October 27, 2015

Legislative Developments on Federal Renewable Energy Tax Credits

Now that a government shutdown was temporarily averted, both chambers face significant legislative challenges. Among the legislative challenges are several bills that need action before pending expiration dates. One bill that must be addressed is a tax extenders bill, which may impact the renewable energy industry.

The Energy Policy Act of 1992 created a renewable energy incentive called the production tax credit (PTC). This tax credit, under Section 45 of the Internal Revenue Code, allowed a 2.3 cent/kilowatt-hour income tax credit for producing electricity from renewable energy. Likewise, the investment tax credit (ITC) was created under the Energy Policy Act of 2005. The investment tax credit is allowed under section 48 of the Internal Revenue Code. This tax credit allowed certain solar and wind projects to be eligible for a 30 percent credit for development costs. The investment tax credit is earned at the time the qualifying facility is placed in service. In 2013, Congress extended the PTC that expired, but it was a one-year, retroactive extension that terminated a few weeks later at the end of 2014. On December 31, 2016, the ITC will expire and subsequently, the tax credit provided at the end of a project’s first year of operation will fall to 10 percent for commercial solar investments and to zero for residential solar investments. 

Last month, the House Ways and Means Committee passed a tax extenders package that would permanently extend several expiring tax breaks but did not include renewable energy incentives.  Conversely, the Senate Finance Committee passed its tax extenders package in July. The Senate package included a two-year extension of the production tax credit. It would extend for two more years the $0.023/kWh tax credit for projects that start construction by the end of 2016.

As stated earlier, the ITC currently does not take effect until the project is completed. But United States Senator Charles Schumer (D-NY) announced that he intends to propose legislation extending the ITC. Moreover, Senator Schumer proposed not only extending the ITC, but also amending the credit’s eligibility rules so that businesses and developers that invest ins solar projects can claim the tax credit when project construction begins, as opposed to when the panels start generating power. Senator Charles Schumer stated that the extension and the change in the regulations that would mirror the wind energy tax credit, which currently is implemented soon after work begins on a project. The change is particularly vital for businesses and large-scale solar developers, which make major investments in solar, but do not benefit from the tax credit until the systems are placed in service.

In conclusion, if Congress is unable to reconcile their differences and pass a tax extenders bill that the president can sign into law, the lawmakers may attempt to include a two-year tax extension in next year’s omnibus spending bill with a special in-construction provision for projects that break ground by the deadline. But first Congress must address the debt ceiling limit as well as preventing another possible government shutdown in December.

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