Editor’s note: This article comes from the Project Finance newsletter published by Chadbourne & Parke LLP, and is authored by Washington-based Kenneth Hansen. For the full newsletter, pick here:
The Senate tax-writing committee voted in July to extend more than 50 expiring tax benefits by two years. Its bill includes a two-year extension, through December 2016, of the deadline to start construction of new wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects to qualify for federal tax credits. Developers who start construction of projects in time would have the option to claim 10 years of production tax credits on the electricity output or a 30% investment tax credit. The committee disappointed solar companies by failing to extend a 30% investment tax credit for new solar projects. Solar companies had hoped the committee would turn a December 2016 deadline to complete solar projects into a deadline merely to start construction.
Solar was not included because it was not considered germane to the bill. The bill deals only with tax benefits that have already expired or are expiring this year. Solar advocates will have another chance to amend the bill when it reaches the Senate floor. The committee also voted to allow a 50% “depreciation bonus” on new equipment put in service by December 2016 or, in the case of transportation equipment and long-lived equipment like transmission lines, by December 2017. No date has been set yet for the full Senate to take up the bill.
Attention is focused for now on the Iran nuclear deal and on a funding measure to keep the US government operating past the end of the current fiscal year on September 30. Some Republicans want to use the funding measure as a vehicle to cut off funding for Planned Parenthood. Religious holidays and a visit by the Pope to Washington mean Congress will have few work days in September. Paul Ryan, the House tax committee chairman, said he hopes to have his committee take up the extenders in September. However, Ryan has also talked about combining the extenders and renewed funding for the highway trust fund, whose authorization runs out on October 29, with an international tax reform bill that most lobbyists consider a long shot this year for passage. The House is not expected to extend any tax benefits for renewable energy.
The fate of any extenders for renewable energy will come down ultimately to a negotiation between the House and Senate, probably late in the year. The staff of the Joint Committee on Taxation estimates that extending the construction-start deadline for wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects will cost the US Treasury $10.492 billion over 10 years, or roughly 12% of the net cost of the full extenders bill.
Some energy tax credit issues may be revisited by the Internal Revenue Service. The IRS hopes to issue a notice in September asking for suggestions from the public about areas where its existing regulations about investment tax credits for renewable energy projects need updating. The regulations were written the early 1980’s. They address what parts of a renewable energy facility qualify for an investment credit. The agency hopes, after collecting suggestions, to issue a set of proposed changes to the regulations by the end of June next year. This may be ambitious.
An example of an area where the IRS feels the law could use clarification is a case the U.S. Treasury Department won in January in the Court of Federal Claims where the government allocated the cost of a biomass power plant between the parts of the plant that produce steam and electricity and paid a Treasury cash grant only on the cost allocated to electricity. Cash grants are paid on the same equipment that qualifies for an investment credit. The Treasury is fighting a similar lawsuit that MeadWestvaco filed in April about another biomass power plant.
The Treasury lost a case in March involving two fuel cell power plants that convert methane gas from municipal wastewater treatment facilities into electricity. The Treasury paid grants on the fuel cell assemblies, but not the gas conditioning equipment. The issue was what the US tax code means by “fuel cell power plant” — the equipment on which an investment credit can be claimed and, by extension, a Treasury cash grant would be paid. The court said the gas conditioning equipment is integral to generating electricity. The fuel cell case is now before a US court of appeals. Other areas that are ripe for clarification are in what circumstances batteries and other storage facilities qualify for tax credits, when support structures for solar panels mounted over parking canopies qualify, and a series of fact patterns around community solar projects.
The IRS released a private letter ruling in early September that it issued to a Vermont homeowner who bought solar panels that are part of a larger, utility-scale “community” solar array that is some distance from his house. The array was sold panel by panel to multiple individuals. The individuals are all members in a limited liability company that handles administrative and financial tasks related to the array, but they own their panels directly.
All the electricity from the array is sold to the local utility. Each panel owner buys the electricity he uses in his home from the local utility and receives bill credits for the electricity from his solar panels that are used as an offset against his utility bill. The IRS told the homeowner he could claim a 30% residential solar credit on the panels he owns. The credit can be claimed on equipment used to generate solar electricity “for use in a dwelling unit [that is] used as a residence by the taxpayer.” Although not a slam dunk, it was probably the easiest of the three or four community solar fact patterns for the IRS to address. The IRS had already said in a notice in 2013 that the residential credit may be claimed for solar panels owned offsite. The ruling is Private Letter Ruling 20153 6017.
For the complete news letter: http://goo.gl/EAK45x