On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) (the Act), which included welcomed extensions to a number of energy tax incentives.
The legislation includes multi-year extensions of the Section 45 Production Tax Credit (the PTC) and the Section 48 Investment Tax Credit (the ITC) for wind and solar projects tempered by a gradual phase out of the total credit available. In the case of wind, the Act extends the PTC through 2019 (including the corresponding election to take the ITC in lieu of the PTC for such projects), such that wind projects that have begun construction prior to the end of 2019 will be eligible for the PTC/ITC. Previously, the PTC for wind had applied only to projects beginning construction before the end of 2014. However, the legislation also reduces the PTC and ITC for wind by 20 percent for projects commenced in 2017, by 40 percent for projects commenced in 2018, and by 60 percent for projects commenced in 2019.
In the case of solar, the Act extends the ITC to solar projects for which construction has begun before January 1, 2022. Prior to the extension, the 30 percent ITC applied only to solar projects placed in service prior to the end of 2016. However, the extended ITC, like the extended PTC, is subject to a phaseout. The ITC credit percentage, which is currently 30 percent of qualifying costs for solar, is reduced to 26 percent for projects commenced in 2020, and 22 percent for projects commenced in 2021. The Act also provides a 10 percent ITC for solar projects where construction begins before 2022 but the project is not placed in service before 2024.
For energy facilities other than wind, such as biomass and geothermal projects, the Act includes an extension of the PTC through the end of 2016, as well as a corresponding extension of the election to take the ITC in lieu of the PTC.
The Act also extends the Section 45D New Market Tax Credit and the Section 168(k) bonus depreciation rules through 2019, although the bonus depreciation extension is subject to a phase out for property placed in service in 2018 and 2019 (40 percent and 30 percent, respectively). For taxpayers that placed eligible property in service this year, it should be noted that an election out of bonus depreciation would need to be made if bonus depreciation is not desired.
All of the foregoing extensions are retroactive to January 1, 2015.
The enactment of the extenders package is a welcomed improvement over past legislation where U.S. Congress failed to extend these incentives for more than one or two year increments. The new legislation provides far more certainty for companies looking to invest in renewable energy projects beyond the end of 2015. Taxpayers should consult with their tax advisors and review their ITC and PTC project pipeline, as Congress may be signaling that it will no longer extend these tax benefits in the future.