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IRS Issues Guidance Extending Four-Year Continuity Safe Harbor to Ten Years for Qualifying Offshore Projects and Federal Land Projects

In a welcome turn of events for developers of offshore wind projects, the IRS issued new guidance (Notice 2021-05) on New Year’s Eve that extends the four-year window, within which projects must place in service in order to be deemed to have satisfied the “continuous efforts” or “continuous construction” requirement, to ten years.

Background

Under the existing provisions, developers must “begin construction”—i.e., begin physical work or incur capital expenditures equal to 5% of the total project cost—by a specified date in order to qualify for the ITC or the PTC. Projects often start construction in contemplation of accessing the credits, and the default rule is that “continuous construction” or “continuous efforts” (depending on whether construction was begun via physical work or capital expenditures) must continue until the project is completed. Under Notice 2017-4, the “continuous construction” or “continuous efforts” requirement is considered to be met if the project is completed in or before the fourth calendar year following the calendar year of the beginning of construction (such rule, the “Continuity Safe Harbor”). To accommodate COVID-19 related delays, Notice 2020-41 extended the Continuity Safe Harbor to the fifth calendar year following the calendar year of the beginning of construction for projects that began construction in 2016 and 2017.

For years, the Continuity Safe Harbor--even as temporarily extended by Notice 2020-41--has posed serious concern to the offshore wind industry because such cutting-edge projects, being of deep regulatory and technical complexity, may frequently require several years or more to develop. As the standard for what constitutes "continuous construction" or "continuous efforts" outside of the Continuity Safe Harbor is not clearly delineated in IRS guidance or case law, many (if not most) offshore projects thus carried an aura of uncertainty with respect to their ITC/PTC eligibility. While this effect was partially mitigated by the recent extension of the 30% ITC for qualified offshore wind facilities beginning construction before January 1, 2026, the specter of the four-year window continued to haunt offshore projects, including those for which construction had not yet begun.

Notice 2021-05

Under the new Notice, a qualified facility or energy property construction project that qualifies as an “Offshore Project”—i.e., is placed in service in the inland navigable waters or coastal waters of the United States, and requires the construction of one or more high-voltage transmission lines to connect the qualified facility or energy property to the electrical system of the United States—satisfies the Continuity Safe Harbor if it is placed in service by the end of the calendar year that is no more than ten calendar years after the calendar year during which construction of the project began.[1] This extension applies also to a qualified facility or energy property construction project that is a “Federal Lands Project,” i.e. more than 50% of which is placed in service on land owned or controlled by the United States (as determined by relative value or area), and requires the construction of one or more high-voltage transmission lines to connect the qualified facility or energy property to the electrical system of the United States.[2]

Observations

  • While Notice 2021-05 comes on the heels of the 30% ITC for “qualified offshore wind facilities” that was signed into law about a week ago, the scope of the ten-year Continuity Safe Harbor for Offshore Projects is both broader than, and narrower than, that of the offshore wind ITC. The ten-year Continuity Safe Harbor is potentially available for any ITC- or PTC-eligible property that is located in U.S. inland navigable waters or coastal waters; the 30% offshore wind ITC is clearly restricted to wind projects. On the other hand, unlike the 30% offshore wind ITC, the ten-year Continuity Safe Harbor is available only if the project requires the construction of a high-voltage transmission line to connect the project to the U.S. electrical system.

  • In order to qualify for the ten-year Continuity Safe Harbor, a project must “require the construction” of a high-voltage transmission line. Does a project still qualify if the transmission line would have been constructed even without the existence of the project (e.g. because multiple projects are sharing the transmission line)? Alternatively, if there is a preexisting transmission line that must undergo construction in order to be modified to the project’s use, does that qualify as “construction” for purposes of the ten-year Continuity Safe Harbor?

  • The IRS cites a list of “ordinary-course delays” for both Offshore and Federal Land projects to illustrate that “such projects ordinarily are subject to significantly greater delays than projects not constructed Offshore or on Federal Land, and therefore are at a significantly higher risk of failing the Continuity Safe Harbor”. These delays, which the IRS notes are ordinarily outside the control of the developers, include more stringent permitting requirements, engineering and construction complexity, heightened environmental regulation, and the need to construct new transmission lines to connect to the U.S. electrical grid system. While Notice 2021-5 has a clearly circumscribed scope, in acknowledging that this list might already be covered by the “excusable disruption” scenarios in Notice 2016-31 and Notice 2018-59, the IRS arguably is confirming that not all delays need be unexpected, and indeed may constitute what the IRS calls “ordinary-course” delays. Such a reading may potentially result in a broader market interpretation of the “excusable disruption” provisions applicable to non-offshore projects, as well as offshore projects that do not require the construction of high-voltage transmission lines.


[1]      § 4.01, 02.

[2]      Id.

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Judy Kwok

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Judy Kwok is a lawyer in the Mintz Tax Practice who focuses on transactions in the energy and sustainability industry, including tax-sensitive structures for renewable energy investments in the project finance space. In addition to advising on tax issues relating to partnerships, depreciation, and energy credit qualification, she has broad experience in mergers and acquisitions, cross-border transactions, and other commercial deals.