The Build Back Better Act, or BBB Act, which is currently stalled in the Senate, proposes extending and expanding the existing tax credit framework for green energy projects. For example, the BBB Act proposes extending the timeline for existing production tax credits and investment tax credits, or PTC and ITC, as well as expanding their scope to include new technologies such as zero-emissions nuclear power. The BBB Act also proposes extending the Section 45Q credit for carbon oxide capture and sequestration to facilities that begin construction before Jan. 1, 2032—construction currently must begin before 2026. Additionally, it includes a proposed tax credit for clean hydrogen produced at a qualified clean hydrogen facility beginning in 2022 during a 10-year period beginning on the date such facility is placed in service. Taxpayers could choose between treating a qualified hydrogen facility as an energy property eligible for the clean energy PTC or the new clean hydrogen credit.
This article is the last in the three-part series of articles breaking down the proposed prevailing wage and apprenticeship requirements, Buy America requirements, and direct pay election included in the proposed green energy tax credits introduced in the BBB Act. This article provides an overview of the proposed direct pay election, as introduced in the BBB Act.
Direct Pay Election
The BBB Act proposes adding the new Section 6417, which would allow taxpayers to elect to be treated as having made a payment of income tax in the amount of an “applicable credit” for the taxable year in which the credit is determined.
The Section 6417 direct pay election would be available for a number of green energy credits, including the renewable energy PTC under Section 45; the ITC for wind, solar, and other green energy property specified in Section 48; and the carbon capture and sequestration credit under Section 45Q. It also would apply to Section 30C, alternative fuel vehicle refueling property credit; Section 48C, advanced energy project credit; Section 48D, ITC for electric transmission property; Section 45W, zero-emission nuclear power PTC; Section 45X, clean hydrogen production credit; Section 48E, advanced manufacturing ITC; Section 45AA, advanced manufacturing PTC; Section 45BB, clean electricity PTC; Section 48F, clean electricity ITC; and Section 45CC, clean fuel PTC.
The value of the direct pay credit would phase out if a facility does not meet the Buy America requirements discussed in the second part of this series. This phaseout would reduce the direct pay credit by the following amounts, beginning in 2024: 10% if construction begins in 2024, 15% if construction begins in 2025, and 100% if construction begins in 2026 or later. Smaller facilities, of less than 1 megawatt, would be exempt from the phaseout. Exemption from the phase out may also be available if the Department of the Treasury finds that using U.S. iron, steel, or manufactured products increases the cost of constructing the facility by 25% or more or if such iron, steel, or manufactured products are not reasonably available in sufficient quantity or of a sufficient quality.
This is not the first time Congress has offered taxpayers a more immediate path to monetizing nonrefundable green energy credits. Section 1603 of the American Recovery and Reinvestment Act, or ARRA, which was enacted in response to the struggles faced by tax equity financing in the aftermath of the 2008 economic recession, allowed cash grants in lieu of tax credits. The many ambiguities and interpretational challenges that ensued resulted in high-volume litigation which continues to this day, as seen in Desert Sunlight 250, LLC v. United States.
The BBB Act’s proposals give approximately nine months for Treasury to publish direct pay election guidance and forms. This accelerated timeline could make it difficult for the IRS and Treasury to issue comprehensive guidance under Section 6417, including how the Buy America provisions will apply. Adding to the challenge, taxpayers would be required to make an irrevocable election to take advantage of the direct pay option. This combination may make it challenging for taxpayers to make an informed election, resulting in controversies and litigation. A positive sign is that the drafters of the proposals took into consideration some of the lessons learned from past disputes. For example, the statute clearly defines the funds received as a result of the direct pay election as a deemed payment of tax—historically, a frequent point of contention in the refundable credit space, as noted in Sunoco Inc. v. United States. We hope that the Treasury will draw other useful lessons from its experiences administering Section 1603.
Other critical issues under the direct pay election will include how quickly taxpayers making an election under proposed Section 6417 could expect to receive a cash payment from the IRS; whether taxpayers can access U.S. iron, steel, and manufactured components; and how taxpayers can avoid the 20% excessive payment penalty if they miscalculate their credit.
The direct pay election would provide an alternative to partnering with tax equity investors who have sufficient tax liabilities to benefit from tax credits generated by a proposed project. It would be helpful to smaller projects that cannot afford the high transaction cost of tax equity structures or to projects which do not rely on outside financing. It would also allow public utilities an alternative path to monetize credits when they are unable to enter into the types of “flip partnership” arrangements the renewable energy industry uses to fund large-scale projects. This does not mean, however, that direct pay is going to replace tax equity financing. We would expect tax equity financing to be further stimulated by the proposed expansion of publicly traded partnerships’ qualified income to include income from renewable energy projects.
The complex path to unlocking the benefits of the proposed amendments to the green energy tax incentive framework leaves us hoping that the administration will consider lessons learned from implementation of green energy cash grants under the ARRA and the decade of litigation that followed. Given the short timeline for Treasury and IRS to issue guidance, taxpayers should monitor the process closely and be ready to comment on areas of ambiguity and technical issues that can be resolved in the guidance process. With the BBB Act delayed in the Senate, taxpayers standing to benefit from these generous proposals have time to identify potential issues and develop practical solutions in advance of legislative action putting Treasury on the clock for rapid guidance release.
Although the direct pay election provides a valuable alternative to monetizing green energy credits, it is unlikely to replace tax equity financing, especially for larger projects requiring outside financing. A careful cost-benefit analysis should be performed to compare the benefits of tax equity structures in light of the direct pay option under proposed Section 6417.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
David B. Blair is a partner at Crowell & Moring and chair of its tax group. He has more than 30 years of experience assisting energy clients with tax planning, controversy and litigation.
Irina Pisareva, a partner in Crowell & Moring’s tax group, has 25 years of experience advising businesses and investors on transaction tax and cross-border tax matters. She provides tax advice to investment funds, corporations, tax-exempt investors, venture capital, and private equity groups and high-net-worth individuals and family offices.
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