A Breath of Fresh Air During the Pandemic: Treasury Plans to Extend PTC and ITC Deadlines for Renewables
Subsequent to the issuance of this alert, the Internal Revenue Service issued Notice 2020-41, providing an extra year to the four-year “continuity safe harbor” for the federal production tax credit (PTC) and investment tax credit (ITC) for renewable energy projects that began construction in 2016 or 2017.
The U.S. Department of the Treasury ("Treasury") plans to adjust the current safe-harbor guidelines for the federal production tax credit ("PTC") and investment tax credit ("ITC"), providing some certainty and predictability for wind and solar projects that have been stalled because of the coronavirus pandemic. In response to COVID-19, in late April, a bipartisan group of senators appealed, via a letter, to Secretary of the Treasury Steven Mnuchin, urging Treasury to extend the "continuity safe harbor" for renewable energy projects that began construction in 2016 or 2017. In its concise response earlier this month, Treasury noted that it "plans to modify the relevant rules in the near future."
While consisting of only a few sentences, Treasury’s response was a sign of welcomed relief for renewable energy projects that are near completion but have been halted because of the COVID-19-delays leading to project schedules now being in disarray. This brief statement nevertheless is encouraging to renewable energy developers and their projects that were qualified for PTCs and ITCs based on actions taken in 2016 and 2017. Under existing safe-harbor provisions, projects that were qualified based on activity in 2016 are currently required to be operational by December 31, 2020 in order to have more certainty about the amount of tax credits to which these projects are entitled. Due to disruptions to supply-chains, capital, and construction caused by the worldwide pandemic, many of these “2016 projects” will be unable to achieve operational status in 2020, a fact that has caused anxiety throughout the renewable energy industry. While projects that began construction in 2017 have a December 31, 2021 deadline, a widespread industry concern exists about the ability of these “2017 projects” to timely achieve their requisite milestone. In addition to trying to preserve jobs along with protecting renewable energy projects, the Senators’ request is for Treasury to provide, at a minimum, a one-year extension of the current deadline.
Renewable energy projects in the United States may be eligible for PTCs and ITCs, which are a dollar-for-dollar reduction in the amount of federal income tax a taxpayer would otherwise owe; however, the method by which these projects qualify for these federal tax credits has been modified over time.
Initially, a "placed in service" method was used to determine a project’s eligibility for tax credits. While no bright-line test from the Internal Revenue Service (“IRS") on what constitutes "placed in service" exists, the IRS has equated it with completed installation of the project. Furthermore, each time the credits were extended, Congress only did so for a limited timeframe, such as, one to two years; as a result, renewable energy developers factored a project’s timing into account in an attempt to ensure that the project would be operational by the then-in-effect deadline. Subsequently, Congress enacted another method of qualifying renewable energy projects: When did the project “begin construction?" The "begin construction" approach uses an economic performance requirement, qualifying projects based on the tax credits available at the time a developer, for example, procures equipment for a project, rather than solely on when the project becomes operational."
A project is treated as having begun construction by starting "physical work of a significant nature" or incurring 5 percent or more of the total cost of the renewable energy project; passing either one of these tests establishes that construction has begun. An additional “continuity requirement” applies to both tests. It requires developers to make "continuous efforts" to advance toward completion of the project.
These renewable tax credits require that continuous progress toward completion continues once construction has begun (the “Continuous Efforts Requirement”). Whether the Continuous Efforts Requirement is satisfied depends on relevant facts and circumstances, a safe harbor (the “Continuity Safe Harbor”) will be deemed to be satisfied if a project is placed into service by the end of the year that includes the fourth anniversary of when construction began on that project.
While IRS Notices have described impediments that can toll the Continuity Safe Harbor as a result of delays due to certain excusable disruptions beyond a developer’s control (e.g., severe weather, natural disasters, work stoppages, supply shortages, and permitting and interconnection delays) that prevented it from meeting the Continuous Efforts Requirement, these do not necessarily provide confidence for investors, especially as a worldwide pandemic is not included on that "approved list." Thus, tax credit equity investors typically require developers to place projects in service within the Continuity Safe Harbor rather than rely on the Continuous Efforts Requirement.
Under current law, wind projects, for example, due to their longer construction schedules, that began construction in 2016 or 2017 are most likely contingent on the project being placed in service by the end of 2020 or 2021, respectively. Developers therefore had to previously take steps to demonstrate that projects “began construction” in 2016 and 2017, which now leads to renewable energy developers scrambling to finish projects in a timely fashion. This caused the renewables industry to lobby for a change in order to give these developers more time and flexibility to meet these requirements.
Wind and solar power are some of the fastest growing industries, and the COVID-19 pandemic threatens to jeopardize this growth. Renewable energy projects are suffering because all aspects of their business operations and financing are being affected in the form of delivery delays, absences of necessary employees, financing concerns, and project cancellations or postponements. Lockdowns, less vehicle and air traffic, and a reduction in industrial activity have resulted in pollution levels and carbon emissions falling worldwide; however, this cleaner air will be at greater risk as businesses and activity resume and people return to work. Given that patients with pre-existing respiratory and heart conditions have a greater risk for developing severe—and potentially deadly—cases of COVID-19, according to the Centers for Disease Control and Prevention, the ability to protect and maintain cleaner air going forward will be easier with more renewable energy available to contain emissions. While COVID-19-related concerns continue to exist that some of these energy projects will not be placed into service on time, the renewables industry continues to balance the delicate issue of ensuring its priorities are heard with the current emphasis on public health and safety during this pandemic. Despite the ongoing challenges that remain, the renewable energy industry is encouraged by Treasury’s plan to provide more certainty that the Continuous Efforts Requirement will be satisfied for many of those projects.
For now, no further details on Treasury’s plans have been provided. We do, however, expect that more information will be issued very soon.
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