December 28, 2015

Breakdown of Energy and Renewable Energy Provisions in Newly Signed Tax Extenders and Government Funding Legislation

On December 18, 2015, President Obama signed into law the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) and an omnibus funding bill for fiscal year 2016 known as the “Consolidated Appropriations Act, 2016” (Appropriations Act). These laws contain significant provisions for the energy and renewable energy industries, including important tax extenders which amend and revise various provisions of the Internal Revenue Code of 1986, as amended (Code).

In our update on December 16, 2015, we outlined highlights of the Path Act and the Appropriations Act. This update provides a more detailed discussion of certain energy and renewable energy provisions contained in the legislation.

Energy and Renewable Energy Amendments and Tax Extenders

Wind Energy Production Tax Credit. The Omnibus Act amends Section 45(d) of the Code by extending the production tax credit (PTC) for wind energy facilities for two years, applicable to production from projects beginning construction in 2015 and 2016. For projects beginning construction in 2017 and prior to 2020, the Omnibus Act provides for a phase-out of the PTC, as follows:

  • PTC is reduced by 20 percent for projects which begin construction in 2017
  • PTC is reduced by 40 percent for projects which begin construction in 2018
  • PTC is reduced by 60 percent for projects which begin construction in 2019

The amendments are effective on January 1, 2015. (Division P — Tax-Related Provisions, Section 301, Omnibus Act)

Wind Energy Investment Tax Credit in Lieu of Production Tax Credit. The Omnibus Act amends Sections 48(a) and 48(a)(5)(C) of the Code to provide that the investment tax credit (ITC) in lieu of PTC is also extended for wind energy facilities beginning construction in 2015 and 2016, subject to a phase-out of the ITC, as follows:

  • ITC is reduced by 20 percent for projects which begin construction in 2017
  • ITC is reduced by 40 percent for projects which begin construction in 2018
  • ITC is reduced by 60 percent for projects which begin construction in 2019

The amendments are effective on January 1, 2015. (Division P — Tax-Related Provisions, Section 302, Omnibus Act)

Solar Investment Tax Credit. The Omnibus Act amends Section 48(a)(2)(A)(i) of the Code by extending the ITC for solar energy for projects beginning construction prior to 2022. Except as provided below, for projects beginning construction in 2021 and 2022, the Omnibus Act provides for a phase-out of the ITC, as follows:

  • ITC is reduced to 26 percent for projects which begin construction in 2020
  • ITC is reduced to 22 percent for projects which begin construction in 2021

In the case of projects that begin construction prior to 2022 and which are not placed in service before 2024, the ITC is reduced to 10 percent. The foregoing amendments are effective on December 18, 2015. (Division P — Tax-Related Provisions, Section 303, Omnibus Act). Additionally, the Omnibus Act amends Section 25D of the Code to provide that the credit against tax for individuals is extended for expenditures made prior to 2022 for qualified solar energy expenditures and qualified water heating property expenditures, and is subject to a similar phase-out. The amendments are effective on December 18, 2015. (Division P — Tax-Related Provisions, Section 304, Omnibus Act).

Other Facilities Producing Energy from Certain Renewable Resources. The Path Act amends Section 45(d) of the Code by extending the PTC for certain other projects which begin construction before January 1, 2017. These projects include:

  • Closed-loop biomass facilities under Section 45(d)(2) of the Code
  • Open-loop biomass facilities under Section 45(d)(3) of the Code
  • Geothermal or solar energy facilities under Section 45(d)(4) of the Code
  • Landfill gas facilities under Section 45(d)(6) of the Code
  • Trash facilities under Section 45(d)(7) of the Code
  • Qualified hydropower facilities under Section 45(d)(9) of the Code
  • Marine and hydrokinetic renewable energy facilities under Section 45(d)(11) of the Code

The Path Act also amends Section 48(a)(5)(C)(ii) of the Code to provide that the ITC in lieu of PTC is also extended for projects which begin construction before January 1, 2017. The amendments are effective on January 1, 2015. (Path Act, Section 187)

Second Generation Biofuels Producer Credit. The Path Act amends Section 40(b)(6)(J)(i) of the Code by extending the $1.01 per gallon Second Generation Biofuel Producer Credit for qualified second generation biofuel production occurring prior to January 1, 2017. The amendments are effective for qualified second generation biofuels production after December 31, 2014. (Path Act, Section 184)

Biodiesel and Renewable Diesel Incentives. The Path Act amends Sections 40(A)(g) and 6426(c)(6) of the Code by extending the $1.00 per gallon biodiesel fuels incentives through December 31, 2016. The amendments apply to fuel sold or used after December 31, 2014. (Path Act, Section 185)

Production Credit for Indian Coal Facilities. The Path Act amends Sections 45(d)(10) and 45(e)(10)(a) of the Code to extend the $2.00 per ton PTC through 2016 for coal produced on land owned by an Indian tribe, to the extent the facility was placed in service before 2009. In addition, the Path Act modifies the credit beginning in 2016 by removing the placed-in-service-date limitation, removing the nine-year limitation and allowing the credit to be claimed against the alternative minimum tax. The amendments:

  • To extend the PTC to 2016 apply to coal produced after December 31, 2014
  • To remove the placed in service date limitation apply to coal produced and sold after December 31, 2015
  • To apply the credit to the alternative minimum tax apply to credits determined for taxable years beginning after December 31, 2015

(Path Act, Section 186)

Special Allowance for Second Generation Biofuel Plant Property. The Path Act amends Section 168(l)(2)(D) of the Code to extend through 2016 the 50 percent bonus depreciation for cellulosic biofuels facilities. The amendment applies to property placed in service after December 31, 2014. (Path Act, Section 189)

Credits Relating to Alternative Fuels. The Path Act amends Sections 6426(d) and 6426(e)(3) of the Code to extend through 2016 the 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit. The amendments are effective for fuel sold or used after December 31, 2014. (Path Act, Section 192)

Energy Efficient Commercial Buildings. The Path Act amends Section 179D(h) of the Code to extend through 2016 the deduction for energy efficiency improvements to interior lighting, heating, cooling, ventilation, hot water systems and the building envelope for commercial buildings. The amendments are effective to property placed in service after December 31, 2014. (Path Act, Section 190)

Lifting of Restrictions on Oil Exports. The Omnibus Act repeals Section 103 of the Energy Policy and Conservation Act to provide that “Notwithstanding any other provision of law, except as provided in subsections (c) and (d), to promote the efficient exploration, production, storage, supply, marketing, pricing, and regulation of energy resources, including fossil fuels, no official of the Federal Government shall impose or enforce any restriction on the export of crude oil.” The exceptions provided in (c) and (d) above permit the President to impose limitations on exports where:

  • A foreign person or government has been sanctioned
  • There exists a national emergency
  • Sanctions or trade restrictions have been imposed for reasons of national security
  • There exists a sustained material shortage of supply.

(Division O — Other Matters, Section 101, Omnibus Act)

Miscellaneous Amendments and Extenders

New Markets Tax Credit. The Path Act amends Section 45D of the Code to extend the NMTC through 2019 and to allocate $3.5 billion of credits for each of years 2015 to 2019. The amendments are effective for calendar years beginning after December 31, 2014. (Path Act, Section 141)

Bonus Depreciation. The Path Act amends Section 168(k) of the Code to extend bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The amendments provide for a phasedown of bonus depreciation, as follows:

  • January 1, 2015 through December 31, 2017—50 percent
  • January 1, 2018 through December 31, 2018—40 percent
  • January 1, 2019 through December 31, 2019—30 percent

To benefit from bonus depreciation, the requirements of Section 168(k)(2)(A) for “qualified property” must be met. Additionally, the amendments permit a taxpayer to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. During 2016, the provision modifies the AMT by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Reference is made to Section 143 of the Path Act for the various effective dates of these amendments. (Path Act, Section 143)

Increased Expensing Limitations and Treatment of Certain Property as Section 179 Property. The Path Act amends Section 179 to permanently extend the expensing limitation and phase-out amounts currently in effect from $25,000 and $200,000, respectively, to $500,000 and $2,000,000, and provides for indexing both the $500,000 and $2,000,000 limits to inflation beginning in 2016. Additionally, the amendments permanently extend the provisions for expensing of computer software and qualified real property, and modify the expensing limitation for qualified real property by elimination of the $250,000 aggregate cost which may be taken into account for any taxable year. Reference is made to Section 124 of the Path Act for the various effective dates of these amendments. (Path Act, Section 124)

Research Tax Credit. The Path Act amends Sections 41(h) and 38(c)(4)(b) of the Code to permanently extend the research and development (R&D) tax credit. Additionally, beginning in 2016, certain eligible small businesses (those having $50 million or less in gross receipts) may claim the R&D tax credit against AMT tax liability and certain qualified small businesses (those having $5 million or less in gross receipts) may use the R&D tax credit against the employer’s payroll tax liability. (Path Act, Section 121)

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