On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the CAA). The CAA extends the production tax credits (PTC) and investment tax credits (ITC) available to taxpayers developing a variety of renewable energy projects.
One-Year Extension of PTC
The PTC, available under Section 45 and 38 of the Internal Revenue Code ("Code"), grants taxpayers a tax credit based on the per-kilowatt-hour electricity generated at qualified facilities using certain renewable sources. Whether a facility is qualified depends in part on when construction began, and taxpayers may claim the PTC for the first 10 years of production at such qualified facility. The PTC was scheduled to expire by the end of 2019, but late last year it was extended through the end of 2020. The CAA again extends the PTC for an additional year for a number of qualified facilities including:
- closed-loop biomass,
- open-loop biomass,
- geothermal energy,
- landfill gas,
- hydropower, and
- marine and hydrokinetic renewable energy.
As a result, taxpayers will continue to qualify for the PTC from such facilities if construction begins prior to January 1, 2022.
For qualifying wind facilities, the CAA also extends the phase out percentage, allowing taxpayers to take the 40% reduced PTC for facilities that began construction prior to January 1, 2022. The corresponding phase out percentage under the ITC is similarly extended.
In addition, the CAA extends for one year the ITC in lieu of PTC, which allows taxpayers to treat a qualified facility under the PTC rules as a qualified investment credit facility for purposes of the ITC rules.
Two-Year Extension of ITC
The ITC, available under Section 48 and 38 of the Code, grants taxpayers a tax credit for certain energy-related investments.
Solar investments are eligible for a 26% ITC or a 22% ITC if construction begins on the relevant property prior to January 1, 2021 or January 1, 2022, respectively. The CAA provides for a two-year extension. As a result, the 26% ITC will be available for properties on which construction begins prior to January 1, 2023, and a 22% ITC will be available for properties on which construction begins prior to January 1, 2024. Property must now be placed in service prior to January 1, 2026 to qualify for the ITC.
Similarly, the permanent 10% ITC for solar investments will be available for property on which construction begins before January 1, 2024, and which is not placed in service before January 1, 2026.
Fiber-optic solar, qualified fuel cell, and qualified small wind energy property similarly receives a two-year extension under the CAA.
With these extensions, taxpayers in the near term may place less emphasis on the safe-harbor provisions to satisfy the "beginning of construction" requirement imposed by the PTC and ITC provisions.
Other Energy Tax Credits
Offshore Wind Facilities: an expanded 30% ITC is available under Section 48 for offshore wind projects if construction begins on or after January 1, 2017 and before January 1, 2026, which is not subject to the normal phaseouts for other wind facilities.
Waste Energy Recovery Property: a new ITC is available under Section 48 for property on which construction begins before January 1, 2024. This ITC is subject to the same phase-out percentages as the ITC for fiber-optic solar, qualified fuel cell, and qualified small wind energy property.
Section 45Q Carbon Sequestration Tax Credit: extended for two years, available for qualified facilities if construction begins before January 1, 2026.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.