IRS Issues Guidance on Renewable Energy Projects, Retirement Withholding

The Internal Revenue Service has issued rules and guidance covering two disparate tax areas: renewable energy and retirement payments.

New rules give relief for taxpayers developing renewable energy projects and producing energy through renewable means. The IRS also issued proposed regulations that update the tax withholding rules for periodic retirement and annuity payments made after Dec. 31, 2020.

There will be a bigger window on renewable energy.

The new relief measures help not only those who develop renewable energy projects but those who use renewable strategies to produce electricity. The acceptable sources include wind, biomass, landfill gas, trash, and hydropower. There’s also a safe harbor for taxpayers using solar panels, fuel cells, micro-turbines and combined heat-and-power systems.

This latest guidance is spelled out in Notice 2020-41.

The IRS admits that the effects of the COVID-19 pandemic has caused delays in the supply chain for the components that are needed to complete renewable energy projects that would otherwise be eligible for important tax credits.

For certain projects that began construction in 2016 or 2017, Notice 2020-41 adds an extra year to the four-year “Continuity Safe Harbor” provided in existing guidance. If these projects are placed in service within five years construction will be considered to be continuous. 

Notice 2020-41 also provides a measure of comfort for those taxpayers who started construction and incurred at least 5% of the project costs and made payments for services or property that was expected to be delivered within 3 1/2 months.  the IRS now considers these taxpayers to be considered “incurred” under economic performance rules.

The notice says if the services or property are received by Oct. 15, 2020, the taxpayer’s expectations at the time of the 2019 payment are considered reasonable.

IRS documents say these changes were all made necessary by the pandemic.

“Extending the Continuity Safe Harbor and providing a 3½ Month Safe Harbor will provide flexibility for taxpayers to satisfy the beginning of construction requirements and limit the impact of COVID-19-related delays on the ability to claim tax credits,” the IRS writes.

What are the new rules for payments?

Accounting Today reports that the IRS and the Treasury Department have also proposed new regulations updating income tax withholding rules for periodic retirement and annuity payments made after Dec. 31, 2020.

The rules for withholding on these kinds of payments were set up for change by the Tax Cuts and Jobs Act in 2017.

Before that time, if no withholding certificate was in effect for a taxpayer’s periodic retirement and annuity payments, withholding was determined by treating the taxpayer as a married individual claiming three withholding exemptions.

The 2017 tax reform measure changed that, saying instead that when no certificate was present, rules set out by Treasury would be the determining factor. But that hasn’t been as simple as it sounds.

The IRS issued Notice 2020-3 earlier this year that basically said the default rate of withholding on periodic payments with no certificate present would continue to be based on that of a married taxpayer with three exemptions.

Now, Accounting Today reports, this new proposal means another iteration of regulations will once again be coming from the IRS and Treasury for 2021 and beyond. The rules and procedures will hopefully determine the default rate of withholding on periodic payments when a taxpayer has no withholding certificate.

Accounting Today, though, advises that more rule changes may yet be on the horizon. Most of the individual tax provisions of the Tax Cuts and Jobs Act will expire in 2025.

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