IRS Clarifies “Begun Construction” Guidance for Production Tax Credits
The Internal Revenue Service released an updated version of Notice 2013-29 on April 25, 2013, providing some needed clarification to developers seeking to satisfy the “begun construction” in 2013 requirement for their renewable energy facilities. The revised Notice clarifies that, for purposes of satisfying this requirement, work conducted by or payments made to a contractor pursuant to a binding contract includes contracts with liquidated damages clauses, so long as liability is not limited to less than 5 percent of the total contract price.
Notice 2013-29, originally issued by the IRS on April 15, describes the requirements that must be met in order for construction on wind and certain other renewable energy facilities to be considered to have started during 2013, thereby permitting the facility to be potentially eligible for the production tax credit (PTC) under Code Section 45 or the investment tax credit in lieu of the PTC under Code Section 48. Under the Notice, during 2013 there must be either (i) physical work of a significant nature (“Physical Work”), or (ii) the incurrence of at least 5 percent of the costs of the project (“Safe Harbor”) and, in either case, satisfaction of certain continuous construction requirements. Both the Physical Work and the Safe Harbor standards can be satisfied by work done by or payments made to a contractor pursuant to a binding contract. See our earlier client alert available here.
The original version of the Notice was a source of concern in the industry because it appeared to preclude a contract from being considered binding if the agreement contained a liquidated damages clause. The updated Notice clarifies that there is not an outright ban on all contracts that contain a specified limit on damages, explaining that for this purpose, a contractual provision “will not be treated as limiting damages to a specified amount” if the specified damages are not less than 5 percent of the total contract price. The updated Notice also cites Treasury Regulation § 1.168(k)-1(b)(4)(ii)(A)-(D) as a source for additional guidance on what constitutes a binding contract.
The revised Notice follows the standard used for purposes of Treasury’s Cash Grant Program. This change was expected, since it had been reported that the IRS did not intend to deviate from Treasury’s 5 percent liquidated damages standard, and was considering publishing further PTC guidance to clarify this point.
Uncertainty remains, however, about another aspect of the Notice. That is, whether the “master contract” rule is limited to satisfying the Physical Work prong and cannot apply for purposes of satisfying the Safe Harbor. Under this rule, the Physical Work standard can be satisfied with respect to the project of a special purpose affiliate (SPE) even if the work was performed by a contractor pursuant to a master contract with the SPE’s parent, provided that the parent assigned its rights to certain components under the master contract to the SPE pursuant to a binding contract. The Notice does not say that similar principles apply with respect to an SPE satisfying the Safe Harbor standard. It is surprising that the updated Notice did not also clarify this point, because it had also been reported that the IRS intended for the master contract rule to apply for purposes of satisfying either prong, which would be consistent with the approach taken by Treasury for purposes of the Cash Grant Program. See our blog post available here.
The IRS has not yet addressed questions regarding transfers of projects prior to completion. Under the Cash Grant Program, projects could be transferred and retain their grandfathered status. While we understand that the IRS generally intended to follow the Cash Grant Program, specific guidance in this area is needed.
We will provide further updates as additional guidance becomes available.
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