Schumer and Manchin Reconciliation Deal Provides $369 Billion in Clean and Renewable Energy Provisions, Including ITC, PTC Extension, as well as ITC Bonus for Affordable Housing and Low-Income Communities
In a surprising development, Senate Majority Leader Chuck Schumer, D-New York, and Sen. Joe Manchin, D-West Virginia, announced July 27 a deal on sweeping reconciliation legislation that includes $369 billion in clean and renewable energy provisions, including extensions of the production tax credit (PTC) and investment tax credit (ITC). The Inflation Reduction Act of 2022 also includes a 15% corporate minimum “book” tax, changes to the taxation of carried interest, increased tax enforcement resources, an extension of the Affordable Care Act premium tax incentives and prescription drug reform. Along with the legislation, the Senate Democratic Leadership provided a one-page summary, tax summary, energy security and climate change investments summary and energy section-by-section summary.
Breaking Down the Clean and Renewable Energy Provisions
PTC, ITC extension
Among clean and renewable energy provisions in the bill is essentially an extension of the PTC and ITC for facilities that start construction after Jan. 1, 2022, and before Jan. 1, 2025,under existing technologies–with the PTC at $26 per megawatt-hour as adjusted by inflation annually and the ITC at 30% of eligible costs if they adhere to the labor requirements on prevailing wages and apprenticeship programs, which are largely retained from previous versions of the reconciliation bill. The 10% bonus for domestic content is also largely retained, as is the ability for solar developers to access the PTC in lieu of the ITC. After 2024, the PTC and ITC would transition to a technology neutral production and investment tax credit for facilities that start construction by the end of2032.
Direct Payment and Transfer of Credits
Despite some press reports in recent weeks, the ability to elect a direct payment of certain clean and renewable energy tax incentives in lieu of tax credits is included in the reconciliation bill, but with important limitations. Direct payment is limited to tax exempt, state and local government entities, Indian tribes and Alaska native claims corporations except for clean hydrogen, carbon sequestration and advance manufacturing projects.
Although direct payments are limited, starting in 2023, companies with taxable income will be generally allowed to transfer some or all of Sect. 30C, 45, 45Q, 45U,45V, 45X, 45Y, 48, 48C, and 48D tax credits for cash to unrelated parties, and the proceeds from the transfer is not taxable income. New transferability provisions are not applicable for direct payment eligible entities, but are applicable to those entities outside the scope of the direct payment provisions.
Energy Storage and Interconnection
The expansion of the 30% ITC for stand-alone energy storage and interconnection property is also largely retained from the previous iterations of the reconciliation bill.
ITC Bonus for Affordable Housing, Low-income Communities, No Basis Adjustment for LIHTC, HTC
The provision to allow ITC not to reduce low-income housing tax credit (LIHTC) basis, the 20% bonus ITC for facilities on covered federal affordable housing programs and the 10% bonus for ITC for low-income communities that were included in previous iterations of the reconciliation bill remain in the announced deal, and the bill includes for the first time no basis adjustment for ITC facilities on HTC properties. However, the calendar year limitation of 1.8 gigawatts for the bonus ITC is reduced from 10 years to three years, while still generally allowing unused amounts to be carried forward after 2024.
Sect. 45Q Carbon Oxide Sequestration Credit
Under the bill’s provisions, any carbon capture, direct air capture or carbon utilization project beginning construction before Jan. 1, 2033, will qualify for the Sect. 45Q carbon oxide sequestration credit, a key priority for Sen. Manchin. Additionally, project developers will have the option to access direct pay for the full value of the tax credit for the first five years of a project, once the carbon capture equipment has been placed in service with the option for direct pay fully phasing out for the remaining seven years of the credit. Nonprofit organizations, cooperatives, and municipal utilities, however, have the option of direct pay for the full 12 years of the lifetime of the credit. Furthermore, the legislation significantly boosts credit values to accelerate project deployment and emissions reductions in key sectors, increasing the value of 45Q for industrial facilities and power plants that capture their carbon emissions to $85 per metric ton for CO2 stored in secure geologic formations, $60 per ton for the utilization of captured carbon emissions and $60 per ton for CO2 stored in oil and gas fields. In addition, the bill also includes increased credit values for direct air capture technologies at $180 per metric ton for those projects seeking to securely store captured CO2 in secure geologic formations, $130 per ton for carbon utilization and $130 per metric ton for CO2 stored in oil and gas fields.
Three-Year Carryback and 22-Year Carryforward
Instead of the current law, one-year carryback and 20-year carry forward, the bill allows PTC, ITC, Sect. 30C alternative fuel vehicle credit and Sect. 45Q credits to be carried back three years and carried forward 22 years.
Energy Efficiency Tax Incentives
The Sect. 45L new energy efficient home credit is extended and modified similar to the previous version of the reconciliation bill, but as proposed for the ITC, the bill would allow 45L credit not to reduce LIHTC basis, which would significantly facilitate the use of the 45L credit with LIHTC properties without excess basis. Allowing no LIHTC basis reduction for 45L credits was not included in previous version of the reconciliation. The reform to the Sect. 179D energy efficient commercial property deduction (which can be used for multifamily housing), Sect. 25C nonbusiness energy property credit and sect. 25D residential energy-efficient property credit (generally used for improvements of existing single family housing) is largely similar to the previous version of the reconciliation bill.
Sect. 48C Advanced Energy Project Credit and Advanced Manufacturing Tax Incentives
The bill largely retains the Sect. 48C advanced energy project credit, advanced manufacturing investment and production tax incentives from the previous version of the reconciliation bill, which would incentivize the manufacturing of key renewable energy components in the United States.
Establishing a Minimum Corporate Tax
The bill would establish a 15% minimum tax on corporations with net income of more than $1 billion. This proposal is often referred to as the book tax, because it is applied to a corporation’s financial-statement earnings based on generally accepted accounting principles (GAAP), which is often referred to as “book” earnings, rather than the income calculation traditionally used for tax purposes. General business credits, such as LIHTC, the new markets tax credit, the historic tax credit, and renewable energy tax credits, could be taken against this minimum tax. According to Senate Democratic leadership, the Joint Committee on Taxation (JCT) estimates this provision would raise $313 billion over 10 years.
A Change in the Taxation of Carried Interest
The bill would change the taxation of carried interest (which is typically defined as a portion of the compensation of investment fund managers receive) to ordinary income tax rates (the tax rate for the highest income bracket is 37% under current law) instead of the capital gains tax rate, which is generally 23.8%. According to Senate Democratic leadership, the JCT estimates this provision would raise $14 billion over 10 years.
The Internal Revenue Service would get $80 billion to add auditors, improve customer service and modernize technology. According to Senate Democratic leadership, the Congressional Budget Office estimates the proposals would increase tax revenue by $124 billion.
What Isn’t Included
While the basis adjustment provisions for ITC facilities on LIHTC and HTC properties, as well as the no basis adjustment for 45L credit on LIHTC properties are included in the bill, it does not include the main LIHTC proposals to restore the 12.5% increase in 9% allocations that expired at the end of 2021 and further increase 9% allocations, lower the private activity bond financing threshold from 50% to 25%, or other LIHTC-related provisions from the House-passed or December 2021 Senate reconciliation bill draft. Also missing are most of the more than $150 billion in housing and community development spending in the previous reconciliation bill versions, although the Schumer-Manchin bill does include $1 billion for green retrofits of HUD-assisted multifamily housing. Affordable housing advocates will attempt to push to include the LIHTC and some of the spending proposals before the bill is considered in the Senate.
The legislation is being considered under the budget reconciliation process, which means it still must be approved by the Senate parliamentarian, then passed by both houses of Congress and signed by President Joe Biden to become law. According to Senate Democratic leadership, the bill text was sent July 27 to the parliamentarian for review and is expected to be completed by next week, but that schedule could slip. It should be noted that while the entire bill will be scrutinized for compliance with the Byrd Rule, which determines what is eligible for consideration under budget reconciliation, the clean energy labor, direct payment and transferability provisions may be particularly vulnerable. If the reconciliation bill text is approved by the parliamentarian in time, then the Senate could begin to consider the bill before it is scheduled to depart for the summer recess on Aug. 5, but again that schedule may slip into the following week. The House is scheduled to depart for the summer recess by July 28, but if the Senate approves the bill during the House recess, House Speaker Nancy Pelosi, D-California is expected to bring the House back into session shortly after Senate passage to consider the bill. With only a four-vote margin (likely to shrink to a three-vote margin after Aug. 9) and no House Republicans expected to vote for the bill, it will not be straightforward for Pelosi to find the votes required for passage. Stay tuned.