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.
President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.
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.
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.
The Internal Revenue Service (IRS) has advised that the flip partnership guidelines under Rev. Proc. 2007-65, 2007-2 C.B. 967, do not apply to solar facilities or other projects claiming the Section 48 investment tax credit (ITC). The statement, made in in recently released CCA 201524024, was not surprising to practitioners in the solar arena as the revenue procedure expressly does not apply to ITC transactions.
The Internal Revenue Service (IRS) has issued additional guidance relating to when construction begins with respect to wind and other qualified facilities for purposes of the production tax credit and investment tax credit. This guidance focuses on the continuous construction and continuous efforts tests and the effects of ownership transfers of a facility after construction has begun.
To read the full article, click here.