On June 29, 2021, the Internal Revenue Service (IRS) released Notice 2021-41 (the “Notice”) granting additional relief for certain renewable energy projects planning to claim the U.S. federal production tax credit (PTC) or investment tax credit (ITC).
In general terms, the amount of PTC or ITC available for a renewable energy project depends on when the construction of the project begins. Under prior IRS notices, there are two methods of beginning construction. One method is beginning physical work of a significant nature (the “Physical Work Test”) and maintaining a continuous program of construction (the “Continuous Construction Test”). The other is paying or incurring 5% of the project costs (the “5% Safe Harbor”) and making continuous efforts to advance towards completion of the facility (the “Continuous Efforts Test”). In each case, there is a safe harbor that the continuity requirements will be deemed satisfied if the project is placed in service within a specified time period (the “Continuity Safe Harbor”), which the IRS has extended several times.
In prior IRS notices, the IRS provided that a project must be placed in service no more than four calendar years after the calendar year in which construction began. Then, on May 27, 2020 in response to construction delays in connection with the COVID-19 pandemic, the IRS extended the 4-year safe harbor to 5 years for projects that began construction in 2016 or 2017.
Now, the June 29 Notice provides for a further extension of the Continuity Safe Harbor to 6 years for projects that began construction in 2016, 2017, 2018 or 2019 and to 5 years for 2020 projects.
Additionally, in the event the Continuity Safe Harbor is not met, the Notice provides that, regardless of the method that the taxpayer used to begin construction (i.e., the Physical Work Test or 5% Safe Harbor), the continuity requirement is satisfied if the taxpayer demonstrates satisfaction of either the Continuous Construction or the Continuous Efforts Tests. This is a helpful change for projects relying on the Physical Work Test, as the Continuous Efforts Test–previously only available for projects relying on the 5% Safe Harbor–is an easier test to satisfy.
The June 29 Notice does not change specific rules still applicable to certain renewable energy projects, including that solar projects continue to be subject to the statutory cliff and must be completed by the end of 2025 to qualify for the ITC and renewable energy projects offshore or on federal land still have a 10-year Continuity Safe Harbor period.