Beginning of construction requirement continuity safe harbor extended
TAX ALERT |
Authored by RSM US LLP
The IRS recently released Notice 2021-05 addressing the beginning of construction requirement for the renewable electricity production tax credit under section 45 (PTC) and the investment tax credit under section 46 and 48 (ITC). Specifically, the notice provides a background on the beginning of construction requirement and the continuity safe harbor but also extends the safe harbor to qualified facilities and energy property construction projects for offshore and federal land projects, respectively.
Section 38 allows for a credit for the sum of certain business credits, among them, the PTC and ITC. In order to qualify for the credits the taxpayer must produce electricity at a qualified facility, for the PTC, or place energy property in service, for the ITC. Under section 48(a)(5), the taxpayer may elect to claim the ITC in lieu of the PTC with respect to qualified property that is part of certain qualified facilities. Both the PTC and the ITC have a beginning of construction requirement.
In 2013, the IRS released Notice 2013-29 to address the beginning of construction requirement. The notice provides two methods for establishing the beginning of construction, the Physical Work Test and the Five Percent Safe Harbor. Both methods have a continuity requirement, that is, they require the taxpayer to make continuous progress toward completing the construction of the qualified facility or energy property once construction has begun.
The continuity requirement for the Physical Work Test is the Continuous Construction Test. This test requires that a taxpayer maintain a continuous program of construction by continuing physical work of a significant nature. This determination is made on a facts and circumstances basis.
The continuity requirement for the Five Percent Safe Harbor is the Continuous Efforts Test. This test requires that a taxpayer make continuous efforts to advance towards completion of the facility. This determination is made on a facts and circumstances basis. Notice 2013-29, section 5.02(1) provides that facts and circumstances indicating continuous efforts to advance towards completion of the facility may include paying or incurring additional amounts included in the total cost of the facility, entering into binding written contracts for components or future work on construction of the facility, obtaining necessary permits, and performing physical work of a significant nature.
The IRS released Notice 2013-60 in order to provide clarification to when a taxpayer satisfies the Physical Work Test or the Five Percent Safe Harbor. The notice provides a Continuity Safe Harbor, which allowed a facility placed in service before Jan. 1, 2016 to be deemed to have satisfied the continuity requirement of either the Physical Work Test or the Five Percent Safe Harbor.
The Continuity Safe Harbor of Notice 2013-60 was extended and modified several times. Of note, Notice 2016-31 modified the Continuity Safe Harbor by providing that, if a taxpayer places a facility in service by the later of 1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or 2) Dec. 31, 2016, the facility would be deemed to satisfy the Continuity Safe Harbor. The ‘no more than four calendar year’ language was a staple in the Continuity Safe Harbor notices going forward. Notice 2017-04 used this same language but changed the later date to Dec. 31, 2018. Notice 2018-59 reiterated this terminology with an emphasis that if a taxpayer does not place an energy property in service by the end of the fourth calendar year after the calendar year which construction began, that the taxpayer’s satisfaction of the continuity requirement is determined by the relevant facts and circumstances.
Notice 2019-43 and Notice 2020-41 allow for limited exceptions to the Continuity Safe Harbor. Notice 2019-43 permits the Continuity Safe Harbor to be tolled and extended in circumstances involving significant national security concerns. Notice 2020-41 extended the Continuity Safe Harbor, in response to delays caused by COVID, from four to five years for construction on energy facilities that began in either calendar year 2016 or 2017.
On Dec. 27, 2020 the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act) was enacted. The Act made several changes to sections 45 and 46 with regard to the PTC and ITC. First, the Act extended the deadline for the beginning of construction requirements for certain qualified facilities to Dec. 31, 2021. The Act also extended the beginning of construction deadline applicable to the election to claim the ITC in lieu of the PTC by one year to construction beginning before Jan. 1, 2022. The Act also extended the deadlines for the beginning of construction requirements for certain ITC energy property to Dec. 31, 2023. The Act also extended beginning of construction deadlines for the phase out provisions applicable to the PTC and ITC. And, applicable to Notice 2021-05, the Act amends section 48(a)(5) to provide special rules for “qualified offshore wind facilities.”
Qualified offshore wind facility is defined as a qualified facility described under section 45(d)(1), with the begun construction date extended to Dec. 31, 2025, that is located in the inland navigable waters or coastal waters of the U.S. Further, the phase out of credit for wind facilities does not apply to the qualified offshore wind facilities and the beginning of construction deadline for electing to claim the ITC in lieu of the PTC is extended to Dec. 31, 2025.
Notice 2021-05 extends the Continuity Safe Harbor to taxpayers engaged in constructing qualified facilities or energy projects that are offshore projects or federal land projects. Significantly, the notice deems the continuity requirements met for these projects if the facility or property is placed into service by the end of the calendar quarter that is no more than 10 calendar years after the calendar year during which construction began. The notice defines a federal land project as a facility or property construction project, which is more than 50%, placed on federal land, determined by value or area, and will require the construction of one or more high-voltage transmission lines to connect to the Grid. The notice defines an offshore project as a facility or property construction project, which is placed in service offshore and will require the construction of one or more high-voltage transmission lines to connect to the Grid.
The rules for determining qualifying PTC and ITC projects are intricate and complex. The safe harbors and various tests provided in the notices can help taxpayers to plan their projects and relieve them from uncertainty about credit eligibility. It is important to consult with your tax advisor to have a clear understanding of the various rules and safe harbors to more effectively plan the life cycle of your PTC or ITC project.
This article was written by Tom Windram, Trina Pinneau and originally appeared on 2021-01-06.
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