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Energy Tax Extenders in FAA Bill Unlikely

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.

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Senate Finance Committee Holds Hearing on Energy Tax Reform

Tax reform has been a hot topic as of late, particularly for the energy sector.  On September 17, 2014, the Senate Finance Committee continued the focus on energy tax reform by holding a hearing on “Reforming America’s Outdated Energy Tax Code.”  The hearing followed a trio of major proposals released this past year to revise the Internal Revenue Code’s energy tax provisions.  Last December, former Senate Finance Committee Chairman Max Baucus (D-MT) released a discussion draft proposal to streamline energy tax incentives to make them more predictable and technology-neutral.  The proposal consolidates the various tax incentives for clean electricity into a single production tax credit (PTC) or an investment tax credit for all types of power generation facilities that are placed into service after December 31, 2016. In February, House Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of the Tax Reform Act of 2014, which sets forth a broad framework for general tax reform, including the phase out and repeal of many energy-related tax credits such as the PTC.  And in March, the President released his fiscal year 2015 budget proposal, which contained energy-related tax provisions such as a permanent extension of the PTC and a provision making the PTC refundable thereby allowing taxpayers without current taxable income to take advantage of the credit.  A detailed review and comparison of these three proposals can be found here

The September hearing on energy tax reform included industry representatives and academic experts as witnesses.  At the beginning of the hearing, Committee Chairman Senator Ron Wyden (D-OR) articulated three principles that he views are important in moving energy tax reform forward.  First, “the tax code must take the costs and benefits of energy sources into account.”  This would include factors “such as efficiency, affordability, pollution, and sustainability.”  Second, he advocates replacing “today’s quilt of more than 40 energy tax incentives with a modern, technology-neutral approach.”  Third, “the disparity in how the tax code treats energy sources – and the uncertainty it causes – has to end.”

During the course of the hearing, several topics were addressed.  A central focus of the hearing centered on achieving “parity” between fossil fuels and renewable fuels through a technology neutral tax structure.  The witnesses debated over various ways to achieve such parity, including the proposal to eliminate expensing for drilling intangible costs.  Other topics addressed by the witness panel included how to encourage technology advancements in the transmission and storage of energy, allowing renewable energy production to be financed through master limited partnerships, and the carbon tax.

At the end of the hearing, Wyden again reiterated his focus for energy tax reform: a technology-neutral approach focused on performance not fuel type.  Although it is unlikely that any broad tax reform will be accomplished in the near future, it appears that there is continued interest in structuring the energy tax provisions in a way that is technology neutral and that achieves parity between fossil and renewable fuels.

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Senate Finance Committee Passes Bill to Extend Certain Lapsed Tax Breaks

The Senate Finance Committee passed the Expiring Provisions Improvement Reform and Efficiency Act (EXPIRE Act) on April 3, 2014.  The legislation would renew through 2015 more than 50 tax incentives that either have lapsed or will lapse at the end of 2014.  The EXPIRE Act is not yet scheduled for consideration by the full Senate.  The legislation includes a number of energy-related tax credits, including extensions for the renewable electricity production tax credit (PTC) and the new markets tax credit (NMTC).  The legislation also modifies the bonus depreciation rules under Section 168(k).

The EXPIRE ACT extends the PTC and the election to claim the energy investment tax credit (ITC) in lieu of the electricity production credit for two years, through December 31, 2015. The PTC expired for qualifying renewable energy facilities at the end of 2013 if construction of such facilities did not begin before January 1, 2014.  The PTC provided a credit that ranged from 1.1 cents to 2.3 cents per kilowatt-hour of renewable electricity produced, depending on the type of renewable energy.  If passed, the proposal would be effective as of January 1, 2014.

The legislation also includes an extension for bonus depreciation under Section 168(k).

  • The proposal extends the 50 percent additional first-year depreciation deduction through 2015 (and through 2016 for certain longer-lived and transportation property), and applies to property placed in service after December 31, 2013, in taxable years ending after such date.
  • The legislation also makes a conforming change to the percentage of completion rules under Section 460(b)(1)(A) for certain long-term contracts.
  • The EXPIRE Act extends the election to increase the alternative minimum tax (AMT) credit limitation in lieu of bonus depreciation for two years to property placed in service before January 1, 2016 (January 1, 2017, in the case of certain longer-lived property and transportation property).

The EXPIRE Act also extends the NMTC (which expired at the end of 2013) for two years, through 2015, permitting up to $3.5 billion in qualified equity investments for each of the 2014 and 2015 calendar years. The proposal extends for two years, through 2020, the carryover period for unused NMTCs. The proposal applies to calendar years beginning after December 31, 2013.

The EXPIRE Act also contains a variety of other energy extenders, including:

  • The  Section 30C credit for alternative fuel refueling property is extended for two years (one year in the case of hydrogen refueling property, the credit which continues under present law through 2014), through December 31, 2015.
  • The Section 30D credit for electric motorcycles and three-wheeled vehicles is extended for electric motorcycles for two years, through December 31, 2015. The credit for electric three-wheeled vehicles is not extended.
  • The Section 40(b)(6) second generation biofuel producer credit is extended for two years, through December 31, 2015.  The proposal is effective for fuel sold or used after December 31, 2013.
  • The Section 40A biodiesel fuel and renewable diesel fuel credit and the Section 6426 excise tax credit for biodiesel mixtures are extended for two [...]

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