Keywords: tax credit, wind energy, bonus depreciation, taxpayer relief act, tax extender provisions
On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the "Act"), which was passed by both the Senate and House of Representatives on January 1, 2013. In addition to addressing some issues related to the so-called "fiscal cliff," the Act contains several "tax extender" provisions that could significantly impact the development and financing of wind and other renewable energy projects in the United States in 2013 and beyond.
Sunset Date for Wind PTC Extended; Eligibility for PTC and ITC Election Based on When Construction Begins
Under prior law, section 45 of the Internal Revenue Code of 1986, as amended (the "Code"), provided a production tax credit (the "PTC") for electricity produced and sold during a 10-year period from a wind facility that was placed in service before January 1, 2013. Absent an extension, a wind facility that was not placed in service by December 31, 2012 would not have been eligible for the PTC. The Act extends the sunset date for the PTC with respect to wind facilities until January 1, 2014. By pushing out the sunset date for wind facilities, the Act puts them on parity with closed-loop biomass, open-loop biomass, geothermal energy, landfill gas, municipal solid waste, qualified hydropower and marine and hydrokinetic facilities, which have a sunset date of January 1, 2014.
In another significant (but more subtle) modification, the Act replaces the requirement that a facility be placed in service before January 1, 2014 with the requirement that construction of the facility must have begun before January 1, 2014. This modification, which applies to wind facilities, as well as closed-loop biomass, open-loop biomass, geothermal energy, landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic facilities, is a welcome broadening of the definitions of "qualified facilities" that takes into account the long development and construction periods required to complete certain projects. Although this modification does not provide the long-term certainty that a multi-year extension would have provided (as was sought by the wind industry), it effectively provides for more than a simple one-year extension to the PTC sunset date for wind facilities.
The new begun-construction requirement is similar to the requirement under the US Treasury Department's ("Treasury") section 1603 cash grant program that construction on a facility have begun during 2009, 2010 or 2011 and for which Treasury adopted a 5 percent safe harbor. However, there is no guidance indicating if the Internal Revenue Service will apply similar standards in determining whether construction of a facility has begun for purposes of the modified PTC requirements. It is possible that the IRS could adopt a 10 percent safe harbor similar to that used in the Treasury regulations dealing with the special first-year depreciation allowance (commonly referred to as "bonus depreciation") under section 168(k) of the Code.
The Act also extends for one year the ability of taxpayers to elect to claim the 30 percent investment tax credit (the "ITC") under section 48 of the Code in lieu of the PTC, with the placed-in-service requirement being replaced with the begun-construction requirement.
Notably, the Act does not change the placed-in-service requirements under section 45 of the Code for small irrigation power, solar, refined coal or Indian coal facilities, and it does not modify the placed-in-service requirement under section 48 of the Code for solar energy property, which still must be placed in service before January 1, 2017 to be eligible for the ITC. It does, however, extend the PTC period for production from Indian coal facilities placed in service before January 1, 2009 from seven to eight years.
One-Year Extension of 50 Percent Bonus Depreciation
The Act provides a one-year extension to the 50 percent bonus depreciation for qualifying property that is both acquired and placed in service before January 1, 2014. Certain long production-period property will be eligible for 50 percent bonus depreciation if it is acquired before January 1, 2014 and placed in service before January 1, 2015.
Delay in Cuts to Treasury's Section 1603 Cash Grant Program
The Act delays until March 1, 2013 any mandatory spending cuts under the sequestration provisions of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011. Previously, Treasury announced, based on a report by the Office of Management and Budget, that such spending cuts likely would cause grants issued under the section 1603 cash grant program to be reduced by 7.6 percent beginning on January 2, 2013. Thus, the Act does not prevent sequestration but allows Congress additional time to reach a deal on a budget that would prevent such cuts to the section 1603 cash grant program.
Originally published January 3, 2013
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