More Construction Start Issues
More construction start issues are likely to be addressed by the Internal Revenue Service this fall.
Wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects in the United States must be under construction by year end to qualify for federal tax credits. The IRS issued guidance in April about what it means to start construction, but many people still have questions.
The questions are mainly in two areas.
First, once a project is considered under construction, the remaining work must be continuous. It is not always clear what continuous means. For example, is it continuous where some work is done, but then stops until the local utility can catch up on building substation improvements or network upgrades that must be completed before the project can connect to the grid?
Second, it is not clear in what circumstances someone who buys a project, after this year, on which another developer started construction in 2013 can claim tax credits.
The IRS branch for these issues has been given a “tentative green light” to issue additional guidance. The guidance is “not that far along” yet, but, if issued, will come out in the fall.
On continuous work, there was talk earlier about releasing examples showing how the IRS views different fact patterns, but the agency has moved away from examples and is now focused on adding more detail to the guidance it already published.
On transfer issues, the US Treasury Department took the position under the section 1603 cash grant program that any project on which significant physical work started in time at the site or factory would remain “grandfathered” no matter how many times the project changes hands before completion. However, it was concerned about developers who started construction of projects by stockpiling wind turbines or solar panels that they then sprinkled among multiple projects in increments that amount to more than 5% of each project’s cost. The Treasury did not want to encourage trafficking in stockpiled equipment as a way of conferring grandfather rights on future projects, so it required the original developer to retain more than a 20% interest in any project to which it contributes such equipment, unless the later sale of the project is a sale of a real project and not a project company that is mere wrapping paper for the stockpiled equipment. Tax equity transactions are not a problem.
The new guidance will probably allow retention of grandfather rights after most transfers.
The government believes that the requirement that there must be “continuous efforts” after this year on projects that start construction by incurring costs will protect against bare trafficking in stockpiled equipment.