Notice 2013-29 [PDF 29 KB] provides two methods that a taxpayer may use to establish that construction has begun:
- A taxpayer may establish the beginning of construction when “physical work of a significant nature” as described in today’s notice is started.
- A taxpayer may establish the beginning of construction by meeting the safe harbor rule provided in Notice 2013-29.
While a taxpayer may satisfy both methods, the IRS notice clarifies that a taxpayer need only satisfy one method to establish that construction of a facility has begun for the purpose of qualifying for the PTC or ITC.
A taxpayer can claim a PTC with respect to electricity produced at a “qualified facility” within the meaning of section 45(d). If the taxpayer makes an election under section 48 (a)(5), the taxpayer may instead claim an ITC with respect to that facility.
Previously, to be a qualified facility, a facility had to be placed in service before January 1, 2014—except for qualified wind facilities, which had to be placed in service before January 1, 2013.
A provision of the American Taxpayer Relief Act of 2012 (enacted January 2, 2013) modified:
- Section 45 by extending the PTC for wind facilities through 2013
- The definition of qualified facility by replacing the requirement to place a facility in service before January 1, 2014, with the requirement to begin construction of a facility before January 1, 2014
For purposes of sections 45(d) and 48(a)(5), qualified 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.
The IRS notice in general explains that:
- Construction of a qualified facility begins when physical work of a significant nature begins.
- Work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in the taxpayer’s trade or business (or for the taxpayer’s production of income) is taken into account in determining whether construction has begun.
- Whether a taxpayer has begun construction of a facility before January 1, 2014, will depend on the relevant facts and circumstances.
- 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 as determined under Notice 2013-29.
The safe harbor provided under Notice 2013-29 provides that construction of a facility will be considered as having begun before January 1, 2014, if:
- The taxpayer pays or incurs—within the meaning of Reg. section 1.461-1(a)(1) and (2)—5% or more of the total cost of the facility before January 1, 2014; and
- Subsequently, the taxpayer makes continuous efforts to advance towards completion of the facility (as determined under Notice 2013-29)
The IRS notice provides examples illustrating the safe harbor rules.