Investment tax credits
An investment tax credit can be claimed on an increase in tax basis in an existing project, the IRS said.
The IRS also confirmed again that such tax credits can be claimed on renewable energy projects in Puerto Rico, Guam, the US Virgin Islands and other US possessions.
A utility holding company that owns wind and solar projects that are used to supply electricity to customers changed how it charges “mixed service costs” to basis in such projects. “Mixed service costs” are costs of departments that perform administrative, service or support activities that are necessary for overall operation of the company.
The change meant that more such costs were added to basis in solar assets that the company had already put in service.
The company made a “section 481 adjustment” to spread the effect on its taxable income for the year of the accounting-method change over four years.
However, the IRS said an additional investment tax credit could be claimed in full on the basis bump up in the existing solar assets in the year of the accounting-method change.
The investment tax credit is normally claimed when an asset is put in service. However, if the final cost is not yet known, then an additional credit can be claimed in a later year when the remaining basis is established.
The ruling is Private Letter Ruling 201949002. The IRS made it public in early December.
Meanwhile, the IRS released another private letter ruling in October — the fifth since 2011 — confirming that renewable energy projects in US possessions qualify for investment tax credits, even if owned by a partnership like a US tax equity partnership. All the partners must be US corporations or citizens.
The latest ruling on this subject is Private Letter Ruling 201943021.
Equipment qualifies for an investment tax credit only if it is used in the United States. US possessions are considered outside the United States for this purpose.
However, the US tax code makes an exception for property used in possessions as long as the equipment is owned by a US corporation or citizen. US taxpayers keep asking the IRS what happens if the owner is a partnership since the tax code does not mention partnerships in this context. Partnerships and disregarded entities are transparent for US tax purposes. The IRS said it looks through them to any corporations or individuals in the ownership chain. Thus, a project can be owned by a project company formed in the possession as long as the project company is wholly owned by a tax equity partnership of two or more US corporations or US citizens. The local project company is not considered to exist for US tax purposes.
It is unclear how many more times the IRS will be willing to repeat this or why the market feels to the need to have it do so.