IRS Further Extends Continuity Safe Harbor for 2016 and Later Renewable Energy Projects

On June 29, 2021, the IRS issued Notice 2021-41, providing taxpayers additional relief for purposes of satisfying the beginning-of-construction requirement for qualifying production tax credit (PTC) and investment tax credit (ITC) projects. Specifically, the IRS notice extends the generally applicable Continuity Safe Harbor (defined below) by providing (1) a six-year Continuity Safe Harbor for projects that began construction in 2016, 2017, 2018 or 2019 and (2) a five-year Continuity Safe Harbor for projects that began construction in 2020.

Under prior IRS guidance, once a qualifying renewable energy project has satisfied the beginning-of-construction requirement for ITCs or PTCs, such construction must continue until the project is placed in service (the Continuity Requirement). A project can satisfy the Continuity Requirement by either (1) maintaining a “continuous program of construction” when the beginning of construction is based on the Physical Work Test (the Continuous Construction Test) or (2) making “continuous efforts” to complete the project when the beginning of construction is based on satisfying the 5 Percent Safe Harbor (the Continuous Efforts Test).

In its prior guidance, the IRS provided a presumption of continuity for most renewable energy projects for purposes of satisfying the Continuity Requirement: As long as the project was placed in service within four calendar years after the calendar year during which construction began, the Continuity Requirement would be deemed satisfied (the Continuity Safe Harbor). In response to the COVID-19 pandemic in 2020, the IRS provided a one-year extension to the Continuity Safe Harbor for projects that began construction in 2016 or 2017.

Recognizing the ongoing adverse impact on the ability of many taxpayers to satisfy the Continuity Safe Harbor due to continuing COVID-19 related delays in the development of renewable energy facilities eligible for the PTC or ITC, the IRS has agreed in Notice 2021-41 to further extend the Continuity Safe Harbor by providing (1) a six-year Continuity Safe Harbor for projects that began construction in 2016, 2017, 2018 or 2019 and (2) a five-year Continuity Safe Harbor for projects that began construction in 2020.

For qualifying wind projects, the PTC is set to expire at the end of 2021 for projects that have not yet begun construction. For qualified facilities satisfying the applicable Continuity Safe Harbor, the available PTC is as follows: 

For qualifying solar projects, the 26 percent ITC is set to step down at the end of 2022 to 22 percent for projects that have not yet begun construction. To qualify for the 30 percent, 26 percent or 22 percent ITC, the solar project must be placed in service before 2026. If the solar project is placed in service after 2025, the project is eligible only for the 10 percent ITC. For solar energy property satisfying the applicable Continuity Safe Harbor, the available ITC before the step-down to 10 percent in 2024 is as follows:

Finally, in response to taxpayer requests and to harmonize the methods for satisfying the Continuity Requirement, IRS Notice 2021-41 provides that if a qualified facility or energy property does not satisfy the Continuity Safe Harbor, then the Continuity Requirement is satisfied if the taxpayer satisfies the Continuous Construction Test or the Continuous Efforts Test, regardless of whether the Physical Work Test or 5 Percent Safe Harbor was used to establish the beginning of construction.

McGuireWoods lawyers are experienced in renewable energy, project finance and tax equity structures — representing developers, tax equity providers, lenders, off-takers and other parties in renewable energy project development and financing. Please do not hesitate to contact us if you or your business would like to learn more.