Congress unveils 2020 energy tax extenders

Congress is moving rapidly towards passing the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Extenders Bill) as part of the Consolidated Appropriations Act, 2021.  If enacted, the Extenders Bill would extend certain tax credits for the renewable energy and alternative fuels industries and make certain other changes to energy tax-related provisions.

Highlights of the Extenders Bill include:

• One-year extension of the section 45 production tax credit (PTC) (and section 48 investment tax credit (ITC) in lieu of PTC) for wind facilities at the current 2020 rate,
• A 30% ITC for offshore wind facilities the construction of which begin before 2026,
• Two-year extension of the section 48 ITC for solar and other facilities at the current 26% rate, 
• Addition of a section 48 ITC for waste energy recovery property,
• Extensions for certain other PTC and ITC-eligible facilities,
• Two year extension of the section 45Q carbon capture and sequestration credit,
• Extensions of the alternative fuel tax credits, and
• Extensions of additional energy tax provisions.

Congressional leaders unveiled the Extenders Bill on December 21, 2020. The Extenders Bill is expected to be attached to spending bills that likely will be passed and signed into law in a matter of days.

Section 45 Production Tax Credit (PTC)

Under existing law, the amount of the otherwise available PTC (and ITC in lieu of PTC) for wind facilities ramps down for wind facilities the construction of which began after 2016 and is fully eliminated for facilities the construction of which begin after 2020.

Under the Extenders Bill, the credit for wind facilities is extended by one year at the current PTC rate (note, however, that a more favorable, longer term ITC extension is provided for offshore wind facilities as discussed in the section 48 ITC summary below):   

If construction begins:	Existing Law Reduction in available credit	Extenders Bill Reduction in available credit
Prior to 2017	0%	0%
In 2017	20%	20%
In 2018	40%	40%
In 2019	60%	60%
In 2020	40%	40%
In 2021	100%	40%
In 2022 or later	100%	100%

Eversheds Sutherland Observation: Taxpayers that have begun or are in the process of beginning construction on facilities in 2020 may want to quickly consider opportunities to shift to a 2021 (or later) beginning of construction date if helpful to have additional time available to satisfy the continuity safe harbor.

Under existing law, the PTC (and ITC in lieu of PTC) is not available for the following facilities if construction begins after December 31, 2020.  Under the Extenders Bill, the 100% PTC (and ITC in lieu of PTC) would be available for these facilities if construction begins by December 31, 2021. 

• closed-loop biomass facilities,
• open-loop biomass facilities,
• geothermal energy facilities,
• landfill gas facilities,
• trash facilities,
• qualified hydropower facilities, and
• marine and hydrokinetic renewable energy facilities.

Section 48 Investment Tax Credit (ITC)

Under existing law, the amount of the otherwise available ITC for solar facilities ramps down for solar facilities the construction of which began after 2019.  Under the Extenders Bill, the credit for solar facilities is extended by two years at the current 26% rate and the placed-in-service date deadline is extended by two years:

Extenders Bill
If construction begins:	And the project is placed in service by:	The applicable ITC percentage is:
Prior to 2020	The end of 2025	30%
In 2020	The end of 2025	26%
In 2021	The end of 2025	26%
In 2022	The end of 2025	26%
In 2023	The end of 2025	22%
Before 2024	After 2025	10%
After 2023	In any year	10%

Offshore wind facilities are separately addressed in the Extenders Bill. The bill would add new rules applicable to offshore wind facilities that provide for a 30% ITC for offshore wind facilities on which construction begins before 2026. A qualified offshore wind facility is defined as a qualified wind facility as described in section 45(d)(1) that is located in the inland navigable waters or coastal waters of the United States. 

Eversheds Sutherland Observation: The continuity safe harbor for offshore wind projects is not addressed in the Extenders Bill, but rather will require an update to existing IRS guidance. We are hopeful that updated IRS guidance will provide for a continuity safe harbor for offshore wind projects well in excess of the current four-year period given the anticipated construction timeframes for the development of such projects.

The Extenders Bill would also add waste energy recovery property as energy property eligible for the ITC under section 48 beginning in 2021.  Waste energy recovery property is defined as property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity.  Property with a capacity in excess of 50 megawatts is excluded from the definition of waste energy recovery property.  Property that is part of a combined heat and power system property is not treated as waste energy recovery property unless a taxpayer elects to have such property treated as waste energy recovery property and not combined heat and power system property.  Waste energy recovery property is subject to same deadlines that apply to qualified fuel cell, fiber-optic solar and small wind facilities detailed below.

The Extenders Bill extends the relevant dates for qualified fuel cell, fiber-optic solar and small wind facilities. Consequently, the relevant dates for these projects and waste energy recovery property would be as follows:

Extenders Bill
If construction begins:	And the project is placed in service by:	The applicable ITC percentage is:
Prior to 2020	The end of 2025	30%
In 2020	The end of 2025	26%
In 2021	The end of 2025	26%
In 2022	The end of 2025	26%
In 2023	The end of 2025	22%

If construction on these facilities begins after 2023 or the project is not placed in service by the end of 2025, no ITC would be available.

Under the Extenders Bill, the beginning of construction deadline for qualified microturbine, combined heat and power, and geothermal heat pump facilities is extended two years and such facilities are entitled to a 10% ITC if construction begins before 2024 and the facility is placed in service at any time. 

Eversheds Sutherland Observation: Although there have been numerous proposals for an ITC for standalone batteries and other storage that is not part of a renewable energy project, no such provisions were included in this Extenders Bill.

Section 45Q Carbon Capture and Sequestration Credit

The Extenders Bill would extend the section 45Q carbon capture and sequestration credit by two years such that construction such facilities must begin before January 1, 2026 rather than January 1, 2024 as provided under current law.

Eversheds Sutherland Observation: Given the absence of final regulations under section 45Q, the two-year extension is responsive to stakeholders’ concerns about the ability of developers to begin construction on carbon capture and sequestration projects before January 1, 2024. Based on various reports, we understand that Treasury and the IRS are seeking to issue those final regulations shortly.

Eversheds Sutherland Observation: Although there have been several proposals for a direct cash pay provision for section 45 PTCs, section 48 ITCs and the section 45Q credit, no such provisions were included in this Extenders Bill.

Biodiesel and Alternative Fuel Industries

The Extenders Bill would extend the section 40 second generation biofuel producer credit to biofuel produced through December 31, 2021.

The Extenders Bill would also extend the section 6426 and section 6427 alternative fuels credits (other than the section 6427 credit for alternative fuel mixtures) for fuel sold or used by December 31, 2021. 

The Extenders Bill would not extend the section 40A biodiesel and renewable diesel credits or the section 6426 and section 6427 biodiesel mixture credits which were extended through 2022 by the Taxpayer Certainty and Disaster Relief Act of 2019.

Additional Energy Tax Provisions:

• The section 179D energy efficient commercial buildings deduction was made permanent.  Under existing law, the deduction is available only for property placed in service on or before December 31, 2020.
• Five-year extension of the section 4611 oil spill liability trust fund financing rate through 2025.
• Extension by one year of the section 25C nonbusiness energy property credit to property placed in service by December 31, 2021.
• Extension by one year of the section 30B credit for fuel cell motor vehicles to property purchased by December 31, 2021.
• Extension by one year of the section 30C alternative fuel refueling property credit to property placed in service by December 31, 2021.
• One-year extension of the section 30D credit for two-wheeled plug-in electric vehicles acquired through 2021.
• One-year extension of the section 45(e)(10) credit for Indian coal production facilities for coal produced by December 31, 2021.
• Extension by one year of the section 45L credit to energy efficient new homes acquired by 31, 2021.

If you have any questions about this legal alert, please feel free to contact any of the attorneys listed under Related People/Contributors or the Eversheds Sutherland attorney with whom you regularly work.