On February 1, the U.S. House Sustainable Energy and Environment Coalition requested the Internal Revenue Service and Treasury Department clarify the renewable energy tax credits set forth in The American Taxpayer Relief Act of 2012. The Act, signed into law on January 1 in response to the looming “fiscal cliff," includes a number of tax provisions intended to incent energy-related business. Lawmakers hope extending these tax incentives for another year will strengthen the economy, spur job creation and address both energy independence and environmental concerns facing the nation.
Previous versions of the law stated a renewable energy facility would qualify for production tax credits (PTC) when “placed in service” by December 31, 2013. The Act allows these same PTC to apply to renewable energy facilities placed under construction by January 1, 2014. At issue is vague language that fails to define the “commenced construction” criteria that new facilities must meet in order to qualify for the tax credits.
Tax Provisions
Facilities that use either closed-loop or open-loop wood biomass to generate electricity or produce renewable fuels are eligible for either PTC or investment tax credits (ITC). The current PTC rate as measured by the amount of energy produced at a facility is 1.1 cents per kilowatt hour.
ITC equal a portion of the cost of the facility. The Act allows for a 30 percent investment tax credit for renewable energy projects so long as such projects are placed in to service on or before the specified expiration date. The “commenced construction” provision also applies to ITC when used in lieu of PTC.
Bonus Depreciation Extension
The Act extended the bonus depreciation allowance for cellulosic biofuel plant property through 2013. This provision allows a taxpayer to take a first-year deduction equal to 50 percent of the cost of any depreciable property placed into service prior to January 1, 2014. As such, producers that place renewable energy facilities into service in the coming year may expense 50 percent of the facility cost.
Fuel Credits
A number of tax credits for cellulosic biofuels were also extended through 2013. The Act allows for PTC for cellulosic biofuel produced and sold throughout the year and also continues the one dollar per gallon income tax credit for biomass-derived diesel fuels. In addition, the Act retroactively extended excise tax credits and outlay payments for biodiesel and renewable diesel.
Anticipated Next Steps
In response to the request for clarification, the IRS and Treasury Department may elect to adopt analogous rules already in place for other purposes. One such rule is included in the renewable energy grant program administered by the Treasury Department. This “begin construction” rule defines the start of a construction project as “physical work of a significant nature” and excludes preliminary work such as:
- Planning & Design
- Financing
- Exploration & Research
- Clearing a site
- Work to determine soil conditions
- Excavation to modify the contour of the land
Work considered part of the continuous program of construction includes excavation required for foundations, setting anchor bolts and pouring concrete pads.
It is possible that clarification in regards to the language of “commenced construction” will in turn lead to questions over “placed in service” deadlines. The current version of the law appears to allow taxpayers to maintain PTC eligibility no matter when projects are placed in service so long as construction commences before the deadline. The House may find it necessary to pass further legislation to set a defined date by which projects under construction must go live in order to remain PTC-eligible.
Forest2Market: July 14, 2023
