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Treasury Extends Four-Year Continuity Safe Harbor to Five Years, Provides Safe Harbor for 3.5 Month Rule

Treasury has made good on its widely anticipated commitment to provide relief for investment tax credit (“ITC”) and production tax credit (“PTC”) projects adversely affected by COVID-19 by issuing Notice 2020-41, which (1) extends the four-year window within which 2016 and 2017 projects must place in service in order to be deemed to have satisfied the “continuous efforts” or “continuous construction” requirement and (2) provides that certain equipment paid for in 2019 will be deemed to have satisfied the “3.5 month rule” for the 5% Safe Harbor (described below) if it is delivered by October 15, 2020.

Extension of Four-Year Window. 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. However, 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”). Cognizant that certain projects may have undergone COVID-19 related delays, the new IRS guidance extends 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.

Addition of 3.5 Month Safe Harbor. 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”). 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. However, “to provide certainty and assurance,” the new IRS guidance provides that if a taxpayer paid for services or property on or after September 16, 2019, the taxpayer is automatically deemed to have a “reasonable expectation” that the services or property would be received within 3.5 months after the date of payment, so long as the services or property are actually received by the taxpayer by October 15, 2020 (such new rule, the “3.5 Month Safe Harbor”). The 3.5 Month Safe Harbor applies only for purposes of the beginning of construction requirement for ITC and PTC.

While the new IRS guidance is consistent with Treasury’s previously stated intent, it falls short of prior suggestions that the Continuity Safe Harbor be relaxed for projects using physical work to start construction, and the new limited-applicability five-year window for the Continuity Safe Harbor for ITCs and PTCs still lags behind the analogous six-year window for section 45Q carbon capture credits.

 

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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.