Digging Deeper: Tax Considerations for Renewable Energy Projects | Husch Blackwell LLP

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One of the main drivers of renewable energy projects is tax considerations. This fall, Husch Blackwell’s Energy and Natural Resources team hosted a webinar that explored available federal and state credits, reductions, incentives, and in some cases, specialized taxes that affect the profitability of energy projects. renewable. Over the course of the program, we received a number of questions that are worth sharing with our blog subscribers who address tax issues related to their renewable energy projects. This article answers these questions.

With direct pay, what percentage of the capital stack do you expect tax fairness to be?

Direct payment ”refers to a provision of a legislative text published by the House Ways and Means Committee, in particular in the subheading G on green energy (the« green energy subheading » ). At the time of writing, this provision, which is part of the House Reconciliation Bill (aka) Build Back Better Act) has not yet been enacted. The direct payment (or, as it is sometimes called, elective payment) provision, if passed, would allow a taxpayer to elect to be treated as having made a tax payment equal to the value of the tax. credit for which it would otherwise be eligible.

Rather than deferring credits to years when the credit can offset a taxpayer’s tax liability, this provision would allow a taxpayer to claim a refund for the deemed payment after construction of the project is complete. This would allow entities with little or no tax to accelerate the use of credits.

It is difficult to say exactly what effect the adoption of the direct payment provision will have on the percentage of tax capital of projects; however, it would appear that this would put downward pressure as the adoption of the direct payment provision would increase the number of investors who could take advantage of renewable energy credits.

Will a tax equity investor be needed to realize the benefits of the Modified Accelerated Cost Recovery System (MACRS)?

MACRS tax benefits are not credits. These are accelerated depreciation deductions. As information on MACRS tax benefits, for example, a solar project may qualify for an initial ITC based on the amount invested in the project and then, in addition to this credit, may also generate MACRS depreciation deductions. annuals that a taxpayer could use. to offset other income. In the absence of amendments or indications to the contrary, it does not appear that the direct payment provisions of the Green Energy subtitle would affect the benefits of MACRS. Therefore, tax fairness can always be the most effective use of these tax advantages.

Is cogeneration eligible for ITC?

Combined heat and power (CHP) plants (i.e. combined heat and power or cogeneration plants) currently benefit from an investment tax credit (ITC) 10% under Section 48 of the Internal Revenue Code, subject to certain limitations. Some key requirements state that unless the system uses biomass, it must achieve energy efficiency greater than 60 percent and must generate at least 20 percent of its total useful energy as thermal energy, which is not used in the generation of mechanical energy. , electric or a combination of power. The Green Energy subtitle provides that cogeneration would qualify for ITC and increase the maximum potential credit rate from 10% to 30%.

Should storage be added to ITC?

Clearly, energy storage facilities are essential components of renewable energy infrastructure, in terms of intermittency, reliability and stability solutions. Currently, a storage system coupled with a solar project will be eligible for ITC. If the green energy subtitle is adopted, stand-alone storage will also qualify.

If the Green Energy subtitle is approved, will a solar developer be able to claim the PTC (Production Tax Credit) instead of the ITC?

Yes, the PTC would be available until 2026, gradually increasing to 80% in 2027 and 60% in 2028. Taxpayers could continue to claim the ITC instead of the PTC. Since ITC is measured based on a taxpayer’s initial investment in a solar project and PTC is based on a project’s actual output, a taxpayer might find PTC more beneficial than ITC regarding a solar project with a relatively low yield. initial costs and relatively high projected production.

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