Clean Energy Tax Proposals in Biden’s New “Build Back Better” Framework

Vinson & Elkins LLP

Faced with opposition from within his own party, President Biden last week unveiled a new, pared down framework for his “Build Back Better” agenda. Following release of the president’s framework, H.R. 5376 (the “Build Back Better Act” or the “Act”) was released. Among other things, the Act would allocate $555 billion for investments in clean energy and combatting climate change, including $320 billion in clean energy tax credits, $105 billion in resilience investments, $110 billion in technology, manufacturing and supply chain incentives, and $20 billion for clean energy procurement.

Notably, the Act would extend the current production and investment tax credits (albeit under a different framework) for projects beginning construction before January 1, 2027. For projects beginning construction in 2027 and beyond, the Act would create a new technology-neutral credit structure whereby taxpayers could elect a production-based or investment-based tax credit. The Act would also extend and enhance the carbon sequestration tax credit (the “45Q Credit”) under section 45Q of the Internal Revenue Code (the “Code”),1 create a new tax credit for hydrogen production, and add a “direct pay” option for certain tax credits. In addition, the Act would expand the definition of “qualifying income” for purposes of the publicly traded partnership rules to include income derived from various renewable energy activities.

The Act also includes a provision imposing a corporate minimum tax (generally equal to 15% of a corporation’s book income) – however, certain renewable credits would be available to offset this minimum tax.

The following is a high-level summary of certain of the clean energy tax proposals included in the Build Back Better Act. If you have any questions or would like to discuss any of the items below, please contact any of the authors.

Section 45 Production Tax Credit (“PTC”) Extension

  • 5-year PTC extension – The PTC, currently set to expire for projects beginning construction after December 31, 2021, would be extended to projects beginning construction before January 1, 2027.
  • Solar – The PTC for solar projects, which expired in 2006, would be reinstated for projects beginning construction before January 1, 2027.
  • New credit structure – The full PTC (2.5 cents/kWh of electricity produced, as adjusted for inflation) would be available if the prevailing wage and apprenticeship requirements are met. If these requirements are not met, the PTC credit rate would be 0.5 cents/kWh of electricity produced, as adjusted for inflation.

Prevailing Wage and Apprenticeship Requirements: Under the prevailing wage requirements, a taxpayer must ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of a project and, in some cases, for the alteration and repair of such project for a defined period after the project is placed into service. The apprenticeship requirements require a taxpayer to ensure that no less than the applicable percentage (10% for projects for which construction begins in 2022, 12.5% in 2023, and 15% thereafter) of total labor hours for the construction of the project are performed by qualified apprentices. There are cure options in the event of failure to satisfy either requirement. Taxpayers may be eligible to receive the full credit amount without satisfying the wage and apprenticeship requirements if the project either (i) is a small project or (ii) began construction within 60 days of the date the Secretary publishes guidance on these requirements.

  • Bonus PTC – Taxpayers would be eligible for an additional 10% PTC if certain “domestic content requirements” are met.

Domestic Content Requirements: Taxpayer must certify that any steel, iron, or manufactured product which is part of the facility was produced in the United States. For this purpose, manufactured products will be considered manufactured in the United States if the “adjusted percentage” of the total cost of the components of such product are mined, produced, or manufactured in the U.S. The adjusted percentage is 40% if the facility begins construction before January 1, 2025, increasing each year through 2026, in which the percentage is 55%. This requirement is slightly relaxed for offshore wind facilities.

  • Phaseout extension – The current PTC phaseout (for projects beginning construction after December 31, 2016) would continue to apply for any project that is placed in service (“PIS”) before January 1, 2022. Projects beginning construction before January 1, 2027 and PIS after December 31, 2021 are not subject to any PTC phaseout.
  • Direct pay2 – Taxpayers otherwise eligible for the PTC would be entitled to elect for direct payment of the credit amount. A phasedown applies to projects beginning construction after 2023 if the domestic content requirements discussed above are not satisfied.

Section 48 Investment Tax Credit (“ITC”) Extension

  • 3-year ITC extension – The ITC, which under current law begins phasing out for projects beginning construction after 2019, would be extended to projects beginning construction before January 1, 2027.
  • ITC for projects PIS before 2022 – The ITC would be set at 26% with respect to any project beginning construction after 2019 if the project is PIS before January 1, 2022.
  • Credit expiration – The ITC goes to zero for certain projects which begin construction before January 1, 2027 but are not PIS before January 1, 2029.
  • New credit structure – For most ITC eligible property (including solar, storage, geothermal, fuel cell, CHP, offshore wind, small wind, microturbine, biogas, and microgrid controllers), a 30% ITC would be available if prevailing wage and apprenticeship requirements are met (with the same exceptions available as those for the PTC ). If such requirements are not met, the ITC would be limited to 6%.
    • The prevailing wage requirement must be satisfied through the five-year anniversary of the date the project is PIS.
  • Expanded ITC Eligible Property definition – The definition of ITC eligible property is expanded to include energy storage technology, qualified biogas property, and microgrid controllers and, for projects with a maximum net output of less than 5MW, interconnection property.
    • For this purpose, energy storage property means property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy), and has a nameplate capacity of not less than 5 kilowatt hours.
    • Microgrid controllers are defined to mean equipment which is part of a qualified microgrid (i.e., an electrical system includes equipment which is capable of generating not less than 4 kilowatts and not greater than 20 megawatts of electricity, is capable of operating (i) in connection with the electrical grid and as a single controllable entity with respect to such grid, and (ii) independently (and disconnected) from such grid, and is not part of a bulk-power system) and which is designed and used to monitor and control the energy resources and loads on such microgrid.
  • Bonus ITC – Similar to the PTC (and subject to the same requirements), taxpayers would be eligible for an additional 10% ITC if certain domestic content requirements are met (reduced to 2% increase if the prevailing wage and apprenticeship requirements are not also met) or if the energy property is located in an “energy community” (i.e., historically coal communities – oil and gas are not included) or a low-income community.
  • Direct pay –Taxpayers otherwise eligible for the ITC would be entitled to elect for direct payment of the ITC amount. A phasedown applies to projects beginning construction after 2023 if the domestic content requirements (similar to those described above) are not satisfied.
  • New ITC – A new, separate ITC under section 48D is available for certain transmission property beginning construction after December 31, 2021 and PIS before January 1, 2032.
    • For this purpose, transmission property eligible for this credit include an electric transmission line which (i) is capable of transmitting electricity at a voltage of not less than 275 kilovolts and (ii) has a transmission capacity of not less than 500 megawatts.
    • As with the solar property ITC, the transmission property credit is 30% if prevailing wage and apprenticeship requirements are met (with the same exceptions available as for the PTC ) and 6% if not met.
    • Taxpayers otherwise eligible for the 48D credit would be entitled to elect for direct payment of the credit amount. A phasedown applies to projects beginning construction after 2023 if the domestic content requirements (similar to those described above) are not satisfied.

New Technology Neutral ITC and PTCs

Section 45BB Clean Electricity Production Tax Credit

  • New credit – A technology-neutral PTC under new section 45BB would be available for the production of clean electricity produced at a qualified facility beginning construction after December 31, 2026, for which the greenhouse gas emissions rate is not greater than zero, and which is sold to an unrelated person or sold, consumed, or stored by the taxpayer (as long as the facility is equipped with a metering device owned and operated by an unrelated person).
  • Amount – The credit rate would be 1.5 cents/kWh of electricity produced, as adjusted for inflation, if prevailing wage and apprenticeship requirements are met (similar to those described above). If the prevailing wage and apprenticeship requirements are not met, the credit rate is 0.3 cents/kWh of electricity produced. The technology-neutral PTC would be available for ten years following the date the facility was PIS.
  • Bonus PTC – Taxpayers would be eligible for an additional 10% PTC if the domestic content requirements (as described above) are met or if the qualified facility is located in an “energy community” (i.e., historically oil, gas and coal communities).
  • Phaseout – The technology-neutral PTC would begin to phaseout for qualified facilities beginning construction in the first calendar year after the later of (i) the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2021 and (ii) 2031.
  • Exclusivity – A qualified facility does not include any facility for which a 45Q Credit, a PTC, or an ITC is allowed.
  • Direct pay – Taxpayers otherwise eligible for the technology-neutral PTC would be entitled to elect for direct payment of the credit amount, provided the domestic content requirements are satisfied.

Section 48F Clean Electricity Investment Tax Credit

  • New credit – A technology-neutral ITC under new section 48F would be available for the qualified investment in an electric generating facility or any energy storage property beginning construction after December 31, 2026 and for which the greenhouse gas emissions rate is not greater than zero.
    • The definition of energy storage property is the same as that for the section 48 ITC.
    • Recapture rules apply in the event the greenhouse gas emission rate for a qualified facility is greater than 10 grams of CO2e per KWh.
  • Amount – The credit rate is 30% if prevailing wage and apprenticeship requirements are met (similar to those described above); if such requirements are not met, the credit rate is 6%.
  • Bonus ITC – Taxpayers would be eligible for an additional 10% ITC if the domestic content requirements (as described above) are met (reduced to 2% increase if the labor requirements are not also met) or if the qualified facility is located in an “energy community” (i.e., historically oil, gas and coal communities).
  • Phaseout – As with the clean electricity PTC, the clean electricity ITC would begin to phaseout for qualified facilities beginning construction in the first calendar year after the later of (i) the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2021 and (ii) 2031.
  • Exclusivity – A qualified facility does not include any facility for which a 45Q Credit, a PTC, an ITC, a 45J credit, a 45BB credit, a 48A credit, or a 48D credit is allowed.
  • Direct pay – Taxpayers otherwise eligible for the technology-neutral ITC would be entitled to elect for direct payment of the credit amount, provided the domestic content requirements are satisfied.

Section 45Q Carbon Capture Credit (“45Q Credit”) Extension

  • 6-year extension – The 45Q Credit would be extended to projects beginning construction before January 1, 2032. Currently, the 45Q Credit only applies to projects beginning construction by December 31, 2025.
  • Lower capture requirements – Most facilities would be eligible for the 45Q Credit if they capture at least 12,500 metric tons of qualified carbon oxide during the taxable year. Electric generating facilities would only be eligible for the 45Q Credit if they capture at least 18,750 metric tons of qualified carbon oxide during the taxable year and at least 75% (by mass) of the carbon oxide that would otherwise be released into the atmosphere by such facility. A direct air capture facility has less stringent requirements and would be eligible for the 45Q Credit if it captures at least 1,000 metric tons of qualified carbon oxide during the taxable year.
  • Increased credit amounts – For projects that meet the new prevailing wage and apprenticeship requirements (which are similar to those described above), the 45Q Credit amounts are increased to $85/metric ton for qualified carbon oxide disposed of by the taxpayer in secure geological storage and $60/metric ton for qualified carbon oxide used by the taxpayer as a tertiary injectant and disposed of in a qualified enhanced oil or natural gas recovery project. For projects that do not meet the new prevailing wage and apprenticeship requirements, the 45Q Credit is only $17/metric ton for secure geological storage and $12/metric ton for use as a tertiary injectant.
    • Direct air capture facilities beginning construction after December 31, 2021 which capture at least 1,000 metric tons of qualified carbon oxide in a year would qualify for an even higher 45Q Credit. In the case of qualified carbon oxide captured by a direct air capture facility and disposed of by the taxpayer in a secure geological storage, the credit amount would be $180/metric ton if the prevailing wage and apprenticeship requirements are met and $36/metric ton if those requirements are not met. In the case of qualified carbon oxide captured by a direct air capture facility and used by the taxpayer as a tertiary injectant and disposed of in a qualified enhanced oil or natural gas recovery project, the credit amount would be $130/metric ton if the prevailing wage and apprenticeship requirements are met and $26/metric ton if those requirements are not met.
  • Direct pay –Taxpayers otherwise eligible for the 45Q Credit would be entitled to elect for direct payment of the credit amount. The 45Q Credit direct payment option does not require domestic content requirements be met.
  • Effective Date – These amendments to Section 45Q would only apply to facilities or equipment the construction of which begins after December 31, 2021.

New Section 45X Clean Hydrogen PTC

  • New credit – A ten-year production tax credit under new section 45X would be available for the production of clean hydrogen produced after December 31, 2021 by a taxpayer at a qualified facility beginning construction by December 31, 2028.
  • ITC-in-lieu-of-PTC election – Taxpayers would have the option to elect the ITC in lieu of the PTC with respect to a clean hydrogen production facility.
  • Amount – If prevailing wage and apprenticeship requirements are met, the credit rate is $3.00/kilogram, adjusted for inflation, multiplied by an applicable percentage, which is 100% if the lifecycle greenhouse gas emissions rate is less than 0.45 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen (adjusted downward based on the lifecycle greenhouse gas emissions rate). If the prevailing wage and apprenticeship requirements are not met, the credit rate is reduced to $0.60/kilogram.
  • Exclusivity – A taxpayer cannot benefit from both the clean hydrogen PTC and the 45Q Credit, but appears to be able to take both the PTC or ITC and the clean hydrogen PTC.
  • Direct pay – Taxpayers otherwise eligible for the clean hydrogen PTC would be entitled to elect for direct payment of the credit amount. The 45X Credit direct payment option does not require domestic content requirements to be met.

Section 45W Zero-Emission Nuclear Power PTC

  • New credit – A new PTC for the production of electricity from a nuclear facility (other than an advanced nuclear power facility under section 45J) which is PIS before the date of enactment would be available.
  • Amount – If prevailing wage and apprenticeship requirements are met, the credit rate is 5 cents/kWh, adjusted for inflation. If the prevailing wage and apprenticeship requirements are not met, the credit rate is reduced to 0.3 cents/kWh, adjusted for inflation. The credit is also reduced by 80% of the excess of gross receipts from electricity produced and sold over $0.5 times the amount of electricity sold.
  • Expiration – Section 45W Credit terminates on December 31, 2029.
  • Direct pay – Taxpayers otherwise eligible for the zero-emission nuclear power PTC would be entitled to elect for direct payment of the credit amount.

Section 48C Advanced Energy Project Credit Revision and Expansion

  • Overview – Section 48C, which provided ITCs for projects that equip or expand manufacturing facilities that produce specified renewable energy equipment, including wind, solar and geothermal property, fuel cells, microgrids, and carbon capture and sequestration property, would be revised and expanded.
  • New Eligible Facilities – New eligible facilities include facilities that manufacture energy storage systems and components, electric grid modernization equipment or components, electric vehicles or bicycles and recharging or refueling equipment, property used to produce clean hydrogen, battery or energy storage recycling property, and equipment which re-equips a manufacturing facility with equipment designed to reduce greenhouse emissions by at least 20%.
  • Amount – The credit rate is 30% if prevailing wage and apprenticeship requirements are met (similar to those described above); if such requirements are not met, the credit rate is 6%.
  • Allocation – For calendar years 2022 and 2023, $8 billion in credits would be allocated, and $1.875 billion for 2024 through 2031, of which $800 million for 2022 and 2023 and $300 million thereafter are reserved for projects in communities that have experienced substantial losses in automotive manufacturing. The same amounts are reserved for projects in “energy communities” (i.e., historically oil, gas and coal communities). Property must be PIS within 4 years of receiving an allocation.
  • Exclusivity – The 48C credit is not available for any investment if a credit is allowed under sections 48, 48A, 48B, 48F, 45Q or 45X.

Direct Pay Election

The Act would make a direct pay option available for the following credits:

  • Section 48 ITC,
  • Section 45 PTC,
  • Section 45BB Clean Electricity PTC,
  • Section 48F Clean Electricity ITC,
  • Section 45Q Credit,
  • Section 30C Credit for Alternative Fuel Vehicle Refueling Property Credit,
  • Section 48C Advanced Energy Project Credit,
  • Section 45W Zero-Emission Nuclear Power Production Credit,
  • Section 45X Clean Hydrogen PTC,
  • Section 48D Transmission Property Credit,
  • Section 48E Advanced Manufacturing Investment Credit,
  • Section 45AA Advanced Manufacturing Production Credit, and
  • Section 45CC Clean Fuel Production Credit.

Under a direct pay scenario, a taxpayer treats tax credits generated by the relevant project as equivalent to a payment of tax on the taxpayer’s tax return when filed. To the extent such return shows payment of tax (including the deemed payment of tax resulting from a “direct payment” election) in excess of the amount due, the taxpayer will be entitled to a refund of such excess.

Taxpayers making a direct payment election with respect to Sections 45, 45Q, 45X, or 45BB must make a one-time, irrevocable election to have this section apply during the taxable year the facility is placed into service.

Generally, in order to be eligible for a direct payment equal to 100% of the otherwise available credit with respect to the section 48 ITC, section 45 PTC, and section 48D transmission property credit, the domestic content requirements must be satisfied. The domestic content requirements would not apply with respect to the direct pay option for other eligible credits.

The direct payment rules would permit a tax exempt or governmental entity to receive such direct payment (even though such entities are not subject to tax).

With respect to partnerships or S-corporations, the election may be made at the entity or at the partner/shareholder level. If the election is made by the entity, the direct payment will be made to the entity itself. The amount of any direct payment (whether elected by the entity or the partner/shareholder) allocable to each partner/shareholder is based on such partner’s distributive share, or shareholder’s pro rata share, of the underlying credit.

In the event it is determined that the amount of the direct payment was excessive, an additional 20% penalty will be imposed unless the taxpayer can demonstrate reasonable cause for claiming the excessive payment.

See our prior discussion of direct pay here.

Section 25C Residential Energy Property Credit/25D Residential Energy Efficient Property Credit Extensions

The section 25C residential energy property credits allow homeowners to claim a federal tax credit for making certain improvements to their homes or installing appliances that are designed to boost energy efficiency. The Act would increase the credit to 30% and extend it through December 31, 2031.

The section 25D residential energy efficient property credits allow homeowners to claim a federal tax credit for qualified residential energy efficient property expenditures, including solar electric, solar water heating, fuel cell, storage, small wind energy, and geothermal heat pumps. The Act would generally extend this credit at the 30% rate through December 31, 2031, thereafter the credit would phasedown to 26% in 2032 and 22% in 2033 (and expire after 2033). The credit would also be made refundable starting in 2023.

Renewable Fuels Credits

  • Sections 40A & 6426 Biodiesel and Biodiesel Mixture Credits – The existing income and excise tax credits for biodiesel and biodiesel mixtures (including renewable diesel) would be extended at $1.00/gallon through 2026.
  • Section 6426 Alternative Fuel and Alternative Fuel Mixture Credits – Existing excise tax credits for alternative fuels and alternative fuel mixtures would be extended at $0.50/gallon through 2026.
  • Section 40 Second Generation Biofuel Credit – Existing incentives would be extended through 2026.
  • New Section 40B Sustainable Aviation Fuel Credit – The existing credit for aviation fuel produced from biodiesel would be replaced, effective from 2023 through 2026, with a new credit for mixtures of sustainable aviation fuel and conventional aviation fuel. To claim the credit a taxpayer must certify a reduction of lifecycle greenhouse gas emissions of at least 50%. The base credit is $1.25/gallon and increases up to a maximum of $1.75 if greenhouse gas emissions are reduced below 50%.

Section 45CC Clean Fuel Production Credit

  • New credit – A technology-neutral production tax credit under new section 45CC would be available for the production of low-emissions transportation fuel (other than hydrogen) produced at a qualified facility beginning on January 1, 2027.
  • Amount – The credit rate is $1.00/gallon (or $1.75/gallon for sustainable aviation fuel) multiplied by an applicable emissions factor, which is 100% if the fuel emissions factor is less than 75 kilograms of CO2e per mmBTU, but would be reduced to 20 cents/gallon (35 cents/gallon for sustainable aviation fuel) if prevailing wage and apprenticeship requirements are not met.
  • Phaseout – As with the technology-neutral PTC, the clean fuel credit would begin to phaseout for qualified facilities beginning construction in the first calendar year after the later of (i) the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2021 and (ii) 2031.
  • Exclusivity – A qualified facility does not include any facility for which the ITC, the 45Q Credit, or the clean hydrogen PTC is allowed.

Section 30C Alternative Fuel Refueling Property

  • Extension – The alternative fuel vehicle refueling property credit would be extended through 2031.
  • Amount – Beginning in 2022, the credit rate would be 30% for expenses up to $100,000 and 20% for allowable expenses in excess of such limitation for certain electric- and hydrogen-refueling property if prevailing wage and apprenticeship requirements (similar to those described above) are met. If those requirements are not met, the credit would be 6% for expenses up to $100,000 and 4% thereafter.
  • Direct pay – Taxpayers otherwise eligible for the alternative fuel refueling property credit would be entitled to elect for direct payment of the credit amount.

Section 7704 Green Energy Publicly Traded Partnerships

A publicly traded partnership is treated as a corporation for federal income tax purposes unless at least 90% of its gross income is “qualifying income.” The proposed legislation would expand the definition of “qualifying income” to include income derived from various renewable energy activities, including the generation of power from wind, biomass, geothermal, solar, and certain other renewable energy sources, as well as income from the operation of a qualified carbon capture facility.

Corporate Alternative Minimum Tax (“AMT”)

The Act would generally apply an alternative minimum tax to certain C-corporations with average annual adjusted financial statement income for any consecutive 3-year period in excess of $1 billion (or $100 million for certain foreign parented corporations).

The AMT is equal to the excess (if any) of the tentative minimum tax over the regular tax liability. The tentative minimum tax is generally equal to 15% of a corporation’s annual adjusted financial statement income over the corporation’s AMT foreign tax credit.

Adjusted financial statement income is, basically, net income shown on a corporation’s form 10-K filed with the Securities and Exchange Commission, an audited financial statement, or other similar financial statement, with certain adjustments. Generally, a corporation’s adjusted financial statement income includes income of certain related parties and includes disregarded entities owned by the taxpayer if such entities are not otherwise included on the taxpayer’s adjusted financial statement income. Financial statement net operating losses generated after 2019 may be carried forward to offset up to 80% of financial statement net income in a future year. Adjusted financial statement income does not include amounts received as a refund of taxes attributable to a direct pay election.

The proposed legislation appears to preserve the ability of taxpayers to offset a substantial portion of their AMT liability with clean energy tax credits. However, it does not appear that taxpayers will be able to reduce their annual adjusted financial statement income with available depreciation deductions.

The corporate AMT would be effective for tax years beginning after December 31, 2022.

 

1 Except as otherwise stated, all references to “section” herein refer to the Code.

2 The direct pay option is available without regard to the amount of tax owed. See more about the direct pay option here above, and here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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