With the end of 2016 in plain view, anaerobic digestion (AD) projects in the development phase should examine what has to happen by December 31 in order to tap into available federal tax credits. Under current law, Section 45 of the federal tax code makes AD projects eligible for a Production Tax Credit (PTC), which can be converted into an Investment Tax Credit (ITC), if the projects are used to produce electricity. In 2004, Congress passed the American Jobs Creation Act, which included expansion of the PTC to apply to renewable energy. For AD projects, Section 45 is set to expire at the end of 2016. In 2016, Congress put in place two options that would allow projects to obtain the tax credits. These options are the Physical Work Test and the Five Percent Safe Harbor test.
The Physical Work Test means the project must physically begin construction by December 31, 2016 and must have continuous construction throughout the project. The Five Percent Safe Harbor Test requires the project to incur 5 percent of the total cost of the project before December 31, 2016 and have continuous construction.
In June 2016, the Internal Revenue Service (IRS) issued Notice 2016-31, which clarified and expanded Safe Harbor for biomass facilities — including AD — to begin construction by December 31, 2016. In order to satisfy the IRS, a biomass project must meet the Continuity Safe Harbor requirement, so as to qualify for the PTC or ITC for a Biomass Project.
If the project begins construction and meets the Physical Work Test, or meets the Five Percent Safe Harbor test, then the project will deem to make the Safe Harbor Continuity Requirement, providing the project is placed into service no later than four years after the year during which construction began or December 31, 2016. For example, if the project “begun construction” is January 15, 2016 and it is placed in service by December 31, 2020, then the project satisfies the Continuity Safe Harbor.
There are specific requirements for Safe Harbor, which go beyond simply meeting the project’s begun construction date of December 31, 2016. At the outset, there must be a binding written contract established prior to construction, and physical work of a significant nature, which may include integral site improvements such as filling or compacting soil or installing stack piling, must have begun. Be aware that preliminary activities such as planning, designing, site clearing, surveying and a number of other processes are not considered physical work of a significant nature.
Continual progress towards completion must be made once construction has begun. However, the IRS has an allowance for disruptions such as natural disasters, severe weather conditions and the presence of endangered species. Other allowable disruptions include: delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments, including, but not limited to, delays in obtaining permits or licenses from the Federal Energy Regulatory Commission (FERC), the Environmental Protection Agency (EPA), the Bureau of Land Management (BLM), and the Federal Aviation Agency (FAA); interconnection-related delays; delays in the manufacture of custom components; labor stoppages; the inability to obtain specialized equipment of limited availability; financing delays of less than six months; and supply shortages.