United States: New Legislation Extends And Modifies Renewable Energy Industry Tax Incentives

Last Updated: January 4 2016
Article by Paul A. Gordon and Casey August

The five-year tax credit extension for wind and solar power facilities is a welcome development for the renewable energy industry in light of recent indications by Congress of a push to end tax credit benefits for wind and solar projects.

On December 18, US President Barack Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015 and the Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2016 (often referred to collectively as the "tax-extenders legislation" to the extent that they pertain to tax), which contain tax provisions impacting various industries, including the renewable energy industry. The legislation includes the extension of federal tax credits related to the development and operation of certain renewable energy electric generating facilities.

This LawFlash provides a general overview of these provisions and our thoughts about their potential impact on the renewable energy industry.

Tax-Extenders Legislation Overview

The tax-extenders legislation extends tax credits for eligible wind and solar power facilities for five years, but subjects them to a gradual decrease or "phaseout" during the extension period. The tax-extenders legislation also extends and modifies the bonus depreciation rules.

Wind Facilities

For wind facilities, the production tax credit (PTC) and the investment tax credit (ITC, elected in lieu of PTC) expired for facilities that had not begun construction before January 1, 2015. The tax-extenders legislation now extends the PTC and ITC to apply to wind facilities beginning construction prior to 2020. Congress, however, tempered this benefit for the wind power industry by phasing out the current amount of PTC and ITC benefits throughout the five-year extension period as follows:

  • For wind facilities beginning construction during 2015 or 2016, the full amount of PTC/ITC is available.
  • For wind facilities beginning construction during 2017, the currently available PTC/ITC amount (indexed for inflation) is reduced by 20%.
  • For wind facilities beginning construction during 2018, the PTC/ITC amount is reduced by 40%.
  • For wind facilities beginning construction during 2019, the PTC/ITC amount is reduced by 60%.

To illustrate the above for the ITC that may be taken in lieu of the PTC, the current 30% ITC rate is reduced to 24% (30% x 80%) for wind facilities beginning construction in 2017, 18% (30% x 60%) for wind facilities beginning construction in 2018, and 12% (30% x 40%) for wind facilities beginning construction in 2019.

Solar Facilities

Similarly, the tax-extenders legislation extends the ITC for eligible solar energy facilities for an additional five years, replacing the requirement that facilities begin construction before 2017 in effect prior to the tax-extenders legislation with the requirement that facilities begin construction before 2022.

The solar energy facility ITC is also subject to similar phaseout terms during this five-year extension period as follows:

  • The current 30% ITC is available for solar facilities beginning construction before 2020.
  • The ITC rate for solar facilities reduces to 26% for facilities beginning construction in 2020 and 22% for facilities beginning construction in 2021.
  • However, the ITC for any qualifying solar energy facility beginning construction prior to 2022 decreases to 10% (the rate to permanently apply after the ITC phaseout for eligible solar energy property) for any facility not placed in service prior to 2024.

The tax-extenders legislation also provides a similar five-year extension and phaseout for residential solar tax credits for qualifying property placed in service prior to 2022.

Other Renewable Energy Facilities

The tax-extenders legislation additionally extends "begin construction" date PTC and ITC eligibility for certain other renewable energy facilities for two years from January 1, 2015 to January 1, 2017. This extension applies to closed-loop and open-loop biomass facilities, geothermal energy facilities, landfill gas facilities, trash energy facilities, hydropower facilities, and marine and hydrokinetic renewable energy facilities.

Bonus Depreciation

The tax-extenders legislation extends the bonus depreciation eligibility rules from property placed in service prior to 2015 to property placed in service prior to 2020. However, the bonus depreciation percentage gradually decreases during this extension period. Bonus depreciation is 50% for property placed in service prior to 2018, 40% for property placed in service in 2018 and 30% for property placed in service in 2019. The tax-extenders legislation also permits taxpayers to continue to elect to accelerate the use of Alternative Minimum Tax (AMT) credits in lieu of bonus depreciation under special rules for property placed in service during 2015, and modifies AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.

Conclusion

The five-year tax credit extension for wind and solar power facilities is a welcome development for the renewable energy industry, particularly in light of the recent indications by certain members of Congress that they would be pushing to immediately end tax credit benefits for wind and solar energy projects. From a technical perspective, the gradual and incremental phaseout of the ITC/PTC based on when construction commences on a qualifying wind or solar energy project means that the project's "start construction" date will continue to remain a highly significant issue for project developers, investors, and lenders.

The IRS has yet to update its helpful guidance providing quasi-"bright line" safe harbors on how taxpayers may satisfy the "start construction" requirement for ITC/PTC eligibility, although we expect it will do so in light of prior updates in reaction to the enactment of previous "extenders"-type legislation. How the IRS will address some of the finer points in this guidance, however, is less clear given the new ITC/PTC extension period and incremental phaseout of tax credits based on a project's "start construction" date. In particular, the prior guidance requirements that construction, once commenced, needed to be "continuous" (but with an in-service date safe harbor for meeting this test) comes to mind as an area that the IRS may need to carefully consider given the new features of this most recent legislation.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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