The Bipartisan Budget Act of 2018 (2018 BBA) passed by Congress and signed into law on February 9, 2018, extends and changes tax credits for the renewable energy, alternative fuels and nuclear energy industries, and also makes other changes relevant to the energy sector. The energy-related tax provisions in the 2018 BBA closely track those proposed in late December by the Tax Extender Act of 2017 (Extenders Bill), but vary in material respects.1 The 2018 BBA provisions include:
- Extensions of the production tax credit (PTC) and investment tax credit (ITC) for technologies not previously extended.
- Extensions of the biodiesel and alternative fuel tax credits.
- Extensions and favorable changes to the nuclear PTC, consistent with changes proposed by the House of Representatives in its November 2, 2017, version of the bill then known as the Tax Cuts and Jobs Act.
- Extensions of many of the other energy tax credits and extensions of certain energy taxes and other provisions.
This alert summarizes the principal provisions of the 2018 BBA that address energy tax provisions of the Internal Revenue Code.
Eversheds Sutherland Observation: The House version of the recently passed tax reform legislation (P.L. 115-97), formerly known as the Tax Cuts and Jobs Act, included provisions that, if enacted, would have:
- Eliminated the inflation adjustment amount for PTC for projects the construction of which began after the enactment of that legislation. As a result, those projects would have been entitled to a 1.5 cent per kWh credit as opposed to a 2.4 cent (with continuing adjustments for inflation) per kWh credit.
- Potentially changed the beginning of construction rules. The House Plan stated that to be treated as having begun construction, there must be “a continuous program of construction” from the date on which construction begins until the project is placed in service. The addition of that language suggested that the begun construction requirement can be satisfied only through the actual physical work test and not through the 5% safe harbor.
The 2018 BBA does not include either of these provisions and we believe that it is highly unlikely that future legislation will include these proposed changes.
The 2018 BBA was passed as part of a major budget deal that ended a brief government shutdown. The 2018 BBA includes many of the same provisions as the Extenders Bill; however, some of the provisions proposed to be extended through the end of 2018 in the Extenders Bill were extended only retroactively through the end of 2017.
Production Tax Credit (PTC)
Under the 2018 BBA, the PTC under Section 45 (and ITC in lieu of PTC for facilities described in Section 45) is available, retroactive to January 1, 2017, for the following facilities if construction began by December 31, 2017:
- Closed-loop biomass facilities,
- Open-loop biomass facilities,
- Geothermal energy facilities,
- Landfill gas facilities,
- Trash facilities,
- Qualified hydropower facilities, and
- Marine and hydrokinetic renewable energy facilities.
The 2018 BBA did not impact the PTC for wind project since the PTC for wind was previously extended by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which provided as follows for wind projects:
Investment Tax Credit (ITC)
The 2018 BBA extends the ITC under Section 48, retroactive to January 1, 2017, for certain types of facilities described in Section 48 that were not extended by the PATH Act, as described below:
- Qualified fuel cell, fiber-optic solar and small wind facilities are entitled to the ITC as follows:
If construction of these facilities begins after 2021 or the project is not placed in service by the end of 2023, no ITC would be available.
- Qualified microturbine, combined heat and power, and geothermal heat pump facilities are entitled to a 10% ITC if construction begins before 2022.
- Unlike the Extenders Bill, the ITC specific provisions in the 2018 BBA do not include any changes or extensions for geothermal electric facilities although, as noted above, geothermal electric facilities were extended under Section 45.
The PATH Act previously extended the Section 48 ITC for solar projects to provide as follows:
Biodiesel, Alternative Fuels and Second Generation Biofuels
The 2018 BBA extends the Section 40A biodiesel and renewable diesel credits as well as the Section 6426 and Section 6427 biodiesel and alternative fuels credits (other than the Section 6427 credit for alternative fuel mixtures) for fuel sold or used by December 31, 2017, applicable retroactively to fuel sold or used in 2017.
Eversheds Sutherland Observation: Consistent with prior retroactive extensions of these credits, the Secretary of Treasury is directed to issue guidance, within 30 days after enactment, for making 2017 claims, which, we expect, will be substantially similar to guidance provided for prior retroactive extensions.
The 2018 BBA also extends the Section 40 second generation biofuel producer credit to biofuel produced through December 31, 2017, applicable retroactively to production in 2017.
The 2018 BBA also modifies the PTC for advanced nuclear power facilities. The 2018 BBA provides for the allocation of unutilized national megawatt capacity limitation amounts. Under the new provision, the Secretary must allocate any unutilized capacity limitation as rapidly as practicable beginning in 2021, first to facilities already placed in service that did not receive their full nameplate capacity, and then to facilities placed in service beginning in 2021 in the order they are placed in service. A national megawatt limitation amount is considered unutilized if the facility to which it was allocated has not been placed in service by the end of 2020.
The 2018 BBA also permits qualified public entities, defined as government entities, mutual or cooperative electric companies, and not-for-profit electric utilities, to elect to transfer the nuclear PTC and have an eligible project partner be treated as the taxpayer for purposes of the nuclear PTC. An “eligible project partner” is defined broadly, and includes any person: (1) responsible for or participating in the design or construction of the facility; (2) participating in the provision of nuclear steam supply to the facility; (3) participating in the provision of nuclear fuel to the facility; (4) that is a financial institution providing financing to the facility; or (5) having ownership in the facility. If the credit is claimed by a partnership, a partner that is a qualified public entity will be treated as the taxpayer for its distributive share and an “eligible project partner” will include any other partner of the partnership. For any credits transferred to an eligible project partner, the eligible project partner must take the credits in the taxable year ending with or after the taxable year of the transferring qualified public entity.
Eversheds Sutherland Observation: The implementation of these changes will require Treasury guidance regarding the process and procedures for the allocation of unutilized capacity limitation and regarding the credit transferability provisions in the 2018 BBA.
Residential Energy Efficient Property
The 2018 BBA extends the credit for residential energy efficient property for all property covered by Section 25D (qualified solar electric, solar water heating, fuel cell, small wind energy, and geothermal heat pump property) through December 31, 2021, with a phase-out of the credit amount. The phase-out applies to all Section 25D property and allows for a credit of 30% of property placed in service through 2019 (retroactive to property placed in service in 2017), 26% of property placed in service in 2020, and 22% of the property placed in service in 2021.
Other Energy Credit Related Changes
- Extension of the Section 4611 oil spill liability trust fund financing rate for the period March 1, 2018, through December 31, 2018.
- Extension of the Section 25C nonbusiness energy property credit to property placed in service by December 31, 2017. The extension is retroactive to property placed in service in 2017.
- Extension of the Section 30B credit for fuel cell motor vehicles to property purchased by December 31, 2017. The extension is retroactive to property purchased in 2017.
- Extension of the Section 30C alternative fuel vehicle refueling property credit to property placed in service by December 31, 2017, applicable retroactively to property placed in service in 2017.
- Extension of the Section 30D credit for two-wheeled plug-in electric vehicles through 2018, applicable retroactively to vehicles acquired in 2017.
- Extension of the Section 45(e)(10) credit for Indian coal production facilities for coal produced by December 31, 2017, retroactive to production in 2017.
- Extension of the Section 45L credit for energy-efficient new homes acquired by December 31, 2017, applicable retroactively to homes acquired in 2017.
- Changes to calculation of the Section 45Q carbon dioxide sequestration credit.
- Extension of the Section 168(l) special allowance for second generation biofuel plant property through 2017, applicable retroactively to property placed in service in 2017.
- Extension of the Section 179D energy efficient commercial buildings deduction through 2017, applicable retroactively to property placed in service in 2017.
- Extension of the Section 451(k) special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities through 2017, applicable retroactively to dispositions in 2017.
Eversheds Sutherland Observation: The 2018 BBA provides only a one-year retroactive extension of certain tax credits. Consequently, with respect to those provisions, they are again expired for 2018 and we do not anticipate that they will be extended for 2018 until, at the earliest, late in 2018. The timing of the passage of the 2018 BBA, however, allows taxpayers to claim any income tax benefits on originally filed tax returns, whereas had the passage of these extenders for 2017 been delayed, many taxpayers instead would have been required to file amended tax returns to obtain these benefits.