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IRS Notice Clarifies Begin-Construction Requirement for PTC and Elective ITC

IRS Notice Clarifies Begin-Construction Requirement for PTC and Elective ITC

The IRS has issued two notices this year that provide essential guidance for taxpayers who seek renewable energy tax credits under the Production Tax Credit (PTC) and elections to take the Investment Tax Credit (ITC).  Both of these tax credits were significantly amended by the American Taxpayer Relief Act of 2012 (ARTA).  The primary amendment replaced the in-service requirement with the begin-construction requirement. 


The first notice, Notice 2013-29, provides guidance concerning the safe harbor for the begin-construction requirement.  Under the express statutory language, taxpayers may qualify for the tax credits by beginning construction.  Given the ambiguity of the begin-construction requirement, many taxpayers wanted certainty on whether they would qualify for the tax credits.  So the IRS has established an administrative safe harbor that provides additional certainty. 

Under the begin-construction rule, taxpayers must start “physical work of a significant nature.”  As an alternative, taxpayers may qualify under a safe harbor rule.  Under the safe harbor, taxpayers must (i) “pay or incur” five percent or more of the total cost of a facility before January 1, 2014, and (ii) make “continuous efforts to advance towards completion of the facility.”

Though Notice 2013-29 provided very helpful information, taxpayers requested additional guidance regarding (i) the effect of placing a facility in service, (ii) the “master contract” provision, and (iii) the effect of transferring a facility.  The IRS provided the requested additional guidance in Notice 2013-60. 

Additional Guidance Under Notice 2013-60

Notice 2013-60 confirms the safe harbor option, along with the option of satisfying the safe harbor through a binding written contract.  It also reaffirms the second prong of the safe harbor, which requires continuous efforts to advance the project towards completion.  Whether a taxpayer exerts such continuous efforts will be determined by the facts and circumstances. 

The Notice clarifies that if a facility is placed in service before January 1, 2016, the facility will be considered to satisfy the continuous-construction requirement.  Placing a facility in service will satisfy the requirements of continuous construction as well as continuous efforts.  In essence, placing a facility in service is a safe harbor in itself. 

The Notice also clarifies the master-contract rule.  Under this rule, a taxpayer may satisfy the begin-construction requirement’s physical-work test.  But it also may be used to satisfy the safe harbor.  In other words, for purposes of the safe harbor, a taxpayer may enter into a “master contract,” or a binding written contract for a specific number of components to be manufactured, constructed, or produced to pay or incur the necessary costs (i.e., 5% of qualifying project costs). 

Finally, the Notice explains the effect of transferring a facility, which was not addressed by Notice 2013-29.  As expected, the transfer of a facility normally will not preclude a taxpayer from qualifying for the tax credits.  Based on the statutory language of the PTC (and therefore ITC), the taxpayer who receives the credit need not also be the entity that begins construction.  So a taxpayer may still qualify for tax credits even if a third party satisfied the begin-construction requirement. 

For example, if a third party undertook all activities to satisfy the begin-construction requirement (by physical work or the safe harbor), that third pay may transfer its interest to a taxpayer who takes the tax credits, as long as the taxpayer either (i) owns the facility during the tax-credit period (e.g., 10 years) for purposes of the PTC, or (ii) owns the facility when it is originally placed in service for purposes of the ITC election.  In other words, a developer may satisfy the begin-construction requirement and then transfer the facility to investors.  The investors may take the PTC or ITC, as long as they otherwise qualify for the tax credits (other than the begin-construction requirement). 


By issuing very helpful guidance in Notice 2013-29 and Notice 2013-60, the IRS appears very interested in assisting the renewable energy industry.  These notices should provide much-needed guidance to developers and investors who seek to qualify for the PTC or ITC — whether directly or indirectly.  As always, taxpayers seeking to qualify for the PTC and ITC should consult with their tax attorneys and advisors to ensure their projects satisfy all other tax requirements for taking the PTC and ITC.


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