On Dec. 21, 2020, the U.S. House of Representatives and Senate passed a year-end tax package, which would extend certain tax credits for renewable energy and other tax incentives. The bill was sent to President Trump for his signature.
Of importance in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 is a one-year extension to the production tax credit (PTC) for wind projects under Section 45 of the tax code; a two-year extension to the investment tax credit (ITC) for solar projects under Section 48 of the code; a new five-year ITC for off-shore wind projects (without any phase out) under Section 48 of the code; and a two-year extension of the PTC for carbon capture projects under Section 45Q of the code.
Currently, the PTC for wind projects is set to expire at the end of 2020 for projects that have not begun construction. The one-year extension would provide a 60 percent PTC for wind projects that begin construction in 2021. The election to take the ITC in lieu of the PTC is similarly extended one year. If enacted, the PTC would look as follows:
- Projects that begin construction before the end of 2016 – 100 percent
- Projects that begin construction in 2017 – 80 percent
- Projects that begin construction in 2018 – 60 percent
- Projects that begin construction in 2019 – 40 percent
- Projects that begin construction in 2020 – 60 percent
- Projects that begin construction in 2021 – 60 percent
The tax extenders bill also provides a one-year extension for PTCs for the following electrical facilities that begin construction before the end of 2021:
- closed-loop biomass;
- open-loop biomass;
- geothermal energy;
- landfill gas;
- municipal solid waste;
- incremental hydropower; and
- marine and hydrokinetic renewable energy.
Currently, the 26 percent ITC for solar projects is set to step-down at the end of 2020 to 22 percent for projects that have not begun construction. The two-year extension would maintain the 26 percent ITC for solar projects that begin construction in 2021 or 2022. If enacted, the ITC would look as follows:
- Projects that begin construction before the end of 2019 – 30 percent
- Projects that begin construction in 2020 – 26 percent
- Projects that begin construction in 2021 – 26 percent
- Projects that begin construction in 2022 – 26 percent
- Projects that begin construction in 2023 – 22 percent
- Projects that begin construction in 2024 and after – 10 percent
To qualify for the 30 percent, 26 percent or 22 percent ITC, the solar project must be placed in service before Jan. 1, 2026. If the solar project is placed in service on or after Jan. 1, 2026, the project is only eligible for the 10 percent ITC.
The tax extenders bill would provide a two-year extension for carbon capture tax projects under Section 45Q of the code, such that the qualified facility must begin construction before Jan. 1, 2026 (rather than Jan. 1, 2024).
The tax extenders bill also adds a new provision allowing off-shore wind facilities to elect into the ITC under Section 48 if they begin construction before the end of 2025. This is a period four years longer than the 2021 begin-construction requirement for all other wind facilities. Furthermore, the off-shore wind ITC is not phased out and remains at the 30 percent ITC level.
Lastly, the tax extenders bill adds waste energy recovery property as energy property eligible for the ITC under Section 48, which is subject to phase-out that applies to qualified fuel cell, fiber-optic solar and small wind facilities. These are energy projects that can utilize exhaust or lost heat from buildings or equipment (excluding combined heat and power, or CHP). The projects cannot exceed 50MW.
McGuireWoods lawyers are experienced in energy, project finance and tax equity structures. Do not hesitate to reach out and discuss any of the above information.