IRS Releases 2012 Annual Inflation Factor and Reference Prices for Section 45 Production Tax Credits: Renewable Energy Alert

The IRS recently released the inflation adjustment factor and reference prices for the 2012 calendar year, which are necessary for calculating the Section 45 production tax credits. Based on the 2012 inflation factor of 1.4799, there are no changes from 2011 in the tax credit amounts for electricity generated from renewable sources; however, there is a small increase in the tax credit amounts for refined coal and Indian coal production. The 2012 tax credit amounts for renewable energy production, refined coal production, and Indian coal production are set forth below.

2012 Reference Prices; No Tax Credit Phase-out

If the reference price for a particular energy source (as published by the IRS) exceeds a certain designated level, then the Section 45 production tax credit will be reduced or completely phased out. Based on the 2012 reference prices, there will be no phase-out for any of the renewable energy sources or coal production activities for the 2012 calendar year.

The 2012 reference price for wind is 5.31 cents/kilowatt hour. Since this reference price does not exceed 11.84 cents/kilowatt (i.e., 8 cents multiplied by the 1.4799 inflation factor for 2012), there will be no phase-out during 2012 of tax credits realized from the sale of electricity produced from wind energy. Similarly, the 2012 reference price for refined coal is $55.80/ton. Since this reference price does not exceed $80.25/ton (i.e., $31.90 multiplied by 1.4799 inflation factor and 1.7), there will be no phase-out during 2012 for tax credits realized from the sale of refined coal.

The IRS still has not determined reference prices for electricity produced from closed-loop biomass, open-loop biomass, geothermal, solar, small irrigation power, municipal solid waste, hydropower and marine & hydrokinetic energy. Accordingly, there will be no phase-out during 2012 for tax credits realized from these renewable sources.