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IRS Provides Relief on Begin Construction Continuity Requirements

Yesterday, the Internal Revenue Service (IRS) issued Notice 2021-41 (the Notice), providing relief for continuity requirements for the investment tax credit (ITC) under Section 48 and the production tax credit (PTC) under Section 45.

The applicable tax rate for the ITC and PTC is based on the year a project “begins construction.” Under existing IRS guidance, projects are treated as having begun construction by either satisfying the Physical Work Test or the Five Percent Safe Harbor. Both methods require a taxpayer to make continuous progress toward completion of the facility once construction has begun (Continuity Requirement). The IRS previously provided a Continuity Safe Harbor, whereby the Continuity Requirement will be deemed met if the project is placed in service within a certain number of years from beginning construction. For most projects, the Continuity Safe Harbor was previously four years and was extended to five years last year for projects that otherwise began construction in 2016 or 2017. Under the existing guidance, if the Continuity Safe Harbor is not met, a taxpayer can satisfy the Continuity Requirement by meeting the Continuous Construction Test (in the case of the Physical Work Test) or the Continuous Efforts Test (in the case of the Five Percent Safe Harbor). The Continuous Construction Test and Continuous Efforts Test are both demonstrated through facts and circumstances.

In the Notice, the IRS further extended the Continuity Safe Harbor to six years for projects that otherwise began construction in 2016 through 2019 and to five years for projects that otherwise began construction in 2020. In other words, the Continuity Safe Harbor will be satisfied if a taxpayer places the project in service by the end of a calendar year that is no more than five or six years (as applicable) after the calendar year during which construction of the project otherwise began.

The Notice further provides that for a project that does not satisfy the Continuity Safe Harbor, the taxpayer can satisfy either the Continuous Efforts Test or Continuous Construction Test (regardless of whether the taxpayer is relying on the Physical Work Test or the Five Percent Safe Harbor). Under previous guidance, a taxpayer relying on the Physical Work Test was all but certain to fail the Continuous Construction Test, which seems to require regular physical work from the time construction begins. The Continuous Efforts Test appears to encompass more activities than the Continuous Construction Test and may be easier to satisfy for some taxpayers.

The Notice clarifies that the relief was in response to the fact that “regional, national, or global circumstances due to the COVID-19 pandemic have continued to cause delays in the development of certain facilities eligible for the PTC and the ITC. These extraordinary delays have adversely affected the ability of many taxpayers to place facilities in service in time to meet the Continuity Safe Harbor.”

The Notice will be welcome relief to many taxpayers who have struggled with project delays in recent years.




IRS Extends Deadline for ITC and PTC Projects

The IRS yesterday released anticipated guidance extending the placed-in-service deadline for the Investment Tax Credit (ITC) and Production Tax Credit (PTC). Under Notice 2020-41, the “Continuity Safe Harbor” was extended to five years for any project that otherwise began construction in 2016 or 2017.

As background, the applicable credit rate for the ITC and PTC turns on when a project begins construction. The IRS has issued a series of Notices providing guidance on when a project begins construction for these purposes. Under the guidance, taxpayers can either satisfy the “Five Percent Safe Harbor” or “Physical Work Test”. In addition to requiring certain activities in the year construction begins, both methods include a second prong, requiring certain continuous work until the project is placed in service. The IRS has previously provided the Continuity Safe Harbor, under which a project will be treated as having met the second prong so long as it is placed in service by the end of the fourth year after which construction begins on the project. If the project cannot meet the Continuity Safe Harbor, the taxpayer must satisfy the continuity requirement through facts and circumstances.

In the case of the Five Percent Safe Harbor (which requires continuous efforts), demonstrating facts and circumstances is time-intensive and challenging, and is inherently uncertain. In the case of the Physical Work Test (which requires continuous physical work), demonstrating facts and circumstances is likely impossible across four years, leaving many of these projects economically unviable in the absence of IRS relief.

The new Notice extends the Continuity Safe Harbor by one year – from four years to five years – for any projects that began construction in 2016 or 2017. This is welcomed relief for projects that have experienced delays related to COVID-19. The relief is particularly helpful in that it is a blanket extension for any projects that otherwise began construction in 2016 or 2017, without requiring taxpayers prove that delays were specifically related to COVID-19. If the extension were only available for COVID-19 delays, the relief would have had limited value, as taxpayers would have simply gone from trying to demonstrate facts and circumstances relating to continuous work, to having to demonstrate facts and circumstances relating to the nature of the delays. This blanket relief was particularly important, given the cascading impact of COVID-19 through the economy and the renewables industry – which experienced delays relating to supply chains, and also relating to financing and regulatory issues, among others. The extension of the safe harbor provides needed economic certainty for all of these projects.

Notice 2020-41 also provides relief for projects that intended to satisfy the Five Percent Safe Harbor in late 2019 but where equipment has been delayed. Under the existing guidance, costs are taken into account in 2019 under the Five Percent Safe Harbor if they are paid before December 31, 2019 and the property or services are delivered within 105 days of payment (the “105 Day Rule”).  Under the new guidance, if a taxpayer made payment on [...]

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IRS Issues Additional Guidance on Beginning of Construction Rules for Renewable Projects

On December 15, 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the “beginning of construction” requirements for wind and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes. The Notice (1) extends the “Continuity Safe Harbor” placed in service date for projects that started construction before 2014; (2) provides that the “combination of methods” rule set forth in prior guidance only applies to facilities on which construction begins after June 6, 2016; and (3) clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.

Read the full article here.




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