On December 31, 2020, the US Treasury Department and the Internal Revenue Service (the “IRS”) issued Notice 2021-05 (the “Notice”),1 which provides relief for offshore renewable energy projects and renewable projects constructed on federal land. Specifically, the Notice allows the Continuity Safe Harbor (defined below) to be satisfied for projects constructed offshore or on federal land if they are placed into service no more than 10 calendar years after the calendar year during which construction began. This relief is expected to provide additional certainty for taxpayers developing projects offshore or on federal land, given the significant construction delays often associated with such projects.
Under Section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), “qualified facilities,” including wind power projects, are eligible for a production tax credit (“PTC”) for electricity produced and sold to an unrelated person. Under Section 48 of the Code, solar power projects (and electing wind power projects) are eligible for an investment tax credit (“ITC”) determined as a percentage of the basis of “energy property” placed in service. Both the ITC and PTC are subject to phase-out based on the date that construction begins on a project.
Recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Relief Act”), enacted as Division EE of the Consolidated Appropriations Act, 2021,2 extended certain deadlines for beginning of construction with regard to the ITC and the PTC. In the case of the ITC, the Relief Act extended the deadline for a 26% ITC from December 31, 2020, to December 31, 2022 (with a 22% ITC available for projects that begin construction by December 31, 2023). For the PTC, the Relief Act extended the deadline for 60% of the credit (0.9 cents per kilowatt-hour) from December 31, 2020, to December 31, 2021.
Additionally, the Relief Act further relaxed these deadlines for “qualified offshore wind facilities,” including wind farms that are located in the inland navigable waters or the coastal waters of the United States, allowing such facilities to elect either the PTC or the ITC, with a full 30% ITC available for offshore wind farms that begin construction by December 31, 2025, with no phase-out.
Under Notice 2013-29,3 the IRS provided two methods for establishing the date that a project begins construction: the physical work test and the 5% safe harbor. Under each of these methods, IRS guidance generally requires that a wind or solar project be placed in service within four calendar years after the date on which construction of the project began (the “Continuity Safe Harbor”) in order to be eligible for a safe harbor for determining the start of construction date of a project.4 Absent the Continuity Safe Harbor, a taxpayer would be required to satisfy a facts-and-circumstances test to demonstrate either a continuous program of construction (in the case of the physical work test) or continuous efforts toward completion (in the case of the 5% safe harbor), a test that could be difficult to satisfy and that could make a project difficult to finance.
In the Notice, in response to comments from Congress and stakeholders, the IRS noted that renewable projects constructed offshore or on federal lands are subject to significantly greater delays than similar projects not constructed offshore or on federal land, including those due to stricter permitting requirements, the difficulty of installing equipment offshore, heightened environmental regulation and the need to construct new transmission lines to connect the projects to the US electrical grid system. The IRS observed that these delays are ordinarily outside the control of project developers and can result in project completion times of up to twice as long as those of similar projects not constructed offshore or on federal land. Moreover, although “excusable disruptions,” as described in Notice 2018-59,5 would not necessarily bar a taxpayer from satisfying the continuous construction or continuous efforts tests, the excusable disruption rules do not apply to the Continuity Safe Harbor.
In light of these potential delays, the Notice allows the Continuity Safe Harbor to be satisfied for projects constructed offshore or on federal land if they are placed into service no more than 10 calendar years after the calendar year during which construction began. This relief applies to “Offshore Projects” and “Federal Land Projects.” Offshore Projects include qualified facilities or energy property construction projects that will (1) be placed in service in inland navigable waters or coastal waters of the United States and (2) require the construction of one or more high-voltage transmission lines to connect the qualified facility or energy project to the US electrical grid system. Federal Land Projects include qualified facilities or energy property construction projects that will (1) be more than 50% placed in service on federal land, as determined by relative value or relative area, and (2) require the construction of one or more high-voltage transmission lines to connect the qualified facility or energy project to the US electrical grid system.
This relief is likely to be helpful to developers and investors contemplating offshore wind projects and projects on federal land, given the higher likelihood of project delays and accordingly higher risk of failing to satisfy the general Continuity Safe Harbor.
1 Available at https://www.irs.gov/pub/irs-drop/n-21-05.pdf.
2 Pub. L. No. 116-260 (Dec. 27, 2020). For our previous coverage of the ITC and PTC implications of the Relief Act, see https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2020/12/solar-and-wind-tax-credits-extendedagain_1220_v1.pdf.
4 The IRS guidance on the Continuity Safe Harbor established by Notice 2013-29 has been updated on several occasions, but the guidance generally retains the four-year framework for the Continuity Safe Harbor. Recently, in response to the COVID-19 pandemic, the IRS extended the Continuity Safe Harbor to five years for facilities or energy property that began construction in 2016 or 2017.