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Proposed Spending and Tax Extenders Legislation Would Significantly Extend Renewable Energy Tax BenefitsDecember 17, 2015
Congressional leaders have announced a package of legislative proposals that include provisions that would extend a number of key renewable energy tax incentives, including the production tax credit (the “PTC”) for wind projects and the investment tax credit (the “ITC”) for solar projects. The legislative proposals are contained in (i) an omnibus spending proposal and (ii) a tax extenders proposal. Importantly, the wind and solar credits would also be subject to new statutorily prescribed phaseouts under this legislation.
The tax extenders proposal was passed on Thursday, December 17 by the House and the omnibus spending proposal is expected to be voted on in the House on Friday, December 18. Most observers believe the House bills should be passed by the Senate.
Under current law, wind projects are not eligible for the PTC (or for the ITC in lieu of the PTC) unless construction of the project began prior to January 1, 2015. The omnibus legislation would extend this deadline for wind projects through 2019. The extension is subject to important phaseouts based on the following beginning of construction timelines:
- Prior to 2017: Wind projects for which construction begins prior to January 1, 2017 would be eligible for the full PTC, as determined under current law ($0.023/kWh for 2015, adjusted for inflation).
- 2017: Wind projects for which construction begins during 2017 would be entitled to the PTC, but the amount of the PTC would be reduced by 20% (this would be $0.0184/kWh using the current PTC amount).
- 2018: Wind projects for which construction begins during 2018 would be entitled to the PTC, but the amount of the PTC would be reduced by 40% (this would be $0.0138/kWh using the current PTC amount).
- 2019: Wind projects for which construction begins during 2019 would be entitled to the PTC, but the amount of the PTC would be reduced by 60% (this would be $0.0092/kWh using the current PTC amount).
- ITC: To the extent a taxpayer elects to claim the ITC in lieu of the PTC for a wind project, the amount of the ITC would be reduced using the same phaseout haircut timeline described above. That is, the 30% ITC otherwise available for the wind project would be reduced by the same phaseout percentages based on when construction of the wind project began.
After the “placed in service” qualification requirement for the PTC eligibility deadline was initially replaced with a “begun construction” qualification requirement in early 2013, the IRS issued several notices that ultimately interpreted this begun construction standard in a manner welcomed by developers and tax equity investors. When the begun construction deadline was subsequently extended by one year to December 31, 2014, the IRS released further guidance that extended the same guidance and simply reflected the new deadline. If the proposed wind PTC extension is ultimately enacted into law, a similar extension of existing IRS guidance would provide industry participants with a greater degree of certainty regarding PTC qualification than has existed in recent memory.
Current law provides an ITC equal to 30% of eligible basis with respect to qualifying solar projects that are placed in service prior to January 1, 2017. After this date, the ITC is reduced to 10% under current law.
The omnibus legislation extends 30% ITC eligibility and gradually phases this percentage out over time for solar projects that meet new beginning of construction qualification requirements, provided such projects are placed in service prior to January 1, 2024. The new beginning of construction qualification requirement would be a significant change from current law.
- Prior to 2020: Solar projects for which construction begins prior to January 1, 2020 would be eligible for the full 30% ITC.
- 2020: Solar projects for which construction begins during 2020 would be eligible for a 26% ITC.
- 2021: Solar projects for which construction begins during 2021 would be eligible for a 22% ITC.
- January 1, 2024 Placed in Service Deadline: No matter when construction begins, in order for a solar project to be eligible for the ITC in the percentages referenced above, the project would have to be placed in service before January 1, 2024.
- 10% ITC: Solar projects that do not meet the beginning of construction and placed in service requirements above would still be eligible for the 10% ITC.
As noted above, current law bases solar ITC eligibility on the project’s placed in service date. If the proposed provisions are enacted into law, the application of a begun construction requirement in the context of solar would likely provide taxpayers with much of the same comfort that resulted from the change from a placed in service to a begun construction standard in the PTC context (subject, of course, to the proposed December 31, 2023 placed in service cut-off). This comfort could be bolstered by IRS guidance that applies the begun construction requirement to solar projects in a manner analogous to its application to wind projects.
Additional Renewable Energy Tax Benefit Extensions
In addition to the wind and solar credit extensions discussed above, the legislative proposals contain several other key extensions of tax benefits for renewable energy technologies. For instance, the tax extenders legislation would provide an extension of the PTC (and ITC in lieu of PTC) begun construction qualification requirements to January 1, 2017 for closed- and open-loop biomass, geothermal, landfill gas, trash, hydropower and marine and hyrdrokinetic projects. Under current law, construction of such projects must have begun prior to January 1, 2015 in order for the project to qualify for the PTC.
Significantly, the 30% ITC eligibility deadline for fuel cells was not extended beyond the current December 31, 2016 placed in service deadline.
The tax extenders legislation would also extend the eligibility for accelerated or “bonus” depreciation (which allows an additional first-year depreciation deduction of 50% of the adjusted basis of certain qualified property). Under current law, only eligible property that was placed in service by the taxpayer prior to January 1, 2015 was eligible for bonus depreciation. The tax extenders bill would allow taxpayers to take bonus depreciation for qualifying property placed in service in 2015 through the end of 2019. However, as with the proposed wind and solar credit extensions, the legislation contains a phaseout provision that would reduce the amount of bonus depreciation from 50% to (i) 40% for eligible property placed in service in 2018 and (ii) 30% for eligible property placed in service in 2019. These deadlines are extended by one year for certain specified categories of property.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Mark Caterini, an O'Melveny partner licensed to practice law in New York, Arthur Hazlitt, an O'Melveny partner licensed to practice law in New York, Junaid Chida, an O'Melveny partner licensed to practice law in California and New York, and Alexander Roberts, an O'Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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