Tax Law Update
January.08.2021
The Consolidated Appropriations Act, 2021 (the “Act”) was signed into law on December 27, 2020. The Act provided an extension of the beginning of construction deadline for the Production Tax Credit (“PTC”) for wind projects and the Investment Tax Credit (“ITC”) for solar and offshore wind, among other things.
Overview
Solar – ITC
Under the Internal Revenue Code (the “Code”), eligible solar projects currently can benefit from the ITC based on a percentage of the cost basis of the project. The ITC percentage depends on the year in which construction of the project began and the year in which the project is placed in service. For solar projects for which construction began in 2019 or earlier, the ITC was 30%. Prior to the Act, the ITC for solar projects was being phased down over the years 2019 to 2021. The Act extends this phase down schedule by two years. Solar projects will now receive a 26% ITC if construction begins in 2021 or 2022 and 22% ITC if construction begins in 2023. Any solar project claiming the ITC must be placed in service no later than 2025 or else the project will only qualify for a 10% ITC.
The Act does not change the “continuity requirement” imposed by the IRS administrative guidance, which requires that taxpayers make continuous progress on a project once construction has begun. The IRS guidance provides a “continuity safe harbor” for solar projects to be placed in service no more than 4 years after construction began—this is relevant to solar projects that began construction in 2019 or 2020, which must be placed in service by the end of 2023 or 2024, respectively in order to rely on the “continuity safe harbor”. IRS Notice 2021-05, released on December 31, 2020, modifies the “continuity safe harbor” applicable to certain solar projects located on federal land to provide for a ten year safe harbor, as opposed to the general four year safe harbor.
The table below shows the applicable “new” ITC percentages for solar projects under the Act and the “old” ITC percentages for solar projects prior to the Act (assuming for years 2019 through 2023 that the project is placed in service no later than 2025).
|
Year Construction Began |
New ITC |
Old ITC |
|
2019 |
30% |
30% |
|
2020 |
26% |
26% |
|
2021 |
26% |
22% |
|
2022 |
26% |
10% |
|
2023 |
22% |
10% |
|
After 2023 |
10% |
10% |
Offshore Wind – ITC
The Act adds a new ITC category for offshore wind projects. Prior to the Act, offshore wind projects were subject to the same ITC and PTC rules as onshore wind projects (discussed below). Under the Act, offshore wind projects that begin construction any time between January 1, 2017 and December 31, 2025 qualify for a 30% ITC. The table below shows the applicable “new” ITC percentages for offshore wind projects under the Act and the “old” ITC percentages for wind projects prior to the Act.
|
Year Construction Began |
New ITC |
Old ITC |
|
2016 |
30% |
30% |
|
2017 |
30% |
24% |
|
2018 |
30% |
18% |
|
2019 |
30% |
12% |
|
2020 |
30% |
18% |
|
2021 |
30% |
0% |
|
2022 |
30% |
0% |
|
2023 |
30% |
0% |
|
2024 |
30% |
0% |
|
2025 |
30% |
0% |
IRS Notice 2021-05 modifies the “continuity safe harbor” applicable to certain offshore wind projects to provide for a ten year safe harbor, as opposed to the four year safe harbor discussed above for solar projects.
Offshore wind projects that elect to claim the ITC cannot also claim the PTC. Offshore wind projects are eligible for the PTC under the same rules as wind projects on land.
Wind – PTCs
Under the Code, eligible wind projects currently can benefit from the PTC based on the quantity of energy produced and sold during a taxable year. Prior to the Act, the PTC for wind projects was being phased down over the years 2017 to 2020, with the PTC rate being set at a reduced percentage of the “full” PTC rate depending on the year in which construction of the project began. Under the Act, an additional year of 60% PTCs has been granted for wind projects. Any wind project that begins construction in 2021 will be eligible for 60% PTCs, the same as projects beginning construction in 2020. Under the “continuity safe harbor” applicable to wind projects, wind projects that begin construction in 2021 will generally need to be placed in service no later than December 31, 2025. IRS Notice 2021-05, modifies the “continuity safe harbor” applicable to certain wind projects located on federal land to provide for a ten year safe harbor, as opposed to the general four year safe harbor.
The table below shows the PTC phase down schedule for wind projects under the Act.
|
Year Construction Began |
PTC |
|
2016 |
100% |
|
2017 |
80% |
|
2018 |
60% |
|
2019 |
40% |
|
2020 |
60% |
|
2021 |
60% |
The change might take pressure off of back-up PTC qualification strategies for projects being placed in service in 2021. If for some reason the IRS were to win a challenge to the costs incurred under the 5% Safe Harbor or physical work completed under the Physical Work Test for a project claiming construction began in 2016 or 2017 (qualifying for 100% or 80% PTCs, respectively), the developer could argue that the physical work completed in connection with the completion of construction of the project in 2021 should qualify the project for 60% PTCs.