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Safe Harbor Extension for Energy Projects Quells Some Concerns

Posted on June 1, 2020

The renewable energy industry is welcoming the IRS's extension of the continuity safe harbor, but some were disappointed that other requested items of relief didn’t make the cut.

The extra time announced in Notice 2020-41, 2020-25 IRB 1, applies only to projects that had 2016 or 2017 begin-construction dates, and the government didn’t heed industry calls to provide special relief for offshore wind projects and projects on federal land, practitioners told Tax Notes.

The notice, issued May 27, addresses concerns that 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.

Taxpayers that want to claim the full 30 percent investment tax credit for solar projects had to have begun construction before January 1, 2020, while those seeking the full production tax credit (PTC) for wind projects had to have begun construction in 2016.

As set out in earlier guidance, taxpayers can apply one of two tests to satisfy the begin-construction requirement: They can start physical work of a significant nature or they can pay or incur at least 5 percent of the total project cost.

Under both tests, a taxpayer must demonstrate continuous progress toward completion once construction has begun. The physical work test requires taxpayers to maintain a “continuous program of construction,” while the 5 percent test requires “continuous efforts to advance toward completion.” To meet the 5 percent test, accrual-method taxpayers can take advantage of a special accounting rule whereby property the taxpayer reasonably expects to be provided within  months of the date of payment will be considered provided on the payment date (the 3½-month rule).

Prior IRS guidance provided a “continuity safe harbor,” under which the continuity requirement will be deemed satisfied if a project is placed in service no later than the end of the fourth calendar year following the year in which construction began.

Notice 2020-41 adds an extra year to the four-year continuity safe harbor for taxpayers that began construction in 2016 or 2017, and provides a safe harbor for taxpayers that rely on the 3½-month rule. For services or property paid for on or after September 16, 2019, the taxpayer will be deemed to have had a reasonable expectation that the services or property would be received within  months after the date of payment if the services or property are actually received by October 15, 2020.

The notice doesn’t provide a similar safe harbor for purchases made at the end of 2020, but notes that satisfaction of the 3½-month rule is based on reasonable expectations at the time of payment.

Traffic Jam Avoided

Amish M. Shah of Eversheds Sutherland (US) LLP said he appreciates that the IRS is giving renewable energy developers and investors more time to meet project deadlines.

However, Shah said, “We would have preferred that the continuity safe harbor extension also apply to 2018, 2019, and 2020 start-of-construction projects, since they are also impacted by the workforce and supply chain impacts of the COVID-19 crisis, and because the limited extension may unfairly impact 2018 start-of-construction projects which are entitled to a PTC at 60 percent of the full rate and are required to be placed in service by the end of 2022.”

Projects that began in 2018 will now be competing with those that began construction in 2017 and are entitled to a higher PTC (80 percent of the full rate) because the 2017 projects will now also be placed in service in 2022, Shah said.

Keith Martin of Norton Rose Fulbright US LLP said the new notice “deals with the most immediate problem, which was the potential for a massive traffic jam late in the year, because in the wind market there is something like 15,000 megawatts of wind projects that have to be put in service by the end of 2020.”

Martin said there were a few items the industry had hoped would be included in the notice but were not. Taxpayers relying on the physical work test to satisfy the begin-construction requirement had asked for a safe harbor on the proof needed to show “continuous efforts” were made if they don’t finish projects on time, he said.

“You’d have to prove actual, continuous physical construction, which is impossible to do in these projects,” Martin said. “There was a hope by some segments of the industry that the government would give them more time no matter how they started construction. But I think Treasury felt that that wasn’t a purely COVID issue.”

The notice also doesn’t provide any special relief for offshore wind projects, Martin said. He noted that since August 8, 2019, the federal government has put a hold on construction permits for most wind projects off the Atlantic coast.

“Offshore wind developers have been hoping for a four-year extension to address this problem,” Martin said. “But it didn’t get in the notice, again because the government was narrowly focused on things that are solely COVID-related.”

The IRS also didn’t grant a request from five Republican members of the House Western Caucus who had asked that more time be given to taxpayers to complete projects on federal land, Martin said. “I think the issue there was that Treasury was uncertain why a project on federal land was different from one on private land and deserved more time,” he said.

Nevertheless, Martin said he appreciated that Treasury and the IRS have been moving quickly to address taxpayers’ concerns during the COVID-19 crisis. “They make decisions quickly despite everything else on their plate,” he said.

Katherine Breaks of KPMG LLP agreed that the notice provided much-needed relief. “The thing to keep in mind is that these projects are very expensive and they have financing that has to be lined up, so anything the IRS can do to reduce the uncertainty that these projects will qualify for the tax credit is beneficial to the industry,” she said. 

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