On June 29, 2021, the Internal Revenue Service (“IRS”) issued IRS Notice 2021-41 (the “Notice”), which extends the “Continuity Safe Harbor” for renewable energy projects that qualify for production tax credits under Section 45 of the Internal Revenue Code (“PTCs”) or investment tax credits under Section 48 of the Internal Revenue Code (“ITC”).1 In addition, the Notice relaxes the standard for meeting the “Continuity Requirement” for projects that began construction under the “Physical Work Test.”2
The Notice is welcomed by the renewable energy industry, particularly for projects that suffered disrupted supply chains or construction operations, or other delays caused by the COVID-19 pandemic or extreme weather events.
Under the Notice, if a qualified PTC facility or ITC energy project the construction of which began in 2016, 2017, 2018, or 2019 is placed in service within six calendar years after the calendar year in which construction began, the Continuity Safe Harbor is satisfied, and a taxpayer need not demonstrate facts and circumstances indicating continuous construction efforts to satisfy the “Continuity Requirement.” If a project the construction of which began in 2020 is placed in service within five calendar years after the calendar year in which construction began, the Continuity Safe Harbor is satisfied, and a taxpayer need not demonstrate facts and circumstances indicating continuous construction efforts to satisfy the “Continuity Requirement.”
In addition, the Notice clarified that if a renewable energy project does not satisfy the Continuity Safe Harbor, the project may satisfy the Continuity Requirement through the “Continuous Construction Test” or the “Continuous Efforts Test,” regardless of whether the project established the beginning of construction under the “Physical Work Test” or the “Five Percent Safe Harbor.”
The Notice establishes relaxed standards for meeting the Continuity Safe Harbor compared to previous IRS guidance. The Notice also expands the Continuous Efforts Test to include projects that began construction under the Physical Work Test. Under prior guidance, if a project that began construction under the Physical Work Test did not meet the Continuity Safe Harbor, it was necessary for the project to meet the Continuous Construction Test in order to satisfy the Continuity Requirement, which was a more stringent test than the Continuous Efforts Test.
1 Renewable energy projects that qualify for PTCs generally include wind, biomass, and hydropower.
Renewable energy projects that qualify for the ITC generally include solar, geothermal, and fuel cell.
2 The amount of PTCs or ITC that a renewable energy project may claim depends on when the project begins construction. There are two methods for satisfying the beginning of construction requirement: (i) starting physical work of a significant nature (the “Physical Work Test”) or (ii) having paid or incurred five percent or more of the total cost of the energy project (the “Five Percent Safe Harbor”). Both methods require taxpayers to make continuous progress towards completion once construction has begun (the “Continuity Requirement”).
Under previous IRS guidance, a project that began construction in 2016 or 2017 would automatically satisfy the Continuity Requirement if the project is placed in service within five calendar years after the calendar year in which construction began, and a project that began construction in other years would automatically satisfy the Continuity Requirement if the project is placed in service within four calendar years after the calendar year in which construction began (the “Continuity Safe Harbor”).
