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Legal Update

Certain US Energy Tax Credits Extended, But Phaseout Dates Scheduled

28 December 2015
Mayer Brown Legal Update

The Consolidated Appropriations Act of 2016 (P.L. 114-113) (the “Act”) brings both good and bad news for taxpayers with an interest in energy tax credits. On the one hand, the Act extends the time periods during which certain credits are available. These credits include the solar investment tax credit and the wind production tax credit. On the other hand, the Act also introduces phaseout dates with respect to these tax credits, indicating that the era of these energy tax credits may be approaching its end.

The Act extends the 30 percent solar investment tax credit (“ITC”) under Internal Revenue Code (the “Code”) Section 48 to solar energy property that begins construction prior to January 1, 2022 (under prior law, the cutoff date was  January 1, 2017). This legislative change represents not just an extension of the time the credit is available, but also a change from the old “placed-in-service” requirement to a “begun construction” standard, thus bringing the solar ITC in line with the standards applying to the wind production tax credit.1

However, the Act also implements a three-step phaseout for solar energy property. Instead of the energy percentage for the energy credit being 30 percent of the basis of each energy property placed in service during the taxable year, the energy credit will generally be 26 percent for property that begins construction in 2020 and 22 percent for property that begins construction in 2021. The energy credit will be further reduced to 10 percent if such solar energy property is not placed into service prior to January 1, 2024.

The renewable energy production tax credit (“PTC”) for facilities using wind to produce electricity is extended to facilities that begin construction before January 1, 2020 (the previous expiration date was January 1, 2015). The Act also phases out the wind PTC, which generally is an amount equal to the product of 1.5 cents multiplied by certain kilowatt hours of electricity produced by the taxpayer, by providing that the amount of the credit shall be reduced by 20 percent for facilities that begin construction during 2017, 40 percent for facilities that begin construction during 2018 and 60 percent for facilities that begin construction during 2019.2

The election to treat qualified wind facilities as energy property under Code Section 48(a)(5) is likewise extended to facilities that begin construction before January 1, 2020. Under the election, the phaseout would again reduce the credit by 20, 40 and 60 percent, respectively, for facilities that begin construction in 2017, 2018 and 2019.3

The Act has also extended until the end of 2016 the PTCs for closed-loop biomass facilities, open-loop biomass facilities, geothermal and solar energy facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities.4 The election to treat these facilities as energy property under Code Section 48(a)(5) has also been extended to facilities that begin construction before January 1, 2017. With respect to individuals, the Act provides for the extension of credits through January 1, 2022, for certain solar and qualified solar water heating properties under Section 25D, and also the phasing out of those credits.5

Bonus first-year depreciation for certain qualified property (including energy property) has also been extended under the Act to include property acquired before January 1, 2020 (formerly property acquired before January 1, 2015).6

While this added certainty with respect to which credits are available through 2021 is welcome, and expected to have a stimulating effect on investments in these areas, the gradual phaseouts indicate that Congress will not continue to renew the solar ITC and wind PTC on an annual basis after the final phaseout dates. The phaseouts of these energy credits also line up with the expected dates for full implementation of the Clean Power Plan.7

Even if consensus as to the dates of the phaseouts were to change, and congressional impetus were to move back in the direction of continuing to extend the solar ITC and wind PTC beyond 2021, it would likely be more difficult for Congress to enact such a renewal. This is because the other tax extenders that have previously expired and been extended in lockstep with the energy credits now have different expiration dates, or, in the cases of the research and development tax credit and the Section 179 expensing for capital investment, have been extended indefinitely. As a result, there would reduced momentum to extend the application dates of the energy credits without these other extensions also being on the line.

However, it is not impossible that these credits will be extended beyond the final phaseout dates under the Act. It is also possible, particularly given the permanent adoption of the research and development credit, that credits similar to the solar ITC and wind PTC will be enacted for newly discovered or commercialized renewable and alternative energy sources and technologies in the future.

1 See Code Section 48(a)(2)(i)(II); P.L. 114-113, Div. P, Title III, Sec. 303.
2 See Code Section 45(d)(1); Code Section 45(b)(5); P.L. 114-113, Div. P, Title III, Sec. 301.
3 See Code Section 48(a)(5)(E); P.L. 114-113, Div. P, Title III, Sec.302.
4 See Code Sections 45(d)(2), (3), (4), (6), (7), (9), and (11).
5 See Code Section 25D (as effective both before and after January 1, 2017); P.L. 114-113, Div. P, Title III, Sec. 304.
6 See Code Section 168(k); P.L. 114-113, Div. Q, Title I, Sec. 143.
7 See http://www.epa.gov/cleanpowerplan/clean-power-plan-existing-power-plants

Authors

  • Jeffrey G. Davis
    T +1 202 263 3390
  • Suzanne P. Cartwright
    T +1 202 263 3239
  • Isaac L. Maron
    T +1 202 263 3839
  • Binyomin Koff
    Associate
    T +1 202 263 3211

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