IRS Provides Helpful Renewable Energy Guidance in Response to COVID-19 Pandemic
Construction and delivery delays due to the COVID-19 pandemic presented numerous obstacles to the development of renewable energy projects in 2020, including tax issues. In May, the IRS thankfully stepped in to offer taxpayers assistance.
Currently under the Internal Revenue Code, the rate for the production tax credit (PTC) and investment tax credit (ITC) generally hinges on when the applicable facility or project “began construction.” Under IRS guidance, construction begins in the taxable year when either physical work of a significant nature is performed (Physical Work Test) or when five percent of certain eligible costs of the facility or project are paid or incurred (5% Safe Harbor). A facility relying on the IRS guidance must also meet an applicable continuous construction or continuous efforts requirement, either of which may be satisfied by placing the facility or project in service by the end of the fourth year after the year construction commences (Continuity Safe Harbor). Under the 5% Safe Harbor, prepayments for equipment may count if the equipment is reasonably expected to be provided within 3½ months of the prepayment (3½-Month Rule).
The COVID-19 pandemic initially seemed as though it could upend certain PTC and ITC planning based on the Continuity Safe Harbor and the 3-1/2 Month Rule. Although taxpayers were ready to deploy other strategies to preserve their intended benefits, the IRS largely obviated the need for such efforts in Notice 2020-41 by extending the Continuity Safe Harbor by one year for projects that began construction in 2016 or 2017 (allowing placement in service by the end of 2021 and 2022, respectively) and modifying the 3½-Month Rule to deem equipment prepaid for after September 16, 2019 as satisfying the rule if actually provided by October 15, 2020.
Stimulus Package Extends and Expands PTC and ITC
The renewable energy industry eyed Congress with uncertainty as December approached. The ITC for solar, qualified fuel cells and certain other technologies, having stepped down from 30% to 26% in 2020, was slated to step down again to 22%; the PTC for wind facilities was to expire for facilities beginning construction in 2021.
However, under the stimulus package signed into law on December 27, 2020, the 26% ITC was extended to projects that begin construction in 2021 and 2022, stepping down to 22% in 2023 and 10% thereafter. Projects seeking an ITC greater than 10% must be completed before 2026, or sooner if relying on the Continuity Safe Harbor for construction begun before 2021). The PTC for wind facilities was extended by one year at the 2020 rate (i.e., subject to a 40% haircut), and a new 30% ITC was enacted for certain offshore wind facilities that begin construction before 2026.
The Outlook for Renewable Energy Tax Incentives
The GREEN Act passed by the Democrat-controlled House of Representatives in July 2020 would have reverted to a 30% ITC and extended the PTC (at the 2020 rate) for wind facilities, in each case through 2025, and included an expanded ITC for energy storage. The GREEN Act also would have created a direct payment option in lieu of the ITC or PTC, generally at a rate of 85% of the credit amount, and liberalized the investment rules for publicly traded partnerships to include energy property eligible for the PTC and ITC, and renewable fuels. It provided similar benefits for carbon capture projects.
While the GREEN Act did not pass the previous Congress, President Biden and leadership in both houses of Congress have made clear that promoting the development of renewable energy is a top priority, which could translate to concepts from the GREEN Act becoming the subject of legislation early in the near future.
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