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Republican Senators Request “Start of Construction” Relief Under Sections 45 and 48 for COVID-Related Delays, Including “Continuous Efforts” Rule for Physical Work Projects

In a May 21 letter to Treasury Secretary Steven Mnuchin, three Republican senators—Senator Lisa Murkowski (R-AK), Senator Susan M. Collins (R-ME), and Senator Thom Tillis (R-NC)—have requested that Treasury modify existing Internal Revenue Service (“IRS”) guidance on “start of construction” to provide production tax credit (“PTC”) and investment tax credit (“ITC”) relief to wind and solar projects affected by COVID-19 related disruptions. This letter is in direct response to Treasury’s recent announcement that it would issue guidance revising the continuity safe harbor of Notice 2013-29 (for the PTC) and Notice 2018-59 (for the ITC).

The letter recommends two additional, specific ways in which existing IRS guidance should be modified.  First, under the existing guidance, a taxpayer is treated as having “begun construction” for purposes of the year-end deadlines in sections 45 and 48 of the Code if at least 5% of the total cost of the project has been paid or incurred (such test, the “5% Safe Harbor”). Under the current rules, if equipment costs are paid or incurred before year-end, there must be a reasonable expectation that the equipment will be delivered within 3.5 months. Most commentators already believe that if equipment costs were incurred in 2019 and the equipment undergoes unforeseen delivery delays beyond the 3.5 month window for COVID-19 related reasons, the equipment was nonetheless “reasonably expected” to be delivered within 3.5 months at the time of purchase. Nonetheless, the letter urges Treasury guidance confirming that for equipment costs incurred in 2019 or 2020, the equipment may be delivered by the end of the following year (if the delay is COVID-19 related) without an adverse impact on the 5% Safe Harbor.

Second, the letter targets the continuity requirement as it applies to taxpayers that, rather than using the 5% Safe Harbor, begin construction by starting “physical work of a significant nature” (the “Physical Work Test”). Many commentators interpret the existing guidance to mean that projects that begin construction using the Physical Work Test must demonstrate continuous construction until they are placed in service, whereas projects that begin construction using the 5% Safe Harbor need only demonstrate continuous “efforts”—which may or may not include physical construction—until they are placed in service. The letter requests that projects that begin construction using the Physical Work Test be allowed to demonstrate continuous “efforts” until they are placed in service. While the letter does not explicitly mention offshore wind projects, such a proposal may be of particular interest to an industry where projects frequently require more than four years to develop, and thus cannot take advantage of the “continuity safe harbor” under which the continuity requirement is deemed satisfied by projects placed in service by the fourth calendar year after the calendar year of the beginning of construction.

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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.