Production Tax Credit Amended and Extended in Fiscal Cliff Deal | Practical Law

Production Tax Credit Amended and Extended in Fiscal Cliff Deal | Practical Law

An update on the passage of  the American Taxpayer Relief Act of 2012 which, among other things, averted the "fiscal cliff" and modified and extended the production tax credit for qualifying renewable energy projects.

Production Tax Credit Amended and Extended in Fiscal Cliff Deal

Practical Law Legal Update 8-523-3905 (Approx. 3 pages)

Production Tax Credit Amended and Extended in Fiscal Cliff Deal

by PLC Finance
Published on 04 Jan 2013 • USA (National/Federal)
An update on the passage of the American Taxpayer Relief Act of 2012 which, among other things, averted the "fiscal cliff" and modified and extended the production tax credit for qualifying renewable energy projects.
On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the Act) to avert the "fiscal cliff." The Act includes several significant energy related provisions, including:
  • Extending the production tax credit (PTC) to January 1, 2014 from January 1, 2013 for qualifying wind projects. Although this extension is welcomed by the wind industry, the uncertainty about whether the PTC would be extended has already caused many manufacturers to reduce production of turbines to meet the expected reduced demand in 2013. It also caused many developers to reduce the installed capacity of the projects they undertook in order to meet the December 31, 2012 deadline or to postpone these projects altogether. This resulted in many wind projects closing in the first half of the year and falling dramatically by year's end.
  • Amending the definition of qualifying projects to apply to all eligible renewable projects (including geothermal, biomass and tidal) that begin construction before January 1, 2014. Prior reiterations of the PTC had required that qualifying projects be placed in service (i.e. generating power) by the applicable deadline. The change enables developers with projects in the pipeline to qualify for this tax credit if they begin construction before 2014 since it can take up 2 years to complete these projects. The Act does not, however, define what it means to begin construction. Hopefully, the IRS, which administers this tax credit, will provide guidance on this soon.
  • Extending the sunset date for sponsors to elect to claim the investment tax credit instead of the PTC to January 1, 2014 from January 1, 2013 if the project has begun construction by that date.
  • Extending the 50% bonus depreciation of the cost of eligible property placed in service to January 1, 2014 from January 1, 2013.
While this extension will provide some stability to the industry in the short-term, it is significantly shorter than many industry observers and developers had hoped. In addition, it does not resolve the boom and bust cycle that has plagued the wind industry since it was first established under the Energy Policy Act of 1992. In anticipation of the PTC's expiration, many developers postponed projects or rushed to complete projects by January 1, 2013, which has resulted in record new wind energy installed capacity for 2012. However, new wind installed capacity is expected to drop significantly in 2013. Furthermore, the short duration of the extension even in its modified form may mean that developers rush projects to begin construction by January 1, 2014.
For more information on wind energy and the PTC, see Practice Notes, Understanding Renewable Energy: Wind and Wind Energy Project Development Issues: Preliminary Considerations.