On December 18, 2015, extensions to the production and investment tax credits that are applicable to wind, solar and other renewable power projects were enacted pursuant to an omnibus spending bill passed by Congress (the “Act”). Pursuant to the legislation, the production tax credit (“PTC”) for wind facilities available under Section 45 of the Internal Revenue Code of 1986 (the “Code”) has been retroactively re-instated and extended 5 years, as has the ability to elect the investment tax credit (“ITC”) available under Section 48(a) of the Code in lieu of the PTC (in each case, subject to a phase out). In addition, the expiration date for the ITC for solar has been extended by five years, subject to a phase out and with changes in the methodology for qualifying. The Act also reinstated the PTC and ITC for certain other renewable energy facilities on a more limited basis, and extended “bonus depreciation” through 2019.
Credits Applicable to Wind Facilities. The Act extends the PTC available to wind facilities such that any facility that commences construction prior to January 1, 2020 can qualify for the 10 year credit, subject, however, to a phased reduction in the amount of the available credit.
- Wind facilities that commence construction prior to January 1, 2017 will qualify for the full amount of the PTC.
- For wind facilities that commence construction during 2017, the amount of the PTC will be reduced by 20%.
- For wind facilities that commence construction during 2018, the amount of the PTC will be reduced by 40%.
- For wind facilities that commence construction during 2019, the amount of the PTC will be reduced by 60%.
The Act does not provide that facilities must be placed into service within any particular time period following the commencement of construction (unlike for the solar ITC discussed below). Treasury has, however, previously issued guidance regarding a “commencement of construction” test, and we expect that this guidance will continue to apply.
Our prior alerts covering this guidance can be found here and here. For example, Treasury has indicated that while there is a requirement that a sponsor maintain a continuous construction program as regards the construction of a project, Treasury will not scrutinize a sponsor’s compliance with this requirement if the project in question is placed into service within 2 years following the deadline for commencing construction. Of interest here is how Treasury will apply this concept to the phase out. Will a project that commences construction in 2016 but is not placed into service until 2019 be subjected to scrutiny and a possible reduction in the PTC by 20%, or will the 2 year requirement only be applied to projects that are placed into service after 2019? We expect that industry participants will seek further guidance from Treasury on such issues.
The Act also extends the ability of any PTC-eligible wind project to claim the 30% ITC in lieu of the PTC. The extension of the ITC is on the same terms as the PTC extension, namely that projects that commence construction prior to January 1, 2017 may claim the full amount of the ITC, but thereafter there is the same phased reduction in the available ITC (i.e., a reduction of the 30% ITC by 20%, 40% or 60% depending upon the year in which construction commences for an available ITC of 24%, 18% or 12%, respectively).
Credits Applicable to Solar Facilities. The Act extends the expiration date of the ITC that is available to commercial solar facilities under Section 48(a) of the Code. The ITC for these facilities had been set to step down from 30% to its permanent level of 10% for any solar projects placed into service on or after January 1, 2017. Under the Act, the ITC is now subject to a phased step down commencing January 1, 2020, with the drop to 10% now slated for January 1, 2022. In addition, the Act changes the eligibility deadline from a placed in service requirement to a commencement of construction requirement (but subject to being placed into service by January 1, 2024). Specifically, the Act provides as follows:
- Solar facilities that commence construction prior to January 1, 2020 will qualify for the full amount of the ITC (i.e., 30%).
- For solar facilities that commence construction during 2020, the amount of the ITC will be reduced from 30% to 26%.
- For solar facilities that commence construction during 2021, the amount of the ITC will be reduced from 26% to 22%.
- For solar facilities that commence construction in 2022 or thereafter, the amount of the ITC will drop to 10%.
- The Act also establishes a placed in service deadline such that for solar facilities that commence construction any time prior to January 1, 2022 but which are not placed into service before January 1, 2024, the amount of the ITC will be reduced to 10%.
The Act extends the ITC available to residential solar facilities (e.g., rooftop solar and solar water heaters) under Section 25D of the Code, again subject to a phase out and in this case continuing the placed in service requirement for eligibility (as opposed to making the change to the commencement of construction test). Specifically:
- For residential solar projects that are placed into service prior to January 1, 2020, the amount of the ITC is 30%.
- For residential solar projects that are placed into service prior to January 1, 2021, the amount of the ITC will be reduced from 30% to 26%.
- For residential solar projects that are placed into service prior to January 1, 2022, the amount of the ITC will be reduced from 26% to 22%.
- There is no ITC available under Section 25D of the Code for residential solar projects after December 31, 2021.
The ITC available to all other Section 25D residential energy efficiency property (i.e., for qualified fuel cells, small wind energy and geothermal heat pump property) remains unchanged, and thus continues at 30% but expires on December 31, 2016.
Credits Applicable to Other Renewable Facilities.
The Act also provides for a more limited extension of the PTC and ITC for other renewable energy facilities. Specifically, the Act retroactively re-instates the PTC available under Section 45 of the Code, as well as the ability to elect the ITC under Section 48(a) of the Code in lieu thereof, for Closed-loop Biomass Facilities, Open-loop Biomass Facilities, Geothermal Facilities, Landfill Gas Facilities, Trash Facilities, Qualified Hydropower Facilities and Marine and Hydrokinetic Renewable Energy Facilities. For all of these facilities, the full amount of the PTC, or by election the ITC, will now be available if construction commences prior to January 1, 2017.
The Act extends “bonus depreciation” for property acquired and placed in service before 2020. The bonus depreciation percentage will be 50% for property placed in service before 2018. However, the percentage decreases in subsequent years to 40% in 2018 and 30% in 2019.
Companies that place equipment in service before 2020 can therefore deduct the applicable bonus percentage of the tax basis in the equipment immediately and the remaining basis using the normal depreciation table (e.g., over 5 years in the case of wind and solar facilities and other eligible renewable energy property, or over 3 years for similar property located on qualified Indian reservation property if placed into service before 2017).
Bonus depreciation is extended under the Act for an additional year (i.e., for property acquired and placed in service before 2021) for certain property with an estimated production period of greater than one year and costing more than $1 million, provided the property’s recovery period is at least 10 years (e.g., gas and electric transmission property) or the property is “transportation property” (e.g., airplanes).