Beginning of Construction for the Section 48 Investment Tax Credit

Transcription

1 What s News in Tax Analysis that matters frm Washingtn Natinal Tax Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit Octber 8, 2018 by Susan Reaman and Katherine Breaks, Washingtn Natinal Tax * Ntice prvides guidance fr determining when cnstructin begins n a facility eligible fr the energy investment credit under sectin This article discusses the begin cnstructin requirements fr slar prperty as well as fiber-ptic slar, gethermal, qualified fuel cell, qualified micrturbine, cmbined heat and pwer system, qualified small wind, and gethermal heat pump prperty. Legislative Backgrund On December 18, 2015, the Cnslidated Apprpriatins Act, 3 extended and mdified the investment tax credit ( ITC ). As mdified, the ITC is phased dwn fr slar energy prperty, the cnstructin f which begins after December 31, 2019, and befre January 1, 2022, and further limits the amunt f ITC available fr slar energy prperty that is nt placed in service befre January 1, On February 9, 2018, the Bipartisan Budget Act f 2018, 4 further mdified the ITC fr ITC-eligible prperty ther than slar energy prperty by replacing the prir-law requirement t place energy prperty in service prir t 2017 with a requirement t begin cnstructin befre January 1, This * Susan Reaman is a directr and Katherine Breaks is a tax managing directr in the Tax Credit and Energy Advisry Services grup f Washingtn Natinal Tax ( WNT ). 1 Ntice , I.R.B Unless therwise indicated, sectin references are t the Internal Revenue Cde f 1986, as amended (the Cde ) r the applicable regulatins prmulgated pursuant t the Cde (the regulatins ). 3 Pub. L. N , Div. P, Title III, 303, 129 Stat. 2242, 3039 (2016). 4 Pub. L. N , Div. D, Title I, 40411, 132 Stat. 150 (2018) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

2 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 2 mdificatin has the effect f retractively extending by mre than five years the ITC fr fiber-ptic slar, qualified fuel cell, qualified micrturbine, cmbined heat and pwer system ( CHP ), qualified small wind, and gethermal heat pump prperty. The table belw summarizes these requirements. Energy Credit Phase Out Chart Type f Energy Prperty Date Cnstructin Begins Placed in Service Date ITC Amunt Slar Befre 1/1/20 Befre 1/1/24 30% 1/1/20 12/31/20 Befre 1/1/24 26% 1/1/21 12/31/21 Befre 1/1/24 22% Befre 1/1/22 On r after 1/1/24 10% On r after 1/1/22 Any 10% Fiber-ptic slar Befre 1/1/20 Befre 1/1/24 30% 1/1/20 12/31/20 Befre 1/1/24 26% 1/1/21 12/31/21 Befre 1/1/24 22% Befre 1/1/22 On r after 1/1/24 0% On r after 1/1/22 Nt applicable 0% Gethermal Any Any 10% Qualified fuel cell Befre 1/1/20 Befre 1/1/24 30% 1/1/20 12/31/20 Befre 1/1/24 26% 1/1/21 12/31/21 Befre 1/1/24 22% Befre 1/1/22 On r after 1/1/24 0% On r after 1/1/22 Nt applicable 0% Qualified Befre 1/1/22 Any 10% micrturbine On r after 1/1/22 Nt applicable 0% CHP Befre 1/1/22 Any 10% On r after 1/1/22 Nt applicable 0% Qualified small Befre 1/1/20 Befre 1/1/24 30% wind 1/1/20 12/31/20 Befre 1/1/24 26% 1/1/21 12/31/21 Befre 1/1/24 22% Befre 1/1/22 On r after 1/1/24 0% On r after 1/1/22 Nt applicable 0% Gethermal heat Befre 1/1/22 Any 10% pump After 1/1/22 Nt applicable 0% 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

3 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 3 Types f Energy Prperty Slar Energy Prperty Slar energy prperty includes equipment which uses slar energy t generate electricity, t heat r cl (r prvide ht water fr use in) a structure, r t prvide slar prcess heat, excepting prperty used t generate energy fr the purpses f heating a swimming pl. 5 Fiber-Optic Slar Energy Prperty Fiber-ptic slar energy prperty includes equipment which uses slar energy t illuminate the inside f a structure using fiber-ptic distributed sunlight, but nly with respect t prperty the cnstructin f which begins befre January 1, Gethermal Prperty Gethermal prperty includes equipment used t prduce, distribute, r use energy derived frm a gethermal depsit (within the meaning f sectin 613(e)(2)), but nly, in the case f electricity generated by gethermal pwer, up t (but nt including) the electrical transmissin stage. 7 Qualified Fuel Cell Prperty Qualified fuel cell prperty includes qualified fuel cell prperty a fuel cell pwer plant, which is an integrated system cmprised f a fuel cell stack assembly and assciated balance f plant cmpnents that cnverts a fuel int electricity using electrchemical means. T qualify fr the ITC, qualified fuel cell prperty must have a nameplate capacity f at least 0.5 kilwatt f electricity using an electrchemical prcess and an electricity-nly generatin efficiency greater than 30 percent. Qualified fuel cell prperty des nt include any prperty the cnstructin f which des nt begin befre January 1, Qualified Micrturbine Prperty Qualified micrturbine prperty includes a statinary micrturbine pwer plant, which is an integrated system cmpsed f a gas turbine engine, a cmbustr, a recuperatr r regeneratr, a generatr r alternatr, and assciated balance f plant cmpnents that cnverts a fuel int electricity and thermal energy; all secndary cmpnents lcated between the existing infrastructure fr fuel delivery and the existing infrastructure fr pwer distributin, including equipment and cntrls fr meeting relevant pwer standards, such as vltage, frequency, and pwer factrs. 5 Sectin 48(a)(3)(A)(i). 6 Sectin 48(a)(3)(A)(ii). 7 Sectin 48(a) (3)(A)(iii). 8 Sectins 48(a)(3)(A)(iv), 48(c)(1), and 48(c)(1)(D) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

4 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 4 T qualify fr the ITC, qualified micrturbine prperty must have a name-plate capacity f less than 2,000 kilwatts, and an electricity-nly generatin efficiency f nt less than 26 percent at Internatinal Standard Organizatin cnditins. Qualified micrturbine prperty des nt any prperty the cnstructin f which des nt begin befre January 1, Cmbined Heat and Pwer System Prperty Cmbined heat and pwer system prperty includes CHP prperty cmprising a system that uses the same energy surce fr the simultaneus r sequential generatin f electrical pwer, mechanical shaft pwer, r bth, in cmbinatin with the generatin f steam r ther frms f useful thermal energy (including heating and cling applicatins). T qualify fr the ITC, CHP prperty must prduce at least 20 percent f its ttal useful energy in the frm f thermal energy which is nt used t prduce electrical r mechanical pwer (r cmbinatin theref), and at least 20 percent f its ttal useful energy in the frm f electrical r mechanical pwer (r cmbinatin theref). 10 Additinally, CHP prperty must have an energy efficiency percentage that exceeds 60 percent, except in the case f CHP systems that use bimass. The cnstructin f CHP prperty must begin befre January 1, Qualified Small Wind Energy Prperty Qualified small wind energy prperty includes qualified small wind energy prperty that uses a qualifying small wind turbine t generate electricity. T qualify fr the ITC, a qualifying small wind turbine must have a nameplate capacity f nt mre than 100 kilwatts. 12 Gethermal Heat Pump Prperty Gethermal heat pump prperty includes gethermal heat pump equipment that uses the grund r grund water as a thermal energy surce t heat a structure r as a thermal energy sink t cl a structure, but nly with respect t prperty the cnstructin f which begins befre January 1, Sectins 48(a)(3)(A)(iv) and 48(c)(2). 10 Sectins 48(a)(3)(A)(v)and 48(c)(3). 11 Sectin 48(c)(3)(D). Als, sectin 48(a)(2)(A)(ii) prvides that the energy percentage fr CHP prperty is 10 percent. Sectin 48(c) (3)(B) prvides a special frmula fr determining the ITC f CHP prperty with certain electrical capacity. Sectin 48(c)(3) (D)(ii) prvides a special frmula fr determining the ITC f CHP systems that use bimass. 12 Sectins 48(a)(3)(A)(vi) and 48(c)(4). See Ntice , I.R.B. 407, as mdified by Ntice , I.R.B. 133, fr additinal infrmatin n perfrmance and quality standards. 13 Sectin 48(a)(3)(A)(vii) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

5 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 5 Begin Cnstructin Ntice prvides tw methds fr taxpayers t establish the beginning f cnstructin, the Physical Wrk Test and the Five Percent Safe Harbr Test (the Safe Harbr Test ). The beginning f cnstructin rules are similar t thse applicable t renewable energy prperty under sectin Physical Wrk Test Generally, fr self-cnstructed prperty, cnstructin begins when physical wrk f a significant nature begins. This test fcuses n the nature f the wrk perfrmed, nt the amunt r the cst. Fr cnstructin perfrmed fr the taxpayer under a cntract, cnstructin begins when physical wrk f a significant nature begins under a binding written cntract entered int prir t the manufacture, cnstructin, r prductin f the energy prperty r cmpnents f energy prperty fr use by the taxpayer s business. A cntract is binding if it is enfrceable under lcal law against the taxpayer r a predecessr and, in the event f a breach, the cntract des nt limit damages t less than five percent f the ttal cntract price. Physical wrk f a significant nature des nt include wrk (perfrmed either by the taxpayer r by anther persn under a binding written cntract) t prduce cmpnents f energy prperty that are either in existing inventry r are nrmally held in inventry by a vendr. If a manufacturer prduces cmpnents f prperty fr multiple energy prperties, a reasnable methd must be used t assciate individual cmpnents f prperty with a particular purchaser. Off-Site Physical Wrk f a Significant Nature Generally, ff-site physical wrk f a significant nature fr energy prperty may include the manufacture f cmpnents, munting equipment, supprt structures such as racks and rails, inverters, and transfrmers and ther pwer cnditining equipment. On-Site Physical Wrk f a Significant Nature Ntice prvides a nn-exclusive list f examples fr n-site physical wrk f a significant nature fr the varius types f energy prperty: Slar energy prperty the installatin f racks r ther structures t affix phtvltaic (PV) panels, cllectrs, r slar cells t a site Fiber-ptic slar energy prperty the installatin f cllectrs, cncentratrs, tracking systems, bundles f ptical fibers, r fixtures within a structure 14 See Ntice , clarified and updated by Ntice ; Ntice ; Ntice ; Ntice ; Ntice ; and Ntice KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

6 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 6 Gethermal prperty physical activities that are undertaken at a prject site after a valid discvery such as the installatin f piping, turbines, generatrs, flash tanks, r heat exchangers Qualified fuel cell prperty the installatin f cmpnents f a fuel cell stack assembly such as electrdes, gas diffusin layers, mem- branes, gasketing, r plates Qualified micrturbine prperty the installatin f a gas turbine engine, cmbustr, recuperatr, regeneratr, generatr, alternatr, r ther plant cmpnents CHP prperty the installatin f a heat engine, generatr, heat recvery cmpnents, r electrical intercnnectins Qualified small wind energy prperty the installatin f a fundatin, twer, wiring, r grunding systems Gethermal heat pump prperty the installatin f grund heat exchangers, heat pump units, r air delivery systems (ductwrk) Preliminary Activities Physical wrk f a significant nature des nt include preliminary activities, even if the cst f thse preliminary activities is prperly included in the depreciable basis f the energy prperty. Generally, preliminary activities include, but are nt limited t: planning r designing; securing financing, explring, researching, cnducting mapping and mdeling t assess a resurce; btaining permits and licenses; cnducting gephysical, gravity, magnetic, seismic and resistivity surveys; cnducting envirnmental and engineering studies; perfrming activities t develp a gethermal depsit prir t valid discvery; clearing a site; cnducting test drilling t determine sil cnditin (including t test the strength f a fundatin); excavating t change the cntur f the land (as distinguished frm excavatin fr a fundatin); and, remving existing fundatins, turbines, and twers, slar panels, r any cmpnents that will n lnger be part f the energy prperty (including thse n r attached t building structures). Single Prject Slely fr purpses f determining whether cnstructin f energy prperty has begun, multiple energy prperties that are perated as part f a single prject (alng with any cmpnents f prperty, such as a cmputer cntrl system, that serves sme r all such energy prperties) will be treated as a single energy prperty. Whether multiple energy prperties are perated as part f a single prject will depend n the relevant facts and circumstances. Factrs indicating that multiple energy prperties are perated as part f a single prject may include energy prperties that are: Owned by a single legal entity Cnstructed n cntiguus pieces f land 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

7 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 7 Described in a cmmn pwer purchase agreement r agreements Have a cmmn intertie Share a cmmn substatin Described in ne r mre cmmn envirnmental r ther regulatry permits Cnstructed pursuant t a single master cnstructin cntract Financed pursuant t the same lan agreement Physical wrk f a significant nature Only physical wrk f a significant nature n tangible persnal prperty and ther tangible prperty used as an integral part f the activity perfrmed by an energy prperty will be cnsidered fr purpses f determining whether a taxpayer has begun cnstructin f the energy prperty. This includes prperty integral t the prductin f electricity, but des nt include prperty used fr the transmissin f electricity. Rads that are integral t an energy prperty are integral t the activity perfrmed by the energy prperty including nsite rads that are used fr equipment t perate and maintain the energy prperty. Rads primarily fr access t the site, r rads used primarily fr emplyee r visitr vehicles, are nt integral t the activity perfrmed by an energy prperty. Generally, fencing is nt an integral part f an energy prperty. Finally, buildings are nt integral parts f an energy prperty because they are nt integral t the activity f the energy prperty unless a building is: A structure that is essentially an item f machinery r equipment; r, A structure that huses prperty that is integral t the activity f an energy prperty if the use f the structure is s clsely related t the use f the hused energy prperty that the structure clearly can be expected t be replaced when the energy prperty it initially huses is replaced. Safe Harbr Test Generally, a taxpayer will be cnsidered t have begun cnstructin f energy prperty under the Safe Harbr Test if a taxpayer pays r incurs 15 five percent r mre f the ttal cst f the energy prperty, and makes cntinuus effrts t advance twards cmpletin f the energy prperty. 15 Csts are incurred within the meaning f sectin (a)(1) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

8 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 8 All depreciable csts f the energy prperty are taken int accunt t determine whether the Safe Harbr Test has been met but des nt include the cst f land r any prperty nt integral t the energy prperty. Cntinuity Requirement fr Physical Wrk and Safe Harbr Tests Bth the Physical Wrk Test and the Safe Harbr Test require a cntinuus prgram f cnstructin ( Cntinuus Cnstructin Test ), which invlves cntinuing physical wrk f a significant nature based upn all relevant facts and circumstances. Facts and circumstances indicating cntinuus effrts t advance twards cmpletin f an energy prperty may include, but are nt limited t: Paying r incurring additinal amunts included in the ttal cst f the energy prperty Entering int binding written cntracts fr the manufacture, cnstructin, r prductin f cmpnents f prperty r fr future wrk t cnstruct the energy prperty Obtaining necessary permits Perfrming physical wrk f a significant nature Excusable Disruptins t Cntinuus Cnstructin and Cntinuus Effrts Tests Certain disruptins in a taxpayer s cntinuus cnstructin r cntinuus effrts t advance twards cmpletin f an energy prperty that are beynd the taxpayer s cntrl will nt be cnsidered as indicating that a taxpayer has failed t satisfy the cntinuity requirement. Hwever, these disruptins will nt extend the Cntinuity Safe Harbr deadline as discussed belw. The fllwing is a nn-exclusive list f cnstructin disruptins that will nt be cnsidered as indicating that a taxpayer has failed t satisfy the Cntinuus Cnstructin Test, such as delays due t: Severe weather cnditins Natural disasters Obtaining permits r licenses frm federal, state, lcal, r Indian tribal gvernments, including, but nt limited t, delays in btaining permits r licenses frm the Federal Energy Regulatry Cmmissin (FERC), the Envirnmental Prtectin Agency (EPA), the Bureau f Land Management (BLM), and the Federal Aviatin Agency (FAA) Written requests f a federal, state, lcal, r Indian tribal gvernment regarding matters f public safety, security, r similar cncerns 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

9 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 9 Intercnnectin-related delays, such as thse relating t the cmpletin f cnstructin n a new transmissin r distributin line r necessary transmissin r distributin upgrades t reslve grid cngestin issues that may be assciated with a prject s planned intercnnectin The manufacture f custm cmpnents Labr stppages The inability t btain specialized equipment f limited availability The presence f endangered species Financing delays Supply shrtages Cntinuity Safe Harbr Ntwithstanding the abve tests fr determining whether a taxpayer has satisfied the Cntinuus Cnstructin Test, a taxpayer will be deemed t have satisfied this test if the energy prperty is placed in service by the end f the calendar year that is n later than fur years after the calendar year during which cnstructin f the energy prperty began. While the excusable disruptin rules d nt apply fr purpses f the safe harbr, if the energy prperty is nt placed befre the end f the furth calendar year after the calendar year during which cnstructin f the energy prperty began, whether the energy prperty satisfies the Cntinuus Cnstructin Test under either the Physical Wrk Test r the Safe Harbr Test will be determined by the relevant facts and circumstances. Nte that the Cntinuity Safe Harbr des nt extend any placed in service deadlines fr energy prperty. Other Rules Applicable t Physical Wrk and Safe Harbr Tests Cnstructin by Cntract Fr cmpnents f energy prperty that are manufactured, cnstructed, r prduced fr the taxpayer by anther persn under a binding written cntract, the wrk perfrmed and amunts paid r incurred under the cntract are taken int accunt in determining when cnstructin begins, prvided the cntract is entered int prir t the wrk taking place r the amunts paid r incurred. Binding Written Cntract A written cntract is binding nly if it is enfrceable under lcal law against the taxpayer r a predecessr and des nt limit damages t a specified amunt (fr example, by use f a liquidated damages prvisin). Fr this purpse, a cntractual prvisin that limits damages t an amunt equal 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

10 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 10 t at least five percent f the ttal cntract price will nt be treated as limiting damages t a specified amunt. 16 Master Cntract If a taxpayer enters int a binding written cntract fr a specific number f cmpnents f prperty t be manufactured, cnstructed, r prduced fr the taxpayer by anther persn under a binding written cntract (master cntract), and then thrugh a new binding written cntract (prject cntract) the taxpayer assigns its rights t certain cmpnents f prperty t an affiliated special purpse vehicle that will wn the energy prperty fr which such cmpnents f prperty are t be used, wrk perfrmed, r amunts paid r incurred with respect t the master cntract may be taken int accunt in determining when cnstructin begins with respect t the energy prperty. Lk-thrugh Rule Physical Wrk Test Bth n-site and ff-site wrk (perfrmed either by the taxpayer r by anther persn under a binding written cntract) may be taken int accunt fr purpses f demnstrating that physical wrk f a significant nature has begun with respect t an energy prperty. Safe Harbr Test Fr an energy prperty r cmpnents f energy prperty that are manufactured, cnstructed, r prduced fr the taxpayer by anther persn under a binding written cntract with the taxpayer, amunts paid r incurred with respect t the energy prperty by the ther persn befre the energy prperty is prvided t the taxpayer are deemed paid r incurred by the taxpayer when the amunts are paid r incurred by the ther persn under the principles f sectin 461. Applicatin f 80/20 Rule t Retrfitted Energy Prperty Energy prperty may qualify as riginally placed in service even thugh it cntains sme used cmpnents f prperty, prvided the fair market value f the used cmpnents f prperty is nt mre than 20 percent f the energy prperty s ttal value (the cst f the new cmpnents f prperty plus the value f the used cmpnents f prperty) (the 80/20 Rule ). In the case f a single prject cmpsed f multiple energy prperties, the 80/20 Rule is applied t each energy prperty cmpsing the single prject. Fr purpses f the 80/20 Rule, the cst f a new energy prperty includes all prperly capitalized csts f the new energy prperty. 16 Fr additinal guidance regarding the definitin f a binding written cntract, see sectin 1.168(k) 1(b)(4)(ii)(A) (D) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.

11 Beginning f Cnstructin fr the Sectin 48 Investment Tax Credit page 11 The infrmatin in this article is nt intended t be "written advice cncerning ne r mre federal tax matters" subject t the requirements f sectin 10.37(a)(2) f Treasury Department Circular 230 because the cntent is issued fr general infrmatinal purpses nly. The infrmatin cntained in this article is f a general nature and based n authrities that are subject t change. Applicability f the infrmatin t specific situatins shuld be determined thrugh cnsultatin with yur tax adviser. This article represents the views f the authr r authrs nly, and des nt necessarily represent the views r prfessinal advice f KPMG LLP KPMG LLP, a Delaware limited liability partnership and the U.S. member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative ( KPMG Internatinal ), a Swiss entity. All rights reserved. The KPMG name and lg are registered trademarks r trademarks f KPMG Internatinal.