Congress appears poised to pass and the president to sign a COVID relief bill that includes extension of the tax credits for renewable energy and carbon sequestration. The legislative text of the pending bill is available here. Here are the highlights for tax credits in these areas:
Solar projects that begin construction in 2020, 2021 or 2022 will qualify for a 26% investment tax credit (ITC), rather than 22% for 2021 and 10% for 2022.
Solar projects that begin construction in 2023 will qualify for a 22% ITC. For any solar project to qualify for more than a 10% ITC, it must be in service before 2026, rather than before 2024.
For onshore wind, projects qualify for a 60% tax credit amount if the project begins construction in 2020 or 2021. Sixty-percent means 60% of the production tax credit amount or $15 a MWh (i.e., 60% of $25 a MWh) or an 18% ITC (i.e., 60% of 30%). This is the same amount that projects that started construction in 2020 qualified for.
There is no statutory deadline for an onshore project to be placed in service; however, to meet the four year “continuity” safe harbor in the IRS’s guidance, which applies to wind and solar, a project on which construction starts in 2021 would need to be placed in service by the end of 2025.
Offshore wind projects qualify for a 30% ITC, if they start construction before 2026. Like onshore wind, there is no statutory deadline for the project to be placed in service.
This legislation is the first time the tax credit statutes have distinguished between onshore and offshore wind. Offshore wind needed a longer window due to the greater time required for permitting and other approvals and the challenges of constructing a project in open water.
Solar for Homeowners
Individuals who install solar on their own homes qualify for a tax credit as well. This tax credit is different than the ITC that is available for commercial investments in solar.
The solar homeowner tax credit is 26% for systems placed in service in 2020, 2021 or 2022. It declines to 22% for systems placed in service in 2023.
The solar homeowner tax credit is determined by the placed in service date, rather than the date construction began, as the beginning of construction rules would be too complicated for individual homeowners to navigate.
The bill also extends the tax credit for carbon sequestration. The deadline is a requirement to begin construction prior to 2026, rather than prior to 2024.