Treasury Department Extends Safe Harbors On Renewable Energy Tax Credits Amid COVID-19
On May 27, 2020, the Treasury Department responded to Congressional requests to extend safe harbors for the renewable energy production tax credit (“PTC”) and the energy investment tax credit (“ITC”) to provide temporary relief for renewable energy developers during the ongoing COVID-19 crisis.
2018 Internal Revenue Service (“IRS”) guidance creates two avenues for safe harbor eligibility. A developer may “safe harbor” a project by: (1) the “physical work test,” which is met when the developer begins work of “a significant nature” and maintains a “continuous program of construction”; or (2) the “five percent safe harbor test,” which is met when the developer incurs five percent of the total cost of the project and maintains “continuous efforts” towards completion. Under the 2018 guidance, the developer had to complete the project within four years.
On May 27, 2020, the IRS issued Notice 2020-41, which provides two forms of relief for developers. First, it adds an extra year to the four-year continuity safe harbor for projects that began construction in 2016 or 2017. This extension grants relief to developers that are nearing the end of the prior safe harbor period and are experiencing disruption from industry-wide supply chain delays.
Second, the Notice provides a safe harbor from the three-and-a-half-month rule. This rule holds that liabilities for goods or services that the developer has not received are only attributable to the current tax year when the developer can reasonably expect delivery or performance within three and a half months of payment. Now, liabilities paid by the developer on or after September 16, 2019 may be attributed to the time of payment as long as they are received by October 15, 2020. This provides flexibility for developers who need to attribute liabilities to a specific time period to satisfy the “five percent safe harbor test.”
The updated guidance follows Congressional efforts to provide relief for renewable energy developers and investors. In a letter dated April 23, 2020, a bipartisan group of senators led by Finance Committee Chairman Charles Grassley (R-IA) urged Treasury Secretary Steven Mnuchin to consider a one-year continuity safe harbor extension for projects that started construction in 2016 or 2017. Notice 2020-41 honored this request.
On May 21, 2020, in another letter to Secretary Steven Mnuchin, Senators Lisa Murkowski (R-AK), Susan Collins (R-ME), and Thom Tillis (R-NC) sought two additional amendments to PTC and ITC guidance. First, they requested that the Treasury Department expressly designate COVID-19 related delivery delays as acceptable disruptions to safe harbor requirements for projects that commenced in 2019 or 2020, as long as the materials are received by the end of the following year. Notice 2020-41 did not honor this request. It addresses supply-chain disruption in a narrower fashion with its three-and-a-half-month safe harbor and October 15, 2020 deadline.
Second, the senators requested that the Treasury Department modify the “physical work test.” The current “physical work test” requires a “continuous program of construction” once it has begun. Citing delays in permitting, the Senators pressed the Treasury Department to substitute a “continuous efforts” standard which could be satisfied by a broad range of activities when traditional construction activities are disrupted. Notice 2020-41 is silent on this request.
We are tracking the situation as it develops. In the interim, please contact us if you have questions about the tax credits or the changes.
The full text of the IRS guidance regarding safe harbor and eligibility for the PTC and ITC is at: (Notice 2013-29, Notice 2016-31, Notice 2018-59, Notice 2020-41).
The full text of the IRS press release detailing its May 27, 2020 COVID-19 relief measures is at: (IR-2020-106).