This article, from McDermott Will & Emery, is authored by Madeline Chiampou, Tully, Heather Cooper, Martha Groves Pugh, Philip Tingle and Justin Jesse
As in previous proposed budgets, President Obama’s recently released budget proposal for the 2017 fiscal year contains energy-related tax provisions that include a permanent extension of the renewable energy production tax credit (PTC) and a provision making it refundable.
Making the PTC permanent and refundable signals the administration’s continued strong support for renewable energy. The Obama administration’s budget proposal affects several energy-related tax provisions, many of which were also included in the revenue proposals from past years.
However, there are two key differences from past proposals. Past proposals called for the permanent extension of the research and experimentation (R&E) credit and section 179 expensing. Last year, Congress made the R&E credit and section 179 expensing permanent. For more information, see McDermott’s analyses of energy tax proposals in the 2011, 2012, 2013, 2014, 2015 and 2016 proposed budgets. This On the Subject summarizes the key energy-related tax provisions contained in the Proposal and detailed further in the US Department of the Treasury’s general explanation of the Proposal (Green Book).
Modify and permanently extend the production tax credit
Last year, Congress enacted multi-year extensions of the PTC under section 45 of the Code for qualifying renewable energy facilities, such as wind, solar, biomass, geothermal, landfill gas, municipal solid waste, hydroelectric, and marine and hydrokinetic facilities.
To qualify for the PTC, construction of the qualifying facility for qualifying renewable energy resources (other than wind) must begin before January 1, 2017. For wind facilities to qualify for the PTC, construction of a qualifying facility must begin before January 1, 2020.
However, the PTC for wind facilities phases out beginning in 2017. For wind facilities the construction of which begins after December 31, 2016, and before January 1, 2018, the PTC is reduced by 20%. For wind facilities the construction of which begins after December 31, 2017, and before January 1, 2019, the PTC is reduced by 40 percent.
For wind facilities the construction of which begins after December 31, 2018, and before January 1, 2020, the PTC is reduced by 60%.
Congress also extended the investment tax credit (ITC) under section 48 of the Code for solar projects through 2022. For solar facilities, the ITC is reduced beginning in 2020, and is reduced to 10 percent for projects the construction of which begins before 2022 but which are not placed in service before 2024.
In addition, qualified wind facilities may elect to claim the ITC in lieu of the PTC for facilities on which construction begins before January 1, 2020. For wind facilities, the ITC also phases out beginning in 2017 under the same phase-out schedule as for the PTC. For all other qualified facilities, the election to claim the ITC in lieu of the PTC must be made for facilities on which construction begins before January 1, 2017. Click here for more information on the extension of the PTC and the ITC. 2 Key Energy-Related Tax Provisions in the 2017 Budget Proposal ON THE SUBJECT
The PTC is a credit per kilowatt-hour of electricity produced from qualified energy facilities. The base amount of the PTC (indexed annually for inflation) is 1.5 ¢/kWh of electricity produced from wind, closed-loop biomass, geothermal energy and solar energy, and $0.75/kWh for electricity produced in open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities. In 2015, the credit was 2.3 ¢/kWh for qualified resources in the first group and 1.2 cents per kilowatt hour for qualified resources in the second group.
The Proposal would permanently extend the PTC at current credit rates (adjusted annually for inflation) and would make the PTC refundable. Many renewable energy developers are new, growing firms that have insufficient tax liability to claim the PTC. As a result, these developers enter into joint ventures or other financing transactions with other parties to take advantage of the PTC. Making the PTC refundable might reduce transaction costs for developers, further incentivizing the production of renewable energy. The Proposal would also allow the PTC for solar facilities that qualify for the ITC and on which construction begins after December 31, 2016.
In addition to extending the general PTC, the Proposal would extend the credit to electricity consumed directly by the producer to the extent that the production can be independently verified. The Proposal would also allow individuals to claim the PTC for energy-efficient solar property installed on a residential dwelling unit before January 1, 2022, in lieu of the residential energy-efficient property tax credit under section 25D of the Code.
The current energy-efficient property tax credit was extended by Congress last year and applies to residential solar systems placed in service before January 1, 2022, subject to the same phase-out schedule as the ITC. Individuals who install solar property on a dwelling unit after December 31, 2021, may claim only the PTC.
Under the Proposal, the ITC would also be permanently extended based on the availability of the credit under current law in 2017. The ITC currently provides a 30 percent credit for solar, fuel cell and small wind property, and a 10 percent credit for geothermal, micro turbine, and combined heat and power property placed in service by December 31, 2016 (December 31, 2021, for solar projects).
However, beginning in 2017, the ITC for wind will be phased out and reduced by 20 percent. Thus, the Proposal would provide for a permanently reduced ITC for wind projects. The Proposal would make those credits permanent and would also make permanent the election to claim the ITC in lieu of the PTC for qualified facilities eligible for the PTC.
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