Beginning of Construction for Sections 45 and 48; Extension of Continuity Safe Harbor for Offshore Projects and Federal Land Projects

Beginning of Construction for Sections 45 and 48; Extension of Continuity Safe Harbor

for Offshore Projects and Federal Land Projects

Notice 2021-05

SECTION 1. PURPOSE

This notice clarifies and modifies the prior notices1 published by the Department

of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) that

address the beginning of construction requirement for qualified facility and energy

property projects under §§ 45 and 48, respectively, of the Internal Revenue Code

(Code). Specifically, section 4.01 of this notice provides that a qualified facility or

energy property construction project that is an Offshore Project or a Federal Land

Project (each as defined in section 4.02 of this notice) satisfies the Continuity Safe

Harbor (as defined in section 2.04(3) of this notice) if a taxpayer places the qualified

facility or energy property that is the subject of the project into service within 10

calendar years after the calendar year during which construction of the project began.

SECTION 2. BACKGROUND

.01 Renewable Electricity Production and Investment Tax Credits. Section 38 of

the Code allows certain business credits against the tax imposed by chapter 1 of subtitle

A of the Code. Among the credits allowed by § 38 are (i) the renewable electricity

production tax credit under § 45 of the Code (PTC), and (ii) the investment tax credit

1 Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-36

I.R.B. 520; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04,

2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; and Notice

2020-41, 2020-25 I.R.B. 954 (collectively, the prior notices).

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determined under § 46 of the Code (ITC). The ITC includes the energy credit under

§ 48. See § 46(2).

.02 Qualification and Calculation of PTC and ITC

4; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04,

2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; and Notice

2020-41, 2020-25 I.R.B. 954 (collectively, the prior notices).

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determined under § 46 of the Code (ITC). The ITC includes the energy credit under

§ 48. See § 46(2).

.02 Qualification and Calculation of PTC and ITC. To qualify for the PTC,

electricity must, among other things, be produced by the taxpayer at a qualified facility

described in § 45(d). See § 45(a)(2)(A)(ii). The PTC for any taxable year is calculated

by multiplying an inflation-adjusted credit rate by kilowatt hours of electricity produced

and sold by the taxpayer to an unrelated person. See § 45(a). The ITC is calculated

as a percentage of the basis of energy property (as defined in § 48(a)(3)) placed in

service during the taxable year. See § 48(a)(1). Additionally, under § 48(a)(5), a

taxpayer may elect to claim the ITC in lieu of the PTC with respect to qualified property

that is part of certain qualified facilities. Both the PTC and the ITC have beginning of

construction requirements.

.03 Recent amendments to PTC and ITC statutes. The Taxpayer Certainty and

Disaster Tax Relief Act of 2020 (Act), enacted as Division EE of the Consolidated

Appropriations Act, 2021, Public Law 116-260 (Dec. 27, 2020), amended §§ 45 and 48

with regard to the PTC and the ITC. Section 131(a) of the Act extended the deadlines

for the beginning of construction requirements for certain qualified facilities to December

31, 2021 (in other words, before January 1, 2022). Section 131(b) of the Act extended

the beginning of construction deadline applicable to the election to claim the ITC in lieu

of the PTC by one year with respect to certain qualified facilities if construction of such

facilities begins before January 1, 2022

e beginning of construction requirements for certain qualified facilities to December

31, 2021 (in other words, before January 1, 2022). Section 131(b) of the Act extended

the beginning of construction deadline applicable to the election to claim the ITC in lieu

of the PTC by one year with respect to certain qualified facilities if construction of such

facilities begins before January 1, 2022. Section 132(a) of the Act extended the

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deadlines for the beginning of construction requirements for certain ITC energy property

to December 31, 2023 (in other words, before January 1, 2024). In addition, sections

131(c) and 132(b) of the Act extended beginning of construction deadlines for the

phaseout provisions applicable to the PTC and the ITC. Finally, section 204 of the Act

amends § 48(a)(5) of the Code to provide special rules for “qualified offshore wind

facilities.”

.04 Physical Work Test, Five Percent Safe Harbor, and Continuity Requirement

for Qualified Facilities. Notice 2013-29 provides two methods to establish the beginning

of construction for a qualified facility: (i) the “Physical Work Test” and (ii) the “Five

Percent Safe Harbor.” Each method requires a taxpayer to make continuous progress

towards completion once construction of the qualified facility project has begun

(Continuity Requirement).

(1) Physical Work Test. Section 4 of Notice 2013-29 sets forth the Physical Work

Test. Section 4.01 of the notice provides the following, which requires a facts-and-

circumstances analysis:

Construction of a qualified facility begins when physical work of a

significant nature begins. . . . Whether a taxpayer has begun construction

of a facility before [the statutory deadline], will depend on the relevant

facts and circumstances

otice 2013-29 sets forth the Physical Work

Test. Section 4.01 of the notice provides the following, which requires a facts-and-

circumstances analysis:

Construction of a qualified facility begins when physical work of a

significant nature begins. . . . Whether a taxpayer has begun construction

of a facility before [the statutory deadline], will depend on the relevant

facts and circumstances. The [IRS] will closely scrutinize a facility, and

may determine that construction has not begun on a facility before [the

statutory deadline], if a taxpayer does not maintain a continuous program

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of construction as determined under section 4.06 [(Continuous

Construction Test)]. (Emphasis added.)

Section 4.06(1) of Notice 2013-29 provides that a “continuous program of construction”

involves continuing physical work of a significant nature. Further, section 4.06(1)

provides that whether the taxpayer has maintained a continuous program of

construction (and thus satisfied the Continuous Construction Test) will be determined by

the relevant facts and circumstances.

(2) Five Percent Safe Harbor. Section 5 of Notice 2013-29 sets forth the Five

Percent Safe Harbor. Section 5.01 of the notice provides the following general rule,

which also requires a facts-and-circumstances analysis:

Construction of a facility will be considered as having begun before [the

statutory deadline], if (1) a taxpayer pays or incurs (within the meaning of

Treas. Reg. § 1.461-1(a)(1) and (2)) five percent or more of the total cost

of the facility, except as provided in section 5.01(2), before [the statutory

deadline], and (2) thereafter, the taxpayer makes continuous efforts to

advance towards completion of the facility (as determined under section

5.02) [(Continuous Efforts Test)]

dline], if (1) a taxpayer pays or incurs (within the meaning of

Treas. Reg. § 1.461-1(a)(1) and (2)) five percent or more of the total cost

of the facility, except as provided in section 5.01(2), before [the statutory

deadline], and (2) thereafter, the taxpayer makes continuous efforts to

advance towards completion of the facility (as determined under section

5.02) [(Continuous Efforts Test)]. (Emphasis added.)

Section 5.02(1) of Notice 2013-29 provides that whether a taxpayer makes continuous

efforts to advance towards completion of the facility (and thus satisfies the Continuous

Efforts Test) will be determined by the relevant facts and circumstances. Further,

section 5.02(1) provides that facts and circumstances indicating continuous efforts to

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advance towards completion of the facility may include, but are not limited to: (i) paying

or incurring additional amounts included in the total cost of the facility; (ii) entering into

binding written contracts for components or future work on construction of the facility;

(iii) obtaining necessary permits; and (iv) performing physical work of a significant

nature (as described in section 4.02 of Notice 2013-29). See section 5.02(1)(a) through

(d).

(3) Continuity Safe Harbor for determining satisfaction of the Continuity

Requirement. Notice 2013-60 provides clarifications for determining whether a taxpayer

satisfies the Physical Work Test or the Five Percent Safe Harbor with regard to a

qualified facility. In particular, section 3.02 of Notice 2013-60 provides a “Continuity Safe

Harbor” that allows a facility to be deemed to have satisfied the Continuity Requirement.

Under the Continuity Safe Harbor, if a facility is placed in service before January 1,

2016, the facility will be considered to satisfy (i) the Continuous Construction Test, for

purposes of satisfying the Physical Work Test, or (ii) the Continuous Efforts Test, for

purposes of satisfying the Five Percent Safe Harbor

allows a facility to be deemed to have satisfied the Continuity Requirement.

Under the Continuity Safe Harbor, if a facility is placed in service before January 1,

2016, the facility will be considered to satisfy (i) the Continuous Construction Test, for

purposes of satisfying the Physical Work Test, or (ii) the Continuous Efforts Test, for

purposes of satisfying the Five Percent Safe Harbor. Section 3.02 of the notice also

provides that, if a facility is not placed in service before January 1, 2016, whether the

facility satisfies the Continuous Construction Test or Continuous Efforts Test will be

determined by the relevant facts and circumstances, as described in sections 4.06 and

5.02 of Notice 2013-29, respectively.

.05 Additional notices further extending and modifying the Continuity Safe Harbor.

The Treasury Department and the IRS have published several notices to extend and

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otherwise modify the Continuity Safe Harbor, which include the following:

(1) Notice 2015-25, which extends the Continuity Safe Harbor for one year.

(2) Notice 2016-31, which modifies the Continuity Safe Harbor (as originally

provided in section 3.02 of Notice 2013-60 and extended by Notice 2015-25) by

providing that, if a taxpayer places a facility in service by the later of (i) a calendar year

that is no more than four calendar years after the calendar year during which

construction of the facility began, or (ii) December 31, 2016, the facility will be

considered to satisfy the Continuity Safe Harbor.

(3) Notice 2017-04, which further extends and modifies the Continuity Safe

Harbor by providing that, if a taxpayer places a facility in service by the later of (i) a

calendar year that is no more than four calendar years after the calendar year during

which construction of the facility began, or (ii) December 31, 2018, the facility will be

considered to satisfy the Continuity Safe Harbor.

(3) Notice 2017-04, which further extends and modifies the Continuity Safe

Harbor by providing that, if a taxpayer places a facility in service by the later of (i) a

calendar year that is no more than four calendar years after the calendar year during

which construction of the facility began, or (ii) December 31, 2018, the facility will be

considered to satisfy the Continuity Safe Harbor.

(4) Notice 2018-59, which provides methods to establish the beginning of

construction of an energy property (that is, the Physical Work Test and Five Percent

Safe Harbor), a Continuity Requirement for both methods, rules for transferring energy

property, and additional rules applicable to the beginning of construction requirement for

energy property projects for purposes of the ITC. Section 6.05 of Notice 2018-59

provides a Continuity Safe Harbor that mirrors the safe harbor provided for qualified

facilities in the prior notices:

Except as provided in this section, if a taxpayer places an energy property

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in service by the end of a calendar year that is no more than four calendar

years after the calendar year during which construction of the energy

property began (the Continuity Safe Harbor Deadline), the energy property

will be considered to satisfy the Continuity Safe Harbor. The excusable

disruption rules in section 6.03 do not apply for purposes of applying the

Continuity Safe Harbor. However, if an energy property is not placed in

service before the end of the fourth calendar year after the calendar year

during which construction of the energy property began, whether the

energy property satisfies the Continuity Requirement under either the

Physical Work Test or the Five Percent Safe Harbor will be determined by

the relevant facts and circumstances.

(5) Notice 2019-43, which provides that the Continuity Safe Harbor may be tolled

and extended in certain limited circumstances involving significant national security

concerns.

roperty began, whether the

energy property satisfies the Continuity Requirement under either the

Physical Work Test or the Five Percent Safe Harbor will be determined by

the relevant facts and circumstances.

(5) Notice 2019-43, which provides that the Continuity Safe Harbor may be tolled

and extended in certain limited circumstances involving significant national security

concerns.

(6) Notice 2020-41, which, in response to development delays caused by the

Coronavirus Disease 2019 (COVID-19) pandemic, extended the Continuity Safe Harbor

from four years to five years for qualified facilities or energy property that began

construction under the Physical Work Test or the Five Percent Safe Harbor in either

calendar year 2016 or 2017.

.06 Relief provided to qualified offshore wind facilities by the Taxpayer Certainty

and Disaster Tax Relief Act of 2020 -- (1) Qualified offshore wind facilities. Section 204

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of the Act amends § 48(a)(5) of the Code to provide special rules for “qualified offshore

wind facilities.” Under amended § 48(a)(5)(F)(ii), a “qualified offshore wind facility”

means a qualified facility described in § 45(d)(1) (determined without regard to any

date by which the construction of the facility is required to begin) that is located in the

inland navigable waters of the United States or in the coastal waters of the United

States.

(2) Summary of relief. Solely with regard to qualified offshore wind facilities,

amended § 48(a)(5)(F)(i) provides the following relief. First, for purposes of qualifying

as a qualified investment credit facility (as defined by § 48(a)(5)(C)), the beginning of

construction deadline under § 48(a)(5)(C)(ii) is extended to December 31, 2025. See

§ 48(a)(5)(F)(i)(I). In addition, the phaseout of credit for wind facilities under

§ 48(a)(5)(E) does not apply. See § 48(a)(5)(F)(i)(II)

des the following relief. First, for purposes of qualifying

as a qualified investment credit facility (as defined by § 48(a)(5)(C)), the beginning of

construction deadline under § 48(a)(5)(C)(ii) is extended to December 31, 2025. See

§ 48(a)(5)(F)(i)(I). In addition, the phaseout of credit for wind facilities under

§ 48(a)(5)(E) does not apply. See § 48(a)(5)(F)(i)(II). Lastly, for purposes of qualifying

as a qualified facility (as defined by § 45(d)(1)) for which a taxpayer can elect to claim

the ITC in lieu of the PTC under § 48(a)(5), the beginning of construction deadline

provided in § 45(d)(1) is extended to December 31, 2025. See § 48(a)(5)(F)(i)(III).

(3) Applicability of relief. Amended § 48(a)(5)(F) applies to periods after

December 31, 2016, under rules similar to the rules of § 48(m) of the Code before the

amendment of § 48 by the Revenue Reconciliation Act of 1990. This citation makes

applicable certain transitional rules regarding the ability of a taxpayer to claim qualified

progress expenditures to the extent of their qualified investment. See section 204(b) of

the Act.

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SECTION 3. RECOGNITION OF GREATER DELAYS FOR CONSTRUCTION OF

PROJECTS OFFSHORE AND ON FEDERAL LAND

.01 Overview. The Treasury Department and the IRS are aware of certain

qualified facilities and energy property that are being constructed Offshore or on

Federal Land (each as defined in section 4.02 of this notice). Based on comments

received from Congress and project stakeholders, the Treasury Department and the

IRS have determined that such projects ordinarily are subject to significantly greater

delays than projects not constructed Offshore or on Federal Land, and therefore are at

a significantly higher risk of failing the Continuity Safe Harbor.

.02 Description of typical project delays

ice). Based on comments

received from Congress and project stakeholders, the Treasury Department and the

IRS have determined that such projects ordinarily are subject to significantly greater

delays than projects not constructed Offshore or on Federal Land, and therefore are at

a significantly higher risk of failing the Continuity Safe Harbor.

.02 Description of typical project delays. The ordinary-course delays for the

qualified facility and energy property projects described in section 3.01 of this notice

result from various complicating factors, including (i) the applicability of significantly

more stringent permitting requirements, (ii) lengthier engineering and construction

timelines due to, for example, the difficulty of installing equipment Offshore, (iii)

heightened environmental regulation (including, for example, the environmental

analysis process carried out by the Director of the Bureau of Land Management), and

(iv) the need to construct new transmission lines to connect these projects to the

electrical grid system of the United States (Grid). In addition, such delays ordinarily are

outside the control of the project developers and can result in project completion times

of up to twice as long as those experienced by qualified facility and energy property

projects that are not constructed Offshore or on Federal Land.

.03 Additional certainty to investors provided by this notice. The Treasury

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Department and the IRS are providing this relief to complement previous relief provided

through the list of excusable disruptions under section 4.02(2) of Notice 2016-31 and

section 6.03 of Notice 2018-59, which potentially would cover the complicating factors

described in section 3.02 of this notice (and therefore would disregard them, and the

delays resulting therefrom, for purposes of determining whether a taxpayer satisfied

the Continuous Construction Test or Continuous Efforts Test with regard to a qualified

facility or energy property).

SECTION 4

16-31 and

section 6.03 of Notice 2018-59, which potentially would cover the complicating factors

described in section 3.02 of this notice (and therefore would disregard them, and the

delays resulting therefrom, for purposes of determining whether a taxpayer satisfied

the Continuous Construction Test or Continuous Efforts Test with regard to a qualified

facility or energy property).

SECTION 4. EXTENSION OF THE CONTINUITY SAFE HARBOR FOR SECTIONS 45

AND 48

.01 Qualification for Continuity Safe Harbor Extension. A qualified facility or an

energy property construction project that is an Offshore Project or a Federal Land

Project (each as defined in section 4.02 of this notice) satisfies the Continuity Safe

Harbor if a taxpayer places the qualified facility or energy property that is the subject of

the project into service by the end of a calendar year that is no more than 10 calendar

years after the calendar year during which construction of the project began.

.02 Definitions. For purposes of qualifying for the Continuity Safe Harbor

extension under section 4.01 of this notice, the following definitions apply:

(1) Federal Land. The term “Federal Land” means any land owned or controlled

by the United States.

(2) Federal Land Project. The term “Federal Land Project” means a qualified

facility or an energy property construction project--

(a) more than 50 percent of which will be placed in service on Federal Land, as

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determined by relative value or relative area; and

(1) Federal Land. The term “Federal Land” means any land owned or controlled

by the United States.

(2) Federal Land Project. The term “Federal Land Project” means a qualified

facility or an energy property construction project--

(a) more than 50 percent of which will be placed in service on Federal Land, as

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determined by relative value or relative area; and

(b) that will require the construction of one or more high-voltage transmission

lines to connect the qualified facility or energy property to the Grid.

(3) Offshore. The term “Offshore” means any inland navigable waters of the

United States or any coastal waters of the United States.

(4) Offshore Project. The term “Offshore Project” means a qualified facility or an

energy property construction project that will be placed in service Offshore.

SECTION 5. NO RULE

The IRS will not issue private letter rulings or determination letters to a taxpayer

regarding the application of this notice, the prior IRS notices, or the beginning of

construction requirements under §§ 45 and 48.

SECTION 6. EFFECT ON OTHER DOCUMENTS

Each of Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25, Notice

2016-31, Notice 2017-04, Notice 2018-59, Notice 2019-43, and Notice 2020-41 is

clarified and modified.

SECTION 7. DRAFTING INFORMATION

The principal author of this notice is Jennifer Bernardini of the Office of Associate

Chief Counsel (Passthroughs & Special Industries). For further information regarding

this notice contact Jennifer Bernardini on (202) 317-6853 (not a toll-free call).