Construction Start Issues
Construction start issues are proving too factual for the Internal Revenue Service to address in private rulings.
Most renewable energy projects in the United States — other than solar and fuel cell projects — had to be under construction by December 2013 to qualify for federal tax credits. Production tax credits of 2.3¢ or 1.1¢ a kilowatt hour — depending on the type of project — can be claimed on the electricity output for 10 years, or else an investment tax credit for 30% of the project cost can be claimed in the year the project is put in service.
The Internal Revenue issued two notices in 2013 explaining when a project will be considered under construction in time.
IRS officials suggested last fall that they may be willing to issue private rulings about individual projects, as long as the rulings ask purely legal questions about how to interpret the rules rather than how then to apply them to particular fact patterns.
However, after considering at least four ruling requests, the agency appears to have decided that questions in this area are inherently too factual. The IRS returned the fee that it charges for processing ruling requests in all four cases.
Meanwhile, the Senate tax-writing committee voted April 3 to extend the construction start deadline by another two years through December 2015. The extension is part of a larger “tax extenders” bill that would extend more than 50 tax benefits.
The bill goes next to the full Senate, where it is expected to pass. The outlook in the House is uncertain. The House tax-writing committee chairman, Dave Camp (R-Michigan), has wanted to keep the focus on major corporate tax reform. However, Camp decided in March to retire at year end. The House tax-writing committee has begun holding hearings on extenders, but still seems in no hurry to move.
Even if the House passes an extenders bill, the House bill is not expected to allow more time for renewable energy developers to start construction. Any additional time will have to be settled in negotiations between the House and Senate.
Solar companies had hoped to persuade the Senate to convert a December 2016 deadline to place solar projects in service to qualify for a 30% investment tax credit into a deadline merely to have started construction of such projects. Senators Maria Cantwell (D-Washington) and Michael Bennett (D-Colorado) offered an amendment to do this during the tax committee mark up on April 3. However, the amendment had to be withdrawn because it was not considered germane. The underlying bill only addresses tax breaks that expire in 2013 and 2014.
Senator John Thune (R-South Dakota) tried to persuade the committee to phase out production tax credits for wind. Thune offered an amendment to limit tax credits on wind projects put in service after 2014 to only a fraction of the normal rate. The fraction would have been 90% for projects put in service in 2015, 80% in 2016, 70% in 2017 and 60% in 2016. Projects put in service after 2016 would not qualify for any production tax credits. The amendment was not included in the final bill.
The Senate extenders bill would also extend a number of other tax breaks of interest to power and other infrastructure companies. Only a few of these are expected to be included in any House bill.
The bill would extend a 50% depreciation bonus for assets placed in service through 2015. (A bonus could also be claimed on longer-lived assets put in service in 2016, but only on the costs incurred through 2015.) A 50% bonus is the ability to deduct 50% of the “basis” in the project immediately in the year a project is completed. The remaining 50% is deducted over the normal depreciation period — for example, five years for a wind or solar project.
Companies engaged in domestic manufacturing in the United States pay taxes currently on only 91% of income from such manufacturing. Generating electricity is considered manufacturing. This provision also applies to income from manufacturing in Puerto Rico, but only through 2013 and only if all of the company’s income earned in Puerto Rico is subject to federal income taxes in the United States. The bill would extend the ability to pay a reduced tax on Puerto Rican manufacturing income through 2015.
Projects on Indian reservations qualify for faster depreciation — for example, accelerated depreciation over three years rather than five years for wind and solar projects and nine years for gas-fired power plants. Projects had to be completed by 2013 to qualify. The bill would extend the deadline through 2015. It would also extend a wage credit for employing enrolled members of Indian tribes who live on or near reservations. The credit is 20% of wages and the cost of health insurance for such employees. However, the credit does not apply to any worker who is paid more than $45,000 a year (the 2013 figure before adjusting for inflation).
The bill would allow companies producing coal from reserves owned by or held in trust for Indian tribes to claim another two years of tax credits on the coal produced. The credit was $2.308 a ton. It is adjusted each year for inflation. The mine producing the coal had to be in service by December 2008. The placed-in-service deadline was not extended.
Contractors building new homes get a tax credit of $1,000 to $2,000 for making them energy efficient. The credit is $1,000 if the energy usage is reduced by at least 30% compared to a 2006 baseline and $2,000 if the energy usage is reduced by at least 50%. The bill would allow the credit to be claimed on new homes sold through 2015.
The bill would authorize another $3.5 billion in new markets tax credits in each of 2014 and 2015. The new markets tax credit is a 39% tax credit taken over seven years on investments in “community development entities” that make loans or equity investments in projects in low-income areas. The credit has sometimes been claimed on investments in power projects in rural areas.
Finally, the bill would extend various tax credits for making or mixing cellulosic biofuel, biodiesel, renewable diesel and other alternative fuels. However, ethanol credits were not extended. There was also no extension in the ability of paper companies to claim refundable tax credits for mixing black liquor with other fuels.
A technical corrections bill also approved by the committee on April 3 makes clear that section 1603 Treasury cash grants for renewable energy projects do not have to be reported as income under the alternative minimum tax. The American Recovery and Reinvestment Tax Act in 2009 already made clear that they do not have to be reported as income for regular income tax purposes.
By Keith Martin