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The Current: Renewable Energy Industries Receive Extensions to Tax Credit Equity Deadlines

Published by Forrest D. Milder on Thursday, February 4, 2016

Journal cover February 2016   Download PDF

Every December, the renewable energy industries go through the final push of a yearlong effort to get tax equity programs extended and expanded. Sometimes, it happens. At the end of 2015, both the Consolidated Appropriations Act (Appropriations Act) and the Protecting Americans from Tax Hikes Act (PATH Act) became law, providing extensions for several, but not all, renewable technologies.


Measured by word count, the wind industry easily got the largest amount of changes.

Before the amendment, the Internal Revenue Code (IRC) provided wind a production tax credit (PTC) of 2.3 cents per kilowatt-hour (adjusted for inflation), provided the project began construction before the end of 2014. The Appropriations Act retroactively extended the credit as follows:

Construction of wind facility:PTC for wind is:
Begins before Dec. 31, 2016Not reduced
Begins after 2016, and before 2018Reduced by 20 percent
Begins after 2017, and before 2019Reduced by 40 percent
Begins after 2018, and before 2020Reduced by 60 percent

A similar extension is provided for wind projects that elect the 30 percent investment tax credit (ITC), instead of the PTC. The extension applies as follows:

 Construction of wind facility:  ITC for wind is: 
Begins before Dec. 31, 201630 percent
Begins after 2016, and before 201824 percent
Begins after 2017, and before 201918 percent
Begins after 2018, and before 202012 percent

These modifications provide a far longer extension of the credit for wind facilities than happened with previous amendments to these provisions. Of course, this probably won’t stop the annual lobbying effort–with a phasedown that begins in 2017, it won’t be surprising if the wind industry is out this December trying to delay the start of the reduction in credit rates.

In the past, the Internal Revenue Service (IRS)  has measured compliance with the begun construction requirement by having the facility pass one (or both) of two tests–the “physical work test” or the “5 percent safe harbor.” (For discussions of these tests, see the September 2014 and April 2015 issues). We understand that the IRS is in the process of issuing guidance for determining begun construction under the new law; it would seem likely that future rules will operate similarly to the old rules, but with later dates. Of course, it is always possible that the IRS will make larger changes.

Presuming that the two tests will continue to apply, and recognizing that  investors often favor the certainty of the 5 percent safe harbor, this can be impractical for projects that cost hundreds of millions of dollars or more, where even 5 percent is a large amount of money. As a result, the physical work test has become important for wind projects. In its published authorities, the IRS has provided easy-to-follow guidance as to the nature of the physical work test: excavation for the foundation, the setting of anchor bolts to the ground or the pouring of concrete pads of the foundation all count as physical work, while drawing plans does not.  The level of physical work can be pretty minimal. After publishing an example in 2013 that involved excavating the site for 10 wind turbines out of a project that consists of 50 turbines, in 2014, the IRS made it clear that this example was not intended to indicate that there is a 20 percent threshold or minimum amount of work required to satisfy the physical work test, saying “Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.” Note that while the IRS will likely continue to impose a “continuous work” or “continuous efforts” test for these new provisions, as it has each time the placed in service deadlines were extended by prior legislation, it is too early to predict whether it will also include a safe harbor that presumes continuity if the project is completed by a certain date.


Solar has generally had the longest horizon before its credit sunsets. Before the 2015 legislation became law, solar was eligible for a 30 percent ITC, provided the facility was placed in service by Dec. 31. The credit was reduced to 10 percent if the facility was placed in service after 2016.

The Appropriations Act does three things for solar credits. First, it changes the effective-date rules to a begun construction test, although it continues to employ a placed-in-service requirement with a very long horizon. Second, it provides for an extension of the higher than 10 percent credit for solar, all the way out to facilities which begin construction before 2022. Finally, it steps the credit down to 26 percent and then 22 percent, for facilities which begin construction before 2022, and are placed in service before 2024, as follows:

 Construction of solar facility:  Solar Facility is Placed in Service:  ITC for solar is: 
  Begins before 2020   Before 2024   30 percent  
  Begins after 2019, and before 2021   Before 2024   26 percent  
  Begins after 2020, and before 2022   Before 2024   22 percent  
  Begins anytime   After 2023   10 percent  

With these changes, solar largely continues to have an edge on other technologies in its eligibility for tax equity finance. First, unlike wind, the solar ITC stays at a full 30 percent for construction starts before 2020, long beyond the “prior to 2017” test that applies to wind and other technologies (see below). Second, the decline in the percentage rate of the credit for solar, to 26 percent, 22 percent and even 10 percent, are all greater than the corresponding declines in credit rates for wind.  As discussed below, the other technologies don’t get any phase out at all. And, third, by adopting a begun construction test, solar can now enhance its eligibility for tax equity by demonstrating that the project has already begun, without having to wait to demonstrate that the project was actually placed in service before deadlines. Being able to satisfy the test at the start of construction generally helps a project qualify for debt financing as well, because lenders like the confidence of knowing that the project will certainly qualify for a certain level of tax equity based on an event that has already happened. Nonetheless, the placed-in-service requirement is not completely eliminated–a solar facility must still be placed in service before 2024, or the credit falls to 10 percent, regardless of when construction began. Still, 2024 is a pretty long time from now.
Of course, solar developers haven’t had to worry about begun construction tests since the deadline passed for qualifying under the Section 1603 cash grant program. So, they may also want to look at our previous articles for a refresher course in the IRS standards, remembering that the IRS may change these rules when new guidance is published.

Other Technologies

PTC technologies: Much shorter extensions were also adopted for many of the technologies that are defined in Section 45 of the IRC. That’s the section that defines facilities eligible for the PTC, and which are therefore eligible for the 30 percent ITC (by making an election, pursuant to IRC Section 48(a)(5)). These include electricity generated by biomass, geothermal, landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic, provided the project began construction before 2017. Unlike wind and solar, these credits do not have a gradual phase-out, so we can expect the usual “fire drill” of developers trying to demonstrate that they passed the begun construction test at year-end.

ITC technologies: Other than solar, there are no changes to the tax credit for technologies that are only defined in Section 48 of the IRC. Thus, fuel cells, micro-turbines, cogeneration and geothermal that generates heat or cooling continue to be eligible for the same credits as under current law, all determined by their placed-in-service date, which continues to be not later than Dec. 31. It should be noted that there are at least four bills pending in Congress which would extend this date, and some in Congress have referred to the failure to include these technologies in the extenders as “inadvertent.”  Again, it is impossible to predict whether any of the proposals will become law.

Small wind: Small wind is identified in more than one IRC provision; it is both “wind,” a PTC technology (that can also elect the ITC), and “small wind,” an ITC technology. While the new laws did not specifically extend the deadline for small wind projects, they should still be able to take advantage of the extenders that apply to the PTC and ITC for all wind, including the phaseout, as described above. ;

Forrest David Milder is a partner with Nixon Peabody LLP. He has more than 30 years’ experience in tax-advantaged investments including the tax credits that apply to affordable housing, energy, new markets and historic rehabilitation, as well as the tax treatment of partnerships and LLCs, tax-exempt organizations, and structured financial products. He can be reached (617) 345-1055 or [email protected].

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