IRS issues updated guidance for renewable energy

Continuity Safe Harbor

Developers of renewable projects can now qualify for the Continuity Safe Harbor over six years for renewable energy projects which started between 2016 to 2019, or for five years for projects started in 2020.

Simply put, the Continuity Safe Harbor is satisfied if a taxpayer places the qualified facility or energy property in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction began with respect to that qualified facility or energy property in which construction started between 2016 to 2019. The timeline to put the qualified facility or energy property in services reverts to five years for projects that began in 2020.

Safe Harbor period

The Notice recognizes the impact of COVID-19 on development projects and provides relief in the form of the extension of the continuous construction safe harbor period from the previous five years to six years for projects started between 2016 to 2019 as well as from four years to five years for projects started in 2020. The Notice does not change the deadline for solar energy projects, which need to be completed and placed in service by the end of 2025 in order to qualify for the higher Investment Tax Credit.

Projects where construction began in 2020 or 2021 may qualify for the investment tax credit at 26%, whereas projects where construction began between 2016-2019 may qualify for a 30% investment tax credit. However, the Investment Tax Credit for solar energy projects that are not completed and placed in service by the deadline of 2025 may qualify for the lower 10% credit.

Continuity requirement

Additionally, the Notice provides that the continuity requirement may be satisfied for any project either through the Continuous Construction Test or the Continuous Efforts Test, regardless of whether the beginning of the construction was originally established by the Physical Work Test or Five Percent Test.  This allows developers to demonstrate continuity through a greater range of methods such as incurring additional costs, entering into contracts for work on the project either onsite or offsite, and obtaining project permits. These additional methods provide developers much more flexibility in demonstrating the continuation of the development projects.

Mazars’ Insight

The expansion of the Continuity Safe Harbor may allow more taxpayers to claim an earlier start date and thus a higher Investment Tax Credit for Solar projects slowed down by the impact of COVID-19.

Revenue Ruling 2021-13

Finally, on July 1, 2021, the IRS issued Revenue Ruling 2021-13 clarifying several issues from the section 45Q regulations released in January 2021. The final regulations provide a functionality-based definition of carbon capture equipment:

• The revenue ruling makes clear that, because one of the functions of the AGR system is to separate CO2 from a gas stream, it is carbon capture equipment for purposes of section 45Q.
• The revenue ruling clarifies that one person is not required to own every component of the carbon capture equipment within a single process train; however, to be the person whom the section 45Q credit is attributable, a person must own at least one component of the carbon capture equipment in a single process train.
• Furthermore, the revenue ruling clarifies that the relevant placed in service date for section 45Q purposes is the placed in service date of the single process train of the carbon capture equipment, regardless if certain assets within that single process train have different placed in services date for depreciation purposes.

Mazars’ Insight

The Revenue Ruling may allow more taxpayers to claim the Carbon Recapture Credit under section 45Q by expanding the definition of qualified equipment to having at least one function related to the CO2 separation process and only needing to own at least a single component of the carbon capture equipment.

Please contact your Mazars professional for additional information.

Published on July 13, 2021

Authored by Ryan Vaughan and Andrew Kosoy 

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.