Reed Smith Client Alerts

On May 28, 2020, the Internal Revenue Service (IRS) issued Notice 2020-41, which eased qualification requirements for investment tax credits (ITCs) and production tax credits (PTCs) due to difficulties taxpayers have had in qualifying projects in light of production delays resulting from COVID-19.
enr electricity


PTCs are available for production of energy from qualified energy resources, which generally include wind, closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy.

ITCs are available for solar energy property, solar illumination property, geothermal energy property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, qualified small wind energy property, and qualified geothermal heat pump property. In addition, a taxpayer may elect to treat certain renewable energy facilities that otherwise qualify for PTCs to claim ITCs in lieu of PTCs.

PTCs for any taxable year are calculated by multiplying an inflation-adjusted credit rate by kilowatt hours of electricity produced and sold by the taxpayer to an unrelated person. ITCs are calculated as a percentage of the basis of energy property placed in service during the taxable year.

Beginning construction

In many cases, eligibility for credits, and the amount of credits available, depends on when construction of a facility begins.

A taxpayer may establish the beginning of construction by starting physical work of a significant nature (the Physical Work Test). Alternatively, under a safe harbor, construction of energy property will be considered as having begun when a taxpayer pays (in the case of a taxpayer on the cash method of accounting) or incurs (in the case of an accrual method taxpayer) 5 percent of the cost of the energy property (the 5-Percent Test).