A Tax Extenders Bill

A Tax Extenders Bill

July 09, 2015 | By Keith Martin in Washington, DC

A TAX EXTENDERS BILL may start to move through the US Congress this month. Wind companies are looking for more time to start construction of new projects to qualify for production tax credits. Such projects had to be under construction by December 2014. Solar companies hope to convert a December 2016 deadline to complete solar projects to qualify for a 30% investment tax credit into a deadline merely to start construction.

Senator Orrin Hatch (R-Utah), who heads the Senate tax-writing committee, said on July 7 that he may ask his committee to vote on a tax extenders bill as early as July 15. Democrats on the committee want to extend expired or expiring tax breaks by two years to spare Congress from having to deal with extenders again until 2017 when Congress may be looking at a broader rewrite of the corporate income tax code. The committee must decide what can be included — for example, whether to limit the bill only to tax benefits that have already expired — how long to extend and whether to add offsets to pay the cost before the tax extenders bill can make progress.

Any move to deal with extenders this summer would be a break from recent practice. In 2014, Congress waited until three weeks before year end, leaving companies little time to act on the extensions and, in some cases, wastefully throw-ing incentives retroactively at companies that were supposed to induce the companies to do things that they had already done.

Meanwhile, production tax credits for wind farms continue to take flak from House Republicans as battle lines form around a possible extension.

The US allows owners of new wind, biomass, geothermal, landfill gas, incremental hydroelectric and ocean energy projects to claim production tax credits on the electricity sold to third parties from such projects for the first 10 years after the projects are put in service. Production tax credits can also be claimed for producing “refined coal,” which involves treating raw coal to make it less polluting.

Eighty-five wind companies wrote Rep. Kenny Marchant (R-Texas), a senior member of the House tax-writing committee, and 21 other Republican cosponsors of a House bill called the “PTC Elimination Act” in mid-June asking them to reconsider.

Marchant’s bill, introduced in late April, would make three changes in the production tax credit statute. It is H.R. 1901.

The tax credit amounts are adjusted currently each year for inflation. The bill would eliminate any further inflation adjustments after 2015.

Production tax credits are only available currently for new renewable energy projects on which construction started by December 2014. The IRS requires not only that construction must have started in time, but also that there must be continuous work on the project after 2014. The IRS will assume there has been continuous work on any project that is completed by December 2016. The type of work that must be shown for projects that slip past 2016 depends on how the project started construction. If the developer incurred at least 5% of the total project cost to get the project under construction by December 2014, then the developer must show “continuous efforts” on development-type tasks after 2014. If the developer relied on physical work at the project site or a factory to get the construction underway in 2014, then it must show “continuous construction” after 2014, which requires continuous physical work at the site and factory.

The bill would retroactively rewrite the construction-start rules by eliminating the 5% test and by overriding the IRS presumption that there was continuous work on any project that is completed by December 2016.

Finally, it would repeal production tax credits for renewable energy projects after 2025. The effect would be to deny renewable energy projects that are put in service after 2015 a full 10 years of production tax credits. The owners would still have the option of claiming a 30% investment tax credit in the year projects go into service.

It would be very unusual for Congress to repeal a tax benefit retroactively after taxpayers have been induced to make investments based on the benefit.

Any effort to extend the construction-start deadline for wind and other renewable energy projects will have to originate in the Senate. The House is expected to oppose the extension. Assuming the Senate acts, the fate of the extension will come down to bargaining between the two houses.

Keith Martin in Washington