Renewable Energy Projects: Maximizing
Production and Investment Tax Credits
After Newly Released IRS Guidance Navigating the Construction, Master Contracts and Transfers of Facilities Requirements
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
WEDNESDAY, OCTOBER 30, 2013
Presenting a live 90-minute webinar with interactive Q&A
Gregory F. Jenner, Partner, Stoel Rives, Washington, D.C.
Kevin T. Pearson, Partner, Stoel Rives, Portland, Ore.
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-888-601-3873 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can address
the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the word balloon button to send
FOR LIVE EVENT ONLY
Renewable Energy Projects October 30, 2013
4
Presented by
Gregory F. Jenner
Kevin T. Pearson
October 30, 2013
Renewable Energy Projects: Maximizing Production and Investment Tax Credits After Newly Released IRS Guidance
Renewable Energy Projects October 30, 2013
5
Overview of Available Incentives
• Production Tax Credit (“PTC”)
• Investment Tax Credit (“ITC”)
• Section 1603 Grant
• Accelerated Depreciation (“MACRS”)
• Bonus Depreciation
Renewable Energy Projects October 30, 2013
6
Production Tax Credit
• Based on amount of electricity
– Produced from qualified resource, and
– Sold to unrelated person
– During each year of credit period
• Credit rate adjusted for inflation each year –
2.3¢ per kilowatt hour for 2013
• Credit Period – 10-year period beginning
with “placed-in-service” date
Renewable Energy Projects October 30, 2013
7
Production Tax Credit
• Qualified resources include:
– Wind
– Geothermal
– Open- and closed-loop biomass
– Hydropower, marine and hydrokinetic
– Others (small irrigation, landfill gas, trash,
refined coal, Indian coal)
• Does not include solar
Renewable Energy Projects October 30, 2013
8
Production Tax Credit
• Facility must be owned by taxpayer
claiming PTC
• Electricity must be produced by taxpayer
claiming PTC (prevents leasing structures)
• Facility must be located in the US
• Construction must begin on the facility
before 2014
Renewable Energy Projects October 30, 2013
9
Investment Tax Credit
• Based on cost of qualifying equipment
– Generally 30% of tax basis (reduced to 10%
after 2016)
– Credit is claimed entirely in the year in which
property is placed in service
• Property generally must be placed in
service by taxpayer claiming ITC
• Property must be “energy property”
Renewable Energy Projects October 30, 2013
10
Investment Tax Credit
• “Energy property” includes
– Solar
– Geothermal
– Fuel cells
– Certain PTC-eligible facilities for which an
election is made to claim ITC rather than PTC
• Property must be eligible for depreciation
• Does not apply to transmission property
Renewable Energy Projects October 30, 2013
11
Investment Tax Credit
• PTC-eligible property must be tangible
personal property or other tangible property
(not building or structural component) used
as integral part of facility
• Basis of property reduced by 50% of ITC
• Recapture if property or interest in property
sold or ceases to be energy property within
5 years of “placed in service” date
Renewable Energy Projects October 30, 2013
12
Section 1603 Grant
• Operates similarly to ITC, except cash
grant rather than tax credit
• Eligibility requirements similar to ITC
• Property must be: – Placed in service in 2009, 2010 or 2011, or
– Construction must begin in 2009, 2010 or 2011, and
property must be placed in service by “credit
termination date”
Renewable Energy Projects October 30, 2013
13
Section 1603 Grant
• Application requirements
• Recapture rules similar to ITC
• Treasury Dept. Guidance re “beginning
construction” and other issues
• Forget (mostly) everything you know about
Treasury Dept. Guidance, particularly
regarding valuation
Renewable Energy Projects October 30, 2013
14
“Placed in Service” vs.
“Beginning of Construction” • Prior to 2012 “Fiscal Cliff” bill, eligibility for PTC
and ITC was based on “placed-in-service”
– Large wind projects – before 1/1/13
– Biomass, geothermal (PTC), landfill gas, trash,
hydropower – before 1/1/14
– Solar, geothermal (ITC), fuel cells, microturbines,
combined heat & power, small wind – before 1/1/17
• Fiscal cliff legislation changed requirement
for everything except third category (solar)
Renewable Energy Projects October 30, 2013
15
“Beginning of Construction”
• To qualify for PTC or ITC (by election),
construction must begin before January 1,
2014
• IRS guidance
– Notice 2013-29 – April 15
– Notice 2013-60 – September 20
• Similar, but not identical to, prior Treasury
Dept. guidance for Section 1603 Grant
Renewable Energy Projects October 30, 2013
16
“Beginning of Construction”
• Two methods for beginning construction:
– Physical work of a significant nature
– 5% safe harbor
• These are alternative methods – do not
need to satisfy both
Renewable Energy Projects October 30, 2013
17
“Facility” and “Project”
• Facility - all components that are functionally
interdependent (e.g., each wind turbine)
• Project – Multiple facilities operated as part of
a single project – factors include: – Facilities owned by single entity
– Constructed on contiguous pieces of land;
– Described in common PPA or other agreements;
– Common intertie and substation;
– Described in common permits
– Single construction agreement and loan agreement
Renewable Energy Projects October 30, 2013
18
Physical Work
• May be on-site or off-site
• Must constitute “physical work of a significant
nature”
– Includes excavating for foundations, setting
anchor bolts, pouring concrete pads,
– Does not include “preliminary activities” such as
planning, designing, financing, exploring,
researching, licensing, surveys, engineering, etc.
• Facts and circumstances test
Renewable Energy Projects October 30, 2013
19
Physical Work (cont.)
• May be performed by taxpayer or by another
person under a binding written contract
• “Binding written contract” means
– Enforceable against taxpayer under state law
– Does not limit damages to less than 5% of contract price
• Contract must exist before work begins
• Does not include work to produce to inventory
• Privity issue – subcontractors?
Renewable Energy Projects October 30, 2013
20
Physical Work (cont.)
• “Master contract” rule – Master contract for components to be manufactured or
produced for taxpayer
– Assignment for components to “affiliated” special
purpose vehicle
• If mfg. produces components for several
facilities, “reasonable method” must be
used to associate components with facilities
Renewable Energy Projects October 30, 2013
21
Physical Work (cont.)
• Once physical work has begun, must maintain
continuous program of construction: – Facts and circumstances test
– Certain disruptions beyond taxpayer’s control permitted • Weather and natural disasters,
• Licensing and permitting delays,
• Labor stoppages or supply shortages
• Inability to obtain specialized equipment of limited availability,
• Endangered species,
• Financing delays of less than 6 months,
• Presumption if placed in service before 2016
Renewable Energy Projects October 30, 2013
22
5% Safe Harbor
• Must “pay or incur” 5% or more of total cost of
facility and make continuous efforts toward
completion thereafter
• “Pay or incur” depends on method of
accounting – “Pay” – cash method
– “Incur” – accrual method
• Total cost of facility includes depreciable basis
of facility (not land or non-integral property)
Renewable Energy Projects October 30, 2013
23
5% Safe Harbor (cont.)
• Special issue for accrual taxpayers – must
have “economic performance” – Generally occurs when property or services provided
– Special 3½ month rule
– Note - use of rule is “method of accounting”
• Property is considered “provided” when
delivered or when title is transferred
• Many taxpayers foregoing safe harbor
Renewable Energy Projects October 30, 2013
24
5% Safe Harbor (cont.)
• Look-through rule
– For property that is manufactured for taxpayer by another
person under binding written contract, costs incurred by
the other person may be taken into account
– Mfg must be able to associate costs with purchased
products – very difficult
• Master contract rule applies to safe harbor
• Cost overruns – may be able to treat individual
facilities separately to preserve 5% safe harbor
Renewable Energy Projects October 30, 2013
25
Safe Harbor (cont.)
• Continuous efforts
– Similar to physical work requirement (continuous
construction)
– Presumption if in service before 2016
– Otherwise, question of fact
• Includes paying additional costs, entering into
contracts, obtaining permits, etc.
• Certain disruptions beyond taxpayer’s
control permitted (see above)
Renewable Energy Projects October 30, 2013
26
Transfers of Facilities
• Taxpayer that begins construction need not
be the same taxpayer who places project in
service
• Any taxpayer that owns facility during PTC
period can claim PTC
• Any taxpayer that owns facility on placed in
service date can claim ITC
• Caution required re transfers
Renewable Energy Projects October 30, 2013
27
Supply Contract Drafting Issues
• Components vs. completed facilities
• Partial performance (Caltex)
• Delivery or title transfer
• 3½ month rule issues
• Preserving argument that mfg.’s physical
work can be taken into account – Not in inventory
– No production before contract executed
Renewable Energy Projects October 30, 2013
28
Supply Contract Drafting Issues
(cont.)
• Who is party to the agreement
– Developer?
– Special purpose entity?
• Identifying purchased components with
specific property
– May not be an issue if placed in service
before 2016
– May be an issue if placed in service later
Renewable Energy Projects October 30, 2013
29
Open Questions
• What if taxpayer does not know identity
and nature of project at time costs
incurred?
• What will tax equity require?
– Physical work and 5%?
– Earmarking components? When?
• Other open issues
Renewable Energy Projects October 30, 2013
31
Questions?
Gregory F. Jenner, Partner
(612) 373-8857
Kevin T. Pearson, Partner
(503) 294-9622
The materials are for informational purposes only and not for the purpose of providing legal advice or
soliciting legal business. You should contact your attorney to obtain advice with respect to any
particular issue or problem.