May 28, 2020
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The IRS announced in Notice 2020-41 relief for taxpayers developing renewable energy projects to satisfy the “beginning of construction” requirement by extending the four-year “continuity safe harbor” for certain projects that began construction in 2016 or 2017. The Notice also provides a “3.5 month safe harbor” for services or property paid for by the taxpayer on or after September 16, 2019 and received by October 15, 2020. This guidance provides taxpayers with flexibility to satisfy the beginning of construction requirement and minimizes the impact of COVID-19 on the ability to claim energy tax credits.
Generally, and among other requirements, to qualify for a production tax credit (PTC) or an investment tax credit (ITC) a taxpayer must satisfy the beginning of construction requirement by year’s end to be eligible for such year’s PTC or ITC tax credit rate. Taxpayers may rely on either the “physical work test” or the “5% safe harbor” to satisfy the beginning of construction requirement. Both of these safe harbors require a taxpayer to make continuous progress toward completion of the energy facility once construction has begun. Pursuant to prior IRS guidance, the continuity requirement was deemed satisfied if the energy facility was placed in service no later than four years after the calendar year during which construction began.
Acknowledging the delays and disruptions caused by COVID-19, this IRS extension provides that for projects that began construction in 2016 or 2017, the four-year safe harbor is now extended to five years. This will provide relief to developers struggling to demonstrate satisfaction of the continuity requirement to investors.
Additionally, under the 5% safe harbor used to satisfy the beginning of construction requirement, construction of a facility will be considered as having begun if a taxpayer pays or incurs (within the meaning of Section 461 of the Code) 5% or more of the total cost of the facility in such year and thereafter, the taxpayer makes continuous efforts to advance towards completion of the facility. Pursuant to this safe harbor, taxpayers have relied on the 3.5 month rule of Section 461 of the Code and associated U.S. Treasury Regulations, in which an expense is treated as having been paid if the taxpayer reasonably expects to receive the services or property within 3.5 months after the date of the payment. Again acknowledging the delays and uncertainty caused by COVID-19, the IRS provides that for services or property paid by the taxpayer on or after September 16, 2019, the taxpayer will be deemed to have had a reasonable expectation that the services or property would be received within 3.5 months after the date of payment if the services or property are actually received by October 15, 2020.
We will continue to provide updates as future developments and renewable energy related guidance and stimulus emerge.
Please contact any member of the Shearman & Sterling LLP team for further information.
 IRS Notice 2013-29.
 See IRS Notice 2016-31; IRS Notice 2017-04; and IRS Notice 2018-59.
 Treasury Regulation Section 1.461-4(d)(6)(ii).