IRS Attempts to Clear the Air with Additional Guidance on Renewable Energy Tax Credits

On August 8, 2014, the IRS issued Notice 2014-46, which provides guidance on several issues relating to the implementation of recent changes to the renewable electricity production tax credit (PTC) under Section 45 of the Tax Code and the energy investment tax credit (ITC) in lieu of the PTC under Section 48. In particular, the Notice addresses the manner in which taxpayers can satisfy the “physical work” test and the effect of various types of transfers of ownership after the construction of a facility has begun. In addition, the Notice modifies the 5% safe harbor test included in previous notices. In light of the issuance of the Notice, the IRS says it will not issue private letter rulings on the topics addressed in the Notice.


The American Taxpayer Relief Act of 2012 (ATRA) (Pub. L. No. 112-240) amended the PTC/ITC by, among other things, removing the requirement that facilities be “placed in service” by January 1, 2014. Instead, taxpayers need only to have “begun construction” on the facility before January 1, 2014 in order to qualify.

To clarify how taxpayers can demonstrate that they have “begun construction” on a facility, the IRS released Notice 2013-29 in April 2013. Under Notice 2013-29, there are two ways in which taxpayers can establish that construction has begun: (1) showing that significant “physical work” on the facility has occurred; or (2) satisfying a safe harbor provision based on the amount of capital invested in the facility. After releasing Notice 2013-29, the IRS in September 2013 released follow-up guidance, Notice 2013-60, on related issues, including the applicability of master contracts and the effect of transfers of ownership on eligibility for the credits.

Physical Work Test

The first issue addressed in Notice 2014-46 is the “physical work” test. In particular, the Notice attempts to clarify an example in Notice 2013-29 that caused confusion among some taxpayers. Notice 2014-46 states unequivocally that there is not a 20% threshold or minimum amount of work required to satisfy the physical work test. The Notice states that “[a]ssuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.”

Transfers of Ownership

The Notice also clarifies certain issues relating to transfers of ownership. For example, the Notice states that the taxpayer that places a facility in service does not have to be the same taxpayer that begins construction on the facility. A taxpayer may generally transfer a fully or partially developed facility to a different taxpayer without losing the facility’s qualification under the physical work test or the safe harbor. Under this scenario, the work performed by the transferor may be taken into account by the transferee for purposes of the tests.

The Notice also says that if a taxpayer begins construction of a facility in 2013 at one site, but thereafter transfers components of the facility to a different site and places the facility in service, the taxpayer may take into account the work performed or amount paid or incurred before January 1, 2014 at the initial site for purposes of the tests. Transfers solely of tangible personal property to an unrelated transferee will not, however, benefit from this rule.

Relaxed Safe Harbor

Finally, the Notice relaxes the safe harbor rule contained in previous guidance. The general rule remains in place—the taxpayer must incur at least 5% of the total cost of a facility that is a single project comprised of multiple facilities before January 1, 2014. However, if the taxpayer incurs at least 3% of the total cost of the project prior to January 1, 2014, the taxpayer may claim the PTC or ITC on some of the facilities that comprise the project, as long as the total aggregate cost of the individual facilities when the project is placed in service is not more than 20 times the amount the taxpayer incurred before January 1, 2014 (effectively, the 5% test on a subset of facilities). By contrast, if the project is comprised of only one facility, and the taxpayer incurs less than 5% of costs prior to January 1, 2014, no PTC or ITC is allowed.

The Notice is widely expected to free up some projects that were in “wait-and-see” mode pending further clarification from the IRS.


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