The IRS recently issued Notice 2021-05, which extends the continuity safe harbor to 10 years for offshore wind projects and renewable energy projects constructed on federal land. Under prior IRS guidance, most renewable energy projects had to be placed in service within four years after the year construction began; however, during the COVID-19 crisis, the IRS provided a one-year extension for renewable energy projects that began construction in 2016 or 2017. See McGuireWoods’ May 29, 2020 alert, “Wind PTC and Solar ITC Gain COVID-19 Construction Relief From IRS.”
There are two ways to determine whether a taxpayer has satisfied the beginning-of-construction requirement under Sections 45 (production tax credit) and 48 (investment tax credit) of the Internal Revenue Code of 1986, as amended. One is if “physical work of a significant nature” has commenced, and the other is if the taxpayer has paid or incurred 5 percent or more of the total cost of the facility.
In addition to satisfying either the physical work method or the 5 percent safe harbor method, the taxpayer is required to make continuous progress toward completion once construction has begun (continuity requirement), which progress will be determined based on the relevant facts and circumstances. Given the uncertainty associated with such a determination, the IRS has established a safe harbor such that a renewable energy project will be deemed to have satisfied the continuity requirement if the project is placed in service within four calendar years after the year in which construction began, or within five calendar years if construction began in either 2016 or 2017 (continuity safe harbor).
The IRS recognized that certain renewable energy projects being constructed offshore or on federal land are subject to significantly greater delays than other projects and, therefore, are at a significantly higher risk of failing the continuity safe harbor. These delays, which are ordinarily outside the control of the project developers, include more stringent permitting requirements, lengthier engineering and construction timelines, heightened environmental regulation, and the need to construct new transmission lines to connect these projects to the grid.
Also, renewable energy projects that are located in the inland navigable waters or in the coastal waters of the United States and that will require the construction of one or more high-voltage transmission lines to connect the project to the grid (offshore projects) can now qualify for the continuity safe harbor if the project is placed in service within 10 years after the calendar year during which construction of the project began. Similarly, projects that are located more than 50 percent on land owned or controlled by the United States (as determined by relative value or relative area) and that will require the construction of one or more high-voltage transmission lines to connect the project to the grid (federal land projects) can now qualify for the 10-year continuity safe harbor.
The 10-year continuity safe harbor will now provide more certainty to developers of offshore wind and federal land projects.