In less than a week, the Rules Committee of the US House of Representatives (the “Rules Committee”) released two versions of modified legislative text of H.R. 5376, the Build Back Better Act. The first version was released on October 28, 2021, and a subsequent version (the “Bill”) was released on November 3, 2021.1 In connection with the release of the Bill on November 3, 2021, House Speaker Nancy Pelosi noted that it had been her intent to have a Rules Committee hearing on the Build Back Better Act on Monday, November 1, 2021, but that additional comments and changes continued to come in, which necessitated the second release of the Bill.
The Bill covers a wide range of green energy tax incentives and makes significant changes to a prior version of the Bill that was approved by the House Ways and Means Committee on September 15, 2021 (the “Prior Bill”).2 The Bill must be approved by the Rules Committee before it will come to a vote in the full House of Representatives, and, as evidenced by the flurry of activity from the Rules Committee over the past week, it remains subject to continuing review and modification. We will continue to closely monitor developments in the Rules Committee and the full House of Representatives, and we will provide further updates as warranted.
The Bill is similar to the Prior Bill in that it incorporates various legislative proposals made by Congress and the White House over the past year.3 The Bill would extend and expand the existing production tax credit of Section 45 (“PTC”),4 the existing investment tax credit of Section 48 (“ITC”), and the existing credit for carbon oxide sequestration of Section 45Q (“45Q”). The Bill would also expand the ITC to cover additional property, including nuclear generation, energy storage and electric transmission property; enhance incentives for a variety of other green initiatives and activities, such as energy-efficient construction and electric vehicles; and provide incentives for renewable fuels by extending existing incentives and creating a new tax credit for the creation of clean hydrogen. The Bill also contains a “direct pay” option for the PTC and ITC and enhances credits for certain projects constructed in low-income areas or that meet minimum standards for domestic content. Finally, the Bill seeks to incentivize domestic job creation by sharply limiting the PTC and ITC for projects that do not satisfy prevailing wage and apprenticeship requirements.
Despite the similarities between the Bill and the Prior Bill, there are also some significant differences, including that the Bill:
- Does not include any increase in corporate tax rates or marginal rates on individuals, but it does introduce a new corporate alternative minimum tax (“AMT”) proposal that would impose a 15% minimum tax on adjusted financial statement income for corporations with such income in excess of $1 billion;
- Fully extends the PTC and ITC but only through 2026, whereas the Prior Bill extended the PTC and ITC through 2033 with phasedowns for 2032 and 2033;
- Introduces new emissions-based clean energy credits that are neutral and flexible between clean energy technologies for projects that begin construction in 2027 and later years; and
- Provides helpful clarifications regarding the transition rules for the prevailing wage and apprenticeship rules.
Corporate Alternative Minimum Tax
The AMT proposal would impose a 15% minimum tax on adjusted financial statement income for corporations with such income in excess of $1 billion. Under the Bill, an applicable corporation’s minimum tax would equal the amount by which its tentative minimum tax exceeds the corporation’s regular tax for the year. Tentative minimum tax is determined by applying a 15% tax rate to the adjusted financial statement income of the corporation for the taxable year.
For purposes of the AMT, adjusted financial statement income is the net income or loss of the taxpayer included on the taxpayer’s applicable financial statement with certain modifications. Adjusted financial statement income does not include any direct-pay tax credits received by the taxpayer.
In addition, similar to the current rules applicable for general business credits (including the PTC and the ITC) of a corporation, such credits may generally offset up to approximately 75%5 of a taxpayer’s normal income tax and alternative minimum tax. As a result, the PTC and the ITC are largely protected from the AMT in the Bill. However, accelerated depreciation benefits that are available to renewable energy projects and that can significantly decrease a corporation’s regular tax are not protected from the AMT proposal.
Extension and Modification of the PTC, the ITC and Section 45Q
The Bill would increase the PTC for wind energy to the full applicable credit rate through the end of 2026, revive and extend the PTC for solar energy through 2026, extend the ITC for solar energy at the full credit rate through the end of 2026, and extend Section 45Q for projects that begin construction prior to the end of 2031. These are welcome extensions and modifications from current law where the PTC for wind was due to expire for projects beginning construction after 2021, the PTC for solar had expired in 2006, the ITC for solar was subject to a phasedown for projects beginning construction after 2019, and Section 45Q applied only to projects beginning construction prior to 2026.
As with the Prior Bill, the extensions in the Bill come with some trade-offs—particularly the creation of two-tiered incentives with a “base rate” and a higher “bonus rate” for projects that meet certain prevailing wage and apprenticeship requirements, which are discussed below. In the case of the PTC for wind, the base rate would be 0.5 cents per kilowatt-hour, and the bonus rate would be 2.5 cents per kilowatt-hour through the end of 2026. In the case of the ITC for solar, the base rate would be 6%, and the bonus rate would be 30% through the end of 2026. In addition, a taxpayer may claim an increased credit with respect to energy property placed in service after December 31, 2021, if such property meets the domestic content requirements, which are described below. The credit increase for the PTC is 10% of the amount otherwise allowable. The credit increase for the ITC is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
As noted above, the extensions of the PTC and ITC in the Bill are shorter than provided in the Prior Bill, which would have fully increased the PTC for wind energy, reinstated the PTC for solar energy, and extended the ITC for solar energy, in each case, for projects beginning construction prior to 2032 and with phasedowns for projects beginning construction in 2032 and 2033.
These amendments would apply to facilities placed in service after December 31, 2021. Of particular note, the Bill would preserve the existing phasedown of the ITC to 26% for projects that began construction after 2019 but that are placed in service in 2021. However, a 30% ITC would be available for projects that began construction in 2020 or 2021 and that are placed in service after December 31, 2021. Therefore, it appears that some projects may be eligible for a larger credit if they are placed in service in 2022 rather than 2021.
Moreover, as discussed below, the prevailing wage and apprenticeship requirements, which must be satisfied to qualify for the full ITC or PTC credit rate, would not apply to larger projects beginning construction prior to 60 days after the publication of regulations on such requirements. The Prior Bill would have made such requirements applicable on the date of enactment.
Regarding carbon capture, the Bill would substantially reduce the minimum annual capture thresholds necessary to qualify for Section 45Q credits, with the thresholds generally reduced to the levels specified in the Prior Bill. One change from the Prior Bill is that, for facilities other than direct air capture facilities and electricity generating facilities, the Bill drops the requirement that such facilities capture at least 50% of carbon oxide that would otherwise be released into the atmosphere, which the Prior Bill would have imposed in addition to the 12,500 metric ton threshold.
As with the Prior Bill, the Bill would increase the 45Q credit amounts and provide an additional bonus for direct air capture facilities but, similar to the ITC and PTC, would only allow one fifth of the otherwise available credit if apprenticeship and prevailing wage requirements are not satisfied. Similar to the ITC and PTC, the Bill’s 45Q provision differs from that of the Prior Bill in that it would not impose the prevailing wage or apprenticeship requirements on projects the construction of which begins prior to 60 days after the publication of regulations on such requirements.
Energy Storage Technology
The Bill would expand the ITC to include energy storage technology, which is property that receives, stores, and delivers energy for conversion to electricity and has a minimum capacity of 5 kilowatt hours. As with the ITC for solar, for energy storage technology, the base rate would be 6% and the bonus rate would be 30% through the end of 2026.
Emissions-Based Clean Electricity Production and Investment Credits
The Bill would create a new emissions-based incentive for electricity-generating facilities that begin construction in 2027 or beyond, which would permit taxpayers to choose between a production credit under Section 45BB or an investment tax credit under Section 48F. In either case, the credit would be based on the carbon emissions of the electricity that is generated at the facility. The credit would be technology-neutral, and any power facility of any technology could qualify for the credits as long as the facility’s carbon emissions are at or below zero.
Under the new proposal, all taxpayers would be eligible for a production tax credit of 0.5 cents per kilowatt-hour (as adjusted for inflation) or an investment tax credit of 6%. The prevailing wage and apprenticeship provisions in this proposal would apply in the same manner as for the PTC and ITC, meaning that taxpayers who pay wages at not less than local prevailing rates and utilize registered apprenticeship programs are eligible to receive elevated credits of 2.5 cents per kilowatt-hour (as adjusted for inflation) or 30%.
Taxpayers would be eligible to receive larger credits under certain circumstances, including investments in clean electricity or grid improvement property in communities that have seen a coal mine or coal plant closure. In addition, projects that comply with certain domestic content requirements also qualify for elevated credit rates, including using steel, iron, and manufactured products that are mined, produced, or manufactured in the United States. These rules would apply in a similar manner to those applied to the PTC and the ITC. The elevated credits are generally equal to a 10% increase to the value of the new production tax credit or a 10 percentage point increase to the value of the new investment tax credit.
These new credits would be subject to a three-year phasedown beginning at the later of 2031 or the year in which the US electric power sector emits 75% less greenhouse gas than 2021 levels. Facilities would then be able to claim a credit at 100% value in the first year after such year, 75% for the second year after such year, 50% for the third year after such year, and then 0%. Taxpayers would be able to elect direct pay for the new production tax credit and the new investment tax credit in the same manner as the PTC and ITC, including the limitations with respect to domestic content.
Zero-Emission Nuclear Power, Hydrogen and Advanced Energy Project Credits
The Bill would establish a new credit under Section 45W for the production of electricity from a qualified nuclear power facility, which must have been placed in service before the date of enactment. The credit is set at 1.5 cents per kilowatt-hour of electricity sold to an unrelated person, or 0.3 cents per kilowatt-hour if prevailing wage requirements are not met, with the credit amount decreasing based on the price of electricity sold from the facility. This credit would be available for electricity produced and sold after December 31, 2021, in taxable years beginning after such date, and expires for taxable years beginning after December 31, 2027.
The Bill would also provide a credit under Section 45X for the production of clean hydrogen, with a credit amount set at between $0.45 and $3 per kilogram based on the greenhouse gas efficiency of the production. The Previous Bill had set different credit levels based on the percentage reduction in greenhouse gas production relative to the amount that would be produced by steam-methane reforming (with the smallest credit, $0.60, being available for reductions of 40%-75% and the largest credit, $3, being available for reductions of 95% or more). The Bill takes a different approach, basing the credit amount on the amount of lifecycle greenhouse gas emissions generated by the production (with the smallest credit only available if no more than 6 kilograms of CO2 are produced per kilogram of hydrogen). The available Section 45X credits are reduced to between $0.09 and $0.60 if prevailing wage and apprenticeship requirements are not satisfied.
As with the Prior Bill, the credit is allowed for clean hydrogen produced after December 31, 2021, at a qualified clean hydrogen facility that is placed in service no later than December 31, 2028 (although, unlike the Prior Bill, the Bill makes the credit more stringent for facilities placed in service in 2027 or 2028, which must produce less than 4 kilograms of CO2 per kilogram of hydrogen). Similar to the Prior Bill, a taxpayer may elect to have the qualified clean hydrogen facility treated as energy property eligible for the ITC but would not then be eligible for the Section 45X credit. However, unlike under the Prior Bill, the facility would also not be eligible for a 45Q credit.
The Bill would also revive the dormant Section 48C for “qualifying advanced energy projects,” providing an additional $5 billion of credits for each of calendar years 2022 and 2023 and $1.875 billion for each of calendar years 2024 through 2031. A substantial portion of these credits is reserved for projects in census tracts that have experienced major job losses in the automotive manufacturing sector. As compared with the Prior Bill, the credit amounts are the same overall but more front-loaded, as the Prior Bill would have provided $2.5 billion of credits in each of calendar years 2022 through 2031.
Prevailing Wage and Apprenticeship Requirements
The Bill, like the Prior Bill, would structure the new and extended tax incentives as two-tiered incentives, providing either a “base rate” or a “bonus rate.” The bonus rate would be equal to five times the “base rate” and would be applied to projects that meet certain prevailing wage and apprenticeship requirements.
Similar to the Prior Bill, the Bill would require that in order to claim the “bonus rate” with respect to a project, the taxpayer must ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of such project and, in some cases, for the alteration and repair of such project for a defined period after the project is placed into service. A failure to satisfy the prevailing wage requirements can be cured by compensating each worker with the difference between wages paid and the prevailing wage, plus interest, and paying a $5,000 penalty to Treasury for each worker paid below the prevailing wage.
The Bill also includes apprenticeship requirements that would require, in order to claim the “bonus rate” with respect to a project, that the taxpayer ensure that no fewer than the applicable percentage of total labor hours of the project are performed by qualified apprentices. The applicable percentage is 10% for projects beginning construction in 2022, and it increases to 12.5% in 2023 and 15% thereafter. A failure to satisfy the apprenticeship requirements can be cured by paying a penalty to Treasury equal to $50 for each labor hour for which the requirements are not satisfied (or $500 per hour if the failure was due to intentional disregard).
The Bill provides clear transition guidance for application of the new prevailing wage and apprenticeship requirements. Specifically, taxpayers would be eligible for the “bonus rate” even if they do not meet the new requirements for projects with output of less than 1 megawatt or for any projects that begin construction prior to the date that is 60 days after the secretary of the Treasury publishes guidance with respect to these new requirements, which is when the requirements otherwise would apply.
Domestic Content Requirement
The domestic content requirement would require that, with respect to a project for which a tax credit is claimed, the taxpayer ensure that any steel, iron or manufactured product that is part of the project at the time of completion was produced in the United States. Steel and iron that are not part of a manufactured product must be 100% produced in the United States. Whether a product is manufactured in the United States is determined by reference to the percentage of the total cost of components that are mined, produced or manufactured in the United States.
The Bill would allow taxpayers to be treated as having made a payment of tax equal to the value of the credit they otherwise would be eligible for under various provisions, including (among others) the Section 45 PTC, the Section 48 ITC, the Section 45Q credit for carbon capture and sequestration, and the Section 48D credit for transmission property. In the case of a facility placed in service after December 31, 2021, for which the Section 45 PTC, the Section 48 ITC, the Section 45Q credit, or the Section 48D credit is allowed, the amount of the payment will be equal to the amount of credit otherwise allowed multiplied by the applicable percentage, which would be 100% for facilities that satisfy the domestic content requirements. This provision would apply to taxable years beginning after December 31, 2021.
1 The text of the Bill is available here: https://www.taxequitytimes.com/wp-content/uploads/sites/15/2021/11/Build-Back-Better-Text.pdf.
2 For our earlier coverage of the Prior Bill, see https://www.mayerbrown.com/en/perspectives-events/publications/2021/09/us-house-ways-and-means-committee-proposes-substantial-green-energy-support.
3 For our earlier coverage of some of these proposals see, e.g., https://www.mayerbrown.com/en/perspectives-events/publications/2021/08/energy-storage-tax-credits-in-the-biden-administration-fy-2022-budget-green-act-and-clean-energy-for-america-act (energy storage credit proposals); https://www.mayerbrown.com/en/perspectives-events/publications/2021/06/energy-tax-implications-of-the-administrations-fy2022-budget-tax-proposals (Biden administration proposals); https://www.mayerbrown.com/en/perspectives-events/publications/2021/04/recent-legislative-proposals-could-drastically-change-us-energy-taxation (Congressional green energy proposals).
4 Unless otherwise specified, all “Section” references are to the Internal Revenue Code of 1986, as amended (the “Code”).
5 General business credits (including renewable energy credits) can be used to offset the first $25,000 of the alternative minimum tax plus 75% of the alternative minimum tax in excess of $25,000.