In the first half of 2020, the US Congress, Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) have taken unprecedented actions to address the disruptions caused by COVID-19. Most notably, Congress has passed three stimulus packages to support individuals, the medical industry, and businesses in the United States in the fight against the virus and to mitigate the damage it has inflicted on the economy. While these new laws contained some significant US federal tax relief for businesses in the energy industry, none of the bills contained any provisions that were specific to the energy industry.
As Congress debates the possibility of enacting a fourth stimulus package, there are a variety of proposals that would provide relief specifically to the energy industry. On June 22, 2020, Democratic lawmakers in the US House of Representatives introduced several pieces of legislation as part of a $1.5 trillion infrastructure package called the Moving Forward Act. The infrastructure package includes the Growing Renewable Energy and Efficiency Now Act (“the GREEN Act”), which was released on June 25, 2020, by Congressman Mike Thompson of California, Congressman Richard Neal of Massachusetts, and 46 other Democrat sponsors in Congress.
Key Provisions of the GREEN Act
- Five-year extension of the renewable energy production tax credit (“PTC”) for wind and certain other resources under Section 45 of the Internal Revenue Code (the “Code”);
- Five-year extension of the investment tax credit (“ITC”) for solar, and certain other property, under Section 48 of the Code;
- Two-year extension of the “start of construction” requirements for qualified facilities to qualify for the carbon oxide sequestration credit under Section 45Q of the Code;
- Introduction of a direct pay option worth 85% of the credit value in lieu of the tax credit;
- Expansion and extension of tax credits for zero emission vehicles; and
- Inclusion of additional incentives to encourage investment in green energy and energy efficiency.
Section 45 PTCs
Section 45 of the Code allows a PTC against federal income tax for electricity produced by a taxpayer at a “qualified facility” during the 10-year period beginning on the date such facility was originally placed in service. A “qualified facility” includes, among other facilities, wind facilities, solar facilities, trash facilities, and hydropower facilities. The PTC rate is 1.5 cents per kilowatt hour of electricity, adjusted for inflation1. This credit is phased down for a facility using wind to produce electricity, with the PTC reduced by 20% for facilities for which construction began in 2017, 40% for facilities for which construction began in 2018 and 60% for facilities for which construction began in 2019.
The availability of the PTC for wind facilities has been extended several times in previous years, most recently in 2019. On December 20, 2019, President Trump signed into law a package of “tax extenders” (the “Extenders Bill”) allowing PTC with a 40% reduction for wind facilities for which construction begins in 2020. As a result, the PTC for wind is due to expire at the end of 2020. The GREEN Act proposes to preserve the PTC at the current phase-out levels of 40% for facilities the construction of which begins in 2021 and prior to January 1, 2026.
Section 48 ITCs
Section 48 of the Code allows an ITC against federal income tax for “energy property” that is placed in service during a taxable year, with the ITC rate being a percentage of the tax basis of that property. Currently, for projects the construction of which began prior to January 1, 2020, the credit is equal to 30%, but it steps down to 26% for projects the construction of which begins in 2020, and a 22% credit for projects the construction of which begins in 2021 (in each case, as long as the energy property is placed in service prior to January 1, 2024). The ITC drops to 10% where the construction begins before January 1, 2022, and the project is not placed in service before January 1, 2024, or for commercial solar projects where construction begins after December 31, 2021. The GREEN Act proposes a five-year extension of the ITC for solar energy at 30% for projects the construction of which begins prior to 2026, and then 26% for projects the construction of which begins in 2026, 22% for projects the construction of which begins in 2027, and 10% for projects the construction of which begins after 2027. The GREEN Act would also expand eligibility for the investment tax credit by broadening the definition of energy property to include energy storage technology (such as rechargeable batteries, hydroelectric dams, and ice storage tanks) and waste energy recovery property.
In the case of wind facilities, a taxpayer may elect to treat these facilities as “energy property” and thereby claim the ITC in lieu of the PTC. Similar to the phase-down for the PTC for wind facilities, the ITC for wind facilities is similarly phased down. The Extenders Bill allowed taxpayers to elect to receive the ITC with a 40% reduction for wind facilities for which construction begins in 2020 and the GREEN Act would extend this opportunity for wind facilities for which construction begins prior to January 1, 2026.
Section 45Q Carbon Capture Tax Credits
Section 45Q of the Code provides a tax credit on a per metric ton basis for carbon oxides that are captured by a taxpayer with carbon capture equipment at a qualified facility and disposed of, either in secure geological storage or through certain other methods. A “qualified facility” includes any industrial facility, electricity generating facility or direct air capture facility, the construction of which begins before January 1, 2024, if either the construction of carbon capture equipment begins before that date or the facility was originally designed to include carbon capture equipment. The GREEN Act proposes to extend the timeframe for commencing construction of a qualified facility until January 1, 2026.
Cash Payment in Lieu of Credits
In addition to the modifications and extensions of the credits under Sections 45, 48 and 45Q of the Code, the GREEN Act would permit eligible taxpayers to elect a direct pay option. Pursuant to this election, an eligible taxpayer could choose to receive a cash payment equal to 85% of the tax credit rather than receiving a credit against income taxes. There is precedent for making cash payments in lieu of tax credits. In response to the 2008 economic crisis, Congress enacted a temporary grant provision under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (“1603 Grants”) whereby eligible taxpayers could receive a 30% cash grant from Treasury in lieu of the PTC or ITC, effectively making the credits refundable. Unlike the1603 Grants, the GREEN Act would have the IRS rather than Treasury administer this option using the annual tax return filing process.
The GREEN Act not only extends and expands the federal tax incentives to promote clean energy technologies but it also supports widespread adoption of zero-emissions cars, vans and buses by expanding the electric vehicle tax credit and creating new tax credits for buyers of used electric cars and manufacturers of zero-emission commercial vehicles and buses.
Amending Current Limitation on Electric Vehicle Credits
The GREEN Act, if enacted, would modify existing limitations on the available credits for qualified plug-in electric drive motor vehicles. Under current law, the tax credit available for such vehicles is between $2500-$7500 and phases out beginning with the second calendar quarter following the calendar quarter which includes the first date on which the number of vehicles manufactured by the manufacturer after December 31, 2009, for use in the United States is at least 200,000. The GREEN Act would amend this limitation by instituting a transition period for all vehicles sold after a manufacturer reaches the 200,000 vehicle threshold and reducing the per vehicle dollar limitation under the transition period by $500. Further, the GREEN Act would increase the phase-out period threshold to 600,000 vehicles.
The GREEN Act would also exclude any vehicles sold during an exclusion period, which is the date in which a manufacturer sells at least 200,000 vehicles until the date of passage of the GREEN Act. This exclusion period would allow manufacturers who have already passed the 200,000 threshold to begin at the transition period and continue to benefit from the credit.
Creation of Credit for Used Electric Vehicles
The GREEN Act would create a new tax credit for used electric vehicles, which would be defined as: (i) a vehicle in which the model year of the vehicle is at least 2 years earlier than the year the vehicle is acquired; (ii) the original use originated with a person other than the taxpayer claiming the credit; (iii) which is acquired by the taxpayer in a sale; (iv) is for sale in the United States; and (v) otherwise meets the requirements for credit under law. The amount of the credit is based on a statutory formula and would be limited to no more than 30% of the sales price of the vehicle.
Creation of Credit for Zero-Emission Heavy Vehicles
The GREEN Act would create a new tax credit for any vehicle weighing at least 7 tons that is not powered or charged by an internal combustion engine and is solely propelled by an electric motor. The credit is equal to 10% of the sales price of such vehicle, except to the extent the sales price of such vehicle exceeds $1 million.
The GREEN Act also encourages residential investments in green energy and energy efficiency by increasing the tax credit from 10% to 20% for the amount paid for qualified energy efficiency improvements and increases the lifetime limitation.
The GREEN Act also expands incentives for energy efficiency and conservation in homes and buildings with updated standards. The residential energy efficient property credit under section 25D allows for a credit equal to the applicable percentage of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Generally, this credit terminates for property placed in service after December 31, 2021, which would be extended to December 31, 2027, by the GREEN Act and certain expenditures related to biomass fuel property and battery storage technology would be added to such credit. The commercial buildings energy efficiency tax deduction under section 179D primarily enables building owners to claim a tax deduction for installing qualifying systems and buildings, which must have been placed in service by December 31, 2020, but the GREEN Act would extend this date to December 31, 2025. The tax deduction would also be increased to $3.00 from the current $1.80 per square foot. Section 45L would also be amended to extend the New Energy Efficient Home Credit for a qualifying home purchased before December 31, 2025, instead of December 31, 2020.
1 For 2020, adjusted for inflation, the PTC rate is 2.5 cents per kilowatt hour of electricity.