On Wednesday, May 27, 2020, in response to delays in the supply chain caused by the COVID-19 pandemic, the Treasury Department and the IRS issued Notice 2020-41, 2020-25 IRB (Notice 2020-41), which provides tax relief for certain affected owners of renewable energy facilities intending to qualify for the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the Code) or the investment tax credit (ITC) under Section 48 of the Code. As described in more detail below, Notice 2020-41 provides an extension to five years of the Continuity Safe Harbor (described below) and provides certainty regarding the satisfaction of the Five Percent Safe Harbor (described below).
Background on PTC and ITC
The PTC provides a federal tax credit to owners of certain renewable energy facilities that produce electricity from wind and certain other specified energy sources for sale to unrelated persons. The amount of the PTC is determined annually by multiplying a credit rate by the number of kilowatt hours of electricity produced by the facility in each of the first 10 years following the date the facility is placed in service. The PTC is phased down for facilities that commence construction before the end of 2020 and is completely phased out for facilities that commence construction after 2020.
The ITC provides a federal tax credit to owners of certain solar facilities on commercial properties where the original use of the equipment begins with the taxpayer or the facility is constructed by the taxpayer. The amount of the ITC is equal to a percentage of the cost of installing, developing, or financing an eligible facility. For facilities commencing construction in 2020, the amount of the ITC is 26 percent and phased down to 10 percent for facilities commencing construction in or after 2022.
Determining when a facility has “commenced construction” is materially relevant for purposes of both the PTC and ITC, and the IRS has issued prior guidance on how it will evaluate whether a facility has commenced construction. In general, the guidance provides that a taxpayer may establish that a facility has commenced construction by either starting physical work of a significant nature (the Physical Work Test), or satisfying a safe harbor based on having paid or incurred five percent or more of the total cost of such facility (the Five Percent Safe Harbor). Both methods require that a taxpayer make continuous progress towards completion of the facility once construction has commenced (the Continuity Requirement). Whether the Continuity Requirement is satisfied, and thus, whether a facility is deemed to have commenced construction under the Physical Work Test or the Five Percent Safe Harbor, is based on all of the relevant facts and circumstances. However, prior IRS guidance provides a safe harbor for determining whether a facility satisfied the Continuity Requirement without requiring an analysis of all of the relevant facts and circumstances (the Continuity Safe Harbor). Under the Continuity Safe Harbor, if a taxpayer places a facility in service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of such facility began or (2) December 31, 2018, such facility will be deemed to have satisfied the Continuity Requirement.
Summary of Notice 2020-41
Extension to Five Years of the Continuity Safe Harbor
Under Notice 2020-41, taxpayers that otherwise established commencement of construction of a qualified facility in 2016 or 2017 using either the Physical Work Test or the Five Percent Safe Harbor are given an additional year (from four years to five years) to place such facility in service and still satisfy the Continuity Safe Harbor. Specifically, for any qualified facility that began construction under the Physical Work Test or the Five Percent Safe Harbor in calendar year 2016 or 2017, such facility will be deemed to have satisfied the Continuity Requirement if the taxpayer places the facility in service by the end of calendar year 2021 (for facilities that commenced construction in 2016) or calendar year 2022 (for facilities that commenced construction in 2017). The four-year Continuity Safe Harbor continues to apply to taxpayers that established the commencement of construction of a qualified facility in years after 2017.
Certainty Regarding the Five Percent Safe Harbor
Under Notice 2020-41, taxpayers received additional certainty regarding whether the Five Percent Safe Harbor is satisfied. As described above, a taxpayer that pays or incurs five percent or more of the total cost of a facility is deemed to have commenced construction with respect to such facility under the Five Percent Safe Harbor. If permitted under the taxpayer’s method of accounting, a taxpayer may treat payment for services or property as costs incurred at the time that the taxpayer makes payment if the taxpayer reasonably expects the person to provide such services or property within three and a half months after the date of payment. Under Notice 2020-41, if services or property paid for by the taxpayer on or after September 16, 2019 are actually received by October 15, 2020, then such services or property will be deemed to have been reasonably expected to be received within three and a half months after the date of payment. Thus, payment for such services or property related to the facility can be included within the amount paid or incurred for purposes of establishing the commencement of construction under the Five Percent Safe Harbor.
For more information on production tax credits, incentive tax credits, or other federal or State tax credit programs, please contact Hamang B. Patel, Eric J. Callisto, or Daniel M. LaFrenz.