IRS issues guidance on eligibility for wind energy investment credit
TAX ALERT |
IRS sets forth performance and quality standards small wind energy property must meet in order to qualify for the energy investment credit under section 48.
The IRS recently issued Notice 2015-4, which clarifies when small wind energy property (SWEP) acquired or placed in service qualifies for the energy credit under section 48. This guidance clarifies (1) the specifications SWEP must meet to be considered “qualified small wind energy property” under section 48(a)(3)(A)(vi), (2) the manner in which a manufacturer of SWEP may certify its product’s compliance with these specifications, and (3) the situations in which purchasers of SWEP may rely upon a manufacturer’s certification that its SWEP meets the specifications. This guidance applies to all SWEP placed in service after Jan. 26, 2015, and before Jan. 1, 2017.
An overview of the energy credit
Section 48 provides taxpayers with a credit equal to a percentage of qualified energy property placed in service during a taxable year. The definition of “energy property” under section 48(a)(3) includes qualified SWEP “that is constructed, reconstructed or erected by the taxpayer (or acquired by the taxpayer if the original use of the property commences with the taxpayer), subject to depreciation (or amortization in lieu of depreciation), and meets the performance and quality standards (if any) that have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy) and are in effect at the time of the acquisition of the property.” Qualified SWEP is defined as “property that uses a qualifying small wind turbine [defined as a wind turbine with a nameplate capacity of not more than 100 kilowatts (kW)] to generate electricity.”
Taxpayers putting qualified SWEP into place prior to Jan. 1, 2017, are eligible for an annual credit equal to 30 percent of the amount of qualified basis of SWEP placed in service during the tax year.
New SWEP performance and quality standards
The new guidance builds upon the definition of qualified SWEP under section 48(c)(4) by requiring that, in addition to having a nameplate capacity of not more than 100kW, SWEP must meet the performance and quality standards set forth in either of the following: (1) the American Wind Energy Association (AWEA) Small Wind Turbine Performance and Safety Standard 9.1-2009; or (2) the International Electrotechnical Commission (IEC) standards 61400-1, 61400-12 and 61400-11. In determining whether a specific unit of SWEP meets this requirement, the IRS will look to the performance and quality standards in place at the time the SWEP was acquired (for newly acquired property) or the time the SWEP was placed in service (for SWEP that is constructed, reconstructed or erected by the taxpayer).
New manufacturer certification standards
In addition to modifying the definition of qualified SWEP under section 48(c)(4), the new guidance permits manufacturers of SWEP to certify to a taxpayer that their SWEP meets the AWEA or IEC requirements. This certification can be provided in printable form on their website or “in any other manner that will permit the taxpayer to retain the certification for tax recordkeeping purposes” and must contain the following information:
- The name and address of the manufacturer
- The property name and model number
- The name and address of the eligible certifier (defined as “a third party that is accredited by the American Association for Laboratory Accreditation or other similar accreditation body”)
- The nameplate capacity of the wind turbine
- A signed and dated statement by the eligible certifier that the property complies with the performance and quality standards of the AWEA or IEC
Any manufacturer providing these certifications to its buyers is required to retain documentation establishing that the SWEP meets the requirements of Notice 2015-4 (including any test reports conforming to AWEA or IEC requirements) and make this documentation available for inspection by the IRS.
Permissible reliance by taxpayers on manufacturer certification
Notice 2015-4 generally allows taxpayers to rely upon a manufacturer’s certification that its SWEP meets the AWEA or IEC performance and quality standards. In the event the IRS determines a manufacturer is not complying with the documentation requirements and prohibits that manufacturer from providing future certifications for its SWEP, the IRS will issue an announcement letting taxpayers know that they may not rely on any certifications received from that manufacturer from the date of that announcement forward. Though taxpayers may not rely on future certifications from that manufacturer, they may continue to rely on any certifications issued by that manufacturer for SWEP purchased before the date of the IRS announcement.
In addition to relying on certifications in place at the time they purchase SWEP, taxpayers may also rely upon certifications issued after the date on which they purchase SWEP as long as those certifications apply the same quality and performance standards that were in effect on the date the taxpayer purchased the SWEP.
Immediate action required as a result of Notice 2015-4
Notice 2015-4 requires immediate action on the part of SWEP manufacturers and purchasers:
- Manufacturers should start gathering the documentation necessary to support certification of any products they produce that fall within the definition of qualified SWEP for purposes of section 48. In doing so, they should remember that any erroneous certification may result in the imposition of penalties (1) under section 7206 for fraud and making false statements, and (2) under section 6701 for aiding and abetting an understatement of tax liability. These penalties are equal to $1,000 per return on which a credit is claimed in reliance on the erroneous certification.
- Purchasers should ask the manufacturers from which they purchase SWEP with a nameplate capacity of not more than 100kW for certification that this SWEP falls within the definition of qualified SWEP for purposes of section 48. A taxpayer is not required to attach this certification to its return, but should retain it.