United States: Key Energy-Related Tax Provisions In The 2016 Budget Proposal

As in previous proposed budgets, President Obama's recently released budget proposal for the 2016 fiscal year contains energy-related tax provisions that include a permanent extension of the renewable energy production tax credit (PTC) and a provision making it refundable. Making the PTC permanent and refundable signals the administration's continued strong support for renewable energy.

The Obama administration's budget proposal (Proposal) affects several energy-related tax provisions, many of which were also proposed in the revenue proposals from past years. For more information, see McDermott's analyses of the energy tax proposals in the 2011, 2012, 2013 and 2014 proposed budgets.

This Special Report offers a summary of the key energy-related tax provisions contained in the Proposal and discussed further in the U.S. Department of the Treasury's general explanation of the Proposal (Green Book).

Modify and Permanently Extend the Production Tax Credit

Last year, Congress extended the PTC under section 45 of the Code through the end of 2014 for qualifying renewable energy facilities, such as wind, solar, biomass, geothermal, landfill gas, municipal solid waste, hydroelectric, and marine and hydrokinetic facilities. To qualify for the PTC, construction of the qualified facility must have begun before January 1, 2015.

The PTC is a credit per kilowatt-hour of electricity produced from qualified energy facilities. The base amount of the PTC (indexed annually for inflation) is 1.5 cents per kilowatt hour of electricity produced from wind, closed-loop biomass, geothermal energy and solar energy, and 0.75 cents per kilowatt hour for electricity produced in open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities. In 2014, the credit was 2.3 cents per kilowatt hour for qualified resources in the first group and 1.1 cents per kilowatt hour for qualified resources in the second group.

The Proposal would permanently extend the PTC, and for facilities on which construction begins after December 31, 2015, the Proposal would make the PTC refundable. Many renewable energy developers are new, growing firms that have insufficient tax liability to claim the PTC. As a result, these developers enter into joint ventures or other financing transactions with other parties to take advantage of the PTC. By making the PTC refundable, transaction costs for developers will be reduced and incentives for producing renewable energy will be increased. The Proposal would also allow the PTC for solar facilities that qualify for the investment tax credit under section 48 of the Code (ITC) and for which construction begins after December 31, 2015.

In addition to the general PTC, the Proposal would extend the credit to electricity consumed directly by the producer to the extent that the production can be independently verified. The Proposal would also allow individuals to claim the PTC for energy efficient property installed on a residential dwelling unit. The current energy efficient property tax credit under section 25D of the Code would be allowed to expire at the end of 2016.

Under the Proposal, the ITC would also be permanently extended. The ITC provides a 30 percent credit for solar, fuel cell and small wind property placed in service by December 31, 2016, and a 10 percent credit for geothermal, microturbine, and combined heat and power property (and for solar and non-heat pump geothermal property placed in service after 2016). The Proposal would make those credits permanent, and would also make permanent the election to claim the ITC in lieu of the PTC for qualified facilities eligible for the PTC.

Enhance and Make Permanent the Research and Experimentation Tax Credit

The research and experimentation (R&E) credit pursuant to section 41 of the Code expired on December 31, 2014. The R&E "traditional" tax credit equals 20 percent of eligible costs for qualified research expenses above a base amount. The base amount is generally computed by looking at the ratio of the taxpayer's research expenses to its gross receipts for past periods. The base amount cannot be less than 50 percent of the taxpayer's qualified research expenses for the taxable year. Taxpayers can also elect the alternative simplified research credit (ASC), which is equal to 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. An election to use the ASC applies to all succeeding taxable years unless revoked with the consent of the Secretary.

As explained in the Green Book, the Proposal would make the R&E credit permanent, and, effective after December 31, 2015, would eliminate the traditional R&E credit but increase the rate of the ASC from 14 percent to 18 percent.

Provide Carbon Dioxide Investment and Sequestration Tax Credits

Under current law, a $20 credit is allowed for every qualified metric ton of carbon dioxide (CO2) that is captured at a qualified facility and disposed of in secure geological storage. The credit is $10 per metric ton if the CO2 is used as a tertiary injectant in an enhanced oil or natural gas recovery. Credits will be allowed until 75 million metric tons of qualified CO2 have been sequestered.

The Proposal would allocate $2 billion as a new refundable investment tax credit for investments in new and retrofitted electric generating units. New units, and the portions of retrofitted units to which the credit applied, would be required to capture more than 75 percent of their CO2 emissions. The credit would only be available to retrofits that have capacities greater than 250 megawatts and that capture more than one million metric tons of CO2 per year.

The investment credit would equal 30 percent of the installed cost of eligible property, which includes CO2 transportation and storage infrastructure, such as pipelines, wells and monitoring systems. Eligible taxpayers must apply for the credit within 18 months after enactment. The Secretary of the Treasury would award credits based upon the following two considerations:

  • The credit per ton of net sequestration capability
  • Whether the technology and plant will contribute to the long-run viability of carbon sequestration from fossil fuel combustion

In allocating credits, the Secretary would statutorily be required to allocate no more than 60 percent to either new or retrofit projects and no more than 40 percent to any one technology category (i.e., liquid solvents, solid sorbents, gas-separation membranes, warm gas clean-up, oxygen fired combustion systems and hybrid systems). At least 70 percent of the credits would be required to be allocated to projects fueled by more than 75 percent coal.

In addition to the investment credit, the Proposal would allow a new refundable sequestration tax credit for qualified investments. For CO2 permanently sequestered and not beneficially reused, the credit would be $50 per metric ton. For CO2 permanently sequestered but beneficially reused, the credit would be $10 per metric ton. The credit would be indexed for inflation and allowed for a maximum of 20 years of production.

To read this Report in full, please click here.

Key Energy-Related Tax Provisions In The 2016 Budget Proposal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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