The US Internal Revenue Service (IRS) released Notice 2019-43 (the "Notice") on July 12, 2019, which provides that the period in which wind facility and energy property that have begun construction must be placed in service to be within the so-called "Continuity Safe Harbor" may be tolled and extended under limited circumstances when there are significant national security concerns raised by the Department of Defense (DoD). As discussed below, although the Notice provides relief for wind projects, it will not have a practical effect for solar projects that begin construction in 2019 or later.
Section 45 of the Internal Revenue Code of 1986 (the "Code") provides the production tax credit (PTC) for electricity produced from certain qualified energy resources, including wind. Section 48 of the Code provides an investment tax credit (ITC) for certain energy property, including solar property. The amount of the PTC for wind and the ITC for certain energy property (including solar property) is subject to a phase out based on the year in which construction of the project begins. The Code, however, does not define the beginning of construction.
Since 2013, the IRS has issued a series of notices relating to the beginning of construction rules under Sections 45 and 48 of the Code. The earlier notices, Notices 2013-29, 2013-60, 2015-25, 2016-31 and 2017-04, provide the beginning-of-construction rules for the PTC. The more recently issued Notice 2018-59 provides similar rules for the ITC.
Under these rules, a taxpayer may establish that construction has begun by starting physical work of a significant nature (Physical Work Test). Alternatively, a taxpayer may establish that construction has begun by paying or incurring 5% of eligible project costs (5% Safe Harbor). Both these methods impose a continuity requirement that must be satisfied (the "Continuity Requirement"). Specifically, in the case of the Physical Work Test, the IRS will scrutinize a facility and may determine that construction has not begun, if the taxpayer does not maintain a continuous program of construction. Similarly, the 5% Safe Harbor is only satisfied if the taxpayer makes continuous efforts to advance toward completion of the project.
In Notice 2013-29, the IRS provided a facts and circumstances test to determine whether the Continuity Requirement was satisfied. Under the test, certain disruptions in the taxpayer's construction of a facility that are beyond the taxpayer's control are not considered indications that the taxpayer has failed to satisfy the Continuity Requirement (e.g., severe weather conditions, natural disasters, licensing and permitting delays). However, the test did not provide certainty to developers and tax equity investors.
Subsequently, in Notice 2013-60, the IRS created a safe harbor (the "Continuity Safe Harbor"), which provided that a project would be deemed to satisfy the Continuity Requirement if it is placed in service by a specified outside date that was intended to coincide with the two-year anniversary of the last date upon which a project could begin construction and be eligible for the PTC. Notice 2016-31 significantly expanded the Continuity Safe Harbor in that it provides a four-year window (not including the year in which the project is placed in service) for a project to be placed in service and to be deemed to satisfy the Continuity Requirement. (The Continuity Safe Harbor and prior notices are discussed in more detail in our December 2016 Legal Update.) Notice 2018-59 provides a similar Continuity Safe Harbor for the ITC. However, unlike the facts and circumstances test, the Continuity Safe Harbor did not provide any allowance for a slip in the development schedule for disruptions that are beyond the taxpayer's control.
The Notice provides a limited allowance for construction delays. Under the Notice, the Continuity Safe Harbor will be tolled and extended for a period of time to account for delays in the development schedule as a result of national security concerns raised by the DoD but only if the following requirements are satisfied:
- Construction of the wind facility or energy property has begun (as described in the prior IRS notices) pursuant to a development or construction plan (a "Plan");
- Parties holding an interest in the wind facility or energy property (the "Developers") have received a government permit or approval that is necessary to implement the Plan;
- The DoD has provided written notice directly to one of the Developers that an aspect of the Plan raises significant national security concerns and that modification of the Plan would be in the best interests of national security objectives;
- The Developers pursue a modification of the Plan that is acceptable to the DoD to mitigate these significant national security concerns; and
- Due to the modification of the Plan, the Developers obtain new or additional permits or licenses, which delays placing the wind facility or energy property in service.
The tolling period will begin on the date the written notice from the DoD is received and will end once the Developers (i) obtain all new or additional permits or licenses, (ii) obtain written confirmation that such permits or licenses will not be issued, or (iii) notify the relevant federal or state authorities, in writing, that the modification will no longer be pursued. The Continuity Safe Harbor resumes the date after the tolling period ends.
The Notice illustrates the tolling period with a narrow fact pattern in which a wind project has received a transmission permit and then is informed by the DoD that national security concerns merit a different transmission path. The Notice makes it clear that the DOD may simply propose, rather than legally require, an alternative route. The project then needs time to obtain permits for the new transmission path, which causes its construction period to exceed the four-year safe harbor. The Notice concludes that the safe harbor deadline (i.e., December 31, 2020 for a wind project to be entitled to a full PTC of $25 per mWh) to be placed in service is "tolled," or extended, by the time required to obtain the permits for the alternative transmission line.
The Notice provides that a maximum extension for the permitting delays is the lesser of the actual delay and four additional years (i.e., December 31, 2024 for a wind project to qualify for the full PTC). It follows that, for example, if the permitting delay is five years, the additional time granted is only four years (i.e., December 31, 2024 for a wind project to qualify for the full PTC).
Otherwise, the guidance provided in prior IRS notices continues to apply.
Inapplicability to Solar Projects due to Different Statutory Deadline
As a practical matter, due to statutory constraints, the Notice does not provide relief for solar projects that begin construction in 2019 or later. In determining the amount of the ITC for solar energy projects, there are two relevant statutory deadlines. First, as noted above, the amount of the ITC for solar property is subject to a phase out based on the year in which construction of the project begins. Specifically, for solar projects to qualify for a full 30% ITC, they must begin construction no later than the end of 2019. Second, Section 48(a)(6)(B) of the Code requires a solar project to be placed in service by the end of 2023 in order to qualify for an ITC in an amount more than 10%. Accordingly, for a project that is placed in service in 2019, the four-year Continuity Safe Harbor would end on December 31, 2023, which is the outside placed-in-service date under the Code. Because this outside date is statutorily imposed, the IRS does not have the authority to extend it.
A Recent Congressional Development
Congress, of course, could change the statute. On July 25, 2019, the Renewable Energy Extension Act of 2019 (the "Act") was introduced in the House of the Representatives and the Senate to provide a five-year extension of the ITC. Specifically, the Act would extend the beginning-of-construction date to qualify for a full 30% ITC to December 31, 2024 and would extend the outside placed-in-service date to December 31, 2028. If the Act becomes law, solar developers would have at least until December 31, 2024 to place in service a project that is currently under development and qualify for a 30% ITC. Until the legislation is enacted, however, solar developers should carefully examine their development schedules and not expect to receive any extension under the Notice for projects that begin construction in 2019.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.