Further Extension of Continuity Safe Harbor Under IRS Beginning of Construction Guidance
The production tax credit (PTC) for wind and other qualified facilities and the investment tax credit (ITC) for solar and other energy property have never been made permanent. They are scheduled to phase down over time, but are periodically temporarily extended by new legislation, most recently at the end of 2020. Under current law, the rate of credit available depends upon when construction began. At the end of 2021, there was no change to the 26% ITC rate for solar projects, and the PTC expired, but many taxpayers expect to rely upon liberal IRS guidance regarding the time at which the construction of solar and wind projects began to claim the ITC at the 30% rate available for construction begun before 2020 and the PTC at varying rates depending upon the pre-2022 year in which construction began.
Under the 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 project are paid or incurred (5% Safe Harbor). A project 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 project in service by the end of the fourth year after the year construction commences (Continuity Safe Harbor). During 2020, the IRS had provided additional guidance that extended that four-year deadline to provide relief for COVID-related construction delays, and in 2021 the IRS provided additional relief. Under the 2021 guidance, a project that began construction in 2016 through 2019 will satisfy the Continuity Safe Harbor if placed in service by the end of the sixth year after construction commences, and a project that began construction in 2020 will satisfy the Continuity Safe Harbor if placed in service by the end of the fifth year after construction commences. For example, a project that began construction in 2016 must be placed in service by the end of 2022 to qualify for the Continuity Safe Harbor. No extension of the four-year deadline has been provided for construction begun in 2021. While it may be included in future relief if COVID-related construction delays persist, in the case of ITC-eligible energy property other than offshore wind there is a statutory requirement to place the project in service before 2026 to avoid loss or severe step-down of the credit.
Proposed Extension, Expansion and Alteration of Renewable Tax Incentives by Build Back Better Act
The proposed Build Back Better Act would significantly extend, expand, and alter the tax credits for wind, solar and other renewables activities. Highlights of the most recent version of the Build Back Better package include:
- Extension of the PTC at the full un-haircut rate (e.g., 2.5 cents per KWH in 2021) for wind and other qualified facilities placed in service after 2021 that begin construction before 2027, and expansion of the PTC to solar projects;
- Extension of the ITC at the 30% rate for solar and certain other energy property placed in service after 2021 that begin construction before 2027;
- Expansion of the ITC to include energy storage technology, qualified biogas property, microgrid controllers, linear generator assemblies, and dynamic or electrochromic glass;
- Further increased rates of PTC or ITC for inclusion of sufficient domestic content, location in an “energy community,” or location in a low-income community;
- Imposition of new prevailing wage and apprenticeship requirements that must be satisfied to avoid an 80% haircut to the PTC, ITC, and certain other renewable energy credits;
- Creation of a new investment tax credit for electric transmission lines;
- Creation of a new production tax credit for production of clean hydrogen;
- Creation of a “direct pay” election for taxpayers to receive payments for renewables tax credits, as well as the section 45Q carbon capture credit, from the IRS without regard to whether they have a federal income tax liability against which to offset the credit, subject to satisfaction of domestic content requirements that would phase in over time;
- Creation of a uniform 15% haircut to green energy credits for projects financed with tax-exempt debt that begin construction after 2021;
- Future replacement of the PTC and ITC, for projects that begin construction after 2026, with a new technology-neutral clean energy production tax credit and investment tax credit;
- Extension of current renewables fuel credits, creation of a new sustainable aviation fuel credit, and, beginning in 2026, creation of a new technology-neutral fuel production credit; and
- Expansion of the master limited partnership (MLP) regime to allow inclusion of income from certain types of renewables activities, including from projects that qualify for the PTC, ITC, or section 45Q credit, and from certain renewable fuels activities.
The bill was passed by the House in November 2021, and a slightly revised version of that bill was released by the Senate Finance Committee in December 2021, but as of the time of this writing the prospects for the enactment of these provisions, or similar provisions, remain uncertain.
Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.
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