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Safe harbors for renewable energy credits expanded

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Tax Hot Topics newsletterThe IRS has issued guidance (Notice 2020-41) extending the safe harbor deadlines for establishing that construction has begun and is continuous on projects qualifying for the renewable electricity production tax credit (PTC) under Section 45 and the energy investment tax credit (ITC) under Section 48.

The guidance comes in response to supply chain disruptions caused by COVID-19. It extends the continuity safe harbor by one year for projects that began construction in 2016 or 2017 and the 3.5-month safe harbor for property or services paid for on or after Sept. 16, 2019, to Oct. 15, 2020.

The PTC and ITC credits were last extended under the Further Consolidated Appropriations Act in December 2019. Construction on qualified PTC projects must now generally begin before the end of 2020, and taxpayers can elect to claim the ITC in lieu of the PTC for project that began construction by this date. The credit for wind under the PTC and ITC is reduced by 40% for construction beginning in 2020. The full 30% credit for solar property under Section 48 is only available for construction that began by the end of 2019. The credit is reduced to 26% for construction beginning in 2020, 22% for construction beginning in 2021, and 10% thereafter. The credit rate will also be reduced to 10% for solar property placed in service after 2023.

In prior notices the IRS provided that taxpayers can establish that construction has begun by either satisfying a test showing “physical work of a significant nature” has begun or by incurring 5% or more of the total cost of the facility under a safe harbor. Both require taxpayers to make continual progress toward completion once construction is considered to have begun. However, the IRS created a continuity safe harbor that deems that requirement met if a facility is placed in service within four calendar years of the calendar year in which construction began.

Notice 2020-41 extends the continuity safe harbor for one year for projects that began construction in 2016 or 2017, allowing the continuity requirement to be satisfied if a facility is placed in service within five calendar years of the calendar year in which construction began. It also provides relief for purposes of the 5% safe harbor. Taxpayers may generally count payments for property or services toward the safe harbor if they reasonably expect to receive them within 3.5 months of the payment date. Notice 2020-14 provides that the 3.5-month safe harbor will be deemed satisfied for property or services paid for on or after Sept. 16, 2019, if they are actually received by Oct. 15, 2020. This extension applies only for purposes of the PTC and ITC beginning of construction requirement.

Taxpayers who don’t use the continuity safe harbor must generally use a facts-and-circumstances analysis to determine if construction is continual. The following disruptions are excusable:

  • Severe weather conditions
  • Natural disasters
  • Certain licensing and permitting delays
  • Delays at the written request of government for safety, security or similar concerns
  • Transmission interconnection issues
  • Labor stoppages
  • Supply shortages
  • Delays in manufacturing custom components
  • Inability to obtain specialized equipment
  • Financing delays
  • The presence of endangered species

In addition, the following preliminary activities continue to be disqualified as physical work of a significant nature:

  • Planning or designing
  • Securing financing
  • Exploring
  • Researching
  • Conducting geologic mapping and modeling
  • Obtaining permits and licenses
  • Conducting geophysical, gravity, magnetic, seismic and resistivity surveys
  • Conducing environmental and engineering studies
  • Performing activities to develop a geothermal deposit prior to discovery
  • Clearing a site
  • Test drilling of a geothermal deposit
  • Test drilling to determine soil condition
  • Excavation to change the contour of the land (as distinguished from excavation for footings and foundations)
  • Removing existing turbines, towers, panels or other components

The IRS has indicated it will not issue private letter rulings or determination letters regarding the application of Notice 2020-41, prior IRS notices or the PTC and ITC beginning of construction requirement.

Contacts:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

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