On July 1, 2020, the House of Representatives passed an expansive highway and infrastructure bill containing, among numerous other provisions, extensions of tax incentives for renewable energy projects, direct payments in lieu of tax credits, expansion of MLP eligibility to renewable energy assets, and several additional provisions intended to promote the development of green energy.
The Growing Renewable Energy and Efficiency Now Act of 2020 (the “GREEN Act,” part of H.R. 2, the Moving Forward Act (available here)), would provide additional time and flexibility for solar and wind project developers to qualify projects for federal income tax credits (and, in some cases, qualify projects for more credits than available under current law) and also provide a new direct pay option in lieu of credits against tax liability (generally subject to a 15% haircut).
While the GREEN Act is a positive sign for the development of renewable energy, much uncertainty as to its passage, and the ultimate form of the legislation if enacted, remains. We continue to monitor the progress of this and other related legislation. If you have any questions about the current form of the GREEN Act or would like any updates, please contact any of the authors of this update.
I. Solar and Wind Incentives
The 30% investment tax credit (the “ITC”) for solar energy projects (which had been reduced to 26% for projects begun in 2020 under current law) would be extended for 5 additional years through 2025. The ITC would be stepped down to 26% for projects begun in 2026, 22% for projects begun in 2027, and 10% thereafter. The placed-in-service deadline for the 30%, 26% and 22% projects would be extended, respectively, in each instance, by six years to December 31, 2029.
For wind facilities, the production tax credit (“PTC”) (subject to the 40% haircut that applies under current law) would be extended for facilities that begin construction before 2026. A 30% ITC for offshore wind projects would be reinstated and extended through the later of 2025 or the year after the United States achieves a target increase in offshore wind capacity, which generally would be an increase of 3,000MW over current production.
A new direct payment in lieu of the ITC or PTC would be available, including to tax-exempt organizations and state and local government entities (as well as property used by such organizations or entities), for projects completed after the effective date of the GREEN Act. The direct payment would generally be equal to 85% of the ITC or PTC that otherwise would have been available for such projects. The payment would be equal to 100% for payments to Indian tribal governments. As a result of this direct payment option, taxpayers who do not have taxable income against which to use the ITC or PTC may monetize much of the credit by electing the direct payment instead of having to carry the excess credit forward to apply to a tax liability in future taxable years.
The GREEN Act would make clear that energy storage technology is eligible for the ITC. The ITC generally would be in the same amount, and subject to the same phaseout, as the solar energy ITC, except that it would expire after 2027. Unfortunately, the proposed language in the GREEN Act is unclear in certain respects and would seem to require IRS guidance (if not statutory refinement). For example, the statute does not apply to equipment “primarily used in the transportation of goods or individuals and not for the production of electricity.” It is unclear how to measure whether equipment is used “primarily” in such activities and the extent to which the credit is available for equipment that, for example, stores energy produced by a generation facility where such stored energy is used, in part, to charge an electric vehicle. The IRS has spent five years studying the scope of analogous rules under current law (for “dual use”). The proposed provision potentially introduces more ambiguity to this area of law and therefore may create an additional burden for the IRS and more uncertainty for taxpayers.
II. Residential Energy Efficient Property Credit
Under the GREEN Act, the 30% residential energy efficient property credit (which had been reduced to 26% for solar equipment placed in service in 2020 under current law) would be extended through 2025, stepped down to 26% for equipment placed in service in 2026 and 22% for equipment placed in service in 2027.
III. Carbon Capture, Utilization and Sequestration Credit
To claim the carbon capture, utilization and sequestration (“CCUS”) credit under section 45Q, the current deadline for starting construction of a facility is December 31, 2023. Prior alerts discussing the CCUS credit and related IRS guidance can be found here and here.
Under the GREEN Act, the deadline for starting construction would be extended to December 31, 2025. As with the ITC and the PTC, a taxpayer may elect a direct payment generally equal to 85% of the CCUS credit that otherwise would have been available.
IV. Credits for Other Technologies
The GREEN Act would increase the geothermal ITC from 10% to 30% (subject to the same phaseout as solar projects) and would generally extend ITC deadlines for fiber-optic solar, fuel cell, microturbine, combined heat and power system, and small wind projects 6 years through 2026 (subject to applicable phaseouts). New 30% ITCs would be available for certain waste energy recovery, biogas and linear generator projects (subject to the same phaseout as the proposed energy storage ITC).
The PTC (subject to the 40% haircut that applies under current law) would be extended for biomass, landfill gas, trash facilities, hydropower, and marine and hydrokinetic facilities that begin construction before 2026.
As with solar, wind and CCUS projects, a taxpayer would be able to elect to receive a direct payment generally equal to 85% of the applicable credit instead of claiming the ITC or PTC.
V. Publicly Traded Partnerships
The GREEN Act also would expand the definition of “qualifying income” that publicly traded partnerships (commonly called master limited partnerships or “MLPs”) must earn to retain their MLP status to include income derived from green and renewable energy. Under the proposed legislation, qualifying income would include income from energy property eligible for the PTC and ITC, renewable fuels, and gasification and CCUS projects. To the extent the MLP itself generates ITCs, PTCs or the CCUS tax credit, the direct payment in lieu of credit regime described above may allow MLP investors to effectively enjoy the benefits of those credits without regard to the passive activity loss and credit limitations that would otherwise apply.
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