August 17, 2020
Renewable Energy Alert
Renewable Energy Alert
Author(s): Forrest David Milder
The authors of the House-approved Moving Forward Act (MFA) were plainly listening when sponsors of solar energy projects were seeking additional funds, both from the government and tax equity. While the MFA has not been considered by the Senate, it’s still interesting to see what could become law, if interest picks up in the current Senate, or there is a change in control of the Congress and the presidency
With that in mind, I thought it would be interesting to briefly summarize the solar-favorable provisions of the MFA, with some references to other technologies where they benefit from similar provisions. It should be noted that the House hasn’t issued a report summarizing these provisions, and they are spread through large portions of the expensive ($1.5 trillion) and long (2,300-page) piece of legislation. It can be hard to make your way through all the details of each proposal. And with big changes in the tax law, the effective date provisions can sometimes be inscrutable.
Here’s a summary:
Section 90402 of the MFA would provide a five-year extension of the Section 48 investment tax credit at a 30% rate through 2025, with a phase down to 26% in 2026, 22% in 2027, and then down to 10% in 2028 and later. These extensions are generally based on when the facility “begins construction,” a phrase that the solar industry got to know well at the end of 2019. And, note that the wind production tax credit (PTC) and the investment tax credit (ITC) for many other technologies also get extensions through 2025. Similarly, the personal 30% tax credit provided by Section 25D for residential energy efficient property would be extended to 2025, although it does go to zero after 2027.
The effective date for the new rates is “periods after December 31, 2020, under rules similar to the rules of section 48(m) as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.” I’ll save you from having to dig out your pre-1990 Code to understand this wording. It essentially says that for years 2021 and later, expenditures are subject to the credit rate that applied when they were incurred. Now, recall that under current law, there is a 30% credit for facilities for which construction began prior to 2020, and a 26% credit if construction began in 2020, provided that construction is “continuous” or the facility meets the four-year safe harbor of Notice 2018-59. Under the proposed new law, if construction begins in years 2021 through 2025, a 30% credit would once again be available. So, this effective date language could lead to taxpayers trying to establish that they didn’t incur expenditures in 2020, when the credit rate was lower.
Section 90402 of the MFA also provides a new 30% storage tax credit. The big change here is that it isn’t necessary to pair the storage with a renewable technology. However, the storage has to be one of the following: batteries, compressed air, pumped hydropower, hydrogen storage (including hydrolysis and electrolysis), thermal, regenerative fuel cells, flywheels, capacitors, superconducting magnets, or other technologies “identified by the Secretary [of the Treasury] after consultation with the Secretary of Energy,” with a capacity of not less than 5 kWh, or which uses thermal energy to heat or cool a structure other than a swimming pool. So, as of now, no giant springs attached to 18-wheeler trucks! Also excluded is “equipment primarily used in the transportation of goods or individuals and not the production of electricity.”
The effective date for this section includes a double, if not triple, negative—“the term ‘energy storage technology’ shall not include any property the construction of which does not begin before January 1, 2028.” We could likely shorten this to mean that credits are only available for energy storage projects that begin construction before 2028.
Section 90404 inserts a new Section 6431 to the Code, providing taxpayers with an election to be treated as if they had made a payment of tax equal to 85% of the ITC, PTC, or carbon sequestration credit for which they would have otherwise qualified. Thus, this overpayment of taxes should generate a corresponding refund. Note that this would be in lieu of “monetizing” the credit using one of the traditional structures, like a partnership flip or inverted lease. I understand from people close to the negotiations that the adjustment down to 85% is intended to yield a net result that is similar to a monetizing structure, where there would have been closing costs. This new section applies to property first placed in service after the date of enactment.
An important feature of this provision is that state and local governments and their political subdivisions are also eligible for this 85% treatment, while tribal governments would be eligible for a full 100% refund.
Note that the refund isn’t necessarily immediate. The deemed payment is considered made on the later of the date that the return was due or the date the return is actually made, if later. A special rule applies a similar date to government entities—they use the later of the due date for a timely tax return (as if the government was subject to the applicable deadlines) or when the government entity actually submits a claim for credit or refund.
These timing rules mean that project developers may still need another source of financing until they get the anticipated refund. Two more notable provisions: receipt of the refund or claim is not taxable, and (as I noted above) there’s no double dipping, although the provision appears to contemplate dividing the benefit into pieces. For example, a $1M credit might be split in two, with (A) $500K allocated to an investor, and (B) $500,000 times 85%, or $425,000, claimed as a refund under the new section. It’s not clear how any of the rules apply to such a transaction. Obviously, there will be many tax rules implicated by such a transaction, meaning that we might not see them done unless and until the IRS provides guidance.
Section 33131 of the proposed MFA would provide grants for the installation of solar that serves low-income and underserved areas. There are pages and pages of definitions, who the beneficiaries are, what an eligible project is, and so on.
To give you an idea of just how many layers of definitions there are, I’ll note that an “eligible project” is an “eligible installation project” or an “eligible planning project,” each of which involves a “covered facility” in a “covered state.” A covered facility may be one of several things, including a facility for an entire community, a single solar facility at the residence of a low-income household, or a multi-family affordable housing complex. And there’s much, much more—a covered state must have “a process in place to ensure that covered facilities deliver financial benefits to low-income households,” the term “state” includes several possessions and territories, special rules are provided for Indian tribes and native Hawaiian community-based organizations, and this is all done pursuant to a program that the Secretary of Energy “shall establish.”
Undoubtedly, this is all intended to assure that government money isn’t simply awarded without monitoring, a criticism of some recent big-ticket legislation. Nonetheless, as a frequent commenter and participant in the development of IRS regulations with similar objectives, I am awe-struck by the breadth of what is called for here from the Department of Energy and corresponding state agencies. And we haven’t gotten to the numbers yet—this section calls for $200,000,000 for each of fiscal years 2021 through 2025, i.e., a billion dollars over the next five years.
Finally, the Secretary of Energy is directed to encourage eligible entities to “leverage such funds by seeking additional funding through federally or locally subsidized weatherization and energy efficiency programs.” The statutory language does not indicate whether tax credits are such a “program,” and therefore eligible for leverage.
If Section 33131 does become law, it may be dizzying to watch the development of all the rules and regulations called for by the statutory provision.
Solar has long wanted the ability to setup publicly traded partnerships, like traditional energy businesses. Section 90406 of the MFA would expand eligibility to many renewables and storage. Of course, this doesn’t change the five-year recapture rule that applies to the ITC. So, for non-PTC technologies (like solar), publicly traded partnerships are probably a post-five-year option. This new provision applies to taxable years beginning after 2020.
As I noted at the beginning, there are several provisions that relate to other renewable technologies. Here is a very brief summary of the notables. The proposed act would add a new tax credit for “qualified biogas property,” defined as property which converts biomass into a gas consisting of at least 52 percent methane, or is concentrated into a gas which consists of at least 52 percent methane, and captures such gas for productive use, including cleaning and conditioning equipment. The phase-down for the PTC for wind and other PTC technologies would be set at 60 percent of the 2017 level through 2025. There would be an extension of the ITC for offshore wind facilities. The Section 25C nonbusiness energy property credit would be extended and modified for property placed in service by the end of 2025. The 179D energy efficient commercial building deduction would be extended and increased through 2025. And the Section 45L new energy efficient home credit would be modified and extended through 2025. Finally, there are at least a dozen other proposed laws that would address energy taxation.
As always, we’ll be on the lookout for modifications, clarifications, and steps toward becoming legislation.
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