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IRS clarifies beginning of construction to qualify for PTC

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The Internal Revenue Service has issued a notice helping clarify what is the beginning of construction in order for a renewable energy project to qualify for production tax credits or investment tax credits.

In 2013, Congress passed the American Taxpayer Relief Act of 2012, which extended PTCs for an additional year to renewable energy projects including certain hydro and marine hydrokinetic energy projects. It also made eligible those projects that begin construction by Jan. 1, 2014, rather than being placed in service by that date, enabling many more projects to qualify.

To qualify for tax credits, developers may show that they started construction in time either by beginning physical construction "of a significant nature," called the physical work test, or by spending at least 5 percent of the total costs of the eligible project, called the 5 percent safe harbor. To qualify, the developer also must make continuous progress toward completion of the project.

In its Notice 2014-46 issued in August, the IRS clarified how much physical work is required to qualify under the physical work test. It said there is no set minimum amount of work required as long as the work relates to items that are integral to the activity performed by the qualifying facility.

"This test focuses on the nature of the work performed, not the amount or cost," the IRS said, citing examples of excavating for foundations, setting anchor bolts, pouring concrete pads, physical work on a custom-designed transformer, or construction of roads that are integral to the facility.

The notice also clarifies that a qualifying project may change owners without losing its eligibility for tax credits assuming the project already has passed the physical work test or the 5 percent safe harbor. It says a developer that intended to develop a project at a certain site may relocate the project to a new site and still qualify.

The notice also modifies the 5 percent safe harbor for projects that can be separated into individual facilities such as a wind farm or a marine hydrokinetic array that can have multiple turbines. It said if the amount the developer spends on such a project before Jan. 1, 2014, is less than 5 percent but at least 3 percent of the project cost, then tax credits may be obtained for some, but not all, of the individual facilities comprising the project. The taxpayer may claim tax credits on any number of individual facilities as long as the total aggregate cost of the individual facilities placed in service is not greater than 20 times the amount the developer paid before Jan. 1, 2014.

The Internal Revenue Service determines whether to grant production tax credits or investment tax credits after the Federal Energy Regulatory Commission certifies the project's hydropower production.

The National Hydropower Association has been lobbying the Treasury Department and Congress to win changes in the IRS guidance that would make more projects eligible for tax credits. In addition, NHA seeks legislation to extend the tax credits.

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