The US stimulus bill passed into law yesterday includes several key extensions and additions to the tax credits available for renewable energy. The bill had been agreed to by Congress early last week and signed into law by the president last night.
The investment tax credit (ITC) under Section 48 was extended by two years. That is, a solar project that begins construction in either 2020, 2021 or 2022 is eligible for a 26% ITC. A solar project that begins construction in 2023 is eligible for a 22% ITC. Solar projects that begin construction after 2023 are only eligible for a 10% ITC. Likewise, solar projects that are placed in service after 2025 are only eligible for a 10% ITC.
The ITC was also extended by two years for other technologies, including fuel cells, microturbine, combined heat and power and small wind energy property. Fuel cells and small wind energy property are still subject to a phase-out, also extended by two years. That is, fuel cell and small wind energy property are eligible for a 26% ITC when construction begins in 2020, 2021 or 2022, and a 22% ITC when construction begins in 2023. The ITC for these technologies drops to 0% if construction begins after 2023, or if the project is placed in service after 2025. For microturbine and combined heat and power, the ITC is 10% if construction begins before 2024, and drops to 0% if construction begins after 2023.
The production tax credit (PTC) under Section 48 was extended for one year. That is, a wind project that begins construction in either 2020 or 2021 is eligible for a 60% PTC. Wind projects that begin construction after 2021 are not eligible for any PTC. The one-year extension also applies to other PTC-eligible technologies, including biomass, geothermal, landfill gas, trash facilities, qualified hydropower and marine and hydrokinetic renewable energy facilities. The election to take the ITC in lieu of PTC was also extended by one year.
The bill does not impact the Internal Revenue Service (IRS) „continuity requirements“ for purposes of determining when a project is treated as beginning construction. That is, a project must generally be placed into service within four years of beginning construction. The interplay of these rules with the 10% ITC cliff means that solar projects that begin construction in 2020 must be placed in service by the end of 2024 and that solar projects that begin construction in either 2021 or 2022 must be placed in service by the end of 2025 to qualify for the 26% ITC. Projects beginning construction in 2023 must also be placed into service by the end of 2025 to qualify for the 22% ITC, and projects beginning construction after 2023 and/or placed in service after 2025 should all be entitled to the 10% ITC.
The bill also includes a long-awaited standalone ITC for offshore wind. The offshore wind ITC is 30% for any projects where construction begins before 2026 and is not subject to any phase down. Qualified facilities are those located in the inland navigable waters of the United States or in the coastal waters of the United States. This is an exciting advancement for renewable energy tax credits and is expected to generate significant investment in the coming years.
The bill did not include a separate ITC for standalone storage. However, IRS guidance is still in place that contemplates an ITC for storage associated with eligible projects. Further, the IRS has for months been promising additional guidance for storage in the ITC and PTC context.
The final bill was one of the largest in American history, and little was known about its contents until it was made public on December 21—so the inclusion of these energy provisions was a welcomed surprise to the renewable energy sector. These legislative changes are likely to spur tremendous growth and investment in the industry for years to come.
Taxpayers who have been scrambling at the end of 2020 to qualify a project under existing „begin construction“ rules can likely breathe a sigh of relief, as they can push some existing contracts, deliveries and negotiations into 2021 and beyond. The extensions also take pressure off some projects that were struggling to meet deadlines because of supply chain delays due to COVID-19. On the other hand, taxpayers may need to take planning precautions for projects that had previously qualified for the „begin construction“ rules to ensure they continue to qualify for the ITC and PTC.