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Fiscal Cliff Legislation Extends Wind Energy Production Tax Credit

January 4, 2013

 

As part of the American Taxpayer Relief Act of 2012,[1] legislation passed by Congress on January 1, 2013 and signed by President Barack Obama on January 2, 2013 to avoid the so-called “fiscal cliff,” the production tax credit (the “PTC”) available to taxpayers under section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), for the production of electricity produced by wind energy production facilities has been extended. Absent legislative action, the wind energy PTC would have been inapplicable to electricity produced by wind energy production facilities placed in service after December 31, 2012. However, this new legislation extends the availability of the wind energy PTC to wind energy production facilities that begin construction prior to January 1, 2014.

The legislation thus not only extends the PTC deadline to January 1, 2014, but also significantly changes the deadline qualification standard for projects from the traditional ‘placed in service’ concept to a ‘commencement of construction’ approach. A wind facility now can qualify for the PTC if construction of the facility commences in 2013, even if the facility is not placed in service before January 1, 2014. This modification should prove to be far more beneficial to developers and investors than would have been the case had the legislation only extended the existing wind energy PTC provisions by one year because construction of a wind energy facility often takes more than one year to complete. As a result of this change, more projects are likely to qualify for wind energy PTCs by the new deadline than would have been the case under the ‘placed in service’ approach.

The extension of the wind energy PTC received bipartisan support from a variety of key federal and state officials and industry organizations in recent months, including President Obama and numerous members of Congress in both parties. In addition, the wind energy PTC was a subject of considerable debate during the recent presidential election. President Obama supported extension of the PTC for wind energy projects, while his opponent, Governor Mitt Romney, opposed extension of this tax credit. Commentators widely viewed the President’s reelection as significantly increasing the likelihood that the wind energy PTC would be extended. However, certain lawmakers continued to express opposition to PTC extension and the issue remained in question throughout the fiscal cliff negotiations.

The PTC incentivizes the production of electricity from certain renewable energy resources by providing tax credits to taxpayers based on electricity produced by the taxpayer using such renewable resources. As discussed above, in the case of the wind energy PTC, prior to the fiscal cliff legislation the tax credit would have only been available with respect to electricity produced by qualifying wind facilities placed in service prior to January 1, 2013. The revised Code section 45 language allows wind facilities to qualify for the PTC if construction begins in 2013 and does not include a requirement that the wind facility be placed in service in 2013.

The wind energy PTC has historically provided a significant boost for investment in wind energy projects by allowing investors to increase their return on renewable energy investments through the utilization of the PTC. Thus, the prospect of the wind energy PTC expiring at the end of 2012 and the uncertainty surrounding its extension caused a significant reduction in the amount of new investment in wind energy facilities. Although some industry participants have noted that the relatively late extension of the wind energy PTC has reduced the number of new wind facility installations that would have begun construction in 2013, the extension of the wind energy PTC is, nonetheless, expected to significantly encourage investments in wind energy projects capable of commencing construction in 2013.

In addition, similar revisions were made to the PTC deadline provisions for facilities producing electricity from certain other qualifying renewable resources. In particular, electricity produced from certain qualifying open-loop and closed-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, hydropower facilities and marine and hydrokinetic facilities will be eligible for the PTC, provided that construction of the applicable facility begins prior to January 1, 2014. Absent these amendments to section 45 of the Code, such facilities would only be eligible for the PTC if the facilities were placed in service prior to such date.

The legislation also revises the definition of PTC qualifying energy facilities for which a taxpayer may elect to receive a 30% investment tax credit (the “ITC”) under section 48 of the Code in lieu of the PTC. The 30% ITC now will be available for the PTC qualifying facilities described above (i.e., qualifying wind facilities, open-loop and closed loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, hydropower facilities and marine and hydrokinetic facilities) for which construction begins prior to January 1, 2014.[2]

In addition to the PTC and ITC extension provisions described above, the legislation also extends the availability of 50% bonus depreciation to qualifying property placed in service prior to January 1, 2014. Prior to the enactment of this legislation, the 50% bonus depreciation would not have been available for qualifying property placed in service after December 31, 2012. In the case of certain qualifying long production period property and certain qualifying aircrafts, the availability of the 50% bonus depreciation is extended to qualifying property placed in service prior to January 1, 2015. The legislation also extends special depreciation recovery periods available for qualifying property used on Indian reservations by two years.

Finally, the legislation delays until March 1, 2013 automatic budget cuts that would have been scheduled to be activated on January 2, 2013 under the Budget Control Act of 2011[3] if certain deficit reduction provisions were not enacted by such date. On September 14, 2012, the Office of Management and Budget released the “OMB Report Pursuant to the Sequestration Transparency Act of 2012” which indicated in limited guidance that the application of the sequestration process would result in a reduction in funding for Treasury grants under section 1603 of the American Recovery and Reinvestment Act of 2009[4] by 7.6%. Thus, this most recent legislation delays the impact of these potential reductions in section 1603 grants while providing additional time for Congress to reach an agreement before such reductions would take effect.

The inclusion of these provisions in the legislation that ultimately resulted from the fiscal cliff negotiations is widely viewed as a significant victory for the renewable energy industry generally and the wind energy industry in particular. These amendments to the Code give renewable energy developers and investors significantly more certainty in planning facility installations in 2013.

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[1] H.R. 8, 112th Cong. (2d. Sess. 2012).
[2] P.L. 112-25, 112th Cong. (1st Sess. 2011).
[3] P.L. 111-5, 111th Cong. (1st Sess. 2009).
[4] P.L. 111-5, 111th Cong. (1st Sess. 2009). 


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