Opportunities for economic growth in Indian country — including the development of retail space, hotels and resorts, energy projects, data farms, and more traditional farming activities, to name a few — are tied to several recent tax-related developments. These developments include federal regulations regarding the taxation of on-reservation real property and improvements leased and/or owned by non-Indians, whether tribes can collect sales taxes for on-reservation transactions with non-Indians, and how treaties can impact taxation of certain off-reservation activities. The developments are important for both tribes and nontribal parties interested in investing in on-reservation economic growth and development.Read More
Leveraging the Opportunity Zones Tax Incentive to Improve Returns on Development and Operations in The Oil and Gas and Power Industries
A new federal tax incentive enacted in the 2017 tax reform package may provide a boost to many new facilities, repowering projects, and storage facilities. Qualified equipment could include a variety of energy and materials storage equipment, refining equipment, generating equipment, and extraction equipment.
The Qualified Opportunity Zones (“QOZ”) incentive provides attractive tax benefits for investors with capital gains to invest in property and businesses located in geographic areas that are designated as QOZ. Recently released regulations provide significant clarity and highlight how valuable the QOZ incentive can be for qualified investments. See our October 23 alert for a discussion of how the proposed regulations answer many important questions that provide the certainty investors, developers, and entrepreneurs in the energy and infrastructure industries need to proceed with QOZ investments and projects.Read More
On November 15, 2018, the Federal Energy Regulatory Commission (“FERC”) announced two major policy developments on the treatment of Accumulated Deferred Income Taxes (“ADIT”) in light of the recent reduction of the federal income tax rate in the Tax Cuts and Jobs Act of 2017. The proposed developments are intended to benefit utility customers by providing for a fair return of the tax savings created by the new law. First, FERC issued a Policy Statement that outlines FERC’s policy on the treatment of ADIT for both accounting and ratemaking purposes for public utilities, natural gas pipelines and oil pipelines in light of the recent reduction in income taxes. Second, in a notice of proposed rulemaking (“NOPR”), FERC proposes to require all public utility transmission providers to revise their transmission rates to account for the reduction in income taxes caused by the Tax Cuts and Jobs Act of 2017.
Policy Statement: Treatment of ADIT in Light of the Tax Rate Reduction
The Policy Statement, titled “Accounting and Ratemaking Treatment of Accumulated Deferred Income Taxes and Treatment Following the Sale or Retirement of Assets,” provides guidance on two questions FERC posed in its March 15, 2018, Notice of Inquiry (“NOI”).
First, FERC provides details on the specific accounts that public utilities and natural gas pipelines should use to record amortization of excess and deficient ADIT. FERC also explains how oil pipelines should treat deferred tax balances and provides that, for ratemaking purposes, FERC will continue the practice of amortization and removal of excess or deficient ADIT by reducing the returned allowed prior to grossing up for income taxes.
Second, FERC provides guidance on how public utilities, natural gas pipelines and oil pipelines should address excess and/or deficient ADIT that is recorded on their books after December 31, 2017, as a result of the sale or retirement of assets. The Policy Statement explains that in the case of a public utility or natural gas pipeline that continues to have an income tax allowance, any excess or deficient ADIT associated with an asset must continue to be amortized in rates even after the sale or retirement of that asset. If the rate treatment of the excess or deficient ADIT is disallowed, then the amounts should be written off in the year of the disallowance. In line with the existing Uniform System of Accounting for oil pipelines, FERC notes that for accounting purposes an oil pipeline’s ADIT balance will be reduced immediately by the full amount of the excess or deficient tax reserve. For ratemaking purposes, an oil pipeline would maintain the excess or deficient ADIT in the ADIT account and would continue to amortize those amounts when determining its income tax allowance as part of the ratemaking process after the assets are sold or retired.
The Policy Statement also states that, to provide greater transparency, public utilities, natural gas pipelines and oil pipelines should provide additional information regarding ADIT in their annual financial filings.
NOPR: Closing the Gap in Transmission Formula Rates of Public Utilities
The proposed reforms are intended to ensure ratepayers receive the benefits of the Tax Cuts and Jobs Act of 2017 and that transmission rates are just and reasonable following the enactment of the Tax Cuts and Jobs Act. As explained in the NOPR, the proposed changes fall into three categories and apply differently to transmission formula rates and stated rates. First, the NOPR proposes to require public utilities with formula rates to include a mechanism in their formula rate to deduct excess ADIT from or add deficient ADIT to their rate bases. Second, the NOPR proposes to require public utilities with transmission formula rates to include a mechanism in the formula rate that decreases or increases their income tax allowances by any amortized excess or deficient ADIT. The NOPR proposes to require that public utility transmission providers with stated rates to determine the excess or deficient ADIT caused by the Tax Cuts and Jobs Act based on the ADIT amounts approved in their last rate case and return or recover this amount from ratepayers. Finally, the NOPR proposes to require all public utility transmission providers with transmission formula rates to include a new permanent worksheet into their transmission formula rate that will track information annually related to excess or deficient ADIT.
In his remarks at FERC’s monthly meeting, Chairman Chatterjee emphasized that the NOPR does not prescribe a one-size-fits-all approach to make the required adjustments. Rather, the NOPR recognizes that multiple approaches to modify rate base may be just and reasonable.
All three Commissioners strongly supported the NOPR. Commissioner LaFleur stated, “My goal is to get tax savings back into the hands of the customers as quickly as possible. That’s not yet done, but this is an important first step.”
Comments are due within 30 days of publication of the NOPR in the Federal Register. We will continue to monitor the developments of this proceeding.
On Friday, March 2, the Internal Revenue Service released Private Letter Ruling (“PLR”) 201809003. The PLR is not binding precedent, but it indicates that the IRS will permit a taxpayer to claim a Code Section 25D credit in respect of a residential battery installed after the solar panels to which it will be attached was installed. In the PLR, the IRS expressly states that it will treat the battery as property that “uses solar energy to generate electricity,” provided only solar energy is used to charge it.
The PLR concerns individuals claiming a credit for a residential system, but don’t stop reading. This outcome matters for C&I and utility scale projects also.
Congress recently enacted the Bipartisan Budget Act of 2018, which contained a number of extenders applicable to tax credits for energy facilities. In the case of PTC-eligible energy facilities that were not covered by the earlier extension applicable to wind and solar, the credit was extended to facilities where construction was commenced before January 1, 2018. This new rule applies to closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic facilities. In addition, the election to claim the ITC in lieu of the PTC on these facilities was also extended to facilities where construction was commenced before January 1, 2018.
The ITC provisions were amended to extend the “commence construction” dates for 30% credits for fiber optic solar, qualified fuel cell, ground based thermal heating and cooling systems, and qualified small wind energy property to be consistent with solar facilities (terminating at the end of 2021). The Act also extended the “commence construction” dates for 10% credits relating to qualified microturbine and combined heat and power system property (also terminating at the end of 2021). To be eligible for the extension, combined heat and power system property must be placed into service after December 31, 2016.
In addition, the credits for fiber optic solar, qualified fuel cell and qualified small wind project will step down over the next 5 years. It also appears that any such property not placed in service by the end of 2023 will not be eligible for any ITC.
On Wednesday, January 24, 2018 from 12:00-1:30pm ET, K&L Gates Seattle associate Elizabeth Crouse will be moderating the ACORE and Bloomberg New Energy Finance sponsored webinar “Financing Renewables Post-Tax Reform.”
The State of the Industry Webinar, a quarterly series produced in partnership between ACORE and Bloomberg New Energy Finance, offers the latest intelligence and analysis on renewable energy markets, finance and policy.
Provisions included in the tax reform package will affect how leading financiers of renewable energy projects are taxed on their investments. These changes could impact the availability of tax equity – a critical source of financing that is a significant catalyst for market growth and responsible for roughly 20% of annual U.S. renewable energy investment. On this webinar, experts will consider how changes to the tax code might shake out in the renewable energy market, alternate sources of project financing and other factors developers should expect in 2018 and beyond.
Greg Wetstone, President & CEO, ACORE
Todd Foley, Senior Vice President of Policy and Government Affairs, ACORE
Ethan Zindler, Head of Americas, Bloomberg New Energy Finance
Elizabeth Crouse, Associate, K&L Gates LLP
Marshal Salant, Managing Director, Head of Alternative Energy Finance, Citi
Meghan Schultz, Senior Vice President, Structured Finance, Invenergy LLC
Kevin Walsh, Managing Director, Renewable Energy, GE Energy Financial Services
To register for this webinar, please click here.
On December 20, 2017, the U.S. House of Representatives voted to send the Tax Cuts and Jobs Act (the “Act”) to the president for his signature, which is the final step required to make the Act effective. What does the final bill mean for the renewable energy industry? The Investment Tax Credit (“ITC”) and the Production Tax Credit (“PTC”) appear to remain unchanged (for now) and the Base Erosion and Anti-Abuse Tax (aka, the BEAT or International AMT) in the final version of the Act is better for the renewables industry than in previous iterations. Nevertheless, a handful of other provisions may significantly impact the renewable energy industry.
Earlier this evening, the conference committee considering the tax reform bills previously passed by the U.S. House of Representatives and the U.S. Senate released legislative text for the much rumored conference bill. Although neither the Production Tax Credit (“PTC”) nor the Investment Tax Credit (“ITC”) are directly impacted, the Base Erosion and Anti-Abuse Tax (often referred to as the “BEAT” or “International AMT”) provides only partial relief for U.S. corporations subject to that tax that have PTCs or ITCs available to offset their U.S. federal income tax.
Under the conference bill, a U.S. corporation that is subject to the International AMT may use up to the lesser of 80% of the PTCs and ITCs available to them or the “base erosion minimum tax amount” only through 2025. The PTC and ITC cannot be used to eliminate any International AMT otherwise due.
As in previous iterations of the Tax Cuts and Jobs Act, the conference bill does not distinguish between PTCs and ITCs earned in respect of qualifying projects that have already been placed in service or begun construction. In addition, although the International AMT rate has been adjusted (5% for tax years beginning in 2018, 10% for tax years beginning between 2019 and 2025, and 12.5% thereafter), the rate applicable to U.S. corporations that are in an affiliated group with any bank or registered securities dealer will always be 1% higher than the generally applicable rate. In addition, the PTC and ITC cannot be used to reduce the International AMT due in any tax year beginning in 2026 or thereafter.
Thus, although the impact of the International AMT is somewhat reduced in the conference bill, the International AMT could still prompt some multinational investors in renewable energy projects to divest certain operating projects and projects under development as well as discourage investment in new projects.
On October 4, 2017, the Federal Energy Regulatory Commission (the “Commission”) issued an order allowing entities with certain passive investments to transfer those interests without receiving prior authorization from the Commission under Section 203 of the Federal Power Act (“FPA”). Specifically, the Commission found that passive tax equity interests in public utilities or public utility holding companies do not constitute voting securities for the purposes of Section 203. Thus, the transfer of these interests does not require Section 203 approval because such transfer does not constitute a transfer of control with respect to the public utility. In addition, the Commission found that the transfer of these passive investments by a holding company qualifies for blanket authorization under FPA Section 203 (a)(2).
On Thursday, Senator Ron Wyden (D-OR), ranking member of the Senate Finance Committee, released new technology-neutral energy credits legislation that would revolutionize the existing Investment Tax Credit and Production Tax Credit provisions. The legislation features a graduated credit rate schedule based on the level of carbon emissions as compared to a carbon emissions baseline (keyed to “current” national average carbon emissions) that would be available without regard to technology or energy input. In a move that is consistent with cutting-edge energy innovations and responsive to the needs and concerns of many large power consumers and utilities, the credits would expressly be available for energy storage and carbon capture technology installed at power plants placed in service before January 1, 2019. Energy storage would include hydroelectric pumped storage, thermal storage, fuel cells, and–crucially–batteries, among others. Under Wyden’s legislation, the maximum credit rates would be 30% for the ITC and, for the PTC, 2.3 cents per kilowatt hour of electricity produced. In addition, the PATH Act “sunset” provisions on the PTC and ITC would be repealed and the proposal would temporarily extend other energy provisions during a transition period.
The proposed legislation would also create a technology-neutral clean fuel production credit, homeowner versions of the ITC, performance-based incentives for energy efficiency improvements to residential and commercial buildings, and clean energy bonds generally based on existing government bonds frameworks.
Although there are differences of opinion in the Congress on whether the tax code should offer energy incentives, Sen. Wyden’s proposal could come into play this year either as part of tax reform or the infrastructure debate. Senate Democrats recently released a blueprint for infrastructure that includes technology neutral energy reform.
Members of the K&L Gates LLP policy group are closely monitoring this and other tax and energy regulatory reform matters.