As we originally noted, the IRS guidance issued April 15 regarding the "start of construction" requirement for energy projects to qualify for PTC or ITC contained a "big surprise" regarding its definition of a binding contract. Unlike previous incentive programs, the guidance provided that contracts that limit damages to a specified amount, such as by use of a liquidated damages provision, would not be treated as “binding”. Only binding written contracts for work performed on behalf of the taxpayer are taken into account for purposes of satisfying the test for significant physical work.

Following questions about the definition, the IRS has now issued an updated version (PDF) of its Notice 2013-29.

Section 4, Physical Work, paragraph 4.03(1), originally read: “(1) Binding written contract. A contract is binding only if it is enforceable under local law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision).”

The revised Notice incorporates by reference the same 5% liquidated damages threshold that was used in the previous bonus depreciation regulations by adding the following text: “… For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount. For additional guidance regarding the definition of a binding contract, see § 1.168(k)-1(b)(4)(ii)(A)-(D).”

If you have questions regarding the guidance’s revised binding contract definition or any other issue regarding the PTC, the ITC or related matters, please contact one of the Stoel Rives attorneys listed below.

Chris Heuer at (503) 294-9206 or
Greg Jenner at (202) 398-1795 or
Adam Kobos at (503) 294-9246 or
Carl Lewis at (206) 386-7688 or
Kevin Pearson at (503) 294-9622 or