taxpayer
Subscribe to taxpayer's Posts

Key Takeaways | Tax Credit Bonuses for Low-Income and Coal, Oil and Gas Energy Communities

On September 13, McDermott Partners Heather Cooper and Philip Tingle provided a detailed overview of the bonus tax credits under the Inflation Reduction Act of 2022 for projects satisfying low-income thresholds or built-in energy communities with ties to coal, oil and natural gas, including the technical requirements for each bonus and how these new rules will impact deal pipeline, planning and negotiations.

Below are key takeaways from the discussion:

1. There is an annual capacity limitation of 1.8 gigawatts direct current for low-income bonuses. It’s unknown whether this capacity will be allocated to projects on a first-come, first-served basis or shared amongst all applicants annually in the event capacity is reached. The Internal Revenue Service must provide guidance on this point within 180 days of enactment.

2. Projects that fail to satisfy relevant low-income/poverty metrics are subject to recapture (with a one-time opportunity to cure). It remains to be seen whether circumstances outside taxpayer control (e.g., local economic improvement) will trigger recapture.

3. At present, it is difficult to transact on the energy community bonus-based projects located in brownfield or MSA/non-MSA because of a lack of guidance. Projects located in census tracts with retired coal fired EGUs or coal mines, however, can be transacted based on the statute alone.

4. Projects will require researching, tracking and targeting areas where coal mines closed, coal fired EGUs retired and (after relevant guidance is released) brownfields are located.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




read more

IRS Provides Relief on Begin Construction Continuity Requirements

Yesterday, the Internal Revenue Service (IRS) issued Notice 2021-41 (the Notice), providing relief for continuity requirements for the investment tax credit (ITC) under Section 48 and the production tax credit (PTC) under Section 45.

The applicable tax rate for the ITC and PTC is based on the year a project “begins construction.” Under existing IRS guidance, projects are treated as having begun construction by either satisfying the Physical Work Test or the Five Percent Safe Harbor. Both methods require a taxpayer to make continuous progress toward completion of the facility once construction has begun (Continuity Requirement). The IRS previously provided a Continuity Safe Harbor, whereby the Continuity Requirement will be deemed met if the project is placed in service within a certain number of years from beginning construction. For most projects, the Continuity Safe Harbor was previously four years and was extended to five years last year for projects that otherwise began construction in 2016 or 2017. Under the existing guidance, if the Continuity Safe Harbor is not met, a taxpayer can satisfy the Continuity Requirement by meeting the Continuous Construction Test (in the case of the Physical Work Test) or the Continuous Efforts Test (in the case of the Five Percent Safe Harbor). The Continuous Construction Test and Continuous Efforts Test are both demonstrated through facts and circumstances.

In the Notice, the IRS further extended the Continuity Safe Harbor to six years for projects that otherwise began construction in 2016 through 2019 and to five years for projects that otherwise began construction in 2020. In other words, the Continuity Safe Harbor will be satisfied if a taxpayer places the project in service by the end of a calendar year that is no more than five or six years (as applicable) after the calendar year during which construction of the project otherwise began.

The Notice further provides that for a project that does not satisfy the Continuity Safe Harbor, the taxpayer can satisfy either the Continuous Efforts Test or Continuous Construction Test (regardless of whether the taxpayer is relying on the Physical Work Test or the Five Percent Safe Harbor). Under previous guidance, a taxpayer relying on the Physical Work Test was all but certain to fail the Continuous Construction Test, which seems to require regular physical work from the time construction begins. The Continuous Efforts Test appears to encompass more activities than the Continuous Construction Test and may be easier to satisfy for some taxpayers.

The Notice clarifies that the relief was in response to the fact that “regional, national, or global circumstances due to the COVID-19 pandemic have continued to cause delays in the development of certain facilities eligible for the PTC and the ITC. These extraordinary delays have adversely affected the ability of many taxpayers to place facilities in service in time to meet the Continuity Safe Harbor.”

The Notice will be welcome relief to many taxpayers who have struggled with project delays in recent years.




read more

STAY CONNECTED

TOPICS

ARCHIVES

Ranked In Chambers USA 2022
GCR 100 global elite