Tax Law Update | November.09.2017
On November 2, 2017, the House of Representatives (the "House") introduced the Tax Cuts and Jobs Act ("H.R. 1"). This bill, if passed, would make fundamental changes to the incentives currently in place for the energy industry, both for renewable energy and fossil fuels. The House is continuing to mark up H.R. 1 during the week of November 6, and the provisions described below could change as a result of such mark ups.
Most notably, under H.R. 1:
The section 45 production tax credit (PTC), which is has historically been a key tax incentive for the wind industry, would be significantly pared back under H.R. 1.
The PTC provides a credit equal to a certain amount of cents per kilowatt hours of electricity generated and, due to a statutory adjustment for inflation, currently allows a credit of 2.4 cents per kWh produced (for 2017) by wind projects. The PATH Act of 2015 phased out the credit between 2017 and 2019 based on the date that the relevant facility began construction.
Change to Amount of Credit and Beginning-of-Construction Requirements
H.R. 1 would eliminate the prior inflation adjustment so that the rate would revert to the stated statutory rate, which is a maximum of 1.5 cents per kWh produced. The change would apply to all facilities the construction of which begins after the date of enactment.
H.R. 1 would also amend section 45(e) to retroactively require a "program of continuous construction" to meet the PTC "begin construction" test, reversing years of IRS notices that provide a safe harbor for meeting the continuity requirement (and jeopardizing projects which would otherwise have begun construction, but would have trouble demonstrating continuous construction). Under the provision, the construction of any facility, modification, improvement, addition or other property may not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date that such property is placed in service. H.R. 1 does not provide a definition of what qualifies as a "program of continuous construction." The amendment would apply to tax years beginning both before and after November 2, 2017. By changing the requirement to a program of continuous construction, it will not be possible to satisfy the continuity requirement by placing the project in service by a certain safe harbor deadline, as is currently possible under the IRS notices. Because this change would apply to periods prior to enactment, this change could adversely affect existing projects that relied on the safe harbor in the IRS notices to comply with the continuity requirement.
Under H.R. 1, the section 48 investment tax credit (ITC), which is a key tax incentive for the solar industry, would be eliminated, but only for construction beginning after 2027.
The ITC for energy property currently is available for solar projects. Currently, solar property is eligible for a 30% credit if construction begins before 2020, a 26% credit if construction begins in 2020, a 22% credit if construction begins in 2021, and a 10% credit if construction begins in 2022 or later. Certain other energy technologies, including fuel cells, previously qualified for the ITC, but no longer qualify after December 31, 2016. Wind projects can also, as an alternative to PTC, qualify for ITC (subject to a phase-out schedule).
Clean Energy ITC Phase-out and Expiration Dates Revised
The provision changes the expiration dates and phase-out schedules to harmonize the treatment of the different types of clean energy properties, and expands the availability of the ITC for certain types of property. For example, fuel cell property would be eligible for a 30% credit if construction begins before 2020, a 26% credit if construction begins in 2020, and a 22% credit if construction begins in 2021. The 10% ITC available under current law for solar property beginning construction after 2021 would be eliminated for solar property beginning construction after 2027. H.R. 1 would also add a statutory continuous construction requirement for the ITC similar to the requirement for PTC discussed above.
With respect to oil and gas industry incentives, H.R. 1 would repeal the section 43 Enhanced Oil Recovery Credit and the section 45I credit for Marginal Well oil and gas production, with effect beginning in 2018. The repeal of these credits is somewhat ironic since 2016 was the first year for which these credits have provided any substantial benefit to taxpayers in many years. The availability of these credits is based on the price of oil and gas falling below a certain level during a reference period. Only with the drop in oil and gas prices in the 2014 and 2015 period did the credits actually become available to producers and, with current prices, they are no longer available.
Under current law, taxpayers must capitalize and recover over time the cost of property through depreciation or amortization deductions. There is currently an additional first-year "bonus" depreciation deduction allowed equal to 50% of the basis of certain new property placed in service in 2017 (subject to a phase-down to 40% for 2018 and 30% for 2019). H.R. 1 increases the allowance for bonus depreciation from 50% to 100% for property acquired and placed in service after September 27, 2017 and before January 1, 2023. H.R. 1 also allows taxpayers to claim bonus depreciation on used property, whereas it is only allowed for new property under current law.
H.R. 1 would reduce the general corporate income tax rate to 20%. A lower corporate income tax rate would reduce the value associated with depreciation deductions and generally reduce the value of tax benefits to corporate investors interested in renewable energy tax benefits.
Under current law, certain transfers of partnership interests can result in a so-called "technical termination" of the partnership. A technical termination occurs if, within any 12-month period, 50% or more of the total interests in partnership capital and profits are sold or exchanged. H.R. 1 would eliminate the technical termination rule. One result of a technical termination is that the partnership's remaining depreciation deductions are "restarted" as if the property was newly placed in service. Currently, partnership agreements frequently restrict the partners' ability to transfer their interests in order to avoid a potential drop in the depreciation deductions caused by the restart of the depreciation schedule upon a technical termination. If the proposed provision is enacted, such restrictions would no longer be needed.