IRS Extends Start of Construction Safe Harbor for Offshore Wind and Renewable Energy Projects Located on Federal Land
The second round of COVID-19 stimulus that was signed into law at the end of 2020 included extensions to renewable energy tax credits for solar, wind and other renewable energy projects, as well as a standalone investment tax credit (ITC) for offshore wind that we summarized in a recent client alert. Offshore wind projects that start construction before 2026 were granted a new 30 percent ITC. Solar projects were granted a two-year extension of the ITC at 26 percent through 2022 and a 22 percent ITC for projects that start construction in 2023. The ITC steps down to 10 percent for solar projects that start construction in 2024 or later. Solar projects must be placed in service before 2026 to qualify for more than a 10 percent ITC (the “Statutory Deadline”).
A taxpayer is treated as having begun construction on a project by starting physical work of a significant nature or incurring five percent or more of the total cost of the project. The taxpayer must then place the project in service by the end of the calendar year that is no more than four calendar years after the year that they started construction (the “Continuity Safe Harbor”). The Continuity Safe Harbor was extended to five years by the IRS for projects that start construction in 2016 or 2017 in response to development delays caused by COVID-19. If the taxpayer does not place the project in service within Continuity Safe Harbor, it can 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. However, based on our experience, tax equity investors generally only invest in projects that satisfy the Continuity Safe Harbor.
In recognition of the unique challenges developing offshore wind projects and energy projects on federal land, the IRS recently issued Notice 2021-05 (the “Notice”). The Notice extends the Continuity Safe Harbor for “Offshore Projects” or “Federal Land Projects” to ten years. Offshore Projects are projects that will be located in U.S. inland navigable waters or coastal waters and require the construction of one or more high-voltage transmission lines to connect the project to the U.S. electrical grid. Federal Land Projects are projects that will be located more than 50 percent on federal land (determined by value or area) and require the construction of one or more high-voltage transmission lines to connect the project to the U.S. electrical grid.
Based on the Notice, a developer that starts construction on an Offshore Project in 2025 can place the project in service as late as 2035 and still claim the full 30 percent ITC. However, the Notice provides less value for developers of solar projects on federal land as it does not change the Statutory Deadline for the project to claim more than a 10 percent ITC.