Maryland Enacts First in the Nation Energy Storage Tax Credit
On May 4, 2017, Maryland became the first state in the country to offer a tax credit for energy storage systems with Governor Larry Hogan’s (R) signing of Senate Bill No. 758 (available here).
The law provides a tax credit for certain costs of installing an energy storage system. Energy storage systems include systems used to store electrical energy, or mechanical, chemical, or thermal energy that was once electrical energy, for use as electrical energy at a later date or in a process that offsets electricity use at peak times. The tax credit is not limited to storage systems that are charged by renewable energy sources.[1] The tax credit is up to $5,000 for a system installed on a residential property and the lesser of $75,000 and 30 percent of the cost of the energy storage system for a system installed on a commercial property (which presumably would include a utility). The tax credit would apply to systems installed between January 1, 2018, and December 31, 2022. The tax credit may only be used to offset Maryland income tax liability (i.e., it cannot be applied against other types of Maryland taxes such as excise tax) and may not be carried forward to another taxable year. The law sets a limit of $750,000 on the aggregate tax credits issued to all taxpayers in a taxable year; such credits to be issued on a first-come, first-served basis.
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Oklahoma House Votes for Early Sunset of State Wind PTC
On March 9, 2017, Oklahoma’s House of Representatives passed H.B. 2298, which would end the Oklahoma production tax credit for wind energy production three and a half years earlier than current law. This measure was first proposed in Governor Fallin’s 2018 Executive Budget. See our prior coverage.
The bill provides a July 1, 2017 sunset date for wind facilities to be eligible for the zero-emission tax credits. Wind facilities must be placed in operation prior to that date to be eligible for the tax credits. The rate of the tax credit is unchanged at 0.5 cents per kilowatt-hour.
Interestingly, the early deadline only applies with respect to electricity generated by wind. The bill retains the original January 1, 2021 deadline for other zero-emission facilities, such as solar or geothermal facilities. However, the vast majority of zero-emission energy production in Oklahoma is from wind.
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Oklahoma Gov. Proposes New Tax on Wind, Early End to Wind Tax Credits
Oklahoma governor Mary Fallin (R) recently released her proposed 2018 Executive Budget, which includes two new anti-wind tax proposals.[1] The first proposal would end the zero-emission tax credit for wind facilities placed in service after 2017. The second proposal would begin taxing the production of wind energy at $0.005 per KwH produced.
Oklahoma is facing a budget shortfall that has been projected to be nearly $900 million. One of the primary causes of the revenue shortfall is less tax revenue due to low oil prices and an increase in wind energy production resulting in greater tax credits. Governor Fallin’s tax proposals would reduce the amount of tax credits available for wind energy production and increase revenue by imposing a new production tax of electricity generated by wind.[2]
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IRS Extends Continuity Safe Harbor Until December 31, 2018
On December 15, 2016, the US Internal Revenue Service (the “IRS”) released Notice 2017-4 (the “Notice”), which updates previous IRS “start of construction” guidance by extending the Continuity Safe Harbor (described below) to December 31, 2018, and modifying and clarifying Notice 2016-31.1 The Notice is good news for developers with projects for which physical construction started during 2013 in that the extension gives them five years to complete construction and have the project placed in service. The Notice also means they need not worry about whether minimal amounts of physical construction during 2013 would cause these projects to be ineligible for the extension if the extension was only available to projects that commenced construction during 2014.
As discussed in more detail below, the Notice provides that a facility will be deemed to automatically meet the continuous construction requirement if it is placed in service by the later of (i) December 31, 2018 (a two-year extension of the prior deadline) or (ii) the end of the calendar year that is four years after the year in which construction started (the “Continuity Safe Harbor”).
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As Expected, Final REIT Regulations Offer Little Help for Solar
On August 30, 2016, the US Internal Revenue Service (“IRS”) finalized regulations that clarify the definition of real property for purposes of the real estate investment trust (“REIT”) provisions under Section 856. The final regulations generally are consistent with the proposed regulations that were released in May 2014. (See our earlier update, “Proposed Regulations Provide REITs a Framework for Solar Energy Property,” from May 14, 2014.) Certain solar industry participants were advocating for solar to be a REIT-eligible asset class in an effort to create a new market for solar projects in the event that the investment tax credit (“ITC”) declined to 10 percent after 2016. In December 2015, Congress extended the ITC with a gradual phase-down. (See our earlier update, “Certain US Energy Tax Credits Extended, But Phaseout Dates Scheduled,” from December 28, 2015.) The extension made the need to make solar a viable asset class for REITs a less pressing issue. It is fortunate for the solar industry that it does not have to rely on REITs, as the new regulations only enable REITs to own solar projects in limited situations.
The final regulations keep the facts and circumstances framework, as opposed to bright-line rules, for determining whether property is real property for purposes of Section 856. Therefore, all of the specific facts of a particular solar energy property will need to be analyzed to determine its REIT classification. The final regulations apply for taxable years beginning after August 31, 2016.
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New Tax Regulations Curtail Pass-Through Lease Structure Benefit
New Tax Regulations Curtail Pass-Through Lease Structure Benefit
The US Internal Revenue Service (IRS) recently released new proposed and temporary regulations addressing certain investment tax credit issues in a so-called “pass-through lease” structure. A pass-through lease is a structure in which the lessor of an investment tax credit-eligible asset makes an election to pass through the investment tax credit to the lessee of the asset, which lessee is frequently a partnership. The term “inverted lease” is sometimes used to refer to a pass-through lease structure in which each of the lessor and the lessee is a partnership, and the lessor and lessee partnerships are related to each other. The new regulations apply an “aggregate” treatment to partnerships (and S corporations) to ensure that any investment tax credit is appropriately taxable to the taxpayer that used the credit.
As discussed in more detail below, if a partner in a partnership that claimed an investment tax credit transfers its partnership interest during the deemed income period, these new regulations require the remaining income inclusion to be accelerated and to be recognized by the transferor. Further, under these regulations, the deemed income inclusion occurs at the partner level such that it does not result in an increase to the partners’ outside basis.
Although these temporary regulations are primarily directed at the structuring of historic tax credit transactions, the temporary regulations do have a limited effect with respect to solar transactions where the credit is passed through to a partnership (particularly the outside basis adjustment in the case of partnership lessees, as discussed below).
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