IRS Expands Safe Harbors for Renewable Energy Tax Credits

Renewable energy projects that have experienced delays as a result of the coronavirus pandemic will benefit from an expansion of safe harbors that establish the beginning of construction. The expansion provides investors with certainty that delayed projects can still qualify for the production tax credit (PTC) and the investment tax credit (ITC).

The IRS extended the “Continuity Safe Harbor” for the PTC and ITC by one year for projects that began construction in calendar year 2016 or 2017. It also provided a new safe harbor that should make it easier for certain taxpayers to establish the beginning of construction by incurring at least five percent of the total cost of the project.

The beginning of construction requirement is satisfied through either the “Physical Work Test” or the “Five Percent Safe Harbor.” Under the Physical Work Test, a taxpayer can establish the beginning of construction by starting “physical work of a significant nature” and maintaining a “continuous program of construction” thereafter. Under the Five Percent Safe Harbor, a taxpayer can establish the beginning of construction by incurring costs, directly or indirectly, of at least five percent of the total project costs and making “continuous efforts to advance towards completion of the facility.”

With the “Continuity Safe Harbor,” a facility placed in service within four years after the calendar year during which construction of the facility began is deemed to satisfy the “continuous program of construction” requirement under the Physical Work Test and the “continuous efforts” requirement under the Five Percent Safe Harbor.

The IRS extended the period to satisfy the Continuity Safe Harbor from four years to five years for any qualified facility or energy property that began construction under the Physical Work Test or the Five Percent Safe Harbor in either calendar year 2016 or 2017.

The IRS also expanded the 3 ½ Month Safe Harbor, which allows services or property to be treated as provided at the time of payment if the taxpayer can “reasonably expect” that the services or property will be provided within 3 ½ months of the payment date. For renewable energy projects, a taxpayer will be deemed to have satisfied this rule for services or property paid for by the taxpayer on or after September 16, 2019 if the services or property are received by October 15, 2020.

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