The Senate Finance Committee yesterday approved the chairman’s modification to the Senate extenders bill—the
Family and Business Tax Cut Uncertainty Act of 2012—that includes a one-year extension of the section 45 production tax credit (PTC) for wind facilities, which is currently scheduled to expire for facilities placed in service after December 31, 2012.
An earlier version of the bill did not include an extension of the PTC; however, the modified version of the legislation released by Senate Finance Committee Chairman Max Baucus (D-MT) yesterday included the extension with some interesting features, described more fully below.
The legislative text is not yet available, and the discussion below is based on the Joint Committee on Taxation (JCT) description of the Chairman’s modifications.
Extension and modification of the PTC for wind facilities
The section 45 PTC provides a production tax credit for wind facilities placed in service by December 31, 2012. Under current law, taxpayers can claim a 2.2 cents per kilowatt hour tax credit for a ten year period. The credit rate is adjusted annually for inflation.
The bill would:
- Extend the placed-in-service date an additional year—i.e., to projects which are placed in service by December 31, 2013
- Modify the PTC to allow renewable energy facilities that “begin construction” before the end of 2013 to claim the PTC
Currently taxpayers may claim a 30% section 48 investment tax credit (ITC) for renewable energy projects in lieu of the PTC so long as such projects are placed in service during the applicable PTC expiration dates. The one-year PTC extension and “begin construction” provision would also apply to the ITC in lieu of PTC.
The JCT estimates the 10-year revenue effect of this change to be $12.184 billion.
The physical construction of a wind facility can typically take anywhere from four to 10 months. With the expiration of the PTC looming, the development of new large-scale wind projects has slowed significantly. The one-year extension of the PTC for wind has been widely anticipated; however, the general industry perception is that the one-year extension at this point in the year or later would not allow for adequate time to develop a project even with the extra time provided by the extension. The “begin construction” provision is an interesting twist, clearly designed to fix the timing problems presented by the one-year extension.
The chairman’s modification does not include a definition of “begin construction.” The renewable energy grant in lieu of tax credits program, administered by the Treasury Department and enacted under section 1603 of the
American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5) includes a “begin construction” provision. Under that statute, grant eligible projects must be placed in service during 2009, 2010, or 2011, or construction must begin during 2009, 2010, or 2011, and the projects must be placed in service by the otherwise applicable ITC or PTC placed-in-service-date deadlines.
Under the grant program rules, in order to “begin construction” a grant applicant must begin “physical work of a significant nature” or pay or incur 5% or more of the project’s eligible basis by the “begin construction” deadline (the “5% safe harbor”). Under the “physical work of a significant nature” rule, the work that commences cannot be preliminary in nature, and the work must be part of a continuous program of construction. It is possible that rules similar to these could be applied to a “begin construction” provision added to a PTC extension. In practice, the 1603 grant program “begin construction” rules have proved to be somewhat more ambiguous than they may, at first, appear.
It is also not clear from the language of the provision how the “begin construction” requirement will operate. For instance, the provision does not specify when projects that begin construction during 2013 must be placed in service. While it is likely that the Senate itself has not yet fully resolved how the “begin construction” rules will interact with the PTC, there are at least several possibilities:
- The placed-in-service-date approach: Perhaps the most straight-forward option available to Congress would be to amend the proposal to impose a placed-in-service-date deadline for projects that begin construction during 2013. For example, Congress could require all projects that rely on the “begin construction” rule to be placed in service no later than December 31, 2016. Such a rule would make the PTC mimic the section 1603 “begin construction” rule as it currently applies to solar projects.
- The open-ended approach: Under this approach, taxpayers could begin construction in 2013 and would have no specific deadline as to when to place the project in service. This approach would be the most liberal option available to Congress, but it would not be without limitations as well. First, if Congress adopts the section 1603 “begin construction” rules, the “physical work of a significant nature” option requires continuous construction of the project. So those projects would be required to be under constant development, suggesting a placed-in-service date not infinitely far in the future. Second, even in the 5% safe harbor scenario, wind developers will be anxious to place their projects in service—5% of the costs of a wind farm is still a significant amount of deployed capital. Until the wind farm is placed in service, the developer’s deployed capital is earning no return. This in itself would discourage a prolonged grandfathering period.
- The benefits are flowing approach: Some commentators have already suggested that the Senate intended for the PTC to begin at the beginning of construction, not the placed-in-service date. This seems highly unlikely for several reasons. First, the PTC is a production-based credit. It seems wholly counterintuitive for Congress to award a production based credit to a facility that is not yet operational. Second, even if the tax benefits were available during the construction period (e.g., because the developer is electing the ITC in lieu of the PTC and is claiming the ITC on progress expenditures), the benefits would be very hard to monetize. Tax-equity investors abhor construction risk and would be reluctant to invest in a project that is under construction. As such, the tax benefits made available during the construction period would likely be lost.
- The clock is ticking approach: One other scenario is that Congress would amend the proposal to allow projects that begin construction during 2013 to be grandfathered but to start the clock on the 10-year PTC period beginning January 1, 2014. Thus, these projects would still be PTC eligible but would receive some “haircut” on the PTC during the construction period. Such a rule would create a strong incentive for developers to build and commission projects as quickly as possible.
Other renewable energy provisions
Section 45 PTC for municipal solid waste
The PTC is also available for other qualified facilities, including facilities that produce electricity from municipal solid waste. The bill would modify the definition of municipal solid waste to exclude commonly recycled paper that has been segregated from such waste.
Section 25C credit for certain nonbusiness energy property
The bill would extend the section 25C credit for energy efficient home improvements through 2013. Under current law the section 25C credit expired December 31, 2011.
Section 30C credit for alternative fuel refueling property
The bill would extend the 30% section 30C credit for alternative fuel refueling property for two years, through 2013. Under current law the section 30C credit expired December 31, 2011.
Section 40 credit for cellulosic biofuels producer credit
The bill would extend the cellulosic biofuels production tax credit for one additional year, for cellulosic biofuel produced through 2013. The bill also would expand the definition of qualified cellulosic biofuel to include algae-based fuels. Under current law the cellulosic biofuels producer credit expires December 31, 2012.
Section 40A credits for biodiesel and renewable diesel
The bill would extend for two years, through 2013, the $1.00 per gallon credit for biodiesel and the small agri-biodiesel producer credit of 10 cents per gallon. Under current law the biodiesel and renewable diesel incentives expired December 31, 2011.
Section 45 credit for Indian coal production facilities
The bill would extend the section 45 production tax credit for Indian coal facilities through 2013. Under current law this incentive expires December 31, 2012.
Section 45L credit for construction of new energy efficient homes
The bill would extend for two years, through 2013, the section 45L
credit for new homes that achieve a 30% or 50% reduction in heating and cooling. Under current law the section 45L credit expired December 31, 2011.
Section 45M credit for energy efficient appliances
The bill would extend for two years, through 2013, the tax credit for the U.S. manufacture of energy efficient appliances. Under current law the section 45M credit expired December 31, 2011.
Section 168(l) bonus depreciation for cellulosic biofuel plant property
The bill would extend the 50% first year depreciation allowance for cellulosic biofuel plant property an additional year, for facilities placed in service by December 31, 2013. Under current law this incentives expires December 31, 2012.
Incentives for alternative fuel and alternative fuel mixtures
The bill would extend through 2013 the alternative fuel tax credit and alternative fuel mixtures tax credit. The credits can be claimed as a nonrefundable excise tax credit or a refundable income tax credit; however, due to claims of abuse,
the Senate Finance Committee adopted an amendment denying taxpayers from claiming the refundable portion of the alternative fuel mixture credit. Under current law these incentives expired December 31, 2011.
Not included in the bill is an extension to the 1603 renewable energy grant program or additional funding of the section 48C credit for qualified advanced energy projects.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
John Gimigliano (202) 533-4022
Katherine Breaks (202) 533-4578
Hannah Hawkins (202) 533-4225
* * * * *
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Back to top