Production Tax Credit Extended – When is a Year not A Year?

As part of the American Taxpayer Relief Act of 2012 (“Act”), Congress extended the Production Tax Credit (“PTC”) through December 2013 for certain types of energy producers, including wind and biomass facilities. By way of background, the PTC is a per kilowatt hour credit for electricity generated by qualified energy resources which the taxpayer sells to an unrelated person. The credit is an annual credit calculated during the ten year period after the facility is placed in service.

Although similar in most respects to prior law, the new PTC credit provisions were favorably enhanced by replacing the “placed in service” requirement with a “beginning of construction” requirement as a basis for determining whether a facility is eligible for the credit. Under this new standard, qualified facilities do not need to be placed in service by December 31, 2013 to be credit eligible, rather, construction needs to begin by December 31, 2013 to maintain eligibility. In addition, the new law also extends the option for PTC eligible facility owners to claim the Investment Tax Credit (“ITC”) in lieu of the PTC through 2013 using the same “beginning of construction standard”. A project electing the ITC must be placed in service by December 31, 2016 (the date the ITC expires).

Although Congress did not define the term “beginning of construction” in the Act, it is expected that IRS will issue rules similar to the safe harbor standards under the former 1603 cash grant program, i.e., “beginning of construction” will mean either that the taxpayer has begun physical work of a significant nature or pay or incur 5% of more of the project’s eligible costs by the December deadline.

Due to these changes, qualified facility owners will need to make significant decisions in the coming months, including (i) whether to complete a facility by year end, (ii) safe harbor the facility under the expected new “beginning of construction” safe harbor rules and/or (iii) analyze the expected benefits of the PTC vs. ITC for safe harbored projects.

As we experienced with the 1603 cash program, many developers safe harbored their projects without sufficient planning as to the project, expected funding and less than clear development plans. Based on this experience, we strongly encourage PTC eligible facility owners to plan early to allow for a smoother, more efficient process in meeting the expected safe harbor conditions.