Investment tax credit

November 12, 2015 | By Keith Martin in Washington, DC

Investment tax credit regulations that solar, geothermal, and other renewable energy companies use to determine whether, and how much of, their projects qualify for the tax credit are being rewritten. The regulations date to 1982.

The IRS asked in a notice in October for comments about a list of issues about which companies have been asking it in recent years. The request is in Notice 2015-70.

Comments are due by February 16.

The regulations are out of date. As it rewrites them, the IRS will be trying to make clearer what parts of solar, geothermal, fuel cell, biomass, and other renewable energy projects qualify for the tax credit. The credit can only be claimed in most cases on the “facility” for generating electricity. The existing regulations treat that facility as including “storage devices, power conditioning equipment, [and] transfer equipment,” but not equipment that is used to transmit the electricity.

The regulations also treat “dual-use property,” meaning equipment that uses energy from both renewable and non-renewable sources, potentially as eligible, but only if at least 75% of the energy in the year the equipment is put in service is renewable energy, and then the tax credit allowed is whatever fraction is renewable energy. Thus, for example, if the first-year renewable percentage is 90%, then 90% of the investment tax credit can be claimed. If the percentage dips below 90% in any of the next four years, then there is partial recapture of the unvested tax credit. The tax credit vests ratably over five years. Thus, a dip to 80% in year two would lead to recapture of 1.8% of the 27% in original tax credit (30% x 90% = 27% x 80% x 10% = 1.8%). If the renewable energy percentage dips below 75% in any of these years, then the entire unvested credit is recaptured.

The US Treasury has been taking the position that, where a biomass power plant produces both steam and electricity, the cost must be allocated between the two functions, and a Treasury cash grant will be paid only on the part that produces electricity. It won a lawsuit over the issue in January 2015. (For earlier coverage, see the February 2015 Project Finance NewsWire article Treasury Cash Grant.)

The Treasury lost a lawsuit in March 2015 involving fuel cells. It argued that equipment a fuel cell owner uses to clean methane gas from municipal wastewater treatment facilities before feeding the gas into two fuel cell assemblies is not part of each “fuel cell power plant.” (For earlier coverage, see the May 2015 Project Finance NewsWire article The Treasury.)

Treasury cash grants are supposed to mirror the investment tax credit.

Both decisions are being appealed.

The IRS wants comments about whether storage devices and power conditioning equipment should be considered part of the “facility” on which an investment credit can be claimed and how to calculate tax credits on dual-use property. It is also looking for help drawing lines around the eligible equipment at geothermal, fuel cell and distributed cogeneration units, called combined heat and power facilities. It is open to other suggestions about what should be addressed.

Chadbourne has met with IRS officials in Washington in recent years about a number of other issues that are ripe for clarification. They include how much of the cost of solar parking canopies qualifies for tax credits, whether a tax credit can be claimed on improvements to existing wind, solar, geothermal or other facilities on which a Treasury cash grant or investment credit was claimed, whether the “75% cliff” applies to batteries, and whether wells are part of a geothermal power plant for purposes of testing whether a repowered plant qualifies for a new tax credit.