Changes to Renewable and Carbon Capture Tax Credits for 2021

Wednesday, January 6, 2021

On December 22, 2020, the U.S. Home and Senate accepted the Consolidated Appropriations Act, 2021 (the 2021 Act) and, on December 27, 2020, President Trump signed the 2021 Act into legislation.  The 2021 Act extends tax credit presently accessible for photo voltaic, wind, and carbon seize, storage and use initiatives, and supplies a brand new tax credit score for offshore wind initiatives.

Modifications Impacting Photo voltaic Tasks Eligible for the Funding Tax Credit score

Part 48(a) of the Inside Income Code of 1986, as amended (the Code), permits an funding tax credit score (ITC) for a share of the tax foundation of the power property positioned in service throughout a specific taxable 12 months.  For photo voltaic initiatives, such share typically relies on the calendar 12 months when development of the photo voltaic venture begins, topic to an annual part down.  The 2021 Act prolonged the eligibility deadline for every ITC share by two years, as follows:

Photo voltaic ITC Share	Prior Legislation	2021 Act
26 p.c ITC	development begins earlier than January 1, 2021	development begins earlier than January 1, 2023
22 p.c ITC	development begins earlier than January 1, 2022	development begins earlier than January 1, 2024
10 p.c ITC	development begins on or after January 1, 2022	development begins on or after January 1, 2024
10 p.c ITC	positioned in service on or after January 1, 2024 no matter when development begins	positioned in service on or after January 1, 2026 no matter when development begins

The photo voltaic trade has welcomed the two-year extensions, that are anticipated to draw capital to photo voltaic initiatives for which development begins earlier than the top of 2023 and proceed to gas progress within the sector.  Wanting forward, the extensions will present the photo voltaic trade further time to barter a longer-term package deal of incentives that might turn out to be accessible after the photo voltaic ITCs, as prolonged by the 2021 Act, expire.  Regardless of trade strain, the 2021 Act didn’t embrace a direct pay choice for the photo voltaic ITC.  Accordingly, taxpayers with out ample federal revenue tax legal responsibility to make the most of the photo voltaic ITC, together with people who skilled a downturn in profitability on account of the COVID-19 pandemic, should carry the surplus credit score ahead and apply it towards future money tax legal responsibility, or take into account alternate options within the tax fairness markets. 

Modifications Impacting Wind Tasks Eligible for Manufacturing Tax Credit

Code part 45(a) permits a manufacturing tax credit score (PTC) per kilowatt hour (kWh) for electrical energy produced by onshore and offshore wind initiatives for the primary ten years after the venture is positioned in service.  The utmost credit score fee, 1.5 cents per kWh, is adjusted yearly for inflation.  Previous to the 2021 Act, wind initiatives that began development previous to January 1, 2021 had been eligible for 60 p.c of the PTC calculated utilizing the relevant credit score fee.  The 2021 Act prolonged this eligibility deadline for one 12 months and, because of this, wind initiatives that begin development in 2021 additionally can be eligible for the 60 p.c PTC.  Wind initiatives that start development after 2021, nevertheless, is not going to be eligible for the PTC at any stage.

This one-year extension seems much less favorable to the wind trade in comparison with the two-year extension for the photo voltaic ITC, notably as a result of the wind PTC can be unavailable for initiatives that start development after 2021 with out a additional modification to the Code.  The wind PTC, nevertheless, obtained a separate one-year extension on the finish of 2019 below the Consolidated Appropriations Act, 2020 (the 2020 Act), and due to this fact might be seen as receiving a two-year extension on a cumulative foundation. Just like the photo voltaic ITC, the wind PTC doesn’t embrace a direct pay choice.

Modifications Impacting Solely Offshore Wind Tasks

The 2021 Act contains a notable growth for the offshore wind trade with the grant of a separate 30 p.c ITC for certified offshore wind amenities if development begins earlier than January 1, 2026.  The power to say a 30 p.c ITC in lieu of a PTC might be helpful to builders because of the sizable capital funding sometimes required for offshore wind initiatives.  For functions of this new ITC provision, certified offshore wind amenities are certified amenities, inside the that means of Code part 45(d), which are positioned within the inland navigable waters of the US or within the coastal waters of the US. 

Lengthy sought by the trade (and beforehand proposed final year-end with out inclusion in  the 2020 Act), the five-year time period, mixed with the absence of a “positioned in service” requirement, will afford higher flexibility in planning for offshore wind initiatives that are inclined to have longer growth and development intervals than comparable onshore wind initiatives.  Moreover, the 30 p.c fee just isn’t topic to part down over the five-year time period.  Thus, the brand new ITC might present a big supply of financing for builders in a sector nonetheless in its infancy in the US, whether or not by way of the tax fairness markets or in any other case. 

Modifications Impacting Carbon Seize Tasks

Code part 45Q permits a federal revenue tax credit score (the Part 45Q Credit score) based mostly upon metric tons of certified carbon oxide sequestered and used as a tertiary injectant for enhanced oil or gasoline restoration or for an additional permitted business objective, or disposed of in safe geological storage (CCUS).  One of many necessities for the Part 45Q Credit score is the taxpayer should begin development of the carbon seize gear previous to a specified date.  The 2021 Act extends that date by two years from January 1, 2024 to January 1, 2026.  Such extension was lauded by trade teams as vital to encourage future funding in CCUS.  Some CCUS advocates, nevertheless, argued for a 5 to ten-year extension to compensate for the delay in Treasury rules below Code part 45Q, which weren’t launched till greater than two years after Code part 45Q was amended and expanded below the Bipartisan Finances Act of 2018. 

The 2021 Act, nevertheless, doesn’t embrace a direct pay choice for the Part 45Q Credit score to immediately profit taxpayers with out money tax legal responsibility. The 2021 Act, nevertheless, additional encourages the expanded use of CCUS by authorizing billions of {dollars} for federal applications supporting analysis, growth and demonstration of CCUS know-how.

— to www.natlawreview.com

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