Specifically, the Notice allows projects constructed offshore or on federal land to satisfy the applicable safe harbor under the rules for beginning of construction if they are placed into service no more than 10 calendar years after the calendar year during which construction began. Previously, under the general safe harbor requirements, these projects would have only had four years or would have been required to prove qualification based on facts and circumstances (as discussed further below).

This is a policy change that we indicated was likely to occur in our recent client alert regarding renewable energy tax extenders included in the year-end stimulus bill. That legislation included a new benefit for offshore wind projects, allowing such facilities to elect either the PTC or the ITC, with a 30% ITC available for offshore wind farms that begin construction by December 31, 2025.

The Continuity Safe Harbor

For a taxpayer seeking to claim PTCs or ITCs, the calendar year when such taxpayer is deemed to begin construction of the facility or property establishes the applicable amount of available tax credit. The available PTCs and ITCs decline over time based on the year of construction commencement, and therefore the determination of the year when construction begins is critical to taxpayers seeking to claim these credits.

Under current law, as updated by the recent stimulus legislation discussed above, the PTC is available at a rate of 100% for wind projects that began construction before 2017, and then phases down to 80% for projects that began construction during 2017, 60% for projects that began construction during 2018, 40% for projects that began construction during 2019, and then back up to 60% for projects that begin construction in 2020 and 2021. No PTC is available for projects that begin construction in 2022. The 30% solar ITC phased down to 26% for projects that start construction in 2020 and then will be reduced again to 22% in 2023 before it drops down to 10% going forward. Solar projects qualifying for a tax credit above 10% must be placed in service before 2026. Offshore wind projects can elect either the PTC (through 2021) or the ITC. The ITC for offshore wind is 30% for projects that begin construction by December 31, 2025, without any phase out.

For purposes of qualifying for PTCs or ITCs, a taxpayer may establish that construction has commenced on a facility (in the case of the PTC) or energy property (in the case of the ITC) in a particular calendar year by demonstrating that physical work of a significant nature has begun (Physical Work Test) or, by demonstrating that 5% or more of the total cost of such facility or energy property has been incurred (5% Safe Harbor).

In addition to initially satisfying either the Physical Work Test or the 5% Safe Harbor, the taxpayer must satisfy a continuity requirement. Under this continuity requirement, if construction commencement is established using the Physical Work Test, the taxpayer must thereafter maintain a continuous program of construction. If construction begins under the 5% Safe Harbor, then the taxpayer must make continuous efforts to advance toward completion of the property. Under generally applicable IRS guidance, a taxpayer is considered to satisfy the continuity requirement for either the Physical Work Test or the 5% Safe Harbor if the relevant facility or property is placed in service by the end of a calendar year that is no more than four calendar years after the calendar year when construction began (Continuity Safe Harbor).

If the taxpayer fails to complete the project within the applicable safe harbor period, then the taxpayer must otherwise prove that it meets the continuity requirement based on applicable facts and circumstances. Proving continuity based on facts and circumstance can be challenging, so, generally, tax equity investors require developers to place projects in service within the safe harbor period, rather than rely on continuous efforts.

Notice 2021-5

The Notice recognizes that projects located offshore or on federal land are subject to delays that result in longer development timelines as compared to other projects due to stringent permitting requirements, the difficulty of installing equipment offshore, heightened environmental regulation, and required transmission upgrades. The IRS observed that these delays are ordinarily outside the control of developers and can result in project completion times of up to twice as long as those of similar projects not constructed offshore or on federal land.

Accordingly, the Notice allows the Continuity Safe Harbor to be satisfied for projects constructed offshore or on federal land if they are placed into service no more than 10 calendar years after the calendar year during which construction commenced. This relief applies to “Offshore Projects” and “Federal Land Projects.” Offshore Projects include qualified facilities or energy property construction projects that will (1) be placed in service in inland navigable waters or coastal waters of the United States and (2) require the construction of one or more high-voltage transmission lines to connect the qualified facility or energy project to the U.S. electrical grid system. Federal Land Projects include qualified facilities or energy property construction projects that will (1) be more than 50% placed in service on federal land, as determined by relative value or relative area, and (2) require the construction of one or more high-voltage transmission lines to connect the qualified facility or energy project to the U.S. electrical grid system.

While the PTC is often closely associated with wind projects, geothermal projects on federal land are also a likely beneficiary of the guidance provided by the Notice. The Notice does not adjust the deadline for solar projects to be completed by the end of 2025 in order to qualify for an ITC greater than 10%. Any change to the ITC deadline would need to come through legislation.

Final Observations

This relief provided by the Notice will be helpful to developers and investors contemplating offshore wind projects and projects on federal land. In particular, the combination of the newly available 30% ITC, combined with the 10-year Continuity Safe Harbor provided by the Notice, should provide a big boost to offshore wind projects.