USA - IRS Provides Beginning-of-Construction Relief for Offshore Projects and Projects on Federal Land
The IRS recently issued Notice 2021-05, which provides relief for offshore projects and projects located on federal land related to the beginning-of-construction requirements for the production tax credit under Section 45 of the Code (“PTC”) and the investment tax credit under Section 48 of the Code (“ITC”).
The notice provides that an offshore project or a project located on federal land will be deemed to satisfy the continuity safe harbor if the project is placed in service within 10 calendar years after the calendar year during which construction of the project began. This should provide welcome relief for taxpayers developing offshore wind projects and energy projects located on federal land with longer lead times than other PTC- or ITC-qualified projects.
Both the PTC and ITC are subject to sunset provisions based on the year in which construction of an otherwise qualified project begins. The phaseouts for the ITC and PTC were recently extended by the Consolidated Appropriations Act, 2021 (the “Bill”), as described more fully here. In addition, the Bill added a new provision for qualified offshore wind facilities (those located in the inland navigable waters of the United States or in the coastal waters of the United States), for which taxpayers elect to claim the ITC in lieu of the PTC. Qualified offshore wind facilities are eligible for the ITC if construction begins before January 1, 2026.
Prior IRS notices provide that construction of a project is considered to have begun for PTC or ITC qualification purposes when either (i) physical work of a significant nature begins with respect to the project (the “physical work test”) or (ii) the taxpayer pays or incurs 5% of the total cost of energy property included in the project (the “5% safe harbor”). In addition, a taxpayer must satisfy a continuity requirement.