The production and investment tax credits for renewable energy are a valuable offset for the costs of renewable energy projects but are subject to important timing requirements. The IRS has issued guidance for taxpayers developing renewable energy projects to address delays related to the COVID-19 pandemic. In earlier Notices the IRS established a Continuity Safe Harbor that allowed an eligible renewable energy project to satisfy the continuity requirement if the taxpayer placed the project in service within a period that starts in the taxable year in which construction began.
Because the COVID-19 pandemic has caused delays in the development of these projects, many taxpayers may not meet the Continuity Safe Harbor time frame, which can impact project financing and development. A new IRS Notice allows additional time to satisfy the Continuity Safe Harbor and adds flexibility for taxpayers to satisfy the continuity requirement outside of the safe harbor.
The production tax credit for renewable energy projects is an inflation-adjusted per-kilowatt-hour credit for electricity generated by renewable energy resources and sold to unrelated persons. The credit is allowed for 10 years after the date the facility is placed in service.
The investment tax credit for renewable energy projects is a dollar-for-dollar credit for expenses invested in renewable energy properties, such as solar projects.
A taxpayer has two methods to demonstrate the construction of a project has begun:
- the Physical Work Test
- the Five Percent Safe Harbor.
After a taxpayer begins construction, the taxpayer must 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. Under the Five Percent Safe Harbor, a taxpayer uses the Continuous Efforts Test.
Extension of Time
The Notice extends the period of the Continuity Safe Harbor for projects which began construction began in 2016 through 2020, as follows:
- If construction began 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 6 calendar years after the calendar year during which construction began.
- If construction began 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 5 calendar years after the calendar year during which construction began.
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.
These two credits are a valuable offset for renewable energy projects and taxpayers now have more flexibility to take advantage of this relief to boost the profitability of their renewable energy projects.