The Tax Cuts and Jobs Act, released by the House Ways and Means Committee on November 2, 2017, contains several proposals that will affect the renewable energy industry, including the tax credits available for renewable energy projects. This update summarizes the three proposed amendments to the Internal Revenue Code of 1986, as amended (the "Code"), that are particularly important to taxpayers in the solar and wind energy sectors. While the bill is almost certain to change substantially over the coming days and weeks, the current text of the bill provides insight into how Republicans in Congress currently are thinking about renewable energy tax credits. At the very least, the bill shows that renewable energy credits may not escape unscathed from the revisions to the Code.
Should you have any questions or concerns about this update or how the Tax Cuts and Jobs Act may impact your business, please contact any of the authors of this update.
- No inflation adjustment of the production tax credit (the "PTC") under Section 45 of the Code for facilities the construction of which begins after the enactment of the bill.
- De facto repeal of administrative safe harbors that allowed a taxpayer to show continuous construction progress by placing a facility in service within a certain period of time after beginning construction for purposes of eligibility for the PTC and investment tax credit (the "ITC").
- The ITC for solar energy equipment will be completely eliminated for solar facilities the construction of which begins after December 31, 2027.
The first change made by the Tax Cuts and Jobs Act eliminates inflation indexing for the PTC. Section 45 of the Code generally provides that the PTC is a renewable energy production credit equal to the product of (i) 1.5 cents and (ii) the kilowatt hours produced by the taxpayer from qualified energy sources at a qualified facility during the 10-year period from which it was placed in service and sold to unrelated persons (subject to a phaseout based on a reference price). The 1.5 cent rate and the phaseout amount are subject to an inflation adjustment under current law, such that the rate of PTC stands at 2.4 cents for 2017. Under the Tax Cuts and Jobs Act, the inflation adjustment would not apply to any facility the construction of which begins after the date of enactment of final legislation.
The second change made by the Tax Cuts and Jobs Act is the addition of a statutory requirement of "a continuous program of construction" in order to determine when construction of a facility commences. The PTC (or the ITC if elected in lieu of the PTC) is available only to certain wind facilities if construction of such facilities begins before January 1, 2020. The Internal Revenue Service (the "IRS") has released several pieces of guidance on how to determine when a taxpayer meets this commencement of construction requirement. Very generally, the IRS implemented two alternative tests: the physical work test and the five percent safe harbor. In either case, the taxpayer must make continuous progress towards completion of the facility (the "Continuity Requirement"). Under a safe harbor in the IRS guidance, the Continuity Requirement would be deemed satisfied if the facility was placed into service within a certain time frame after construction commenced. The Tax Cuts and Jobs Act essentially codifies the Continuity Requirement at the expense of the safe harbor. The relevant provision states: "the construction of any facility . . . shall not be treated as beginning before any date unless there is a continuous program of construction which begins before such date and ends on the date that such property is placed in service." Therefore, the Tax Cuts and Jobs Act effectively invalidates the IRS safe harbor guidance regarding the Continuity Requirement by requiring "a continuous program of construction." The proposed legislation adds a similar provision requiring a continuous program of construction to the statute governing the ITC.
Finally, the Tax Cuts and Jobs Act eliminates the 10% ITC for solar energy project unless construction commences before January 1, 2028. Under current law, a taxpayer is eligible for an ITC equal to 30% of the tax basis of certain energy property placed in service during the taxable year. The ITC for solar energy property is subject to a phase-down under current law, bottoming out at 10% credit for facilities construction of which begins after December 31, 2021. Under proposed legislation, ITC would be phased out completely for solar energy projects the construction of which begins after December 31, 2027.