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In Notice 2020-41, the IRS extends by one year the four-year Continuity Safe Harbor, under which a qualified facility will be considered to engage in continuous construction once the project has begun, for renewable energy projects that began construction in 2016 or 2017.

In addition, Notice 2020-41 provides a 3½-month Safe Harbor, under which taxpayers are deemed to incur project costs if they pay for services or property on or after September 16, 2019, and receive them by October 15, 2020.

Both provisions are designed to help prevent renewable energy projects from losing eligibility for tax credits as a result of projects being delayed by the effects of COVID-19.

Background

The IRC Section 45 production tax credit (PTC) allows taxpayers to claim a credit for certain renewable electricity produced at a qualified facility. The IRC Section 48 investment tax credit (ITC) allows taxpayers to claim a credit based on certain energy property placed in service during the tax year. To qualify for the credits, taxpayers must complete a project within four years of beginning construction (beginning-of-construction requirement). The Further Consolidated Appropriations Act of 2020 extended the beginning-of-construction deadline by three years to December 31, 2020, for closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities. For wind facilities, the deadline was extended by one year.

Notice 2013-29 permits taxpayers to establish that construction on a qualified facility has begun by either: (1) starting "physical work of a significant nature" (the Physical Work Test) or (2) meeting a safe harbor by paying or incurring 5% or more of the total cost of the facility (the 5% Safe Harbor). Both methods require a taxpayer to make continuous progress towards completing the facility once construction has begun (Continuity Requirement).

Notice 2018-59 created a Continuity Safe Harbor, under which the Continuity Requirement is satisfied for both the Physical Work Test and the 5% Safe Harbor if the energy property is placed in service by the end of the calendar year that is four calendar years after the calendar year in which construction began.

Safe harbors extended

According to Notice 2020-41, the "Treasury Department and the IRS recognize that the COVID-19 pandemic is causing delays in the development of certain facilities eligible for the PTC and the ITC. As a result, many taxpayers will not place facilities in service in time to meet the Continuity Safe Harbor or may have difficulty demonstrating to investors that they have met the Continuity Requirement based on the relevant facts and circumstances."

Continuity safe harbor

Notice 2020-41 extends the time to satisfy the Continuity Safe Harbor by one year. As a result, a qualified facility that began construction under the Physical Work Test or the 5% Safe Harbor in either calendar year 2016 or 2017 will satisfy the Continuity Safe Harbor if a taxpayer places the qualified facility or energy property in service within five years.

3½ month safe harbor

For taxpayers using the 5% Safe Harbor, Notice 2020-41 extends the time under which the taxpayer is deemed to incur the project costs. Under the 3½ Month Rule, a taxpayer may treat economic performance as occurring when the service provider is paid if the taxpayer can reasonably expect the services to be provided within 3½ months of making the payment. Notice 2020-41 created a 3½ Month Safe Harbor for taxpayers that paid for services or property on or after September 16, 2019, and received them by October 15, 2020.

Implications

While the guidance is certainly helpful to those under the most time pressure (i.e., for projects that began construction in 2016 and 2017), it does not provide much support for projects that had either begun construction in 2018 or 2019 (which may have also experienced significant delays due to COVID-19) or have seen delays in the permitting process for federal lands (particularly impacting offshore wind).

The 3½ Month Safe Harbor provides certainty for some projects for which investors might have been concerned over what constitutes "reasonably expected" as related to the performance of services. The certainty of a safe harbor should help facilitate and reduce the cost of financing. Even if the transaction falls outside of the safe harbor window, however, taxpayers that can demonstrate they reasonably expected the services to have been provided within 3½ months of making the payment may still be able to avail themselves of the accrual in the prior year.

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