The much anticipated tax reform bill released today by the Republican leadership in the House would make several potentially significant changes to certain energy tax provisions. These would include changes to the Production Tax Credit (“PTC”) and the Energy Investment Tax Credit (“ITC”). Some of the most noteworthy energy-related proposals are:
- Elimination of Inflation Adjustment for PTC. Under current law, the amount of the PTC is adjusted annually for inflation, from a “base” of 1.5 cents per kilowatt hour of electricity produced and sold. For electricity produced and sold in 2017, the adjusted PTC amount is 2.7 cents per kilowatt hour. The bill would eliminate this inflation adjustment for facilities the construction of which begins after the bill’s date of enactment. This means that such projects would only be entitled to a credit of 1.5 cents per kilowatt hour.
- Statutory Continuous Construction Requirement. For both the PTC and the ITC, the bill would impose a statutory requirement that, for a project to be treated as having “begun construction” within the required time-frame, the taxpayer must have in place a “continuous program of construction.” Under a safe harbor created by the current IRS guidance, a taxpayer is considered to have met this “continuity” requirement if the facility is placed in service within four years of the year in which construction begins. By eliminating this IRS rule, a taxpayer that began construction either by use of the 5% safe harbor or physical work would not be eligible for the PTC or ITC unless there was a continuous program of construction.
- This change would apply to all projects not yet in service as of the date of enactment, whether or not construction has begun. Therefore, it would retroactively eliminate the placed-in-service safe harbor and could force taxpayers to revisit beginning-of-construction qualification. In cases of the PTC, this could result in a reduced credit under the phase-out provisions.
- The Joint Committee on Taxation estimates that the elimination of the inflation adjustment for the PTC and the statutory continuous construction requirement combined would generate $12.3 billion of revenue over 10 years.
- Phase out of 10 Percent Solar ITC. Under current law, the ITC for solar power is scheduled to phase down to 10 percent beginning after 2019. The bill would instead completely phase out (to zero) the ITC for projects the construction of which begins after 2027.
- Restoration of ITC for Certain “Orphan” Technologies. The extension of the ITC in 2015 arguably overlooked technologies such as fuel cells and combined heat and power facilities. The bill would restore the ITC for certain of these technologies, subject to the same phase out as the solar ITC.
- 100% Expensing. Projects placed in service after date of enactment would be entitled to immediately deduct (“expense”) the entire cost basis of the asset, rather than depreciating that amount under the applicable cost recovery system.
- Repeal of Certain Oil and Gas Credits. The bill would repeal the enhanced oil recovery credit and credit for producing oil and gas from marginal wells.