Extension of Energy Related Tax Incentives Boosts Renewable Energy Industry

Introduction

Congress signaled bipartisan support for renewable energy investment in the Taxpayer Certainty and Disaster Relief Act (the Act) of 2020, part of the Consolidated Appropriations Act, 2021. Stradley Ronan Associate Andreas N. Andrews (LAW’14) published an article in Tax Notes and hosted a webcast with the Co-Chair of Stradley Ronan’s Environmental Group, Andrew Levine, about this development.

The Act codified deductions for energy efficient commercial buildings under section 179D (all “section” references are to the Internal Revenue Code of 1986, as amended) and several tax extenders for renewable energy credits. The Act also extended some general business credits related to the renewable energy industry, including the production tax credit (PTC) under section 45(a), the investment tax credit (ITC) under section 48, and the credit for carbon capture and sequestration (CCSC) under section 45Q(a). The extension of these tax credit provisions should incentivize investment in wind and solar energy, and carbon capture and sequestration technology.

Solar

Solar energy property owners may elect to claim a one-time ITC to offset the cost of constructing qualified solar energy property. Taxpayers claiming ITCs for the installation of a solar renewable energy system are permitted to use such credits for the taxable year when such system was placed in service. To be eligible to claim ITCs, must satisfy certain statutory beginning of construction requirements. The ITC is subject to a phaseout schedule based on the beginning of construction and placed-in-service timelines. The Act extended the time period to claim an ITC by two years and increased the credit amount for certain qualified solar energy property placed in service before January 1, 2026.

Wind

PTCs are often the preferred tax credit for owners of wind energy facilities. PTCs are a credit against the amount of electricity produced at a qualified wind facility and sold by the taxpayer to an unrelated person in the taxable year. The PTC period is ten years, i.e., taxpayers claim the credit for the taxable year as the facility is placed in service and each taxable year thereafter for ten years. Similar to the ITC, the PTC is subject to a phaseout schedule based on beginning of construction and placed-in-service timelines.

To be eligible to claim a PTC, taxpayers must begin construction on qualified facilities before a certain year. Prior to the Act, section 45(d)(1) defined a qualified wind facility as a facility owned by a taxpayer, originally placed in service after December 31, 1993, and the construction of which began before January 1, 2021. The Act extended the beginning of construction period for qualified wind facilities by one year, from January 1, 2021 to January 1, 2022. Additionally, the Act’s extension modified the phaseout schedule for qualified wind facilities for which construction began after December 31, 2019 and before January 1, 2022.

Qualified wind facility owners may choose to claim a one-time ITC in lieu of the PTC. The Act extended the time a qualified wind facility may choose to claim the ITC by one year, to before January 1, 2022.

Carbon Capture and Sequestration

Taxpayers may claim CCSCs for a 12-year period as of the taxable year the carbon capture and sequestration equipment is placed in service. This equipment captures carbon oxide that is emitted from a facility or directly into the atmosphere and then sequesters it.

To be eligible to claim a CCSC, taxpayers must begin construction on applicable equipment by a certain year. Prior to the Act, section 45Q(d)(1) defined a qualified facility as any industrial facility or direct air capture facility beginning construction before January 1, 2024. The Act extended the beginning of construction deadline from January 1, 2024 to before January 1, 2026.

Conclusion

While not as robust as the Biden Administration’s plans to for widespread industry reform, the extension of the PTC, ITC and CCSC should encourage investment in renewable energy and provide more certainty to the market.

For more information, we encourage you to access the original article in full here.

Andreas N. Andrews (LAW’14) is an associate at Stradley Ronan where he focuses his practice on tax issues related to mergers and acquisitions.

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