Wind turbines and solar panels.


Energy Insights: Relief for solar projects under COVID-19

When the IRS issued Notice 2018-59, Beginning of Construction for the Investment Tax Credit under Section 48 on June 22, 2018, the IRS provided two methods for showing the start of construction (i) the five-percent test or (ii) the physical work test. Regardless of which method a project owner applies, both methods require a “continuity requirement”: the project owner has to make continuous progress toward completion once construction has begun. Why? Think incentives. The IRS wants to incentivize project owners to get the solar projects to the finish line. With COVID-19, however, there have been some timing issues. That is where IRS Notice 2020-41 came in on May 27, 2020, to help provide some relief.

What is required for the continuity requirement?

It depends on which method the taxpayer uses to show the start of construction. Under the physical work test under Notice 2018-59, the taxpayer needs to have a “continuous program of construction,” which means continuing physical work of a significant nature. What exactly is “work of a significant nature”? Well, it depends on the nature of the work performed and not necessarily how much it costs or the amount realized (i.e., the IRS has not set a minimum amount of work or monetary threshold). The work can be both off-site and on-site.

Under the five-percent test, the taxpayer has to show that it is making “continuous efforts” to advance towards completion of the energy property. Some ways to show that continuous efforts are being made include:

Paying or incurring additional amounts in the total cost of the energy property

  • Entering into “binding written contracts” (this involves certain IRS requirements to ensure the contracts have teeth) for the manufacture, construction, or production of components of the property
  • Obtaining necessary permits
  • Performing physical work of a significant nature.

You may be asking: “What does “continuous” mean to the IRS? Project development has starts and stops and is not necessarily a straight line. What happens if there is a disruption?” Great questions. The IRS allows for excusable disruptions. If there are certain disruptions that are beyond the taxpayer’s control, then these will not be considered as failing to satisfy the continuity requirement. These include, but are not limited to: (i) delays due to weather; (ii) delays due to natural disaster; (iii) delays in obtaining permits or licenses; (iv) interconnection-related delays; (v) labor and supply shortages. (For more see IRB No. 2018-28, 197).

The timing of excusable disruptions varies based upon whether you are dealing with a single energy property or multiple. For single energy properties, the excusable disruption must be determined in the calendar year during which the energy property is placed-in-service. For multiple energy properties, it must be determined in the calendar year during which the last of the properties is placed in service. Basically, the timing of the last placed-in-service energy property is what you need to remember.

In addition, the IRS provides a safe harbor whereby the continuity requirement is deemed satisfied if the energy property is placed in services by the end of the fourth year after the calendar year during which construction of the energy property began, which is referred to as the “Continuity Safe Harbor Deadline.”

How does IRS Notice 2020-41 provide relief?

IRS Notice 2020-41 helps alleviate timing delays caused by COVID-19. IRS Notice 2020-41 extends the time period for projects claiming both the production tax credit under Section 45 of the IRS Code or the investment tax credit under Section 48 of the IRS code by changing the Continuity Safe Harbor Deadline from four years to five years for projects that started construction in 2016 or 2017.

Furthermore, under the five-percent test, taxpayers often structure their operations to take advantage of what is referred to as a “3 ½ month rule” under Treasury Regulation 1.461-4(d)(6)(ii). The 3 ½ month rule, when validly utilized, allows a taxpayer to treat cash payments for goods and services made before the end of the year as causing an expense to be “incurred” for purposes of the five percent test if the goods or services are reasonably expected to be delivered within 3 ½ months of payment. Due to supply chain delays caused by COVID-19, many goods and services that taxpayers may have reasonably expected to be delivered within 3 ½ months of payment were unlikely to meet this deadline. While the rule technically depends on the “reasonable expectations” of a taxpayer at the time of making a payment, certain tax equity investors are uncomfortable relying on this arguably subjective standard and insist on the goods or services actually being delivered within 3 ½ months. The IRS Notice 2020-41 reiterates that the structure of the rule is based on reasonable expectations rather than actual results. Nevertheless, to provide certainty and assurance, IRS Notice 2020-41 creates a presumption that a taxpayer held such reasonable expectations if the goods or services are actually delivered to the taxpayer by October 15, 2020.

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