Colorado has amended its energy tax credit statute to provide for a refundable election for tax credits earned by investing in renewable energy in enterprise zones. The existing statute had not included a refundablity option. The amended statue is effective for investments placed in service between Jan. 1, 2015, and Dec. 31, 2020.
A Colorado enterprise zone is a zone that the Colorado Economic Development Commission has deemed worthy of this designation because of its relatively high unemployment rate, low per-capital income, or slow population growth.
How the Credits Work
The Colorado enterprise zone tax credit is equal to the total of 3% of "qualified investments" in "qualified property," as those terms are defined by U.S. Internal Revenue Code (IRC) Sections 46 and 48. But if the new refundable election is made, only 80% of the credits earned will be honored, with the remaining 20% forgone.Â
The immediate refundability of the tax credits is limited to $750,000 per taxpayer per year. Any refundable credits earned in excess of this will be carried forward until 80% of the credits are exhausted. To prevent taxpayers from creating several business entities in an attempt to claim several $750,000 claims at once, the law stipulates that ""taxpayer' means the entire affiliated group if the taxpayer is part of an affiliated group."
The term "affiliated group" is not explicitly defined in this statute, but its intended definition is likely to be the definition of this term in IRC Section 1504, consistent with other references to IRC Section 1504 in Colorado's tax statutes (e.g., Colo. Rev. Stat. Â§ 39-22-657(2)(a); Colo. Rev. Stat. Â§ 39-22-305(1)). IRC Section 1504 defines an "affiliated group" as a chain of "corporations connected through stock ownership with a common parent corporation" where the requisite degree of ownership from one entity to the next must meet an 80% vote and value ownership test.
The election is made by completing an election form and submitting it with one's tax return. The leniency here regarding when the election must be made by gives taxpayers the benefit of hindsight in determining whether it would be more beneficial to make the election or to simply claim 100% of the credit against otherwise taxable income.
"Renewable Energy Investment" Redefined
Colorado also used the amendment as an opportunity to redefine "renewable energy investment" for purposes of the enterprise zone tax credits. This term is now defined as any investment in "eligible energy resources" as that term is defined by Colorado's Renewable Energy Standard law.
Colorado's Renewable Energy Standard requires retail electricity providers to generate a certain percentage of their energy from renewable sources. For this purpose, fossil and nuclear fuels, and their derivatives, are excluded from the definition of "eligible energy sources." Similarly, certain gas sources (such as coal mine methane gas and synthetic gas produced by pyrolysis of municipal solid waste) are excluded from the definition of "eligible energy sources" unless they are determined to be "greenhouse gas neutral." The new consistency between these two statutes may ease planning burdens for energy companies.
A "legislative declaration" accompanying the updated statute declares that "this change in tax policy is intended to increase renewable energy investment and, thus, increase associated jobs and expand the tax base in rural Colorado." Many state tax credits do little to stimulate the desired activity due to challenges associated with persuading large taxpayers that have tax burdens in the state to undertake the targeted activity.Â
Furthermore, many potential outside tax equity investors refuse to value state tax credits due to the fact that the investors do not pay significant taxes in the states in which such credits arise. Therefore, the credits often end up allocated to the developer of a project, with the developer then carrying the credits forward unused. By making its renewable energy tax credit refundable, Colorado takes itself out of this category of jurisdictions where renewable energy tax credits go unused.Â
It seems likely that developers evaluating a Colorado project versus a project in a state without a state tax credit are likely to select the Colorado project, all other factors being equal (e.g., power purchase agreement pricing). Moreover, Colorado has also given itself an edge over states that have renewable energy tax credits that are not refundable (or assignable in a simple sale).Â
Nonetheless, the Colorado 3% of "qualified investment" tax credit pales in comparison to the North Carolina 35% state tax credit for solar, even taking into account the fact that North Carolina's credit is non-refundable. Yet, given climate and topography, it seems unlikely that Colorado is looking to compete with North Carolina for solar projects or North Carolina is looking to compete with Colorado for wind projects.Â
David K. Burton is a partner in the New York office of Akin Gump Strauss Hauer & Feld LLP. Richard T. Page is an associate in that office. Burton and Page focus their practices, in part, on the taxation of project finance transactions involving renewable energy.