Production Tax Credit Under the American Relief Act of 2012

By Royse Law Firm, PC

In January 2013, the American Taxpayer Relief Act of 2012 modified the requirements for the Production Tax Credit (PTC) by replacing the “placed in service” requirement with a “beginning of construction” requirement.  This meant that taxpayers could claim the PTC with respect to a facility if construction began before January 1, 2014.  Previous IRS guidance established two methods for determining when construction began: (1) the “Physical Work Test” and (2) the “Safe Harbor”.  Recently released IRS Notice 2014-46 gives further guidance on the application of these methods and how the PTC can be retained when a project is transferred to an unrelated taxpayer.

Under the Physical Work Test, a taxpayer must began physical work of a significant nature prior to January 1, 2014.  Notice 2013-29 gives examples of projects where the Physical Work Test is satisfied.  For example, physical work of a significant nature on a wind turbine project would begin with the commencement of the excavation or the setting of anchor bolts into the ground.  Notice 2014-46 states that the focus of the Physical Work Test is on the nature of the work performed, not the amount or cost.

A taxpayer can satisfy the Safe Harbor by demonstrating that five-percent or more of the total cost of the facility was paid or incurred before January 1, 2014.  Notice 2014-46 adds a special rule for single projects consisting of multiple facilities.  For these projects, if at least three percent of the total cost was paid or incurred before January 1, 2014 then the PTC may be claimed with respect to some of the individual facilities comprising the project as a whole.  The PTC may be claimed on individual facilities as long as the aggregate cost of the individual facilities when the project is placed in service is not greater than twenty times the amount paid or incurred before January 1, 2014.

Taxpayers may now also transfer facilities to third parties without the facility losing its status as having begun construction before January 1, 2014.  However, Notice 2014-46 excludes transfers of solely tangible personal property from this treatment.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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