The Department of the Treasury and the Internal Revenue Service (IRS) have extended their safe harbor for taxpayers developing renewable energy projects, in a bid to address delays amid the pandemic.
The Treasury and IRS previously established a Continuity Safe Harbor that allows eligible renewable energy projects that satisfy the continuity requirement to take a production tax credit and investment tax credit.
It works 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.
However, the two bodies said they recognize that the Covid-19 pandemic continues to cause delays in the development of projects that are eligible for these tax credits.
They warned that many taxpayers may not place projects in service in time to meet the Continuity Safe Harbor, which may “significantly impact” project financing and development.
In light of this, the new guidance is said to provide some relief to taxpayers impacted by project delays related to the pandemic by allowing additional time to satisfy the Continuity Safe Harbor.
A taxpayer has two methods to demonstrate the taxpayer has begun construction of a project – the Physical Work Test and the Five Percent Safe Harbor. After a taxpayer begins construction of a project, they must also make continuous progress toward completion to satisfy the 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.
The guidance issued today 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.
It is applicable for projects where 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
For projects for which construction began under the Physical Work Test or the Five Percent Safe Harbor in 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.