On August 8, 2014, the Internal Revenue Service (IRS) issued Notice 2014-46 in response to continued industry requests for clarification on several aspects of the renewable electricity Production Tax Credit (PTC) under section 45, or the energy Investment Tax Credit under section 48 in lieu of the PTC (ITC election).

The biggest policy development in the recent guidance is a reduction in the level of investment taxpayers must have committed before the end of 2013 from five percent to three percent of total project costs for a qualifying facility to remain eligible for the PTC/ITC under the IRS “Safe Harbor” test.

In the American Taxpayer Relief Act of 2012 (ATRA) (Pub. L. No. 112-240, 126 Stat. 231), Congress modified the PTC/ITC election to allow wind, biomass, and geothermal assets to qualify for the tax credits so long as taxpayers began construction before 2014. By adopting an eligibility threshold based on the now-expired “Section 1603” Grant-in-Lieu-of-Tax-Credit Program, projects no longer needed to be placed in service (i.e. producing electricity) before 2014 to remain eligible for the credits if certain requirements were met. So although the PTC/ITC election has expired, eligible projects that began construction in 2013 but are placed in service after 2013 can still qualify for credits if IRS guidance is followed.

During 2013, the IRS issued accompanying guidance in IRS Notice 2013-29 and Notice 2013-60 which laid out tests for taxpayers to determine whether or not they had successfully “commenced construction” and therefore qualified for the PTC/ITC: (1) Beginning physical work of a significant nature or (2) paying / incurring at least five percent of the total project costs before January 1, 2014. In effect, ATRA’s “commence construction” language lengthened the applicability of the PTC/ITC election for several years for developers who meet one of the enumerated IRS tests.

Last week’s IRS Notice sought to address several industry concerns related to (1) how a taxpayer can demonstrate the requisite level of physical work had occurred, (2) the implications of transferring ownership interests in a project once construction has commenced, and (3) reducing the level of investment required to satisfy the “safe harbor” requirement of the PTC/ITC.

Specifically, Notice 2014-46:

1. Clarifies the nature of the work, not simply the amount or cost associated with the activities performed by a taxpayer related to a qualifying facility will be dispositive as to whether or not the “Physical Work Test” has been met. The IRS emphasized it is taking a holistic approach to determining whether the “Physical Work Test” has been met – undertaking a fixed minimum amount of work or a certain monetary value of those activities will not alone satisfy the requirement.

2.  Clarifies that a fully or partially developed facility may be transferred from one taxpayer to another without losing its qualification under the Physical Work Test or the Safe Harbor Provision. As the IRS concludes, “There is no statutory requirement that the taxpayer that places the facility in service also be the taxpayer that begins construction of the facility.”

The IRS also allows taxpayers who commence construction on one site and that transfer equipment or components to another site to consider the work done for the first site for purposes of determining eligibility of the second site. The only exception to this provision is transfers consisting solely of tangible personal property between unrelated parties.

3.  Provides that the Safe Harbor may be used by taxpayers that have paid or incurred less than five percent, but at least three percent, of the total cost of a facility before January 1, 2014. These taxpayers may claim a reduced credit proportional to the amount paid or incurred before the PTC expired on January 1, 2014.

The IRS requires the taxpayer to also meet the “Continuous Efforts Test” outlined in Notice 2013-29 to qualify for the Safe Harbor. This modification to the Safe Harbor only applies to a single project comprised of multiple facilities, and not a single facility.

This clarification benefits large wind projects like Cape Wind where the PTC/ITC election can be claimed for some, but not all of the individual turbines comprising the project, assuming the taxpayer has incurred at least three percent of total costs.

The new IRS guidance provides some of the policy certainty sought by the renewable energy sector for near-term investments. Still, it only impacts investments in projects that are already underway. As industry awaits continued Congressional action on PTC/ITC election extension — which may resume after the November elections — the future of the PTC/ITC election itself remains the larger uncertainty.