The Look-Back Rule: What You Need To Know About The IRS Guidance


Recent guidance from the Internal Revenue Service (IRS) that was designed to qualify more wind farms for tax credits is, instead, slowing down the market as developers and investors grapple with the uncertainty created by the new rules. The bottleneck is being felt most acutely by developers that own long-standing development projects and those looking to buy or tax equity finance these projects.

Unsure of the value of their projects, developers may be unwilling to commit themselves to large turbine orders and are unable to raise development capital from investors. Although a number of solutions are emerging to help eliminate uncertainty, relatively few of them provide absolute comfort to anything but the most straightforward cases.

The latest tax credit extension to 2016 was followed by an IRS notice that deviated from its previous guidance by allowing developers a four-year deadline to complete projects but also started the four-year clock by reference to when construction first began on the project rather than from the new 2016 deadline provided by Congress.

It is this early starting point of the four-year deadline, referred to as the “look-back rule,” that is now creating the market dislocation and the search for solutions to manage its effects.

The look-back rule is creating problems for some developers trying to qualify their projects for tax credits. To qualify their projects for tax credits under previous IRS guidelines, project owners typically engaged in some minimal level of construction activities before the then-applicable deadline. Many developers are now finding themselves penalized for doing the very work they were encouraged to start under previous IRS guidance.

Four ways to satisfy the look-back rule:

Wind farm owners who completed some work on projects a number of years ago may now find themselves trying to distance themselves from that work in an effort to prolong the project’s shelf life for tax credit qualification. A number of approaches may be available to accomplish this objective.

Abandon work. A developer may abandon the prior work by not incorporating the work into the final project design. For example, the developer may cancel the applicable transformer order or other equipment order or may abandon the turbine string roads or turbine foundations.

Although this technique seems to pass the literal legal standard that the project was not begun before a certain date, it appears inconsistent with the underlying policy behind the new guidance, which is that a taxpayer may not choose the year in which it begins construction for purposes of the look-back rule by “beginning” twice.

A variation on this technique would be redoing or modifying the earlier work. For example, if the turbine model has changed, the developer may re-dig the foundations or re-lay turbine string roads to accommodate the new turbine model, or it may amend the transformer purchase order to change the transformer specifications.

These techniques seem most appropriate and defensible in circumstances when there is a valid business reason underlying these actions – rather than no more than a desire to break the start-of-construction chain.

Transfer property to an unrelated person. A developer that began work on “solely tangible personal property” will lose its construction-start status if the property is transferred to an unrelated person and the original developer does not maintain an equity position in the project. Developers that took delivery of completed turbine components under the 5% test may then transfer this property to an unrelated third party and break the beginning of construction taint if a sufficient equity stake is not maintained.

This approach relies on an explicit rule in previous IRS guidance that provided that stockpiled equipment contributed to a project company is counted as beginning construction only if the developer maintains at least a 20% profit or capital interest in the project. If the transfer is an outright sale to a third party, this requirement would not be satisfied.

A drawback of this approach is that it applies only to “tangible personal property” and, therefore, may be unavailable to projects that have commenced work on roads or foundation sites.

Phasing. Another possibility is to develop a project in phases. For example, a developer may complete the first phase of the project using the previously completed work within the required timeline and then have more time to start and complete subsequent phases of the project. Alternatively, a project owner may use the early work in a later, and perhaps smaller, phase and then be free to establish a new start and completion date for earlier phases of the project.

This approach works only if each phase of the project is a separate facility under the IRS rules.

The IRS generally considers each turbine, pad and tower at a wind farm as a separate facility. However, for purposes of determining whether a project was under construction in time, the entire wind farm is treated as a single “facility” when the facts point to one large project. Facts that point to a single facility include the following: When one legal entity owns the entire project, all of the electricity is sold under a single power contract, the electricity moves to the grid through a single substation and intertie, the entire project is financed under a single loan agreement, all of the turbines are on contiguous sites, and all of the turbines are being supplied under a single turbine supply agreement.

Establishing that a phase of a project is a stand-alone single facility is a facts-and-circumstances test. It is also backward-looking. A developer may not know whether phases are separate facilities until all of the phases are completed, and so a careful analysis should be done for any project relying on this approach.

Prove continuity. A final option is to prove that work under the project was, in fact, continuous, without regard to the qualification deadline. This approach requires a developer to establish that work was continuous – although certain events or circumstances that slowed the construction process are excused when applying this test.

Developers that have kept daily or weekly logs showing what was done on developing their projects since the original construction-start date will be in the best position to prove continuity.

Author’s note: Eli Katz is a partner and Eric Kamerman is an associate at law firm Chadbourne. They can be reached at and, respectively.

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