IRS provides COVID-19-related relief for renewables

Eversheds Sutherland (US) LLPOn May 27, 2020, the IRS issued Notice 2020-41, which provides much needed COVID-19-related relief from workforce and supply chain issues impacting the renewable energy industry. The Notice provides the following:

  • For PTC and ITC-eligible projects for which construction began in 2016 or 2017, the continuity safe harbor is extended from four years to five years.
  • For projects that used the 5% Safe Harbor to begin construction and for which payment was made on or after September 16, 2019, a new “3½ Month Safe Harbor” provides that a taxpayer is deemed to have had a reasonable expectation that the services or property would be provided within 3½ months if provided by October 15, 2020.

Continuity Safe Harbor

The amount and availability of section 45 production tax credits (PTCs) and section 48 investment tax credits (ITCs) generally depend upon the year in which construction begins. Current Internal Revenue Service (IRS) guidance provides two methods to establish that construction of renewable energy projects has begun – starting physical work of a significant nature (Physical Work Test) or paying or incurring 5% or more of the total cost of the energy property (5% Safe Harbor). Construction will be deemed to begin on the first date that either method is satisfied, and both methods require continuous progress towards completion of construction (Continuity Requirement). For the Physical Work Test, the Continuous Construction Test requires continuing physical work of a significant nature – a facts and circumstances analysis. For the 5% Safe Harbor, the Continuous Efforts Test, another facts and circumstances analysis, requires a taxpayer to make continuous efforts to advance towards completion of the project property. The guidance lists certain facts and circumstances that indicate continuous efforts, including:

  • paying or incurring additional amounts included in the total cost of project
  • entering into binding written contracts for manufacture of components of property or for future work to construct the project
  • obtaining necessary permits
  • performing physical work of a significant nature

Under prior guidance, the Continuity Requirement is deemed satisfied if a taxpayer places the renewable energy project in service by the end of the calendar year that is no more than four calendar years after the calendar year during which construction of the project began (Continuity Safe Harbor Deadline). If the project is not placed in service before the Continuity Safe Harbor Deadline, whether the Continuity Requirement of either the Physical Work Test or the 5% Safe Harbor is satisfied will be determined by the facts and circumstances.1

As a result of COVID-19-related workforce availability and supply chain issues, many projects for which construction began in 2016 and 2017 are not expected to be placed in service within the four-year period for satisfying the existing Continuity Safe Harbor Deadline. In turn, these potential delays are having significant impacts on project financing and development. Notice 2020-41 provides relief, extending the safe harbor period For PTC and ITC eligible projects for which construction began in 2016 or 2017, from four years to five years. The following summarizes the Continuity Safe Harbor Deadlines following Notice 2020-41:

Year in which construction begins

Continuity Safe Harbor Deadline- prior rules

Continuity Safe Harbor Deadline- as modified2


December 31, 2020

December 31, 2021


December 31, 2021

December 31, 2022


December 31, 2022

December 31, 2022


December 31, 2023

December 31, 2023


December 31, 2024

December 31, 2024

Eversheds Sutherland Observation: Although the relief is welcomed for projects the construction of which began in 2016 and 2017, the same issues may impact projects the construction of which began in 2018 and 2019. We urge Treasury and the IRS in subsequent guidance to extend the relief for those projects as well. In addition, the fact that projects with different tax credit rates (e.g., 80% PTC for 2017 start of construction projects and 60% for 2018 start of construction projects) will likely need to be completed in the same year to satisfy the new Continuity Safe Harbor Deadlines may place 2018 projects at a competitive disadvantage in light the of availability of projects with higher credit amounts available.


3½ month Safe Harbor

The 5% Safe Harbor requires a taxpayer to (i) have paid or incurred (within the meaning of Treas. Reg. § 1.461-1(a)(1) and (2)) 5% or more of the total actual cost of a renewable energy project. An amount is treated as “paid or incurred” for purposes of the 5% Safe Harbor when accrual method taxpayers incur costs. Costs are generally treated as having been incurred when (i) the fact of the liability is fixed; (ii) the amount of the liability is determinable with reasonable accuracy; and (iii) the economic performance test has been met with respect to such cost. Although the economic performance test generally is not satisfied until property or services are provided to a taxpayer, a taxpayer is permitted to treat property or services as provided when the taxpayer makes a payment if the taxpayer can reasonably expect to receive the property or services within 3½ months after the date of payment. Although unexpected delays related to COVID-19 should not impact a reasonable expectation that property or services would be received within 3½ months of payment, to provide certainty to taxpayers, Notice 2020-41 provides a “3½ month Safe Harbor.”

Under the 3½ month Safe Harbor, for services or property paid for by the taxpayer 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 3½ months after the date of payment in the case of any services or property actually received by a taxpayer by October 15, 2020. In the case of any services or property received by a taxpayer after October 15, 2020, the 3½ monthSafe Harbor will not apply. However, in this situation a taxpayer may still be able to satisfy the 5% Safe Harbor based on reasonable expectations at the time of payment, regardless of any subsequent events that prevent that reasonable expectation from actually occurring.

Eversheds Sutherland Observation: The 3½ monthSafe Harbor is a further demonstration of Treasury’s and the IRS’ understanding of the need for certainty with regard to satisfaction of the beginning of construction requirement for the development and financing of renewable energy projects.


1Additional background on these requirements for PTCs and ITCs is available here. The rules for section 45 PTC-eligible facilities are substantially similar to those described in that legal alert.
2In addition, solar energy projects must be placed in service by December 31, 2023, to be entitled to greater than a 10% ITC.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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