Renewable Energy Community Digests New Guidance as Safe Harbor Deadline Nears

Published by Michael Novogradac on Wednesday, December 21, 2011 - 12:00am

On December 12, the Treasury Department published two new questions and answers, 23 and 24, in its Beginning of Construction FAQ document. The new guidance provides some insight and clarity into transactions that involve successors in interest of specified energy property. This guidance comes at a particularly timely moment, as the year winds to a close and the renewable energy community hastens to meet the safe-harbor requirements of the Section 1603 program for renewable energy projects.

In order to preserve Section 1603 grant eligibility, taxpayers must demonstrate that they began construction after 2008 and before 2012. The determination of whether construction has begun before 2012 is addressed in the general guidance issued by Treasury in June 2009, and revised in March 2010 and April 2011 (the general guidance). The issue is also addressed in the FAQs, which were issued on June 25, 2010. Both the general guidance and FAQs provide for the following two methods used for determining when construction has begun:  a project can begin what Treasury refers to as physical work of a significant nature; and/or a project can meet what is known as the 5 percent safe harbor. A project can meet the safe harbor criteria by paying for or incurring 5 percent or more of the total final costs eligible for the investment tax credit before 2012, determined on the taxpayer’s method of accounting.

The new questions and answers address the 5 percent safe harbor, specifically changes of ownership after the safe harbor is met but before projects are placed in service. As my partner Tony Grappone, CPA, writes in the upcoming January issue of the Novogradac Journal of Tax Credits, FAQ 23 essentially requires successors in interest (transferees) to be related to the taxpayer that initially acquired the energy property (transferor). It’s not clear if this was Treasury’s intent or an unintended consequence.

So, how will FAQ 23 affect project finance and ownership for renewable energy projects?  It is generally expected that this new guidance will make project finance less attractive and more difficult.

It’s important to note that renewable energy transactions involving Section 1603 grants are complex and as such, readers are encouraged to contact their tax advisor to discuss how this guidance could affect their transactions specifically. 

If you have questions about the new guidance, please contact my partner Tony Grappone, CPA, in Novogradac & Company’s Boston office or Stephen Tracy, CPA, in Novogradac & Company’s San Francisco office.