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Low Cost Strategies for Meeting the End of the Year "Begin Construction" Requirement for the 30% Investment Tax Credit

October 21, 2013

Tribes can benefit from valuable thirty percent investment tax credits available for their renewable energy projects. However, to receive benefits from tax credits associated with many renewable technologies, tribes need to take key steps now. Specifically, tribes 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.

Godfrey & Kahn's Environment & Energy Strategies Team previously sent tribal clients an alert on the thirty percent investment tax credit available for renewable energy projects. See attachment. A variety of renewable energy projects qualify for the tax credit. Qualifying facilities include: solar electric, solar thermal, fuel-cell, wind, biomass, geothermal, landfill gas, waste to energy, and hydropower.

In the previous update, we explained how tribes can partner with taxable entities to monetize the value of the tax credit. Tribes cannot take advantage of the credit themselves because they are not taxable entities. However, by partnering with taxable entities, tribes can potentially receive very significant value from these tax credits and other tax incentives.

The purpose of this update is to alert tribes to a key tax credit deadline for certain renewable energy technologies. These technologies include wind, biomass, biogas, landfill gas and waste-to-energy. Tribes interested in taking advantage of the tax credit for these technologies need to comply with the IRS requirement that they "begin construction" by January 1, 2014.

Tribes considering these renewable energy projects should not be discouraged by the "begin construction" provision. Our team is working with several tribes and other entities at all stages of development to find creative ways to meet this requirement and protect their tax credit eligibility. Tribes that have previously completed D.O.E. or B.I.A. funded feasibility studies are especially well positioned to take advantage of the tax credit, since they already have at least basic plans for their projects.

Tribes must take certain steps before the end of the year. However, major or costly construction may not be necessary. Recent IRS guidance states that the IRS will allow applicants to satisfy the "begin construction" requirement by: 1) commencing significant physical construction, or 2) incurring five percent of total project costs before the end of the year.

Tribes that do not wish to spend five 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 five 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 IRS will not count construction of transmission lines, buildings, and access roads toward the physical construction requirement. The IRS 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 five percent expenditure is very important. Tribes need to make sure their planned construction will not be considered "preliminary activities." Tribes 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.
By taking the necessary action to preserve eligibility for the 30 percent investment tax credit, a tribe can protect the availability of substantial financial benefits for its project. There are multiple strategies to meet the "begin construction" requirement that preserve tax credit eligibility with minimal upfront costs. These strategies are available to tribes that are still in the early stages of project development.

Other future activities will need to be taken to preserve tax credit eligibility (e.g. continuing construction activities or satisfaction of a safe harbor by completing project construction by December 31, 2015). However, the "begin construction" deadline, if not satisfied, will disqualify projects at the end of this year - permanently preventing Tribes from taking advantage of the important tax benefits afforded by the 30 percent Investment Tax Credit.

The next two months are critical. For more information on whether your tribe's renewable energy project could satisfy the "begin construction" requirement and therefore potentially qualify for the valuable thirty percent tax credit, please contact John Clancy, Godfrey & Kahn's Environment & Energy Strategies Practice Group leader, at 414.287.9256 or jclancy@gklaw.com, or Brian Pierson, Godfrey & Kahn's Indian Nations Team Leader at 414.287.9456 or bpierson@gklaw.com.

Read previous Tribal Energy Alert here.

TRIBAL ENERGY INDEPENDENCE SERIES
This e-mail is part of a series that highlights tools available to help tribes to achieve energy independence. In particular, these e-mails focus on strategies to assist tribes in developing renewable and other energy resources, and implementing energy efficiency projects, so that they can work toward energy independence in a manner consistent with their environmental, economic and other goals. If any of these issues are of interest, please contact Godfrey & Kahn to discuss how your Tribe may be able to use these strategies.

 

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