Beginning construction without needing to break ground: Low cost strategies for investment tax credit for renewable energy technologiesOctober 15, 2013
Individuals and entities that are constructing or contemplating construction of renewable energy projects can benefit from valuable 30 percent investment tax credits available for their renewable energy projects. However, to receive benefits from tax credits associated with many renewable technologies, interested individuals and entities need to take key steps now. Specifically, they need to take steps to ensure that they are able to satisfy a critical "begin construction" requirement that must be met by the end of this year.
A variety of renewable energy projects qualify for the 30 percent tax credit. Qualifying facilities include: solar electric, solar thermal, fuel-cell, wind, biomass, geothermal, landfill gas, waste to energy, and hydropower.
Both taxable and non-taxable entities can take advantage of the tax credit. Non-taxable entities can partner with taxable entities to monetize the value of the tax credit. By partnering with taxable entities, non-taxable entities can potentially receive very significant value from these tax credits.
The purpose of this update is to alert those who are interested of the key tax credit deadline applicable to certain renewable energy projects. These technologies include wind, biomass, biogas, landfill gas and waste-to-energy (early deadline technologies). Individuals and entities interested in taking advantage of the tax credit for these early deadline technologies need to comply with the I.R.S. requirement that they "begin construction" before January 1, 2014.
Those with projects with these early deadline technologies still in the early stages of development need not be discouraged by the "begin construction" provision to meet the January 1 date. Our team is working with several entities at all stages of development to find creative ways to meet this requirement and protect their tax credit eligibility.
Interested parties must take certain steps before the end of the year. However, major or costly construction may not be necessary. Recent I.R.S. guidance states that the I.R.S. will allow applicants to satisfy the "begin construction" requirement by: 1) completing significant physical construction, or 2) incurring 5 percent of total project costs before the end of the year.
Individuals and entities that do not wish to spend 5 percent of their project costs can potentially meet the significant physical construction requirement through either on-site or off-site activity. Off-site construction is an important compliance option. It may be possible to perform off-site construction for significantly less than 5 percent of the total project cost. In addition, constructing facility parts or materials off-site may avoid potential complications with permitting and environmental impact laws.
Generally, construction of any facility component that is integral to electricity generation will count toward the physical construction requirement. However, the I.R.S. will not count construction of transmission lines, buildings, and access roads toward the physical construction requirement. The I.R.S. also will not take into account an off-site vendor's inventory. To count toward the physical construction requirement an off-site vendor must: 1) produce parts or materials for a particular project, 2) pursuant to a contract enforceable under local law; all of which must be accomplished before the January 1, 2014 deadline.
Although satisfying the "begin construction" requirement need not be onerous, determining compliance can be somewhat tricky. Understanding what constitutes significant physical construction and which costs can count toward the 5 percent expenditure is very important. Those who are interested need to make sure their planned construction will not be considered "preliminary activities." Interested individuals and entities also need to ensure that their expenditures are costs that would normally be included in determining the depreciable basis of the facility's eligible equipment.
Taking the necessary action to preserve the opportunity to utilize the 30 percent investment tax credit for these early deadline technologies can be a substantial financial benefit for these projects. Some of these new strategies to meet this requirement provide opportunity to accomplish this important financial goal with minimal upfront cost at the early stages of project development. While there are other future activities needed to qualify for the full tax credit (e.g. continuing construction activities with essentially a safe harbor of completion of construction by December 31, 2015), the failure to meet the commencement of construction deadline will disqualify the project from the important tax benefits afforded by the 30 percent Investment Tax Credit.
The next two months are critical. For more information on whether a renewable energy project containing early deadline technology could satisfy the "begin construction" requirement and therefore potentially qualify for the valuable 30 percent tax credit, please contact a member of our Renewable Energy & Energy Efficiency Practice Group or a member of our Tax & Employee Benefits and Corporate Practice Groups.