In March, the IRS published Notice 2015-25. The rules in the notice will facilitate wind projects raising financing and give projects that had started construction in 2013 but were facing obstacles an additional year to navigate those obstacles.
In the eyes of many tax advisors, the rules in the notice should have flowed naturally from Congress’ extension of the deadline for projects to “start construction” from 2013 to 2014. However, based on the almost three months between the enactment of the legislation in December to the issuance of the notice in March and reports of difficult discussions within the IRS, there appears to have been some wrangling at the IRS as to how to craft the new rules.
In 2012, the 2.3 cent per KwH production tax credit (PTC) lapsed for new wind projects. Congress in early January 2013 enacted an extension with a twist requested by the industry: a change from a “placed in service” deadline to “start of construction.” Therefore, the extension provided that wind projects that started construction before 2014 were eligible for PTCs. Congress provided no gloss on the meaning of “start of construction” nor any deadline for the projects to be completed by. Congress had previously extended the Section 1603 cash grant program for renewables projects that started construction prior to 2012. The industry expected that the IRS would provide PTC guidance similar to the Treasury’s 1603 “start of construction” guidance.
Treasury’s 1603 program’s rules had two paths to starting construction: (i) spending 5 percent of the cost of the project; or (ii) performing significant physical work. The IRS adopted similar rules in Notice 2013-29 for PTCs. However, the IRS in providing start-of-construction rules for PTCs faced an issue that the Treasury had not. The 1603 statutory extension provided deadlines for various types of renewable energy technologies to be in service, even if they started construction prior to 2012, while Congress included no in-service deadline in the PTC extension.
The IRS apparently felt the need to fill this gap with respect to the completion deadline. What the IRS did at first was provide that upon starting construction that the project’s owner must engage in either (i) “continuous efforts” for projects that employed the 5 percent approach or (ii) “continuous work” for projects that employed the significant physical work approach.
Tax equity investors are cautious by nature and these “continuous” standards gave them and their law firms pause. Debates ensued as to how many construction workers needed to be on site each business day and whether the construction crew was permitted to go on holiday between Christmas and New Year’s. Tax equity investors typically demand highly confident tax opinions, and these are not issues readily addressed in such opinions.
Thus, the industry asked the IRS to provide a safe harbor with respect to the “continuous” requirements. The IRS reasoned that if a project that started construction in 2013 was in service by the end of 2015, then the owner must have worked relatively continuously on it. Therefore, in Notice 2013-60 the IRS published a safe harbor that provided that if the project was in service by the end of 2015 it would not be subject to the “continuous” requirement. This 2015 safe harbor was readily addressed in tax opinions and the “continuous” issue was resolved for the time being.
Then, in December, Congress extended the “start of construction” deadline from starting construction prior to 2014 to starting from prior to 2015. The industry was pleased to have the extra year, but the extension raised the question as to how the prior notices that referred to projects that started construction before 2014 would apply to projects that relied on the extension and started during 2014. Four options were available to the IRS:
- Since the notices referred to starting before 2014, projects that started during 2014 would not be subject to the notices. This approach would have led to staunch objections from the industry, criticism from its allies in Congress and, potentially, litigation; the IRS did not give this approach any serious consideration.
- Extend the notices to projects that started in 2014 but leave the “continuous” safe harbor as requiring both vintages of projects to be in service before the end of 2015. Projects that started construction in 2014 would have had to make a mad dash to be in service by the end of this year, and many of them would have been unsuccessful.
- Extend the notices to projects that started in 2015 but extend the “continuous” safe harbor to the end of 2016 only for projects that started construction in 2014 (not 2013). This would have invited developers that previously were of the view they had started construction in 2013 to make the case that they did not do enough in 2013 and actually started construction in 2014. Distinguishing between projects that started in 2014 versus 2013 could have led to an administrative quagmire that the IRS opted to avoid.
- Extend the notices to projects that started in 2014 and extend the “continuous” safe harbor to the end of 2016 for any project that started construction any time before 2015.
The IRS opted for the fourth option, but over the almost three months it spent considering the issue it apparently flirted with the idea of the third option.
From the perspective of the industry, the fourth option has the benefit of providing 2013 start-of-construction projects time to resolve permitting, interconnection and power purchase agreement issues. Expect to see projects completed in 2016 that were started in 2014 but also expect to see projects that were started in 2013 but then ran into hurdles that required additional time to resolve.
Lead image: Wind turbine. Credit: Shutterstock.