WIND DEVELOPERS received good news from the IRS.

WIND DEVELOPERS received good news from the IRS.

June 01, 2003
Wind farms in the United States qualify potentially for a “production tax credit” of 1.8¢ a kilowatt hour on their electricity output. The credits can be claimed on the electricity generated at a project for 10 years after the project is put into service. However, the amount of the tax credit is reduced to the extent the project benefits from any government grants, subsidized energy financing, or other tax credits.

The Internal Revenue Service ruled privately that a wind farm that received three kinds of government help does not have to reduce the amount of its tax credits. The IRS made the ruling public in May.

A state agency made a lump-sum payment to the project to help cover its operating costs. The project will have to repay any money that it fails to spend on operating costs within a certain time period. Otherwise, the money is “earned” by the project as it generates electricity. The IRS said this is not a government “grant” because a grant exists only if there is no circumstance where the project might have to repay the money.

The project also benefits from a government loan guarantee. Another state agency guaranteed the bank that lent money to finance the project that it will step in and repay a certain number of months of debt service on the loan if the project fails to pay. The IRS said this is not a “grant” or “subsidized energy financing.” “Subsidized energy financing” is a program aimed specifically at projects that conserve or produce energy. Presumably, the loan guarantee program from which the wind project benefits in this case has a broader focus.

Finally, the project has also applied to the state to designate the site where the project is located as an enterprise zone. This will mean the project will not have to pay sales or use taxes on the turbines and other equipment. The IRS said such a tax exemption will not require a haircut in the federal production tax credit.

The ruling is also interesting because the wind farm leases the site where the project is located under a lease that requires the project to pay the site lessor the greater of three amounts. They are a fixed rent, or an amount that is essentially a percentage of the production tax credits, or a percentage of gross receipts from wind sales. The IRS ruled that this arrangement does not require sharing any of the production tax credits with the site lessor. Such tax credits must be shared among all persons with an ownership interest in the project in the same ratio that they share in gross receipts from electricity sales. In this case, the IRS concluded that the site lessor has no ownership interest in the wind farm.

In related news, the IRS said in April that the production tax credit will remain at 1.8¢ a kilowatt hour for electricity generated during 2003. The amount of the tax credit is adjusted each year for inflation. The IRS announces the inflation adjustment for each year in April.

The agency also said that the average contract price at which wind electricity was sold last year in the United States was 4.85¢ a kilowatt hour. This figure only takes into account sales under contracts signed in 1990 or later.

Keith Martin