On May 27, 2020, the Internal Revenue Service issued Notice 2020-41, providing taxpayers with relief for purposes of satisfying the beginning-of-construction requirement for qualifying production tax credit (PTC) and investment tax credit (ITC) projects, including wind and solar projects. Specifically, the IRS notice provides (1) a one-year extension to the Continuity Safe Harbor for projects that began construction in 2016 or 2017, and (2) a new safe harbor for satisfying the 3-1/2 Month Rule for property or services purchased after Sept. 15, 2019, and received by the taxpayer no later than Oct. 15, 2020.
Pursuant to guidance set forth in earlier IRS notices, once a taxpayer begins construction on a qualified energy project, it must make continuous progress toward completion of the project (Continuity Requirement), which progress will be determined based on the relevant facts and circumstances. Given the potential uncertainty associated with such a determination, the IRS established a safe harbor in earlier IRS notices that provided that a project will be deemed to have satisfied the Continuity Requirement if the project is placed into service no later than the fourth full calendar year after construction began on the project (Continuity Safe Harbor). If the Continuity Safe Harbor is satisfied, then the project will not need to independently satisfy the Continuity Requirement for purposes of PTC or ITC qualification.
For qualified projects, the construction of which began in 2016 or 2017, IRS Notice 2020-41 now provides a five-year construction window for purposes of satisfying the Continuity Safe Harbor. This means taxpayers that began construction on a qualified project in 2016 can satisfy the Continuity Safe Harbor if the project is placed in service before the end of 2021, while a taxpayer that began construction on a qualified project in 2017 can satisfy the Continuity Safe Harbor if the project is placed in service before the end of 2022. This one-year extension will provide certainty for taxpayers developing renewable energy projects that have been struggling with construction delays related to COVID-19 but otherwise satisfy the beginning-construction requirements for PTC or ITC qualification. (Notably, wind projects that began construction before the end of 2016 may qualify for 100 percent PTCs under Code Section 45, while wind projects that began construction during 2017 may qualify for a reduced 80 percent PTC.) These projects will now have until the end of 2021 and 2022, respectively, to be placed into service and satisfy the new five-year Continuity Safe Harbor.
Additionally, IRS Notice 2020-41 establishes a new safe harbor under the 3-1/2 Month Rule for taxpayers that began construction on qualified projects in late 2019 but are now struggling with delays in the delivery of that earlier purchased safe harbor equipment. Under the prior IRS notices, the beginning of construction of a qualified project may be established by the taxpayer paying or incurring at least 5 percent of the total qualified project costs in the relevant qualifying year (5% Expenditure Test).
Many developers satisfied the 5% Expenditure Test by paying for equipment before the end of 2019 with the expectation that the purchased equipment would be delivered within 105 days after the payment date (3-1/2 Month Rule). The 3-1/2 Month Rule allows a taxpayer to treat the all events test as being satisfied on the earlier 2019 payment date so long as the taxpayer reasonably expected the equipment to be delivered within that 105-day period.
To accommodate COVID-19-related supply chain delays, in Notice 2020-41 the IRS established a new safe harbor whereby the 3-1/2 Month Rule will be presumed satisfied so long as (1) the taxpayer pays for qualified equipment or services after Sept. 15, 2019, and (2) the taxpayer receives such equipment or services on or before Oct. 15, 2020 (the 3-1/2 Month Safe Harbor). This much-needed safe harbor will provide developers and financing parties with certainty that the IRS will respect the 2019 payments for purposes of 2019 ITC and PTC qualification, so long as the final Oct. 15, 2020, delivery deadline is met. While the 3-1/2 Month Safe Harbor will not apply to services or property received by a taxpayer after Oct. 15, 2020, the 3-1/2 Month Rule may still be satisfied, as noted above, based on the taxpayer’s reasonable expectations at the time of payment.
McGuireWoods lawyers are experienced in renewable energy, project finance and tax equity structures. Our lawyers represent developers, tax equity providers, lenders, off-takers and other parties in renewable energy project development and financing. Do not hesitate to contact us if your business would like to learn more.