The Internal Revenue Service (IRS) said May 5 that developers can take four years to complete a new wind project or other renewable power project and still qualify for federal tax credits without having to prove that the construction work was continuous.
“For example, if construction of a new wind farm started in 2013, then the project must be completed by the end of 2017,” Chadbourne & Parke Law Partner Keith Martin in a May 5 analysis of the development.
The IRS made the statement in the first of two new notices (Notice 2016-31) expected after Congress extended the deadlines to start construction of new renewable energy projects to qualify for tax credits.
A second notice is expected later and will focus on solar issues.
The first notice is focused mainly on wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects. Developers of such projects must have the projects under construction by December 2016 to qualify for full tax credits, Martin said.
Wind developers who start construction of their projects in any of the next three years after 2016 can qualify for tax credits at reduced levels. The levels are 80% for wind farms starting construction in 2017, 60% in 2018 and 40% in 2019.
There is no phase down of tax credits for geothermal, biomass, landfill gas, incremental hydro or ocean energy projects. They must be under construction by December 2016 or they will not qualify for any tax credits, with one exception.
Geothermal projects qualify for a permanent 10% investment tax credit no matter when work on the project is started, Martin said.
There are a couple of ways to start construction of a project, the attorney said.
One is by starting physical work of a significant nature. There is no fixed minimum quantity or dollar amount of work required to be considered “significant.”
“The new notice gives examples of tasks that are considered significant at different types of projects: Wind farms, hydropower facilities, biomass and trash facilities and geothermal projects,” Martin said.
The other way to start construction is by “incurring” at least 5% of the eligible project cost by the deadline. Costs are not incurred merely by spending money. They only count once equipment or services are delivered, with one exception. A developer who pays for equipment at year end and takes delivery within 3 1/2 months after the payment can count the payment as incurred on the payment date. Delivery can be at the factory.
“It is not enough merely to start construction,” Martin said. “here must also be continuous work on the project after construction starts. Until now, the IRS has not made developers prove continuous work as long as the project is completed within two years after the construction-start deadline,” Martin said.
New notice takes different approach
Under standards explained in the new notice, “Counsel will have to determine when construction of a project started,” Martin said.
“That sets a four-year clock running starting at the end of the year in which construction started,” Martin said. “Thus, for example, if construction started in 2013, then the project must be completed by December 2017 or else the developer will have to prove continuous work,” Martin said.
Projects that were under construction on account of significant physical work and then run past the four-year mark to be completed must prove “continuous construction.” This may be impossible to do for many projects, Martin said.
Projects that were under construction on account of the 5% test and then run past the four-year mark must prove continuous efforts. This is easier to do because development-type tasks qualify as part of the continuous efforts.
The IRS repeated in the new notice that “preliminary activities” do not qualify as significant physical work. Examples of preliminary activities are securing financing, obtaining permits or doing test drilling at a geothermal site.