IRS Notice 2020-41 provides relief for renewable energy projects that began construction in 2016 or 2017 by extending the “continuity safe harbor” to a five-year period.
As discussed in a prior alert, the COVID-19 crisis has led to industry-wide supply chain disruptions and construction delays and stoppages of renewable energy projects, such as wind and solar. Such delays caused significant concerns for developers and investors in projects that began construction in 2016, as it created uncertainty regarding the possibility of the projects being completed and “placed in service” by the end of 2020, the deadline to meet the IRS “continuity safe harbor,” allowing such projects to qualify for the federal tax credits.
Recognizing the impact of COVID-19 on the renewable industry and addressing the industry’s concerns, the IRS issued Notice 2020-41 on May 27, 2020, which extends the “continuity safe harbor” period for projects that began construction in 2016 or 2017. Such projects will now have a five-year period to complete their construction and be “placed in service,” in lieu of the prior four-year period.
As such, wind projects that began construction in 2016, either by incurring or paying 5% of the cost of the project or by commencing physical work of a significant nature, would now have until the end of 2021 to be “placed in service” to be eligible for the 100% PTCs. Similarly, projects that began construction in 2017 would now have until the end of 2022 to be “placed in service” to be eligible for the 80% PTCs.
The same relief applies to other forms of renewable energy resources eligible for the PTCs or ITC, pursuant to Sections 45 or 48 of the Code, such as geothermal, biomass, landfill gas and hydropower.
The Notice further provides relief for projects that intended to commence construction in 2019 by incurring 5% of the cost of the project and relying on the “3.5-month” rule.
Generally, the cost of property manufactured, constructed or produced for the taxpayer by another person is treated as incurred by the taxpayer when the property is provided to it. The 3.5-month rule is an exception to such general rule. According to such exception, an accrual method taxpayer is deemed to incur the cost of the acquisition of such property provided to it, upon the payment date (and not the delivery date), as long as the taxpayer reasonably expects to receive such property within 3.5 months of the date the payment was made. This exception applied regardless of any subsequent events that prevented that reasonable expectation from occurring.
To address the supply chain disruptions caused by the COVID-19 crisis, which led to delays beyond such 3.5-month period, and to provide certainty and assurance to taxpayers who relied on such exception, the Notice revised this exception by providing a safe harbor. The new safe harbor provides that taxpayers who paid for services or property on or after September 16, 2019, will be deemed to have had a reasonable expectation that the services or property would be received within 3.5 months after the date of payment, as long as such services or property were (or will be) received by the taxpayers by October 15, 2020. As such, these taxpayers will be treated as incurring the cost on the date of such payment.
Although this extended 3.5-month safe harbor will not apply to services or property received by a taxpayer after October 15, 2020, the taxpayer may nevertheless satisfy the 3.5-month rule, based on the relevant facts and circumstances and its reasonable expectations at the time of payment.
In conclusion, the Notice provides the anticipated and much-needed relief for the renewable industry. It provides sufficient flexibility to projects impacted by COVID-19, reassuring developers, investors and lenders that such projects could now satisfy the “beginning of construction” and “continuity” requirements, and limit the impact of COVID-19 related delays on these projects’ eligibility for the relevant tax credits.