The wind energy industry will soon receive long-awaited guidance from the Internal Revenue Service (IRS) on ambiguous language contained in the version of the production tax credit (PTC) signed into law in January.
According to tax insiders who spoke with NAW, the IRS has imposed an internal deadline of March 31 to clarify what it means for a wind project to be considered under construction, per the ‘begin construction’ language included in the legislation.
John Gimigliano, principal in charge of KPMG's U.S. Energy Sustainability Tax practice, says the IRS recognizes the urgency of the matter and is working ‘unusually fast’ to resolve the issues and release the guidance to wind energy developers.
Historically, the IRS has taken up to a year – or even longer – to resolve such discrepancies. However, the wind industry does not have the luxury of time.
‘Speed is of the essence,’ Gimigliano says. ‘This is a 2013 rule.’
The ‘commence construction’ component is the missing piece from the American Tax Payer Relief Act, which was officially signed into law on Jan. 2. The PTC extension included a change in language that requires projects to begin construction before Jan. 14, 2014, in order to qualify for the PTC, rather than the "placed in service" deadline included in previous versions of the PTC.
Without further guidance, developers, suppliers and financiers are more hesitant to move forward with projects.
Tax insiders, such as Gimigliano, were expecting additional guidance from the issuance of the Joint Committee on Taxation's so-called ‘blue book,’ which recaps legislation passed by the prior Congress. Although the guidance was not included in that document, industry watchers should not read too much into the omission, he says.
‘Typically, Congress will pass a law with broad strokes and leave it to the IRS to fill in the blanks," Gimigliano explains. ‘It shows either there wasn't real consensus about what was intended, or it could be a by-product of the bill coming together quickly at the eleventh hour.’
Gimigliano says one of the biggest challenges for the IRS will be to establish a rule that is fair to all the technologies mentioned in Section 45 of the Internal Revenue Code, which includes "electricity produced from certain renewable resources,’ such as wind, solar, geothermal, municipal solid waste and qualifying hydropower.
‘What might be feasible for one industry to undertake by year-end may not be possible for another,’ he notes.
In addition, the IRS must answer questions about the method of guidance that should be applied. The IRS released a similar ‘begin construction’ clarification in July 2010, after the issuance of the U.S. Department of the Treasury's Section 1603 cash-grant program. The American Wind Energy Association has been encouraging the IRS and the Treasury to consider similar rules for the PTC, as the industry is already familiar with that guidance.
"The rules pertaining to Section 1603 cash grants are well understood [by] developers, financiers and regulators living in that world,’ Gimigliano agrees. ‘Rules pertaining to Section 1603 seem to be more logical in their approach.’
Another, albeit unlikely, prediction is that rules pertaining to bonus depreciation – which also includes a ‘begin construction’ component – could be applied to PTC. However, bonus depreciation applies broadly to all businesses, not just renewable energy.