The wind industry association’s change in position—apparently, the December 12 letter is the first indication of this change—may signal that phase-out of the production tax credit for wind energy could be likely.
Section 45 provides a production tax credit for wind facilities placed in service by December 31, 2012. Under current law, taxpayers can claim a 2.2 cents per kilowatt hour tax credit for a 10-year period. The credit rate is adjusted annually for inflation.
On Thursday, August 2, 2012, the Senate Finance Committee approved a chairman’s modification to the Family and Business Tax Cut Uncertainty Act of 2012 that includes a one-year extension of the section 45 production tax credit for wind facilities.
The bill would extend the placed-in-service date for an additional year—i.e., to projects that are placed in service by December 31, 2013. The bill would further modifies the production tax credit to allow renewable energy facilities that “begin construction” before the end of 2013 to claim the section 45 credit.
See TaxNewsFlash-United States: Legislative Update: Production tax credit for wind included in Finance Committee’s tax extender package
Legislative text for the proposal is not available, and there has been very little discussion or explanation of how the “begin construction” rule would work in the proposed extension. For instance, the provision does not specify when projects that begin construction during 2013 must be placed in service. It also unclear what activities would qualify under the “begin construction” rule.
The renewable energy grant in lieu of tax credits program, administered by the Treasury Department and enacted under section 1603 of the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5) includes a “begin construction” provision. Under that provision, grant-eligible projects must be placed in service during 2009, 2010, or 2011, or construction must begin during 2009, 2010, or 2011, and the projects must be placed in service by the otherwise applicable investment tax credit (ITC) or production tax credit placed-in-service date deadlines.
Under the grant program rules, in order to “begin construction,” a grant applicant must begin “physical work of a significant nature” or pay or incur 5% or more of the project’s eligible basis by the “begin construction” deadline (the “5% safe harbor”). Under the “physical work of a significant nature” rule, the work that commences cannot be preliminary in nature, and the work must be part of a continuous program of construction.
It is possible that rules similar to those under the section 1603 grant provisions could be applied to a “begin construction” provision added to a production tax credit extension.
Wind industry’s position
The American Wind Energy Association (AWEA) letter* endorses the “begin construction” rule proposed in the Senate extenders bill.
*The letter is addressed to Sen. Max Baucus (D-MT), Chairman of the Senate Finance Committee; Sen. Orrin Hatch (R-UT), ranking Republican on the Senate Finance Committee; Rep. David Camp. (R-MI), Chairman of the House Ways and Means Committee; and Rep. Sander Levin (D-MI), ranking Republican on the House Ways and Means Committee. Copied on the letter are House Speaker John Boehner (R-OH) and Minority Leader Nancy Pelosi (D-CA); and Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY).
The letter further recommends the following phase-out of the production tax credit (PTC):
- 100% of the PTC for projects that begin construction in 2013
- 90% of the PTC for projects placed in service in 2014
- 80% of the PTC for projects placed in service in 2015
- 70% of the PTC for projects placed in service in 2016
- 60% of the PTC for projects placed in service in both 2017 and 2018
- No PTC in 2019 or beyond
Note that the analysis released by AWEA does not include a discussion of what activities would qualify under the "begin construction" rule of 2013. In addition, the phase-out proposal does not recommend phasing out all of the types of technologies eligible for the production tax credit. Other PTC-eligible technologies include biomass, geothermal, landfill gas, hydropower, and wave/tide.
The possible production tax credit extension along with the wind industry’s phase-out proposal will be closely watched as Congress continues to address tax issues associated with the “fiscal cliff.”
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