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In Notice 2021-5, the IRS extended the Continuity Safe Harbor, under which a qualified facility will be treated as engaging in continuous construction once the project has begun, for projects offshore or on federal land, for up to 10 years after the year in which construction began.

According to the Notice, "the Treasury Department and the IRS have determined that such projects ordinarily are subject to significantly greater delays than projects not constructed Offshore or on Federal Land, and therefore are at a significantly higher risk of failing the Continuity Safe Harbor." Delays caused by factors such as stringent permitting requirements, lengthy engineering and construction timelines, and heightened environmental regulations are "ordinarily are outside the control of the project developers and can result in project completion times of up to twice as long as those experienced by qualified facility and energy property projects that are not constructed Offshore or on Federal Land."

Notice 2021-5 incorporates the changes made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act), which was enacted as part of the Consolidated Appropriations Act, 2021, on December 27, 2020 (see Tax Alert 2021-0028).

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. The tax credit rate is determined based on when construction begins, provided that the project is continuously constructed.

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 provides for 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. In Notice 2020-41, the IRS extended by one year the four-year Continuity Safe Harbor for renewable energy projects that began construction in 2016 or 2017 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 (see Tax Alert 2020-1446). As noted, projects constructed offshore or on federal lands were far less likely to complete a project within the provided safe harbor period.

Implications

Providing a 10-year continuity safe harbor for qualified offshore wind facilities and onshore wind farms on federal land is extremely helpful. Offshore wind farms are often larger and typically involve more construction complexity due to their offshore location, which results in longer construction schedules. The development process can be significantly slowed for taxpayers trying to develop projects on federal land; incremental administrative and regulatory requirements make it very difficult to complete a project within four years.

While projects that fell outside of the continuity safe harbor technically had the opportunity to demonstrate continuous construction based on facts and circumstances, such projects were finding it extremely difficult to obtain financing due to the uncertainty around the availability of the tax credits. The extension of the continuity safe harbor for these projects should reduce uncertainty and help alleviate stakeholder concerns around a project's ability to otherwise meet the continuity standard.

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