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Effect of TIPA on when qualified facility construction begins for purposes of energy credit

Notice 2015-25, 2015-13 IRB

In a Notice, IRS has updated previous guidance on establishing the beginning of a facility’s construction, to reflect the one-year extension by the Tax Increase Prevention Act of 2014 (TIPA, P.L. 113-295, 12/19/2014) of when construction must begin on a qualified facility to be eligible for the Code Sec. 45 renewable electricity production credit.

Background. Under Code Sec. 45, a credit for electricity produced from certain renewable resources is available for such electricity produced at a qualified facility during the ten-year period beginning on the date the facility was originally placed in service. The credit, i.e., the renewable electricity production credit, is allowed for electricity produced by taxpayers from: (1) wind, (2) closed-loop biomass, (3) open-loop biomass, (4) geothermal energy, (5) municipal solid waste, (6) marine and hydrokinetic renewables (e.g., waves and tides), (7) qualified hydropower production, (8) small irrigation power, and (9) solar power.

In addition, taxpayers can elect to have qualified property which is part of certain qualified facilities treated as energy property eligible for a 30% investment credit under Code Sec. 48. These facilities are wind facilities and the other Code Sec. 45(d) facilities (other than refined or Indian coal facilities or solar facilities) for which no Code Sec. 45 credit has been allowed.

IRS has issued three notices (Notice 2013-29, 2013-20 IRB 1085 (see Weekly Alert ¶  45  04/18/2013), Notice 2013-60, 2013-2 CB 431 (see Weekly Alert ¶  27  09/26/2013), and Notice 2014-46, 2014-36 IRB 520 (see Weekly Alert ¶  33  08/14/2014 )—collectively “the prior IRS notices”—to clarify when construction has begun on a qualified facility.

The prior IRS notices provide that a taxpayer may establish the beginning of construction by either (1) starting physical work of a significant nature (Physical Work Test); or (2) paying or incurring 5% or more of the total cost of facility (Safe Harbor). Both methods require that a taxpayer make continuous progress towards completion once construction has begun (as set out in Notice 2013-29, Sec. 4.06 (Continuous Construction Test) and Notice 2013-29, Sec. 5.02 (Continuous Efforts Test), respectively). Notice 2013-60, Sec. 3.02, further provides that if a facility is placed in service before Jan. 1, 2016, the facility will be considered to satisfy the Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the Safe Harbor).

Prior to TIPA, Code Sec. 45(d) and Code Sec. 48(a)(5) required that construction of a qualified facility begin before Jan. 1, 2014 for the facility to be eligible for the renewable electricity production tax credit or the energy investment tax credit. Based on Code Sec. 45 and Code Sec. 48 as in effect before the enactment of TIPA, the prior IRS notices provided guidance to determine whether construction had begun on a qualified facility prior to Jan. 1, 2014.

On Dec. 19, 2014, TIPA extended by one year the date by which construction of a qualified facility (as described in Code Sec. 45(d)) must begin.

Effect of TIPA. As a result of TIPA, a taxpayer will be eligible for the renewable electricity production tax credit under Code Sec. 45, or the energy investment tax credit under Code Sec. 48 in lieu of the renewable electricity production tax credit, with respect to such a facility if construction of such facility began before Jan. 1, 2015.

Because TIPA extended the date by which construction of a qualified facility must begin to Jan. 1, 2015, Notice 2015-25 updates all references to “January 1, 2014” in the prior IRS notices as they relate to the date by which construction must begin on a facility and replaces them with “January 1, 2015.” Except as otherwise specified in Notice 2015-25, the guidance provided in the prior IRS notices continues to apply. (Notice 2015-25, Sec. 2)

Continuous Construction/Continuous Efforts Tests. Consistent with the one-year extension of the beginning of construction date, Notice 2015-25 extends the placed in service date provided in Notice 2013-60, Sec. 3.02, to Jan. 1, 2017. Thus, if a taxpayer begins construction on a facility prior to Jan. 1, 2015, and places the facility in service before Jan. 1, 2017, the facility will be considered to satisfy the Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the Safe Harbor), regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility after Dec. 31, 2014 and before Jan. 1, 2017. (Notice 2015-25, Sec. 3)

No private letter rulings. IRS will not issue private letter rulings to taxpayers regarding the application of Notice 2015-25 or the application of the beginning of construction requirement under Code Sec. 45(d) and Code Sec. 48(a)(5). (Notice 2015-25, Sec. 1)

References: For the renewable electricity production tax credit, see FTC 2d/FIN ¶  L-17751  et seq; United States Tax Reporter ¶  454; TaxDesk ¶  384,054; TG ¶  15352.

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