Among the recent flood of Congressional, Treasury and IRS activity, the impact on the energy sector has been the subject of much discussion. In this update, we discuss the current top 5 tax questions (and answers) received by our Energy Tax Group from the energy industry stemming from that recent activity.
- What energy tax-related stimulus relief is expected in the next stimulus package?
Thus far, Congress has enacted three stimulus packages (in addition to a fix to the third stimulus package). None of those packages included any energy industry specific relief. However, they did include more general relief that may be available to companies in the energy sector including:1
- 5 year net operating loss (NOL) carryback for 2018, 2019 and 2020 and elimination of the 80% taxable income limitation for taxable years beginning before 2021
- Increase in the section 163(j) limitation on interest deductibility from 30% to 50% of the taxpayer’s adjusted taxable income for 2019 and 2020 (and the ability to use 2019 taxable income for 2020 for purposes of the limitation calculation)
- Acceleration of utilization of pre-TCJA AMT credits to 2018 and 2019 (rather than 2018 through 2021)
- Employee retention tax credit providing a refundable payroll tax credit for 50% of certain qualified wages paid by employers to employees during the COVID-19 crisis
- Payroll tax deferral allowing employers to defer payment to 2021 and 2022 of the employer share of payroll taxes due for 2020 after the enactment of the CARES Act
There are a number of tax proposals floating around on the Hill relating specifically to the energy sector. Those include extensions of the renewable energy tax credits (including the section 45 production tax credit (PTC), section 48 investment tax credit (ITC)) and section 45Q carbon capture and sequestration (CCS) credit, as well as numerous other tax incentives for renewable and alternative energy.
In addition, there are proposals to allow taxpayers to receive a cash payment in lieu of a tax credit for a limited period, in anticipation of reduced tax appetite due to expected tax losses for 2020. As many may recall, following the 2008 economic downturn, the 2009 stimulus bill (known as the American Recovery and Reinvestment Act of 2009) permitted renewable energy developers to receive a cash payment in lieu of the PTC or ITC.
There also are proposals to level the playing field for regulated utilities to develop renewable energy projects. Currently, under the normalization rules, ratepayers receive the benefit of the ITC over the life of the project rather than the year in which the project is placed in service and the ITC is available. As a result of that deferral of benefit to ratepayers, under current law, ownership of renewable facilities by regulated utilities may be less attractive to public utility commissions than having the regulated utility acquire power under a PPA, in which the immediate benefit of the ITC typically is taken into account in the PPA pricing providing the benefit to ratepayers on a more accelerated basis.
The recent bill passed by the House on May 15, 2020, unfortunately did not include any of these energy-specific proposals. But the relevant industries continue to work toward inclusion of these provisions in the next stimulus package. If unsuccessful in achieving that goal, these proposals no doubt will be in the discussion for a year-end bill.
1For more information on these incentives, click here
- What continuity safe harbor relief is expected due to coronavirus-related delays?
Construction of a large number of wind energy projects began in 2016 as that was the last year in which construction could begin for entitlement to the full amount of section 45 production tax credit (PTC), or section 48 investment tax credit (ITC) in lieu of PTC. In addition, solar and other renewable energy projects commenced construction in 2016.
Under IRS Notices, a project that is treated as having begun construction in a particular year also must satisfy the “continuity requirement” after construction begins. That requirement is automatically satisfied if construction is completed by the end of the 4th year after the year in which construction begins (the “continuity safe harbor”) – i.e., the end of 2020 for projects that commenced construction in 2016. As a result of the supply chain and workforce disruptions resulting from the COVID-19 crisis, many of those projects may not be completed by the end of this year, as originally planned.
A project that is not completed within the 4 year continuity safe harbor period can still satisfy the continuity requirement under a “facts and circumstances” analysis, although that is generally not preferred given that it provides significantly less certainty than the continuity safe harbor.
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Eversheds Sutherland Observation: Taxpayers that need to rely on a facts and circumstances analysis may need to rely on disruptions caused by COVID-19 to be treated as an excusable delay – we believe that there should be no question that it would be treated as an excusable delay although neither the beginning nor the end of the period of the excusable delay is entirely clear. Perhaps more importantly, taxpayers will need to be able to demonstrate that for the period between beginning of construction until the time when the COVID-19 excusable delay begins, they satisfied the continuity requirement under a facts and circumstances analysis or had an excusable delay for that period.
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In a letter dated May 7, Treasury indicated that they plan to “modify the relevant rules in the near future.” That letter was in response to a letter from six Senators that requested such relief and proposed a temporary extension of the continuity safe harbor from 4 years to 5 years.
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Eversheds Sutherland Observation: Since the beginning of construction requirements, including the continuity safe harbor, are provided in IRS Notices (rather than in statutes) Treasury action to provide relief is appropriate. Providing a temporary extension of the continuity safe harbor, as suggested by six Senators, may be problematic for financing of certain projects if it were to allow projects that began construction in different years to be completed in the same year, thereby making some projects with lower PTC percentages less attractive for financing as compared to projects with higher PTC percentages completed in the same year. For example, if a temporary extension permits a wind project that commenced construction in 2016 or 2017 to have 5 years to complete construction, a 2017 project (with an 80% PTC) and a 2018 project (with a 60% PTC) would both be required to be placed in service by the end of 2022, thereby potentially putting the 2018 project at a disadvantage in financing due to its lower PTC percentage and the availability of a higher PTC percentage project in the same year. In recent guidance for the section 45Q CCS credit, Treasury and the IRS provided a six-year continuity safe harbor. We would urge Treasury and the IRS to provide that same six-year continuity safe harbor for purposes of the PTC and ITC for all projects the construction of which began in 2016 or later. Doing so would provide relief for all projects under construction that may be impacted by COVID-19 and would, as well, avoid the financing issues described above.
In addition, even if an extension of the continuity requirement is provided by Treasury and the IRS, taxpayers will need to review their tax equity commitment agreements to determine whether a condition precedent to an investment by a tax equity investor will fail to be timely satisfied if the project is not placed in service during 2020. That may be the case since the condition precedent may require a project to be placed in service by a specified date in 2020 and that date may not automatically be extended even if the continuity safe harbor is extended beyond 4 years.
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- What is the difference between the direct pay proposals and a cash grant program like we had after the 2008 downturn?
Following the 2008 economic downturn, Congress enacted as part of the American Recovery and Reinvestment Act of 2009, the “1603 Grant Program” (so-named based on the section of the bill in which the program was included). For a limited period, the 1603 Grant Program allowed taxpayers that were otherwise entitled to a PTC or ITC to instead seek a cash payment from Treasury generally equal to 30% of the cost basis of the renewable energy project. The program was extremely popular, ultimately paying out over $26 billion. The popularly in part stemmed from the ability of developers that had no tax liability to directly receive the 1603 grant payment.
Under the direct pay proposals to address the COVID-19 crisis, a similar cash payment would be permitted, however the provisions would be included in the Internal Revenue Code and therefore would be administered by the IRS rather than by Treasury.
Under the 1603 Grant Program, if Treasury disagreed with the amount of grant claimed by a project developer, there was no formal appeal mechanism to resolve the dispute (although Treasury generally did engage in informal discussions regarding disagreements before formally providing a reduced award). If the direct pay proposals are enacted, a taxpayer would be entitled to the typical IRS examination process and formal and informal programs to resolve disputes at that level, as well as opportunities to resolve disputes at the IRS Appeals Division.
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Eversheds Sutherland Observation: Absent an ability to revolve disputes administratively, a project developer ultimately must engage in litigation to resolve disputes over the amount of a cash payment in lieu of tax credit that is available. In many instances, the dispute may be over an amount that is substantial with respect to the renewable energy project, but low relative to the costs of litigation, thereby leaving project developers with little practical ability to challenge reduced cash awards. The availability of meaningful programs, such as those available in disputes with the IRS, to resolve disagreements short of litigation would assist developers in resolving such disputes.
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- What is the status of the section 45Q CCS guidance?
On February 19, 2020, the IRS issued two highly anticipated items of guidance under section 45Q, which provides a tax credit for carbon capture and sequestration (CCS) projects. IRS Notice 2020-12 addresses the beginning of construction requirement for CCS projects. Revenue Procedure 2020-12 addresses allocations of section 45Q credits in partnership flip structures. Notably (1) the section 45Q beginning of construction guidance largely follows the beginning of construction guidance previously issued for wind, solar and other renewable energy projects and (2) the section 45Q guidance for partnership flip structures largely follows similar guidance issued for wind energy partnerships (and often used for solar and other renewable energy projects). For additional discussion of that guidance, click here.
Additional guidance in the form of a notice of proposed rulemaking (NPRM) is expected and will include proposed rules regarding certain section 45Q credit requirements and recapture. The IRS submitted the NPRM to the White House’s Office of Information and Regulatory Affairs (OIRA) on March 12, 2020. At that time, it was anticipated that the NPRM would be released by the end of March with a 60-day notice and comment period to expedite the issuance of final regulations. However, the NPRM has not yet been released.
Department of Energy Undersecretary of Energy Mark Menezes, in a hearing before the Senate Energy and Natural Resources Committee on May 20, 2020 noted that he had been working closely with the IRS to finalize the NPRM for release and that “it’s going to be forthcoming.” Meanwhile, the EPA recently took steps to grant Wyoming primary authority (primacy) to permit and oversee so-called UIC Class VI wells, which can be used to store carbon dioxide underground. Once authorized, Wyoming will be the second state, along with North Dakota, that has received primacy for UIC Class VI wells.
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Eversheds Sutherland Observation: Given that the changes to section 45Q were enacted well over two years ago, it is unfortunate that the guidance needed for taxpayers to utilize section 45Q to develop carbon capture and sequestration facilities has not yet been released. The delay from the expected March release of the NPRM likely was a result of comments to the NPRM from OIRA as well as a necessary shift in focus of the Treasury to providing a substantial amount of COVID-19-related guidance at an unprecedented pace. Nonetheless, the delays in issuing section 45Q guidance are resulting in increased calls to extend the beginning of construction requirement for the credit from its current December 31, 2023 deadline.
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On a related note, the Treasury Inspector General for Tax Administration J. Russell George identified in a letter to the Senate Finance Committee that 10 taxpayers had claimed 99.9% of the over $1 billion of section 45Q credits awarded to date, and that some of those taxpayers had not followed EPA’s monitoring, reporting, and verification (MRV) rules as required to claim the credits. Senator Bob Menendez called for the IRS to audit every taxpayer that has claimed more than $10,000 in section 45Q credits, retroactively deny credits to those that did not follow the required EPA rules, and to disclose the names of the companies that have claimed credits since 2010. Treasury, in a letter to Senator Menendez, indicated that they hope to address the concerns IRS coordination with EPA to verify compliance with EPA rules in the forthcoming regulations.
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Eversheds Sutherland Observation: This recent 45Q activity discussed above relates to the credit as in effect prior to the changes made in 2018. Although section 45Q credits granted under the old and new programs should go only to taxpayers that properly capture and sequester carbon dioxide, we would caution against a rush to judgment as to whether Senator Menendez’s letter and views actually support a conclusion that companies that claimed the section 45Q credit did not satisfy those requirements or did not undertake environmentally beneficial activity without substantially more information. That is particularly the case since the impetus for the Congressional letter, whether politically motivated or otherwise, is unknown.
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For more information on the section 45Q carbon capture and sequestration credit, visit www.section45Q.com.
- What else is the energy industry seeking?
Congress, Treasury and the IRS have been working at an unprecedented pace to issue much-needed guidance related to the COVID-19 pandemic and we recognize the tremendous efforts of so many government officials in providing that guidance.
The perhaps obvious corollary to the focus on releasing that COVID-19-related relief and guidance is the delay of other relief and guidance. Below is a list of relief and guidance that, based on our discussions with the energy industry, are needed for the industry.
- Extension of PTC and ITC
- Section 45 and section 48 continuity safe harbor relief
- Guidance to level the playing field for utility owned renewables
- Section 48 regulations regarding storage and other ITC matters
- Direct pay or cash grant in lieu of the PTC or ITC
- Section 45Q carbon capture and sequestration guidance
- Section 170/172 relief (see our prior legal alert here)
- Section 707/267 clarification (see our prior legal alert here)
- Infrastructure incentives beyond renewables
- Section 468A nuclear decommission regulations (see our prior legal alert here)
- Final 163(j) regulations, including rules regarding the calculations for affiliated groups, some of the members of which engage in a subject trade or business, and others of which do not
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