On December 27, 2020, President Trump signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the "Extenders Bill"), extending certain renewable energy tax credits and introducing new ones. The Extenders Bill was enacted as part of larger legislation providing coronavirus-related relief.
As discussed below in greater detail, the Extenders Bill includes several extensions of existing tax credits, such as a one-year extension for onshore wind production tax credits ("PTC"), a two-year extension for carbon capture credits ("Carbon Capture Credits"), and investment tax credits ("ITC") for solar and certain other projects. Perhaps most significantly, the Extenders Bill introduces a new ITC for offshore wind projects.
PTC for Wind Projects
The PTC under Section 45 of the Internal Revenue Code of 1986, as amended (the "Code"), provides taxpayers a tax credit of 2.5 cents (as of 2020) per kilowatt hour of electricity produced and sold to an unrelated taxpayer during a ten-year period following the date the wind project is originally placed in service.
The value of the PTC generally is subject to a 20% phasedown each year starting in 2017, based on the year the construction of such project commenced. Legislation in late 2019 (the "2019 Bill"), however, phased-up the PTC to 60% for projects the construction of which began in 2020, with the PTC still being scheduled to phase-out entirely for projects for which construction begins in 2021.
The Extenders Bill extends the 60% PTC for such wind projects by one year and further delays the total phase-out from 2021 to 2022.
A summary of the PTC phasedown schedule for wind projects is as follows:
|Year of Construction Commencement||Prior Law||Current Law (following the Extenders Bill)|
|2016 (or earlier)||100% PTC||Same|
|2021||0% PTC||60% PTC|
|2022 and onwards||0% PTC||0% PTC|
This extension provides welcomed relief for developers of, and investors in, wind projects that were affected by the coronavirus and suffered related construction and supply chain delays.
PTC for Other Renewable Projects
In addition, the Extenders Bill extends from December 31, 2020 to December 31, 2021 the PTC deadline for beginning construction on the following types of projects:
- Closed-loop biomass
- Open-loop biomass
- Geothermal energy
- Landfill gas
- Marine and hydrokinetic
- Qualified hydropower
ITC for Solar Projects
The ITC under Section 48 of the Code, most commonly associated with solar projects, allows taxpayers to claim a one-time tax credit as a percentage of the cost of the qualified energy property. Like the PTC, the ITC generally is subject to a phasedown.
The Extenders Bill freezes the phasedown schedule for solar projects for two years. Now, the 26% ITC is available for solar projects the construction of which commences in 2021 or 2022, in addition to 2020. The 22% ITC is available for projects that commence construction in 2023, and a 10% ITC is available for projects the construction of which begins after 2023. In addition, the 10% ITC is applicable for all projects placed in service after 2025, a two-year extension from the prior deadline.
A summary of the ITC phasedown schedule for solar projects is as follows:
|Year of Construction Commencement||Prior Law||Current Law
(following the Extenders Bill)
|ITC (percentage of eligible cost)||Placed-in-service Deadline||ITC (percentage of eligible cost)||Placed-in-service Deadline|
|2019 (or earlier)||30%*||12/31/2023||30%||12/31/2025|
|2024 and onwards||10%*||10%*|
* The 10% ITC would also apply to projects that commenced construction in prior years but did not meet the placed-in-service deadline.
Given that the 2019 Bill did not provide any extensions for claiming ITCs with respect to solar projects, these changes mark a welcomed development for the solar industry. Notably, the Extenders Bill coincides with the increasing competiveness of the solar energy industry, paving the way for a continued solar boom.
Although the placed-in-service date for such projects was extended by two years to December 31, 2025, we expect that developers of projects that commenced construction during or prior to 2020 will nevertheless strive to cause such projects to be placed-in-service for tax purposes prior to 2025, in order to meet the four-year continuity safe harbor provided by the IRS in several of its notices ("Continuity Safe Harbor").
ITC for Onshore Wind Projects
The Extenders Bill also contains benefits for taxpayers seeking to claim ITCs in lieu of PTCs for wind projects. Prior to the Extenders Bill, a stepped-down 18% ITC was available for wind projects the construction of which began in 2020. No ITC was available for later-constructed wind projects.
The Extenders Bill provides for a one-year extension. As such, the 18% ITC will also be available for wind projects the construction of which begins in 2021, and no ITC will be available for projects that begin construction during or after 2022. This extension mirrors the one-year extension applicable to PTCs.
ITC for Offshore Wind Projects
Until the Extenders Bill, offshore wind projects relied on the then-existing PTCs and ITCs, which were enacted mainly with onshore wind projects in mind. However, the longer development and time needed to construct an offshore wind facility, as well as its significantly higher development and construction costs, caused developers and investors some concern regarding the ability of such projects to meet the required timeline and Continuity Safe Harbor. These requirements and deadlines are critical to allow these projects to benefit from the tax incentive needed for financing these offshore projects. As such, the introduction of a new ITC specifically for offshore wind projects that addresses these concerns is a significant and welcome change.
The Extenders Bill provides a 30% ITC for offshore wind projects the construction of which commences on or prior to December 31, 2025. In addition, recognizing the longer development and construction period for offshore wind projects, as compared to onshore projects, the IRS recently issued Notice 2021-05, extending the Continuity Safe Harbor period for offshore wind projects to a ten-year period. So, to qualify for a 30% ITC and meet the IRS Continuity Safe Harbor, an offshore wind project would need to commence construction by December 31, 2025, and then complete the project no later than ten years following the end of the year during which construction began.
The extended time to commence construction, together with the longer period required to meet the Continuity Safe Harbor, as compared to onshore wind projects, should no doubt encourage the future development of, and investments in, offshore wind projects and should be a significant boost to this already growing industry.
ITC for Fuel Cell and Other Tax Credits for Renewable Projects
The Extenders Bill also provides benefits for projects other than wind and solar. It expands the ITC to cover projects such as waste energy recovery property and extends by two years the deadline for the commencement of construction and placing in service of qualified fuel cell, fiber-optic solar, and small wind facilities.
The current commencement of construction timing and placed-in-service schedule for each of these projects generally tracks the schedule for ITCs for solar projects, but with 0% ITC being applied in lieu of 10% ITC. Thus, for example, a fuel cell project would qualify for a 26% ITC if it commences construction in 2020, 2021 or 2022, and would be eligible for a 22% ITC if construction commences in 2023. These projects would also need to meet the December 31, 2025 placed-in-service deadline.
Further, in the same fashion as its 2019 predecessor, in addition to extensions related to the ITC, the Extenders Bill also includes extension for certain other credits and other renewables industry incentives, such as the New Markets Tax Credit (Section 45D of the Code), the Qualified Fuel Cell Motor Vehicles Credit (Section 30B), the Alternative Fuel Vehicle Credit (Section 30C) and the Energy Efficient Homes Credit (Section 45L).
Moreover, the energy efficient commercial building deduction, pursuant to Section 179D of the Code, was made permanent.
Carbon Capture Credits
The Carbon Capture Credit under Section 45Q of the Code is made available to taxpayers who use carbon capture equipment to capture and sequester qualified carbon oxide at a qualified facility. The 12-year Carbon Capture Credit is available per metric ton of carbon oxide properly captured and sequestered, with a value depending on when and how the captured carbon oxide is sequestered.
Prior to the Extenders Bill, the Carbon Capture Credit was available only with respect to projects the construction of which begins on or before December 31, 2023. The Extenders Bill extends that deadline by two years making projects the construction of which begins on or before December 31, 2025 eligible for such Credits.
Combined with taxpayer-favorable guidance released in 2020, this extension is likely to further encourage the development of carbon capture projects. Market participants will find the extension particularly welcome given earlier delays in the promulgation of that guidance.
Overall, the Extenders Bill is a positive and welcomed development for the renewable energy industry. Later deadlines and higher value tax credits should support the ongoing growth of various renewable energy technologies and lead to new installations. The new and extended ITC for offshore wind projects should contribute to the offshore wind industry and likely provide a boon for the market.
There are, of course, some changes that were not included in the Extenders Bill, notwithstanding significant lobbying efforts by certain market participants. In a time of potentially declining corporate taxable income and economic uncertainty, many market participants had hoped—and lobbied—for a "direct pay" option or tax refunds in lieu of tax credits. Further, like the 2019 Bill, the Extenders Bill also failed to deliver the much anticipated ITC for standalone energy storage, missing another opportunity to provide significant support for a much needed technology. These items, however, are likely to remain a focus of both Congress and the new presidential administration and will undoubtedly be the subjects of future discussions and negotiations in 2021 and beyond.
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