IRS Extends Continuity Safe Harbor for PTC and ITC

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The IRS yesterday issued Notice 2021-41, which extends the continuity safe harbor for the beginning-of-construction requirement for the production tax credit under Section 45 of the Code (“PTC”) and the investment tax credit under Section 48 of the Code (“ITC”) and clarifies the methods that may be used to satisfy the continuity requirement for purpose of the beginning-of-construction requirement. The Notice provides much anticipated and welcome relief for taxpayers developing projects that have been delayed by circumstances related to COVID-19.

Both the PTC and ITC are subject to sunset provisions based on the year in which construction of an otherwise qualified project begins. The phaseouts for the ITC and PTC were recently extended by the Consolidated Appropriations Act, 2021, as described more fully here.

Prior IRS notices provide that construction of a project is considered to have begun for PTC or ITC qualification purposes when either (i) physical work of a significant nature begins (the “physical work test”) or (ii) the taxpayer pays or incurs 5% of the total cost of a project (the “5% safe harbor”). Both the physical work test and 5% safe harbor also require the taxpayer to make continuous progress towards completion of the facility once construction has begun either by maintaining a continuous program of construction involving physical work of a significant nature if construction began under the physical work test, or by making continuous efforts to advance towards completion of the energy property if construction began under the 5% safe harbor. In either event, whether the continuity requirement is satisfied depends on all the facts and circumstances. The prior IRS notices also provide a continuity safe harbor pursuant to which the continuity requirement will be deemed satisfied without regard to the facts and circumstances if the project is placed in service by the end of the fourth calendar year following the year in which construction began. Last year, in response to the COVID-19 pandemic, the IRS extended this continuity safe harbor for projects on which construction began in 2016 or 2017 by one year.

In response to delays caused by COVID-19, Notice 2021-41 extends the continuity safe harbor for any project construction of which began in calendar year 2016, 2017, 2018, or 2019 to the end of the sixth calendar year following calendar year during which construction of that project began. For any project construction of which began in calendar year 2020, the continuity safe harbor will be satisfied if the project is placed in service by the end of 2025 (the end of the fifth calendar year following the calendar year in which construction of the project began).

Notice 2021-41 also provides that for any project to which the continuity safe harbor does not apply, a taxpayer may satisfy either the continuous construction test or the continuous efforts test, regardless of whether the physical work test or the 5% safe harbor was used to establish the beginning of construction.

The IRS earlier this year issued Notice 2021-05, which provides that an offshore project or a project located on federal land will satisfy the continuity safe harbor if the project is placed in service by the end of the 10th calendar year following the calendar year in which construction of the project began, as explained further here. The additional extension of the continuity safe harbor provided in Notice 2021-41 provides additional meaningful flexibility for financing onshore projects construction of which began in or after 2016.

Key Contributors

Kevin T. Pearson
Michael L. Such
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