On June 29, 2021, the Department of Treasury (Treasury) issued new guidance (Notice 2021-41) to address delays related to COVID-19 for taxpayers developing renewable energy projects.
One of the requirements to establish qualification for the production tax credit under IRC section 45 (PTC) or the investment tax credit under IRC section 48 (ITC) is to determine the begin construction date. Two safe harbor methods establish beginning of construction – the Physical Work Test and the Five Percent Safe Harbor. Both methods require a taxpayer to make continuous progress towards completion of the facility once construction has begun (Continuity Requirement). Under the Physical Work Test, the Continuity Requirement is met if continuous progress of construction involves continuing physical work of a significant nature (Continuous Construction Test). Under the Five Percent Safe Harbor, the Continuity Requirement is met if the taxpayer makes continuous efforts to advance towards completion of its project (Continuous Efforts Test). Guidance has also established a Continuity Safe Harbor for taxpayers to meet the Continuity Requirement. Under the Continuity Safe Harbor, the renewable energy project must be placed in service by a specific date. The Continuity Safe Harbor has been extended and modified over time by Treasury guidance.
Treasury and the IRS recognize the circumstances of the COVID-19 pandemic continue to delay the development of certain projects eligible for the ITC and PTC. As a result of this delay, many taxpayers may not be able to place projects in service in time to satisfy the deadlines under the previously-extended Continuity Safe Harbor rule. To address this, Notice 2021-41 provides that the period of the Continuity Safe Harbor rule provided and extended by previous guidance will be further extended for projects where construction began in 2016 through 2020:
- For projects for which construction began under the Physical Work Test or the Five Percent Safe Harbor in calendar year 2016, 2017, 2018 or 2019, the Continuity Safe Harbor is satisfied if the project is placed in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction began; and
- For projects for which construction began under the Physical Work Test or the Five Percent Safe Harbor in calendar year 2020, the Continuity Safe Harbor is satisfied if the project is placed in service by the end of the calendar year that is no more than five calendar years after the calendar year during which construction began.
Further, Notice 2021-41 also clarifies that if the Continuity Safe Harbor rule does not apply, the Continuity Requirement will still be met as long as the taxpayer satisfies either the Continuous Construction or the Continuous Efforts Tests, notwithstanding whether the Physical Work Test or the Five Percent Safe Harbor method was used by the taxpayer to establish the begin construction date.
The expansion of the Continuity Safe Harbor under Notice 2021-41 will come as welcome guidance to taxpayers. Previous guidance issued in May 2020 extended the continuity safe harbor for projects that began construction in 2016 or 2017 and provided these projects must be placed in service within five calendar years to meet the safe harbor. Notice 2021-41 extends relief to projects that began construction in 2016-2019 and provides for the project to be placed in service within six years. Further, it provides for projects where construction begins in 2020, the project must be placed in service within five years to meet the safe harbor. Additionally, the Notice clarifies that if the project is not placed in service within the extended time frame of the safe harbor, either the Continuous Construction Test or the Continuous Efforts Test may be used to establish the Continuity Requirement, regardless of the method taxpayer used to begin construction.