Update: US clarifies PTC eligibility

The US tax authority has further clarified rules for wind projects to be eligible for federal tax credits, a move industry analysts say will ease uncertainty and enable those stalled to advance.

To qualify for the production tax credit (PTC) or investment tax credit (ITC), a requirement was for a project to “start construction” before the end of 2013. That is when both incentives expired.

For start of construction, the wind industry had sought further clarification regarding two issues. First, the level of project physical work required for PTC eligibility, if the asset owner opted not to have met the 5% safe harbor threshold.

The IRS last year provided several examples of such physical work of a significant nature” including one in which 20% of a wind turbine foundation was finished. In the minds of some project owners, this appeared to set a 20% bar for them to meet for the PTC.

The new IRS notice dismisses that concern, noting the example was not “intended to indicate” that there is a 20% threshold or minimum level of work needed to meet the “Physical Work Test.”   

“Assuming 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,” the IRS says in its notice.

The IRS directs project owners to the earlier listed examples and notes, “Beginning work on any of the activities described above will constitute physical work of a significant nature.”

“While the physical work test may not redefine the standards or change the rules or lower the bar, it clarifies the rules,” says Jeff Davis, a partner at law firm Mayer Brown."There was a lot of uncertainty in the industry about how it was supposed to be applied.”

“It will break a logjam and allow projects to go forward,” he adds, adding that some equity investors and other lenders had withheld support for some projects to await IRS clarification.

A developer in Texas tells Recharge his first 250MW project stage was on ice for this reason.

General Electric executives last month said that uncertainty about the PTC eligibility wording had led the company to delay booking about $1bn in wind turbine orders in the second quarter.

Second, the industry also wanted the IRS to address the transfer of facilities. The IRS had earlier stated that for tax credits’ qualification, it required only that construction of a facility to have begun before the end of last year.  Not that construction to have started by the project owner claiming the credit.

Still, uncertainty remained in the industry regarding what constitutes a facility, Davis says. This included whether certain equipment constituting a facility could be transferred and used in a project, thus qualifying it under the 5% Safe Harbor.

The IRS in its new notice restates that there is “no statutory requirement” the asset owner that places the facility in service also be the taxpayer that begins the construction.

Davis notes that the IRS also clarifies that within a significant limitation on transfers between unrelated parties, a fully or partially developed facility may change hands with losing its eligibility under the Physical Work Test or Safe Harbor for PTC or ITC purposes.

The agency limitation on such transfers deals with a transfer consisting solely of tangible personal property.  

Lastly, the IRS changed the Safe Harbor in the case of a single project comprised of multiple facilities such as turbines.

Davis notes in such cases, if the asset owner paid or incurred at least 3% of the total project cost before 1 January this year, the Safe Harbor may be met with respect to some, but not all, of those individual facilities.

This is if the total “aggregate cost” of the facilities at the time the project is placed in service does not exceed 20 times the amount the owner paid or incurred before 1 January.

The PTC allows project owners to receive tax credits for each kWh of electricity generated by a utility-scale wind farm over its first decade in operation. A qualified project will receive 2.3 cents per kWh, inflation-adjusted.

The ITC allows owners to opt for a one-time tax credit worth 30% of the value of the facility.

The PTC expired last 31 December. The industry remains hopeful that Congress will extend it during a lame duck session after November national elections

(Corrects law firm name to Mayer Brown from Brown Mayer)

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