The Internal Revenue Service (IRS) has moved to further spell out the requirements for wind developers to qualify for the production tax credit (PTC), including a solution to one of the program's most confusing aspects.
On April 15, the IRS ruled that to qualify for the PTC, project developers must demonstrate work of a significant nature, incur 5% of the project's cost by Dec. 31 and ensure the wind farm is under continuous construction.
However, proving continuous efforts was problematic from the start and caused wind developers to flood the federal agency with follow-up questions.
Therefore, on Sept. 20, the IRS further clarified requirements, including adding a placed-in-service date, which would still allow developers to qualify, but without painstakingly proving continuous efforts.
According to the IRS, wind projects started by Dec. 31 and placed into service by Dec. 31, 2015, are eligible to qualify for 45 D of the Internal Revenue Code. The rationale is that if a wind developer met an in-service date, so-called continuous efforts would be assumed.
Developers whose wind projects go into service after 2015 will be required to demonstrate continuous work.
Keith Martin, partner at law firm Chadbourne & Parke, explains some developers complained that this continuous-work requirement was making it difficult to finance projects, as banks and tax equity investors balked at taking the risk that the pattern of future work will fall short of what is required.
The guidance also sought to demystify the program's other vexing requirements, such as the following:
Ownership transfers. The IRS offered additional guidance about when a project or equipment for a project can be transferred after 2013 to another developer or investor without losing ‘grandfather’ rights to tax credits.
However, this part of the notice only confirmed what the market already assumed was true, Martin explains. ‘It did not shed any real new light on transfer issues.’
Master contracts. Master contracts are agreements a developer has with turbine suppliers, balance-of-plant contractors or other vendors. David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld, says the earlier April rules contained no reference to "master contract" applicability, which led to questions of whether the master contract rules applied to the 5% safe harbor in 2013.
However, the new rules confirm that the master contract rules apply to both approaches to starting construction.
The clarifications are expected to give wind developers – and financiers – the needed certainty to go forward with development.
‘The notice may cause developers to shift back to the physical-work test rather than try to incur at least five percent of the project cost this year,’ explains Martin. ‘It is easier to start physical work.’
According to Martin, many wind developers had been focusing on the 5% test because it seemed to suggest that a project could be merely under development by the end of 2013 while the physical-work test required that it be truly under construction.
The guidance is welcome news for an industry facing its share of challenges, explains Akin Gump's Burton.
‘It should result in a steady stream of wind projects coming online at least through the end of 2015 and leaves open the possibility for projects qualifying for PTCs after 2015,’ he says.