The IRS recently issued Notice 2021-05, which provides relief for offshore projects and projects located on federal land related to the beginning-of-construction requirements for the production tax credit under Section 45 of the Code (“PTC”) and the investment tax credit under Section 48 of the Code (“ITC”). The notice provides that an offshore project or a project located on federal land will be deemed to satisfy the continuity safe harbor if the project is placed in service within 10 calendar years after the calendar year during which construction of the project began. This should provide welcome relief for taxpayers developing offshore wind projects and energy projects located on federal land with longer lead times than other PTC- or ITC-qualified projects.
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 (the “Bill”), as described more fully here. In addition, the Bill added a new provision for qualified offshore wind facilities (those located in the inland navigable waters of the United States or in the coastal waters of the United States), for which taxpayers elect to claim the ITC in lieu of the PTC. Qualified offshore wind facilities are eligible for the ITC if construction begins before January 1, 2026.
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 with respect to the project (the “physical work test”) or (ii) the taxpayer pays or incurs 5% of the total cost of energy property included in the project (the “5% safe harbor”). In addition, a taxpayer must satisfy a continuity requirement. Under this continuity requirement, if beginning of construction is established using the physical work test, the taxpayer must thereafter maintain a continuous program of construction. If construction begins under the 5% safe harbor, the taxpayer must make continuous efforts to advance towards completion of the energy property. Generally, the continuity requirement must be established by showing actual continual physical work or continual efforts toward completion of a project, as applicable. Prior IRS notices provided a safe harbor, however, under which the continuity requirement would be deemed satisfied if a project is placed in service by the end of the fourth calendar year following the year in which construction began. To respond to COVID-19 related delays, Notice 2020-41 extended this continuity safe harbor to the end of the fifth calendar year following the year in which construction began if the taxpayer met the physical work test or the 5% safe harbor in 2016 or 2017.
For projects otherwise eligible for the PTC or ITC that are located offshore or on federal land, Notice 2021-05 provides that the continuity safe harbor will be satisfied 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. The IRS identified several unique development challenges relating to these projects that warranted an extension, including the applicability of significantly more stringent permitting requirements, lengthier engineering and construction timelines due, for example, to the difficulty of installing equipment offshore, heightened environmental regulation, and the need to construct new transmission lines to connect these projects to the electrical grid system of the United States. Although these issues arguably would have qualified as excusable delays under the prior notices, the clarity provided by Notice 2021-05 should provide comfort to developers and investors in offshore projects and projects located on federal land.
The additional time for completing offshore projects and projects located on federal land is a welcome relief to developers of these projects, and is expected to help with the development and financing of a number of large projects.