IRS policy of June 29, 2021 extends the deadline by which renewable energy projects (including wind and solar projects) that began construction in 2016 will complete construction by 2020 and qualify for production tax credits (“PTCs”) or investment tax credits (“ITCs”) “) without having to prove that work has been carried out without interruption during the entire construction period. The deadline detailed below is viewed by most tax equity investors and lenders as a gating issue for assessing the tax credits available for a project. The guide gives 2016-2020 vintage projects an extra year or two as detailed below. The IRS also relaxed the rules for demonstrating continuous work by clarifying that the manner in which sponsors demonstrate continuous work is not tied to the original method by which they started construction. Instructions are provided in IRS Notice 2021-41.
The value of PTCs or ITCs that a renewable energy project can qualify for depends on the year construction of the project begins. There are two ways to start construction in a given year: by starting significant physical work that year, or by paying or assuming (depending on the taxpayer’s accounting method) five percent or more of the total cost of the project that year. Both methods are subject to an intricate web of exceptions and qualifications that has evolved over several iterations of the IRS guidelines.
The rules include a “continuity requirement”, which states that a project must either be “put into operation” within the next four years after construction has started (the “Continuity Safe Harbor”) or the sponsor must prove that the work has been carried out ” continuously ”based on facts and circumstances. The method of meeting the continuity requirement historically depended on how construction started. Physical work projects required to demonstrate continuous physical work and projects that rely on build-up costs to demonstrate “continuous effort”, a more flexible concept that includes activities such as continuing to generate costs, entering into binding written contracts, soliciting of permits and performing physical work involves labor. Between the two, the “continuous effort” test, accessible to five percent of test projects, is generally seen as more achievable with the right facts.
Due to the lack of guidance on the meaning of “continuous” in this context and the conceptual difficulty of demonstrating that something has been continuously worked on that has taken more than four years to go live, tax equity and debt financiers have generally considered compliance with the Continuity Safe Harbor as a gatekeeping problem for the assessment of the tax credit and general financial feasibility.
In May 2020, in response to the COVID-19 pandemic, the IRS extended the four-year Continuity Safe Harbor for vintage projects in 2016 and 2017 to five years. In December 2020, the IRS also provided a special ten-year Continuity Safe Harbor for certain projects on state and for offshore wind projects.
What has changed?
The new policy addresses the fact that projects must effectively comply with the Continuity Safe Harbor in order to move confidently with tax equity and debt financing, and extends the Continuity Safe Harbor to six years for projects that began construction between 2016 and 2019 and to five years for projects whose construction started in 2020. Although the stated intent of the change is to help projects that have been delayed due to the COVID-19 pandemic, the guidelines do not ask sponsors to provide a reason for the delay. The discharge is available to all projects whose construction began between 2016 and 2020.
Although projects before 2016 and after 2020 are generally tied to a four-year Continuity Safe Harbor, the guidelines make it clear that these projects can rely on the more generous standard of “continuous effort”. This will greatly benefit projects that rely on a physical work testing strategy that would previously have been limited to demonstrating continuous physical work outside of the Continuity Safe Harbor, but now have access to additional options to prove their case when needed.