May 29, 2020
On Wednesday, May 27, 2020, the Internal Revenue Service (“IRS”) issued a notice to extend the continuity safe harbor for renewable energy production tax credit (“PTC”) and investment tax credit (“ITC”) projects that began construction in 2016 and 2017. Notice 2020-41 (the “Notice”) modifies existing guidance to add an extra year to the four-year continuity safe harbor, providing that projects placed in service within five years will now satisfy the continuity safe harbor.
Under existing guidance, construction of a project is considered to have begun for purposes of qualifying for PTC or ITC when either (i) physical work of a significant nature begins with respect to a project or (ii) the taxpayer pays or incurs 5% of the total cost of energy property included in a project. The taxpayer must then satisfy a continuity requirement, which must be established by showing a continuous program of construction that involves continual physical work of a significant nature toward completion of a project, based on all of the facts and circumstances. Prior to the Notice, however, a project that was placed in service no later than the end of the fourth calendar year following the year in which construction began would have been deemed to satisfy this continuity requirement.
This extension comes after numerous developers and investors expressed concern that projects that were originally intended to be completed by the end of 2020 may extend into 2021, which would require affected taxpayers to show continuous construction or continuous efforts to qualify for PTC or ITC. This is a particularly welcomed modification to taxpayers whose projects, which would otherwise have qualified, may have failed to qualify due to industry-wide delays in the supply chain and worksite closures caused by the COVID-19 pandemic.
The Notice also provides a safe harbor extending the 3½-month rule for taxpayers to satisfy the beginning-of-construction requirements to include any services or property paid for on or after September 16, 2019 and received by October 15, 2020. Prior to the Notice, for a cost related to the purchase of property or services to be deemed “incurred” by an accrual method taxpayer in a particular year — for purposes of qualifying under the 5% safe harbor test — it must have been reasonable for the taxpayer to expect to receive the property or services within 3 ½ months after the date of payment for such property or services. Under the Notice, if the services or property were paid for by the taxpayer on or after September 16, 2019 and such services or property are received by October 15, 2020, the taxpayer’s expectations at the time of payment in 2019 are deemed reasonable. This modification may provide welcomed relief for taxpayers who started construction by incurring 5% of project costs and made payments for services or property in the latter part of 2019 and reasonably expected to receive same within 3½ months but likely failed to do so as a result of the COVID-19 pandemic.
Please note that the IRS will not issue private letter rulings or determination letters to any taxpayer on these issues.
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