Renewable energy tax credits extended
Many renewable energy developers are scrambling to reevaluate arrangements they put in place this year to start construction of projects to qualify for federal tax credits after Congress extended the deadlines late Monday to start construction.
Projects must normally be completed within four years after construction starts.
A later construction start will buy more time.
A last-minute tax extenders bill that cleared Congress late Monday extends deadlines for developers of solar, wind, fuel cell, geothermal, biomass, incremental hydroelectric and other renewable energy projects to start construction of new projects to qualify for federal tax credits.
The measure also authorizes a 30% investment tax credit for offshore wind projects that start construction as late as 2025 and allows a similar tax credit to be claimed on new power plants of up to 50 megawatts in size that generate electricity using waste heat from buildings and other equipment.
Solar deadlines have been extended by two years.
Projects on which construction starts in 2020, 2021 or 2022 will qualify for a 26% investment tax credit.
The tax credit drops to 22% for projects starting construction in 2023.
All such projects must be placed in service by the end of 2025.
A project slipping past 2025 qualifies for only a 10% investment tax credit.
The Internal Revenue Service requires that projects must be completed within four years after the year construction starts. Thus, any project on which construction started in 2019 or 2020 would have to be completed by the end of 2023 or 2024, notwithstanding the longer outside limit that Congress wrote into the statute.
An investment tax credit is a percentage of the cost of a project and is claimed in the year the project is placed in service. Thus, a 30% investment tax credit on a $600 million solar project is worth $180 million.
Wind projects on land have been given another year to start construction to qualify for tax credits.
They had faced a deadline of the end of this year.
The new deadline is the end of 2021.
Projects starting construction in either 2020 or 2021 will qualify for production tax credits at 60% of the full rate on the electricity output for 10 years or an 18% investment tax credit on the project cost in the year the project is put in service. Production tax credits at 60% of the full rate are currently $15 a MWh.
Congress did not fix a “dip” in the tax credit rate for projects that started construction in 2019. The tax credit rate dipped to 40% of the full rate for 2019 projects compared to 60% for 2018 and 2020 – and now 2021 – projects. A similar extension at the end of last year, but at a higher tax credit rate, set off a scramble by wind developers to rework construction arrangements to push the start of construction on projects into 2020.
Offshore wind has struggled to get the same traction in the United States as in Europe, but the bill will help.
Any offshore wind project on which construction starts after 2016 through the end of 2025 will qualify for a 30% investment tax credit.
The change is retroactive. Thus, any project on which construction started as far back as 2017 will now qualify for a 30% tax credit. However, the project must be completed within four years after construction starts under current IRS policy. The US Treasury is considering whether to extend this to seven or 10 years.
The 30% ITC can be claimed only on “tax basis” built up after 2016. Thus, if the developer had spent $14 million by the end of 2016 on a project that will cost $3 billion ultimately, the tax credit cannot be claimed on the $14 million in capitalized costs through 2016, but can be claimed on the rest of the tax basis.
Offshore wind developers will not have the option to claim production tax credits on the electricity output – instead of an investment tax credit – on any project on which construction starts after 2021. The PTCs for a project on which construction starts in 2021 or earlier are the PTCs under the phase-out schedule for wind projects on land.
Other renewable energy projects that qualify for production tax credits had to be under construction by the end of 2020 to claim them. This deadline has now been moved to the end of 2021.
Tax credits may be claimed at the full rate. There is no phase down in tax credit amount as there is for wind and solar projects.
The full rate for geothermal and closed-loop biomass projects – meaning projects that generate electricity from plants grown specifically to be used as fuel in power plants – is currently $25 a MWh.
The full rate for other types of biomass, incremental hydroelectric, landfill gas, waste-to-energy and marine and hydrokinetic projects is currently $13 a MWh. The production tax credit amounts are adjusted each year for inflation.
Congress gave fuel cell developers the same extensions as for solar projects. Thus, fuel cell projects qualify for a 26% ITC if construction starts in 2020, 2021 or 2022, and a 22% ITC if construction starts in 2023. All such projects must be completed by the end of 2025.
New geothermal heat pumps and combined heat and power projects will qualify for a 10% investment tax credit if construction starts by the end of 2023.
Congress authorized a 30% investment tax credit to be claimed on new power plants of up to 50 megawatts in size that generate electricity using waste heat from buildings and other equipment. The building or other equipment cannot be another power plant. Construction must start by the end of 2023.
The Congressional action set off a scramble Monday by some developers to amend arrangements they put in place to start construction in 2020.
There are two ways to start construction. One is by incurring at least 5% of the total project cost before the deadline. The other way is by starting “physical work of a significant nature” on the project site or at a factory on equipment for the project.
Developers trying to start work under the 5% test usually sign a contract to buy solar panels, inverters, wind turbines or other equipment for delivery by year end or within 3 ½ months after a payment at year end.
A developer might amend the contract to push payment, title transfer and delivery of the equipment into next year. If there has already been a payment under the contract, the contract might still be amended to push title transfer and delivery into next year more than 3 ½ months beyond any 2020 payments.
If the factory already started manufacturing the equipment, then the developer may be out of luck. The project may be under construction in 2020 under the physical work test. It depends on the facts.
If all else fails, a developer can try to rescind the contract before year end. Under a contract rescission doctrine, the parties are treated as if they never signed a contract if the contract is both signed and rescinded in the same tax year and the parties are restored to their original economic positions.
Many developers start work on projects by placing a binding purchase order with a transformer vendor to start manufacturing the main power transformer before the deadline.
Amending such a purchase order to push delivery into next year will not prevent a project from being considered under construction this year if work at the factory is already underway.
It is important in physical-work cases to identify the project on which construction started. It is hard on a common-sense level to see how construction can have started on a project without knowing the project.
Many developers postponed identifying projects until after the November elections, but planned to do so before year end. Developers in this position may have other options. If a project was inescapably under construction this year based on physical work, then the contract may have to be rescinded to escape physical work.