In IRS Notice 2020-41, released May 27, 2020, the IRS offered two significant forms of relief for taxpayers claiming the renewable energy credit, because of the disruption caused by the COVID-19 pandemic. These new provisions create flexibility in the determination of when a project is considered to have begun and is completed pursuant to the existing renewable energy credit rules of section 45 for the Production Tax Credit (PTC) and section 48 for the Investment Tax Credit (ITC).
Extension of time to place property in service
The notice granted an extension of time for taxpayers to place renewable energy property in service for projects that began in 2016 or 2017, as required to claim the ITC or PTC for those years. Generally, this property must be placed in service during the continuity safe harbor to claim the ITC or PTC, which had previously been four years from the calendar year in which the construction began. Under the safe harbor extension granted in the notice, taxpayers will now have five years from the calendar year in which construction began to place the property in service.
Expansion of safe harbor for the ‘beginning construction’ requirement
This notice also expanded a safe harbor for taxpayers to receive property or services for purposes of establishing that the construction of the renewable energy project has begun. The calendar year in which construction begins is important in that it can determine what the available energy credit percentage is for the project. For the ‘beginning construction’ requirement of the PTC and ITC, a taxpayer is required to perform physical work of a significant nature or meet a safe harbor by paying or incurring 5% of the costs of a renewable energy project by the end of the applicable tax year before the construction is considered to have commenced.
In accordance with Reg. section 1.461-4(d)(6)(ii), a taxpayer may treat services or property as provided to the taxpayer as the taxpayer makes payment to the services or property provider if the taxpayer can reasonably expect to receive the property or services within three and a half months after the date of payment. This notice provides a significant extension to taxpayers that pay for property or services on or after Sept. 16, 2019, allowing those taxpayers to include those costs at the time they were paid or incurred as long as the property or service is received by Oct. 15, 2020, and was originally reasonably expected to be received within three and a half months. This creates welcome flexibility for a taxpayer to meet the 5% safe harbor noted above.
Although taxpayers now have more flexibility in their renewable energy credit claims, they should still carefully consider all applicable rules and discuss the project with their tax adviser before making any decisions regarding this extension, safe harbor or the renewable energy credit in general.