IRS Extends Renewable Tax Credit Safe Harbors
The Internal Revenue Service issued Notice 2020-41 (the “Notice”) yesterday which provides some welcome relief to wind project developers struggling to construct and place their projects in service in the face of construction, interconnection and procurement delays stemming from the COVID-19 pandemic.
The Notice now gives developers that started construction on projects in 2016 and 2017 five years to place those projects in service without having to demonstrate that they have continuously worked on the projects in order to qualify for 100 percent of the production tax credit (PTC) for projects that started construction in 2016 or 80 percent of the PTC for projects that started construction in 2017. Under the prior rules, the developer had to place the project in service by the end of the year that is four years following the date that construction on the project commenced (the “Continuity Safe Harbor”). This meant that wind projects that began construction in 2016 needed to be placed in service by the end of this year to benefit from the Continuity Safe Harbor.
The Notice extends the Continuity Safe Harbor an additional year for projects that started construction in 2016 and 2017 only. If a developer does not place the project in service within the Continuity Safe Harbor, it must demonstrate based on the facts and circumstances that it made continuous efforts to complete construction throughout the entire period before the project was placed in service (the “Continuous Efforts Test”). However, tax equity investors almost always require that developers satisfy the Continuity Safe Harbor rather than rely on the subjective Continuous Efforts Test.
The Notice also provides relief that is primarily targeted at solar project developers that ordered equipment at the end of 2019 in order to qualify for the full 30 percent Investment Tax Credit (ITC) that began phasing down this year. A taxpayer is treated as having begun construction by starting physical work of a significant nature or paying or incurring 5 percent or more of the total cost of the energy property included in the project. Developers that paid for equipment or services at the end of 2019 can qualify their projects for the full ITC amount provided that they reasonably expected that the equipment would be delivered or services provided within 3½ months.
Due to supply chain disruptions caused by the COVID-19 pandemic, some equipment that was ordered at the end of 2019 has yet to be delivered. While developers could not have predicted the impact of the COVID-19 pandemic at the end of last year, the Notice gives them certainty that they can include equipment and services that they paid for on or after September 16, 2019, and before January 1, 2020, as a 2019 incurred costs for purposes of the start of construction rules provided that the property is received or services provided by October 15, 2020. If the property is delivered after October 15, 2020, the developer will not be able to rely on the new safe harbor, but they can still make the argument that they reasonably expected the property to be delivered within 3½ months after payment was made.