Q&A: American Taxpayer Relief Act of 2012 Sets the Stage for Wind Transactions
Question: Following the enactment of the American Taxpayer Relief Act of 2012, can wind transactions placed in service after Dec. 31, 2012 still qualify for production tax credits (PTCs) or investment tax credits (ITCs)?
Answer: Yes. H.R. 8, the American Taxpayer Relief Act of 2012 extended the credit termination date and made several important changes to benefit wind and other renewable energy projects.
Changes to Credit Termination Date
As many readers are aware, the PTC for wind projects as provided under Internal Revenue Code (IRC) Section 45, as well as the election to claim the ITC in lieu of the production tax credit, expired on Dec. 31, 2012. Thankfully, the PTC was renewed as one of many “tax extenders” included in the American Taxpayer Relief Act of 2012. Industry veterans are familiar with the “boom and bust” cycle of PTCs, which Congress has renewed for short time periods and occasionally has allowed to lapse since their inception in 1992. However, an important change was made in the most recent renewal of the PTC. Prior to the recent renewal, the credit termination date was a date prior to which projects had to be placed in service in order to be eligible for PTCs. H.R. 8 changes the qualification requirement from a placed-in-service requirement to a “begun construction” requirement; in other words, to qualify for PTCs the same project must now begin construction prior to Dec. 31, 2013, the new credit termination date. Many in the renewable energy industry worked through beginning of construction issues during the Section 1603 cash grant program, which is where the idea of a begun construction cutoff date may have originated. The Section 1603 program officially expired after Dec. 31, 2011 but was extended through the applicable credit termination date for renewable energy projects, as long as the project owner began construction prior to Jan. 1, 2012.
The obvious question from this change is: “When does a PTC project need to be placed in service if construction begins prior to Dec. 31, 2013?” Unfortunately, no specific information relating to this issue is detailed within H.R. 8. Regardless of the ambiguity of the specific language in the act, the change is very beneficial for developers of wind and other PTC-eligible projects, including biomass, geothermal and hydropower. Advocates in the solar industry are already beating the drum for a comparable rule to be incorporated into the rules for the ITC under Section 48. At the time of this writing, we were unable to obtain additional information from the Internal Revenue Service (IRS) regarding this new begun construction language; however, one IRS representative has stated that a similar rule may be contemplated for the ITC in the future.
Another unanswered question is what documentation, if any, is necessary to show a project has been placed in service. Whereas the Section 1603 cash grant program has official applications for placed in service and begun construction that are required to be uploaded directly to the Department of the Treasury, at press time there was no such application process for ITCs and PTCs, which are claimed by a taxpayer simply by completing the requisite tax forms. Although nothing concrete has surfaced, the IRS is reported to be deciding what it means for a project to have begun construction and whether or not it will be adopting any of the Section 1603 cash grant application processes.
Changes to Depreciation
In addition to the amended wording pertaining to the tax credit termination date, there are several other specific sections of the act which will benefit wind (and other renewable energy project) owners. The majority of the assets in renewable energy projects are depreciated as 5-year Modified Accelerated Cost Recovery System (MACRS) property. H.R. 8 extended 50 percent bonus depreciation provided under IRC Section 168(k). The “bonus” comes in the form of 50 percent of the total depreciation allowed to be deducted in the year a project is placed in service with the remaining 50 percent depreciated over the standard 5-year MACRS schedule. For instance, a project that would normally have 20 percent of the basis depreciated in year one can now depreciate 60 percent (50 percent + 50 percent x 20 percent). Additionally, wind (and solar) property placed in service before Dec. 31, 2013 and located on an Indian reservation can be depreciated over a period of three years as opposed to the typical 5-year MACRS.
This article was meant to shed light on the important changes for wind projects as a result of the American Taxpayer Relief Act of 2012. We anticipate discussing these issues further once additional guidance is issued by the IRS relating to the begun construction requirements. In the meantime, as developers evaluate what is best for their projects, Novogradac & Company LLP stands ready to help navigate these unchartered waters.