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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.




Key Takeaways | The Energy Market in 2021: Legislative Update on Renewable Energy Tax Incentive

The energy market has undergone significant change in the past 12 months, with even more on the horizon. Our webinar series explores how these changes have shaped—and will continue to impact—the energy industry, including discussions of what’s to come.

Our latest webinar featured McDermott partners Philip Tingle and Heather Cooper and Carol Wuerffel, Senior Director, Tax at Ameren.

Below are key takeaways from the webinar:

  1. Tech Neutral Credit. The Clean Energy for America Act introduced by Senator Ron Wyden (D-OR) would replace existing renewable energy incentives with technology-neutral tax investment and production credits for facilities with zero net or net negative carbon emissions. In coordination with the Environmental Protection Agency, the US Department of the Treasury would be responsible for promulgating regulations specifying qualifying technologies. The credit would be provided to partnerships and not individual partners for renewable investments made by pass-through entities.
  2. Direct Pay. In early 2021, House Democrats reintroduced the Growing Renewable Energy and Efficiency Now (GREEN) Act. In addition to extending and expanding the existing investment tax credit (ITC) and production tax credit (PTC), the GREEN Act would permit taxpayers to elect to claim 85% of the expanded ITC and PTC amounts as a refundable credit, even if they do not have sufficient tax liabilities to otherwise use the credits. The Wyden bill likewise would offer a direct pay election but without any discount against the tax credit. The timing of payments under the refundable credit may impact whether developers will shift from current tax-equity structures. If a developer must file a return and wait to resolve any examinations or other ongoing proceedings to receive the benefit, the refundability could be of limited value.
  3. Net Zero 2050. US President Joe Biden has set an aggressive climate goal of reducing greenhouse gas emissions by at least 50% below 2005 levels by 2030 and to net zero by 2050. Developers and utilities need additional certainty around the scheduled phaseouts in the ITC and PTC in order to build renewable resources to meet climate goals. While the White House has yet to back a specific package of renewable tax incentives, the proposals introduced by congressional Democrats are a likely starting place for negotiations.

To access past webinars in this series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




Why 2030 is the New 2050 after the Leaders Climate Summit and What President Biden’s Accelerated Transition to a Sustainable Economy Means for Renewables Developers, Investors and Corporates

2030 is the new 2050 as US President Joe Biden has officially set a new goal for fighting climate change over the next decade in the United States. At the Leaders Climate Summit (the Summit) on Earth Day, he announced that America would aim to cut its greenhouse gas emissions at least 50% below its 2005 levels by 2030. If successful, this transition would lead to a very different America and would affect virtually every corner of the nation’s economy, including the way Americans get to work, the sources from which we heat and cool our homes, the manner in which we operate our factories, the business models driving our corporations and the economic factors driving our banking and investment industries. The effectiveness of this transition lies in the administration’s ability to pull on two historically powerful levers: Tax policy and infrastructure funding. However, tax policy will call upon multiple sublevers, such as increased tax rates, expanded tax credits, refundability, carbon capture, offshore wind, storage, transmission and infrastructure investment. All of this will be bolstered by the American corporate sector’s insatiable appetite for environmental, sustainability and governance (ESG) goal investment.

QUICK TAKEAWAYS

There were six key announcements at the Summit for renewables developers, investors and corporates to take note:

  1. The United States’ commitment to reduce its greenhouse gas emissions by 50% – 52% below its 2005 emissions levels by 2030
  2. The United States’ economy to reach net-zero emissions by no later than 2050
  3. The United States to double the annual climate-related financing it provides to developing countries by 2024
  4. The United States to spend $15 billion to install 500,000 electric vehicle charging stations along roads, parking lots and apartment buildings
  5. A national goal to cut the price of solar and battery cell prices in half
  6. A national goal to reduce the cost of hydrogen energy by 80%

President Biden’s goals are ambitious. It is clear from the history of renewable incentives in the United States as well as current developments that moving forward, the green agenda will predominately rely on two primary levers being pulled at the federal level: Tax policy and infrastructure funding. The federal tax levers mentioned above will not be pulled in a vacuum. Instead, they will be pulled in the midst of a tectonic shift among individual investors that now demand that institutional investors and corporations begin to create and meet ESG goals as individual customers are beginning to take a corporation’s climate goals and footprint into account when making purchasing decisions.

As a result, we discuss the following areas in greater detail below:

  1. Tax policy
    1. increased tax rates
    2. expanded tax credits
    3. refundability
    4. carbon capture
    5. offshore wind
    6. storage
    7. transmission
  2. Infrastructure bill
  3. ESG environment

DEEPER DIVE: BREAKING DOWN EACH LEVER AS WELL AS ITS OPPORTUNITIES AND CHALLENGES

  1. Tax Policy: The consistent message from the Biden Administration, at the Summit and elsewhere, makes clear that tax policy will likely play a significant role in the administration’s ambitious climate agenda. At [...]

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IRS Provides Relief for Offshore Wind and Federal Land Projects

New guidance from the Internal Revenue Service (IRS) extends the Continuity Safe Harbor to 10 years for both offshore wind projects and projects on federal land. The relatively quick release of this guidance following enactment of the offshore wind investment tax credit (ITC) last week suggests strong support for these projects by Congress, the US Department of the Treasury and IRS.

Access the article.




COVID-19 Stimulus Bill Includes Key Renewable Energy Tax Credits

The US stimulus bill passed into law yesterday includes several key extensions and additions to the tax credits available for renewable energy. The bill had been agreed to by Congress early last week and was signed into law by the president last night.

Access the full article here.




Six Takeaways from Wind Turbine Vendor Update: A Conversation with GE Renewable Energy


McDermott hosted GE Renewable Energy North America Services Sales Leader Ben Stafford, Commercial Director of Onshore Wind for the North Region Rob Bienick and Commercial Director of Onshore Wind for the West Region Matt Lynch on July 30 for a discussion about COVID-19’s impact to turbine supply chain and construction, the effects of the Production Tax Credit (PTC) safe harbor extension, and how GE is preparing for 2021 and beyond.

Below are key takeaways from this week’s webinar.

1. COVID-19 continues to impact both supply chain and construction – requiring more communication with customers, subcontractors, and within GE, but products continue to be manufactured, delivered, installed, and maintained.

2. The large wind project pipeline in the United States (even prior to the PTC extension) shows that there remains great optimism for the wind industry, despite the current PTC phase-out schedule.

3. The repowering market for wind is growing, providing many benefits including renewed PTCs, increased energy yield, increased reliability, lowered maintenance cost, and optimization of existing site infrastructure over greenfield development.

4. The trend toward longer blades continues, but logistics remain the largest hurdle to wider deployment.

5. Service agreements are trending towards longer terms with greater flexibility to meet customer needs, including opportunities to align interests with revenue and risk sharing terms.

6. GE is available to support both new and repowering projects with available safe-harbor equipment.

To begin receiving Energy updates, including invitations to the webinar series, please click here.

Access past webinars in this series.




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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What COVID-19 Means For Renewable Projects And Financing

The world is facing a situation unprecedented in modern times with the global spread and impact of COVID-19. Its rapid spread has brought severe disruption and uncertainty to everyone’s personal lives, as well as to the wind, solar and storage industry supply chains, the renewable project financing market, and global markets at large.

While the speed and complexity of the virus make it impossible to know the full effects it will ultimately have on the world, what follows is what we know today about the impact of COVID-19 on the supply chains for solar, energy storage and wind developers, as well as the project finance market.

Access the full article.




IRS Releases Initial Section 45Q Carbon Sequestration Credit Guidance

Treasury and the IRS released initial guidance on the amended Section 45Q carbon oxide sequestration credit on February 19, 2020. Notice 2020-12 and Revenue Procedure 2020-12 provide guidance relating to the beginning of construction and tax equity partnership allocations.

This is the first Section 45Q guidance since Treasury issued a request for comments in Notice 2019-32 last year. That Notice sought input on a number of issues raised by amendments to Section 45Q that expanded the scope and enhanced the amount of the Section 45Q credit pursuant to the Bipartisan Budget Act of 2018, P.L. 115-123. The new guidance in Notice 2020-12 and Revenue Procedure 2020-12 is effective March 9, 2020.

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The Senate’s New Base Erosion Tax: Highlights for Renewable Energy

On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act. The Senate Bill includes the base erosion and anti-abuse tax, a new tax intended to apply to companies that significantly reduce their US tax liability by making cross-border payments to affiliates. Given its potential to disrupt the financing of renewable energy projects, taxpayers in the renewable energy sector have been paying close attention to its developments.

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