cost of the facility.  Also, under the safe harbor method, facts and circumstances indicating continuous efforts to advance toward completion of the facility include paying or incurring additional amounts included in the total cost of the facility; entering into binding written contracts for components or future work on construction of the facility; and obtaining necessary permits.

Click here for IRS’s guidance, Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit.