The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.
Martha (Marty) Groves Pugh advises clients on federal income tax issues with a particular emphasis on the nuclear and energy industries. Marty has helped clients seek and receive many private letter rulings and has extensive experience in drafting legislative language for tax proposals and interacting with the US Department of Treasury and the Internal Revenue Service on important industry issues. Her practice also includes tax planning for proposed transactions and advising clients on audits, appeals and litigation issues. Read Martha Groves Pugh's full bio.
As discussed in our post on March 16, the Congressional extension of the Production Tax Credit (PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (ITC) under IRC Section 48 in December 2015 failed to include extensions for certain types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Congressional leaders have stated that the omission was an oversight that would be addressed in 2016.
On March 30, 2016, President Barack Obama signed into law the Airway and Airport Extension Act of 2016 (H.R. 4721) (the Act), which extends certain Federal Aviation Administration (FAA) programs and revenue provisions only through July 15, 2016. Expiring in less than four months, the FAA extension was apparently crafted with an intentionally short timeframe to allow inclusion of the omitted PTC and ITC provisions in long-term FAA reauthorization legislation that will likely follow this summer. Accordingly, while the Act does not directly address the energy tax provisions omitted from last year’s extenders package, experts hope that it paves the way to addressing the omission in a few months.
Senator Ron Wyden (D-WY) has said that he hopes to introduce a long-term FAA bill addressing the omitted energy tax credit extenders after the Senate returns this week. House Ways and Means Committee Chair Kevin Brady (R-TX) has expressed opposition to attaching energy credit tax extenders to the FAA reauthorization legislation. As developments occur, we will update this blog.
Renewable Energy Industry Seeks Additional Energy Credit Clarifications
On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) (the Act). The Act includes multi-year extensions of the Production Tax Credit (the PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (the ITC) under IRC Section 48 for wind and solar projects—both of which are gradually phased out. The Act, however, did not extend the ITC for other types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Read further discussion of the Act’s extension of renewable energy tax incentives. Continue Reading President Obama Signs Consolidated Appropriations Act
President Obama’s recently released budget proposal for the 2017 fiscal year repeats many of his past energy-related tax proposals, including a permanent extension of the renewable energy production tax credit and a provision making it refundable. Making the production tax credit permanent and refundable signals the administration’s continued strong support for renewable energy. This On the Subject summarizes the key energy-related tax provisions contained in the budget proposal and detailed further in the US Department of the Treasury’s general explanation of the proposal.
With the recent extension of the federal income tax credits available for renewable energy projects, practitioners and industry participants have raised questions as to how the “begun construction” rules will apply under these new regimes. The new regimes refer to the dates on which construction on projects began for purposes of determining qualification for the credits and also provide for a phaseout or reduction in the available credits over time. (For more information on these extensions, see our previous article on the extensions.)
Industry participants expect that the Internal Revenue Service will soon issue guidance detailing when a project will be determined to have “begun construction” and when continuous construction efforts are required. It is expected that this guidance will be similar to the beginning of construction guidance summarized here for wind projects. However, in light of the different considerations for different technologies and the reduction in the credit amount over time, which differs from the prior credit for wind that expired in its entirety, a number of questions have been raised by industry participants. It is hoped that some of these questions will be answered by any guidance that is issued with respect to the credit extensions. Some of these questions include:
- Will the beginning of construction tests be the same as they currently are for wind (e., a physical work of a significant nature test and a 5 percent safe harbor test)?
- Will continuous construction efforts be required under the new regimes?
- What is the consequence of failing to maintain a program of continuous construction? Will the project still be eligible for a reduced credit, and how will that credit amount be determined?
- Will there be a placed in service safe harbor? The wind guidance had provided that continuous construction efforts would be considered maintained so long as projects were placed in service prior to a specific date. That date was two years after the end of the year in which the project was required to be placed in service. Most industry participants believe this safe harbor will be extended to apply to wind projects beginning construction through 2016.
- If there is a placed in service “safe harbor,” will it apply to all technologies in the same manner? That is, will the safe harbor period be the same for all renewable technologies?
- Will the guidance address and provide examples of “physical work of a significant nature” for solar projects?
- How would the physical work and safe harbor tests apply in the context of residential or commercial and industrial solar projects?
- In the solar context, what will be considered a single “facility” for purposes of the beginning of construction tests?
We will provide additional updates as we get more information, so please stay tuned.
On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) (the Act), which included welcomed extensions to a number of energy tax incentives. The legislation includes multi-year extensions of the Section 45 Production Tax Credit (the PTC) and the Section 48 Investment Tax Credit (the ITC) for wind and solar projects tempered by a gradual phase out of the total credit available.
The Internal Revenue Service issued Notice 2015-25 on March 11, 2015, to provide further guidance on meeting the beginning of construction requirements for wind and other qualified facilities. The Notice extends the date by which a facility can meet the beginning of construction deadline to correspond with the extension of Code Section 45 passed by Congress at the end of 2014.
President Obama’s recently released budget proposal for the 2016 fiscal year repeats many of his past energy-related tax proposals, including a permanent extension of the renewable energy production tax credit and a provision making it refundable. Making the production tax credit permanent and refundable signals the administration’s continued strong support for renewable energy. This Special Report offers a summary of the key energy-related tax provisions contained in the budget proposal and discussed further in the U.S. Department of the Treasury’s general explanation of the proposal.
President Obama’s recently released budget proposal for the 2015 fiscal year contains energy-related tax provisions that include a permanent extension of the production tax credit (PTC) and a provision making it refundable. The recently released discussion draft of the Tax Reform Act of 2014 from House Ways and Means Committee Chairman Dave Camp also contains numerous energy-related tax provisions, but would phase out and repeal the PTC, along with many other energy-related tax credits. In late 2013, former Senate Finance Committee Chairman Max Baucus also released discussion drafts regarding energy-related tax provisions, including a proposal to consolidate the various tax incentives into a PTC or an investment tax credit. This Special Report provides a comparison of the key energy-related tax provisions in each proposal.
Senate Finance Committee Chairman Max Baucus (D-MT) released a proposal on December 18 that would streamline energy tax incentives to make them more predictable and technology-neutral. The proposal consolidates several different energy tax incentives into just two tax credits: one for electricity and one for transportation fuels. The proposed provisions would allow facilities placed in service after 2016 to choose between a 10-year production tax credit and an investment tax credit of up to 20 percent. The amount of the credit is dependent on the greenhouse gas emissions of the facility or fuel, as determined by the Environmental Protection Agency (EPA); the cleaner the facility the larger the credit. Any facility producing electricity that is 25 percent cleaner than the average for all electric production facilities will receive the credit. The credit would be open to all resources. The credit phases out over four years once the greenhouse gas intensity in the market has declined by 25 percent. The package of reforms is based on proposals previously offered by both Republicans and Democrats. The package calls for extending current clean energy incentives through 2016 to provide for a smooth transition period.
Earlier in the week, over 30 Congressmen sent letters to the House Ways and Means Committee and Senate Finance Committee urging their fellow Congressmen to extend numerous clean-energy tax credits set to expire at the end of the year. The letters supported a comprehensive reform of the tax code but urged immediate action to renew specific clean energy incentives facing expiration.
Among the tax incentives slated to expire are the production and investment tax credits for wind, biomass and other renewable technologies other than solar, and the advanced energy manufacturing tax credit. Also set to expire are tax credits for efficient commercial buildings, new homes, appliances and home energy efficiency upgrades; transportation fringe benefits which provide parity between parking and transit benefits; and tax credits for biofuel production, hybrid medium- and heavy-duty trucks, and the installation of refueling equipment for alternative fuel vehicles.
The coalition of Congressmen urged long-term extension of the tax credits in order to accommodate the long planning horizon of renewable projects, such as offshore wind farms. However, another group of Senators urged the Senate Finance Committee on December 17 to allow for the expiration of the production tax credit for wind energy, arguing that it is time to let the technology stand on its own.
Jessica Bayles, associate in McDermott’s Energy Advisory practice, contributed to this article.