Production tax credits can only be claimed on the net amount of electricity supplied to the grid. IRS Notice 2006-88 | Norton Rose Fulbright
PRODUCTION TAX CREDITS can only be claimed on the net amount of electricity supplied to the grid, the IRS said.
Production tax credits are tax credits of 1¢ or 1.9¢ a kilowatt hour for generating electricity from wind, biomass, geothermal steam and other renewables. Credits can only be claimed on electricity sold to third parties. Some projects sell all of their output and buy back whatever electricity they require for startup and other station use from the local utility.The IRS said in October in a notice about power plants that burn open-loop biomass as fuel that the credits can only be claimed on the net amount of electricity supplied to the grid.The same logic should apply to credits for wind farms and other renewables projects.
The IRS had been expected to issue it last spring to answer a series of questions about power plants that burn biomass.
Production tax credits can be claimed for five years on biomass power plants that were in existence before August 8, 2005. New plants put into service after that date qualify for 10 years of tax credits. Some owners of biomass plants have explored whether they can turn them into new plants by investing in upgrades. In order for this to work, the amount spent on upgrades would have to reach 80% of the sum of the upgrade costs plus the value of the used equipment retained from the old plant. This test is applied to looking only at amounts spent on or retained from the biomass “facility.” The IRS explained in the new notice what counts as the “facility” for this purpose. The “facility” is all the equipment that is “necessary to the production of electricity.” It does not include equipment for collecting, processing and storing the biomass before it is used as fuel, the inter- tie-related equipment to move the electricity to the grid, and site improvements like roads and fences.
Another open issue had been how much other fuel can be mixed with biomass and still have the plant qualify for production tax credits. The IRS said that as long as the other fuels are not fossil fuels, any mixture is fine. However, production tax credits can only be claimed on a portion of the output based on the Btu content of the biomass compared to the other fuels. Use of fossil fuels for more than startup and flame stabilization will taint the entire plant.
The IRS said it will not rule on issues about biomass plants. The branch chief who administers the production tax credit statute said it is a resource issue: she does not have enough staff to handle all the ruling requests. The agency is also not ruling on issues in transactions that use partnership flip structures.