Treasury, IRS Extend Safe Harbor for Renewable Energy Projects
The Department of the Treasury and the IRS recently issued Notice 2021-41, extending the Continuity Safe Harbor for taxpayers developing renewable energy projects affected by the COVID-19 pandemic.
In prior notices, the Treasury Department and the IRS established the Continuity Safe Harbor that allows an eligible renewable energy project to be deemed to satisfy the continuity requirement for taking the production tax credit and the investment tax credit (Continuity Safe Harbor) if the taxpayer places the project in service within a certain period that starts in the taxable year in which construction of the project began.
Notice 2021-41 provides relief to taxpayers impacted by project delays related to the pandemic by allowing additional time to satisfy the Continuity Safe Harbor. It also adds flexibility for taxpayers to satisfy the continuity requirement outside of the safe harbor.
A taxpayer has two methods to demonstrate construction has begun of a project, the Physical Work Test and the Five Percent Safe Harbor. After a taxpayer begins construction of a project, the taxpayer must also make continuous progress toward completion to satisfy beginning of construction requirements. Under the Physical Work Test, a taxpayer uses the Continuous Construction Test to demonstrate continuous progress whereas under the Five Percent Safe Harbor, a taxpayer uses the Continuous Efforts Test.
Notice 2021-41 provides that the period of the Continuity Safe Harbor provided and extended by prior IRS notices is further extended for projects for which construction began in 2016 through 2020:
- For projects for which construction began under the Physical Work Test or the Five Percent Safe Harbor in 2016, 2017, 2018, or 2019, the Continuity Safe Harbor is satisfied if the project is placed in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction began, and
- For projects for which construction began under the Physical Work Test or the Five Percent Safe Harbor in calendar year 2020, the Continuity Safe Harbor is satisfied if the project is placed in service by the end of the calendar year that is no more than five calendar years after the calendar year during which construction began.
The notice also clarifies that if the Continuity Safe Harbor does not apply, the continuity requirement is satisfied if the taxpayer demonstrates satisfaction of either the Continuous Construction or the Continuous Efforts Tests, regardless of the method that the taxpayer used to begin construction.