Menu
Tax Notes logo

COVID-19 Could Threaten Energy Tax Credit Eligibility

Posted on Apr. 14, 2020

Supply chain disruptions from the coronavirus pandemic are threatening many taxpayers’ ability to meet IRS deadlines for qualifying their solar and wind energy projects for the maximum amount of tax credits.

While many are hoping that Treasury and the IRS will provide some kind of relief for projects affected by the pandemic, some taxpayers may be able to argue that they have a good excuse for not meeting deadlines, Katherine Breaks of KPMG LLP said during an April 13 webinar hosted by her firm.

Taxpayers that wanted to claim the full 30 percent investment tax credit for solar projects had to begin construction before January 1, 2020. The credit is reduced to 26 percent if construction begins in 2020, with further reductions in subsequent years.

In Notice 2018-59, 2018-28 IRB 196, the IRS said taxpayers can apply one of two methods to satisfy the begin-construction test to qualify for the credit: They can start physical work of a significant nature, or, as a safe harbor, pay or incur at least 5 percent of the total project cost.

To qualify for the safe harbor, many accrual-method taxpayers at the end of 2019 took advantage of a special rule whereby property the taxpayer reasonably expects to be provided within three and a half months of the date of payment will be considered provided on the payment date, said Breaks.

“Now we’re seeing a lot of supply chain issues, and it looks like many people may not get their property delivered within the relevant time frame,” Breaks said. “One of the things we’re working with our clients on is ‘Do you have a good factual predicate for showing that you did reasonably expect delivery of the property within the relevant time frame? Assuming you get the property eventually, do you have a good position that your projects are grandfathered?’”

Every taxpayer’s circumstances will differ, but “we’ve seen many clients that have very strong facts that, even though they’re not going to get delivery by April 15, they did reasonably expect delivery within that time frame,” Breaks said. “It’s something to be thinking about if you’re in that situation.”

Wind Projects

Breaks said she’s also getting many questions about wind projects qualifying for the production tax credit. To get the full credit, taxpayers had to begin construction in 2016 and have the project placed in service within four years — that is, sometime in 2020.

“Due to COVID-19-related disruptions, we’re seeing a lot of wind projects that may not make their 2020 expected deadline because of labor stoppages, delays in delivery of supplies and equipment, and delays in obtaining permits and other regulatory requirements,” Breaks said.

Breaks noted that the IRS issued guidance in 2016 (Notice 2016-31, 2016-23 IRB 1025) stating that if a wind project is delayed because of “excusable disruptions,” those delays won't be taken into account for determining the end of the four-year continuity safe harbor.  

“There are a number of items listed in that guidance that might be relevant to the coronavirus outbreak, including things such as natural disasters, delays by the government regarding matters of public safety or similar concerns, delays in the manufacture of custom components, labor stoppages, et cetera,” Breaks said.

“We’re working with clients to examine their particular fact situation and see if they can fall within one or more of the excusable items,” Breaks said, adding that the continuity requirements are administrative and not in the statute itself.

“So we’re monitoring developments closely in hopes that Treasury might issue some sort of blanket guidance that would cover delayed projects in a broader way,” Breaks said.

Copy RID