The IRS handed renewable energy investors and developers a much needed break on June 29, 2021, when they issued Notice 2021-41. It gives developers more time to finish their renewable energy construction projects and it makes it easier to prove that the construction on their project was begun in a particular year. The benefit of relaxing the rules is that developers who are working on wind, solar, and other renewable projects will more easily qualify for production tax credits (“PTCs”) and investment tax credits (“ITCs”). Those developers who faced delays due to COVID-19 are breathing a sigh of relief.
Investors in renewable energy projects have a choice between claiming ITCs or PTCs. The ITC is a percentage of the basis of eligible energy property placed in service in that year. The PTC is variable and based on the amount of electricity produced for each of the first 10 years after the project is in service.
They both phase out depending on when a project started construction. Establishing the amount and availability of ITCs and PTCs is important for tax equity investors, so developers keep records based on the guidance of the notices from the IRS.
There are two options to indicate that a project has begun: The Physical Work Test or the 5 Percent Safe Harbor. Both require a demonstration of continuous progress towards completion either by the test applicable to the method used to establish the start of construction, or the Continuity Safe Harbor.
The Continuity Safe Harbor required a project to be placed in service within 4 calendar years after the beginning of construction. In May 2020 this was extended to 5 years for projects that were started in 2016 or 2017. Most recently, IRS Notice 2021-41 extends the service requirement to 6 years if the project was started in 2016 through 2020. So developers who have struggled due to delays caused by the pandemic or materials shortages or supply chain issues, have a cushion to complete their construction. In addition, the continuity requirement is considered met if either the Continuous Construction or Continuous Efforts test can be met regardless of which was chosen to start construction.
With the more favorable requirements, developers may begin construction under the physical work test because of the availability of the more lenient Continuous Efforts test. Tax equity investors may be more motivated to finance the projects. All of which means more construction jobs, more clean energy jobs, and help for the economic recovery. If further extensions are put into place, it would be a boon to the renewables sector and will further the current administrations goals to reach a net-zero emission economy by 2050.