On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act. The Senate Bill includes the base erosion and anti-abuse tax, a new tax intended to apply to companies that significantly reduce their US tax liability by making cross-border payments to affiliates. Given its potential to disrupt the financing of renewable energy projects, taxpayers in the renewable energy sector have been paying close attention to its developments.
Madeline Chiampou Tully represents clients on federal income tax matters relating to taxable and tax-free mergers, acquisitions and divestitures, corporate restructurings and finance transactions. Within these areas, her tax practice focuses on energy tax issues, including advising on renewable energy transactions such as solar and wind projects. Read Madeline Chiampou Tully's full bio.
Changes to the energy credits proposed in the Tax Cuts and Jobs Act could impact the eligibility of renewable energy projects that had been relying on the guidance previously issued by the Internal Revenue Service.
On January 19, 2017, the Internal Revenue Service (IRS) issued Rev. Proc. 2017-19, 2016-6 I.R.B. (the Rev. Proc.), providing a safe harbor under which it will not challenge the tax treatment of an Energy Savings Performance Contract Energy Savings Agreement (ESPC ESA) as a service contract under Section 7701(e)(3). While the application of the guidance is limited to the ESPC ESA context, the Rev. Proc. nonetheless provides potential insight into the IRS’s views of other power purchase agreements for the purchase of renewable energy generally.
On December 15, 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the “beginning of construction” requirements for wind and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes. The Notice (1) extends the “Continuity Safe Harbor” placed in service date for projects that started construction before 2014; (2) provides that the “combination of methods” rule set forth in prior guidance only applies to facilities on which construction begins after June 6, 2016; and (3) clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.
The US Court of Federal Claims awarded damages of more than $206 million to the Plaintiffs in a case with respect to the cash grant program under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). In its opinion, which was unsealed on Monday, October 31, the Court held that the US Treasury Department (Treasury) had underpaid the Section 1603 Grants arising from projects in the Alta Wind Energy Center because it had incorrectly reduced the Plaintiffs’ eligible basis in the projects. The Court rejected Treasury’s argument that the Plaintiffs’ basis in the facilities was limited to development and construction costs, and accepted Plaintiffs’ position that the arm’s-length purchase price of the projects prior to their placed-in-service date was a reasonable starting place for the projects’ value. The Court determined that the facilities, having not yet been placed in service and having only one customer pursuant to a master power purchase agreement (PPA), could not have any value assigned to goodwill or going concern value which would reduce the amount of eligible costs for purposes of the Section 1603 Grant. The Court noted that the transactions surrounding the sales of the facilities were conducted at arm’s length by economically self-interested parties and that the purchase prices and side agreements were not marked by “peculiar circumstances” which influenced the parties to agree to a price highly in excess of fair market value. Importantly, the Court also held that PPAs were more like land leases which should not be viewed as separate intangible assets from the underlying facilities, and are thus eligible property for purposes of the Section 1603 Grant. Finally, the Court accepted the Plaintiffs’ pro rata allocation of costs between eligible and ineligible property.
This significant decision is welcomed by the renewable energy industry and is an affirmation of a long held view by many taxpayers as to an appropriate measure of cost basis in the context of the Section 1603 Grant. The decision may also serve as much-needed guidance for determining cost basis for purposes of the investment tax credit under Code Section 48.
McDermott will be issuing a full On the Subject review and analysis of the Court’s opinion in the coming days.
On August 31, 2016, the Internal Revenue Service (IRS) and US Department of the Treasury issued final regulations (Final Regulations) under section 856 of the Internal Revenue Code to clarify the definition of “real property” for purposes of sections 856 through 859 relating to real estate investment trusts (REITs). The Final Regulations largely follow proposed regulations issued in 2014 (Proposed Regulations) by providing a safe harbor list of assets and establishing facts and circumstances tests to analyze other assets.
As discussed in our post on April 7, US Congress extended 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, but 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. Some congressional leaders had stated that the omission was an oversight that would be addressed in 2016.
In March, President Barack Obama signed an extension of certain Federal Aviation Administration (FAA) programs and revenue provisions through July 15, 2016. This legislation was apparently crafted with an intentionally short timeframe to allow inclusion of the omitted PTC and ITC provisions in long-term FAA reauthorization legislation. However, Senate Finance Committee members have indicated that the long-term FAA legislation will not include energy tax incentives. According to Tax Analysts, Senate Finance Committee member John Thune (R-SD) recently indicated that the extenders will not make it into the FAA reauthorization bill. Senator Richard Burr (R-NC) also said that the most likely vehicle for energy tax incentives would be an end-of-the-year tax bill.
On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.
The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:
A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.
Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.
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.
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.