President Barack Obama has signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH), a $1.15 trillion spending measure that includes a package of tax breaks, among them the extension of renewable energy tax credits.  

The legislation, signed by the President on December 18, lifts a 40-year ban on exports of crude oil produced in the US, and as a tradeoff for lifting the ban, includes multi-year extensions of the tax credits for solar and wind facilities, an extension of the election to claim the Internal Revenue Code Section 48 energy credit for certain qualified facilities, including wind facilities, phaseouts of the tax credits for solar and wind facilities, and two-year extensions for a range of other renewable energy tax incentives.  

Extension of the solar energy investment tax credit and wind facility production tax credit

Under the legislation, the investment tax credit for equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat (solar property), will remain at 30 percent, so long as the construction begins prior to the end of 2019.  The available credit would decline each year during 2021 and 2022 before becoming 10 percent in 2022.  

Importantly, the applicable percentage for which solar property will qualify under the energy investment tax credit will be based on the year in which construction of the property begins.  The shift to a “begun construction” standard for determining the amount of the energy investment tax credit, from a placed in service standard, mirrors a similar change previously made to the Code Section 45 production tax credit.  In prior guidance issued after the prior extension of the production tax credit, the Internal Revenue Service has provided that a taxpayer may establish the beginning of construction by either (1) starting physical work of a significant nature (Physical Work test) or (2) paying or incurring five percent or more of the total cost of facility (Safe Harbor).  Both methods require that a taxpayer make continuous progress towards completion once construction has begun.    

The phaseout of the energy investment tax credit for Solar Property, the construction of which begins after 2019, operates in the following manner:

  • 26 percent credit for property, the construction of which begins after December 31, 2019, and before January 1, 2021
  • 22 percent credit for property, the construction of which begins after December 31, 2020, and before January 1, 2022 and
  • 10 percent credit for property the construction of which begins after December 31, 2021 and any solar property which is not placed in service before January 1, 2024, regardless of when construction began.

Under the legislation, the production tax credit for wind facilities, which expired at the end of 2014, is extended retroactively through 2016 and then declines by 20 percent each year thereafter until it is phased out starting January 1, 2020.  Similarly, the option to elect to claim the energy investment tax credit (at a rate of 30 percent) for qualified property which is part of a wind facility in lieu of the production tax credit is extended through 2019, with a phaseout beginning in 2017.  The phaseout of the production tax credit and energy investment tax credit for wind property operates in the following manner:

  • 20 percent reduction in the credit for any facility, the construction of which begins after December 31, 2016 and before January 1, 2018
  • 40 percent reduction in the credit for any facility, the construction of which begins after December 21, 2017 and before January 1, 2019 and
  • 60 percent reduction in the credit for any facility the construction of which begins after December 31, 2018 and before January 1, 2020

Two-year extension of the production tax credit for other qualified facilities

The legislation also retroactively extends the production tax credit under Section 45 of the Code for closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities the construction of which begins prior to January 1, 2017.

Additional renewable energy extensions

The legislation also provides for the following:

  1. Extension of the 30 percent credit under Code Section 25D for qualified solar property expenditures and qualified solar water heating property expenditures through 2019, a 26 percent credit for such expenditures in 2020, and a 22 percent credit for such expenditures in 2021
  2. A two-year extension, through 2016, of the individual income tax credit under Code Section 25C for qualified energy efficiency improvements and residential energy property expenditures and a modification of the requirements for energy efficient building envelope components, beginning January 1, 2016
  3. A two-year extension, through 2016, of the income tax credit under Code Section 30C for alternative fuel vehicle refueling property 
  4. A two-year extension, through 2016, of the Code Section 30D income tax credit for acquisition of 2-wheeled plug-in electric vehicles
  5. A two-year extension, through 2016, of the Code Section 40 income tax credit for second generation biofuel producers
  6. A two-year extension, through 2016, of the Code Section 40A income tax credit for use, sale or mixing of biodiesel and renewable diesel and the Code Sections 6426 and 6427 refundable excise tax credit for producing biodiesel mixtures and a mandate for the Internal Revenue Service to issue guidance on claiming the Section 6426 excise tax credit or payment under Section 6327 determined with respect to 2015
  7. A two-year extension, through 2016, of the Code Sections 6426 and 6427 refundable excise tax credit for producing alternative fuels and alternative fuel mixtures and a mandate for the Internal Revenue Service to issue guidance on claiming the Section 6426 excise tax credit or payment under Section 6327 determined with respect to 2015
  8. A two-year extension of the of the Code Section 45 income tax credit for the production of “Indian coal,” and effective January 1, 2016, repeal of the requirement that the facility producing such coal was placed in service prior to January 1, 2009, modification of the requirement that the Indian coal be sold to an unrelated person to permit both direct sales to unrelated persons and sales to such persons after transfer to one or more related persons, and adding the credit for production of Indian coal as a specified credit allowed against the Alternative Minimum Tax
  9. A two-year retroactive extension, through 2016, of the Code Section 45L income tax credit for construction and sale of new energy efficient homes
  10. A two-year retroactive extension, through 2016, of the Code Section 30B income tax credit for new qualified fuel cell motor vehicles