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Key Energy Tax Provisions Included in ‘Fiscal Cliff’ Legislation

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 to address the tax rate hikes and expiring tax incentives to avert the “fiscal cliff.”  President Obama signed the legislation into law on January 2, 2013.  The legislation included important provisions to businesses, including extending the production tax credit for wind energy facilities through 2013 and requiring that a qualified facility begin construction (rather than be placed in service) before January 1, 2014, to claim the credit.

After many weeks of negotiation to avert the much talked about “fiscal cliff,” Congress passed the American Taxpayer Relief Act of 2012 in the wee hours of January 1, 2013 (the Act).  President Obama signed the Act into law on January 2, 2013.  The Act includes important provisions to the business community as well as individuals, including an extension of the production tax credit (PTC) for wind energy facilities through 2013.  The development of wind projects had slowed down significantly by the end of 2012 due to the expiration of the PTC.  The extension of the PTC and a modification of its key requirement should help renew interest in the development of wind projects.  The Act also extends and modifies various other energy and business tax provisions, including bonus depreciation, the new markets tax credit (NMTC), the research tax credit, the election to expense certain business assets under Section 179 and other business- and energy-related tax credits. 

The Act extends the PTC for wind energy facilities and requires that qualified renewable energy facilities claiming the PTC must begin construction before January 1, 2014.  Previously, facilities claiming the PTC had to be put into service prior to the deadline.  This modification applies not only to wind energy facilities, but also to other renewable energy technologies, such as closed-loop biomass facilities, open-loop biomass facilities, geothermal energy facilities, landfill gas facilities, trash facilities, hydropower facilities and marine and hydrokinetic renewable energy facilities.  The legislation also allows for a 30 percent investment tax credit (ITC) in lieu of the PTC for facilities that begin construction before January 1, 2014.  The change to a “begin construction” requirement rather than a “placed in service” requirement extends the impact of the PTC beyond 2013 and provides additional time to begin construction of new wind energy projects and other qualifying renewable energy projects.  There will be many industry questions in the months to come about the meaning of “beginning of construction” in this context.  It is currently unclear how guidance will be provided on this issue, but it could potentially be found in guidance issued with respect to grants for renewable energy projects under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. 

The Act also extends 50 percent bonus depreciation through 2013 for qualifying property that is purchased and placed in service before January 1, 2014 (or before January 1, 2015, for certain other longer lived and transportation assets).  The provision also allows taxpayers to elect to accelerate some alternative minimum tax credits in lieu of claiming bonus depreciation.  With respect to regulated utilities, the legislation clarifies that the normalization rules for bonus depreciation are violated if a utility, for ratemaking purposes, assumes a bonus depreciation benefit when the utility has not elected to take bonus depreciation.

The NMTC and the 20 percent research tax credit are also extended for two years through 2013.  The NMTC is sometimes paired with renewable projects, and therefore this extension is also significant to  the energy industry.   

The Act also temporarily extends and increases the maximum amount and phase-out thresholds related to the election to expense business property under Section 179 for 2012 and 2013 to $500,000 and $2,000,000, respectively, the same levels that were in effect for 2010 and 2011.  After 2013, the temporary extension of the maximum amount and phase-out limitation under Section 179 reverts to $25,000 and $200,000, respectively. 

Other energy and business tax provisions extended through 2013 under the Act include:

  • Mine rescue team training credit up to $10,000
  • Election to immediately expense 50 percent of certain advanced underground mine safety equipment
  • Work opportunity tax credit allowing businesses to claim a tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of certain targeted groups
  • $1.01 per gallon tax credit for cellulosic biofuel produced through 2013
  • 30 percent tax credit for alternative vehicle refueling property
  • $1.00 per gallon tax credit for biodiesel and renewable diesel, $1.00 per gallon tax credit for diesel created from biomass and 10 cents per gallon small agri-biodiesel producer credit
  • Extension of 50 percent bonus depreciation for facilities producing cellulosic biofuel for facilities placed in service before January 1, 2014, and expansion of the definition of cellulosic biofuel production to include algae-based fuel
  • 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit
  • Deferral of gain to be recognized ratably over an eight-year period on sales of transmission property by vertically integrated electric utilities to independent transmission companies approved by the Federal Energy Regulatory Commission
  • Tax credit for energy-efficient improvements to existing homes, and updates eligible property to reflect improvements in energy efficiency
  • Tax credit for the construction of energy-efficient new homes that achieve a 30 percent or 50 percent reduction in heating and cooling energy consumption relative to a comparable home constructed under standards in effect for 2003
  • Tax credit for U.S.-based manufacturers of energy-efficient appliances
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About this Author

Gale E. Chan, McDermott Will Emery Law Firm, Tax Attorney
Associate

Gale E. Chan is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C. office.  She focuses her practice on federal and international tax matters involving partnerships, limited liability companies and corporations.  Gale advises clients on state audit examinations involving challenges to complex partnership and limited liability company structures.  She is a member of the Firm’s Pass-Throughs Practice Group.

202-756-8052
Madeline Chiampou Tully, McDermott Will Emery Law Firm, Tax Attorney
Associate

Madeline M. Chiampou is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office.  Madeline focuses her practice on federal income tax matters relating to advising domestic and international clients on taxable and tax-free mergers, acquisitions and divestitures, corporate restructurings and finance transactions.

212-547-5643
Counsel

Martha Groves Pugh is counsel in the law firm of McDermott Will & Emery LLP and is based in its Washington, D.C., office.  She focuses her practice on federal income tax issues with a particular emphasis on the nuclear and energy industries.  Marty has helped clients seek and receive many private letter rulings and has extensive experience in drafting legislative language for tax proposals. Her practice also includes tax planning for proposed transactions and advising clients on audits, appeals and litigation issues.

202-756-8368
Partner

Philip Tingle is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Miami office.  Phil’s national tax practice includes representing clients in restructuring, mergers and acquisitions, and other transactional energy related matters.

305-347-6536