Digging Deeper: Tax Considerations for Renewable Energy Projects

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Tax considerations are one of the main drivers for renewable energy projects. This fall, Husch Blackwell’s Energy and Natural Resources team hosted a webinar that explored the available federal and state credits, abatements, incentives, and in some cases, specialty taxes that affect the profitability of renewable energy projects. During the program, we received a number of questions worth sharing with our blog subscribers that are navigating tax issues on their renewable energy projects. This article addresses those questions.

With direct pay, what percentage of the capital stack do you expect tax equity to be?

Direct pay” refers to a provision in legislative text released by the House Ways and Means Committee, specifically in subtitle G on Green Energy (the “Green Energy Subtitle”). As of the date of drafting, this provision, which is a part of the House Reconciliation Bill (a.k.a) the Build Back Better Act) has yet to be passed into law. The direct pay (or, as it is sometimes referred to, elective payment) provision, if enacted, would allow a taxpayer to elect to be treated as having made a payment of tax equal to the value of the credit for which they would otherwise be eligible.

Rather than carrying credits forward to years when the credit can offset a taxpayer’s tax liability, this provision would allow a taxpayer to request a refund for the deemed payment upon the completion of construction of the project. This would allow entities with little to no tax liability to accelerate the utilization of the credits.

It is difficult to say exactly what effect the enactment of the direct pay provision will have on the tax equity capital stack percentage of projects; however, it would seem that it would exert a downward pressure as the enactment of the direct pay provision would increase the number of investors who could take advantage of renewable energy credits.

Will a tax equity investor be necessary to realize MACRS (Modified Accelerated Cost Recovery System) benefits?

MACRS tax benefits are not credits. They are accelerated deductions for depreciation. As background on MACRS tax benefits, for example, a solar project may qualify for an up-front ITC based on the amount invested in the project and then, in addition to this credit, may also generate annual MACRS depreciation deductions that a taxpayer could use to offset other income. Absent amendments or guidance to the contrary, it does not appear that the direct pay provisions of the Green Energy Subtitle would impact MACRS benefits. Therefore, tax equity may still be the most efficient utilizers of such tax benefits.

Does CHP qualify for ITC?

Combined Heating and Power (CHP) plants (i.e., combined heat and power or cogeneration plants) currently qualify for a 10% Investment Tax Credit (ITC) under Section 48 of the Internal Revenue Code, subject to certain limitations. Some key requirements state that unless the system uses biomass, it must attain an energy efficiency of greater than 60 percent, and must generate at least 20 percent of its useful energy total in the form of thermal energy, which is not used in generation of mechanical, electrical or a combination of power. The Green Energy Subtitle provides that CHP would qualify for the ITC and would raise the maximum potential credit rate from 10% to 30%.

Should storage be added to ITC?

Obviously, energy storage facilities are critical components of renewable energy infrastructure, in terms of intermittency, reliability, and stability solutions. Currently, a storage system paired with a solar project will qualify for the ITC. If the Green Energy Subtitle is enacted, stand-alone storage will also qualify.

If the Green Energy Subtitle is approved, will a solar developer be able to claim the PTC (Production Tax Credit) in lieu of the ITC?

Yes, the PTC would be available through 2026, phasing down to 80% in 2027 and 60% in 2028. Taxpayers would be able to continue to claim the ITC in lieu of the PTC. Since the ITC is measured based on a taxpayer’s initial investment in a solar project and the PTC is based on the actual production of a project, a taxpayer could find the PTC more advantageous than the ITC with respect to a solar project with relatively low up-front costs and relatively high projected production.

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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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