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In Notice 2021-41, the IRS expands the period that qualifies for the Continuity Safe Harbor for renewable energy projects for which construction began in 2016 through 2020. The Notice responds to the "extraordinary delays" caused by the COVID-19 pandemic.

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 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). Notice 2013-29 also establishes the Continuous Construction Test, stating that the IRS may determine that the Physical Work Test is not satisfied if the taxpayer fails to maintain a continuous program of construction. The safe harbor provided in Notice 2013-29 also is only available if the taxpayer maintains continuous efforts to advance completion of construction (the Continuous Efforts Test).

Notice 2013-60 provides that a facility placed in service before January 1, 2016, will satisfy the Continuous Construction Test and the Continuous Efforts Test (the Continuity Safe Harbor).

Notice 2018-59 also included the 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).

Continuity Safe Harbor extended

For energy properties that began construction in 2016 through 2019 under the Physical Work Test or the 5% Safe Harbor, Notice 2021-41 extends the Continuity Safe Harbor until six years after the calendar year during which construction began.

For energy properties that began construction under the Physical Work Test or the 5% Safe Harbor in 2020, Notice 2021-41 extends the Continuity Safe Harbor until five years after the calendar year during which construction began.

For energy property to which the Continuity Safe Harbor does not apply, Notice 2021-41 clarifies that the Continuity Requirement is satisfied if the taxpayer satisfies the Continuous Construction Test or the Continuous Efforts Test under Notice 2013-29, regardless of whether the Physical Work Test or the 5% Safe Harbor was used to establish the beginning of construction (the Continuity Safe Harbor will not apply if the project takes longer than is allowed under the four-year Continuity Safe Harbor plus any applicable COVID exceptions).

Implications

The extended length of the Continuity Safe Harbor will be welcomed by industry participants, especially those that have faced construction delays due to COVID restrictions or COVID-related shortages. For projects that began construction in 2020, taxpayers should note that the safe harbor is extended for five years, not six.

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