Notice 2021-41: IRS Extends Continuity Safe Harbor for Renewable Energy Projects
On June 29, 2021, the IRS issued Notice 2021-41 (the “Notice”), which extends the Continuity Safe Harbor (as defined below) for qualified facilities or energy property the construction of which began in 2016 through 2020 for purposes of determining eligibility for the production tax credit (“PTC”) or the investment tax credit for energy property (“ITC”) under Sections 45 and 48 of the Internal Revenue Code of 1986, as amended (the “Code”). The Notice states that the extension is being provided in recognition of delays in development of certain facilities eligible for the PTC and ITC due to the COVID-19 pandemic. For qualified facilities or energy property the construction of which began in 2016 through 2019, taxpayers now have six years after the year in which construction started to place such qualified facility or energy property in service. For qualified facilities or energy property the construction of which began in 2020, taxpayers now have five years after the year in which construction started to place such qualified facility or energy property in service. This extension of the Continuity Safe Harbor provides welcome relief for taxpayers whose construction efforts were impacted by the COVID-19 pandemic.
Background
Treasury and the IRS have issued a number of administrative notices establishing and modifying various safe harbors for wind, solar and other renewable projects with respect to which taxpayers may claim the PTC or ITC. While the amount of PTCs or ITCs (if any) for which a renewable energy project is eligible under the Code depends, in part, on when construction for such project begins, the statute is silent on how a taxpayer establishes commencement of construction or how long a taxpayer has to finish a project and still be eligible. Treasury and the IRS have provided guidance allowing taxpayers to establish commencement of construction under two methods—the “Physical Work Test” and the “Five Percent Safe Harbor”—provided that the taxpayer also maintains a continuous program of construction until the facility or property is placed in service (the “Continuity Requirement”).
Under prior notices, the IRS created the “Continuity Safe Harbor” under which a taxpayer is deemed to satisfy the Continuity Requirement if it places into service the qualified facility or energy property by the end of the calendar year that is no more than a certain period after the calendar year during which construction began. Most recently, Notice 2020-41 extended the Continuity Safe Harbor such that a taxpayer can satisfy the safe harbor with respect to a project that began construction in either 2016 or 2017 if the taxpayer places the qualified facility or energy property in service by the end of a calendar year that is no more than five calendar years after the calendar year during which construction with respect to that qualified facility or energy property began. If a taxpayer cannot meet the Continuity Safe Harbor, the taxpayer may still be able to show that the Continuity Requirement is met through the relevant facts and circumstances. The prior notices have established the “Continuous Construction Test” (generally, continuing physical work of a significant nature) and the “Continuous Efforts Test” (generally, continuous efforts to advance towards completion) for satisfying the Continuity Requirement under the Physical Work Test and the Five Percent Safe Harbor, respectively, for taxpayers who cannot meet the Continuity Safe Harbor.
The Notice
The Notice provides that for any qualified facility or energy property the construction of which commenced in 2016, 2017, 2018, or 2019, the Continuity Safe Harbor is satisfied if a taxpayer places the qualified facility or energy property in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction with respect to that qualified facility or energy property began. For a qualified facility or energy property the construction of which commenced in 2020, the Continuity Safe Harbor is satisfied if a taxpayer places the qualified facility or energy property in service by the end of a calendar year that is no more than five calendar years after the calendar year during which construction with respect to that qualified facility or energy property began.
Significantly, the Notice also adds flexibility for taxpayers to satisfy the Continuity Requirement outside the Continuity Safe Harbor by providing that, for any property that does not qualify under the Continuity Safe Harbor, the Continuity Requirement will be satisfied if the taxpayer meets either the Continuous Construction Test or the Continuous Efforts Test, regardless of which of the two methods the taxpayer relied upon to establish commencement of construction. Therefore, a project that established commencement of construction by performing physical work at the project site could satisfy the Continuity Requirement by showing continuous efforts by, for example, pursuing permits, without needing to show continuous physical work. Moreover, the Notice does not limit this flexibility to projects which began construction in 2016 through 2020; it may therefore be useful to pre-2016 projects.
The IRS does not issue private letter rulings or determination letters to taxpayers regarding satisfaction of the beginning of construction requirements. Taxpayers must therefore rely on guidance such as that provided by the Notice in supporting their credit claims.
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