IRS extends continuity safe harbor for renewable energy projects

On June 29, 2021, the IRS issued Notice 2021-41, which provides a further extension of the continuity safe harbor and revises the “facts and circumstances” rules:

• For PTC and ITC-eligible projects for which construction began in calendar years 2016 through 2019, the continuity safe harbor is extended to six years.
• For PTC and ITC-eligible projects for which construction began in 2020, the continuity safe harbor is extended to five years.
• Under a facts and circumstances analysis, the continuity requirement may be satisfied under either the continuous construction test or the continuous efforts test, regardless of whether the physical work test or the five percent safe harbor is used.

In issuing this Notice, Treasury and the IRS recognized that COVID-19 continues to cause delays in the development of certain renewable energy projects and, as a result, many taxpayers may not place projects in service in time to meet the current Continuity Safe Harbor, which may significantly impact project financing and development.

Continuity requirement and changes

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. Internal Revenue Service (IRS) guidance provides two alternative 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).

Prior to the issuance of this Notice, to satisfy the Physical Work Test a taxpayer was required to continue physical work of a significant nature (Continuous Construction Test) to satisfy the Continuity Requirement. And, for the 5% Safe Harbor a taxpayer was required to make continuous efforts to advance towards completion of the project (the Continuous Efforts Test) to satisfy the Continuity Requirement. This Notice allows a taxpayer to satisfy the Continuity Requirement using either the Continuous Construction Test or the Continuous Efforts Test regardless of whether the taxpayer used the Physical Work Test or the Five Percent Safe Harbor to begin construction.

Eversheds Sutherland Observation: One of the factors sometimes used in deciding to use the Five Percent Safe Harbor rather than the Physical Work Test to qualify as beginning construction was the fact that the Continuous Efforts Test was considered easier to satisfy than the Continuous Construction Test. Further there was some question as to how the differently the IRS would apply the two tests in practice. This Notice allays those concerns.

Under prior guidance, the Continuity Requirement was deemed satisfied if a taxpayer places a 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). In 2020, the IRS issued Notice 2020-41 providing that for projects for which construction began in 2016 or 2017, the Continuity Safe Harbor was extended to five years. Notice 2021-41 further extends the Continuity Safe Harbor for projects for which construction began in 2016 through 2019. The Continuity Requirement is deemed satisfied for those projects if placed in service by the end of the calendar year that is no more than six calendar years after the calendar year in which construction of the project began. Notice 2021-41 also extends the Continuity Safe Harbor for projects the construction of which began in 2020 to five calendar years after the calendar year during which construction of the project began. 

Eversheds Sutherland Observation: In light of continuing supply chain and workforce disruptions caused by COVID-19, this relief is very much welcome in relieving the uncertainty inherent in a facts and circumstances analysis to satisfy the Continuity Requirement, rather than the Continuity Safe Harbor.

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