President Biden’s recently released General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals document prepared by the Department of the Treasury provides detailed descriptions of the Administration’s tax proposals. This document, commonly referred to as the Green Book is setting the course for Congressional action.
The Prioritize Clean Energy section of the Green Book proposes the following energy tax reforms:
- Eliminate fossil fuel tax preferences
- Extend and enhance renewable and alternative energy incentives
- Provide tax credit for electricity transmission investments
- Provide allocated credit for electricity generation from existing nuclear power facilities
- Establish new tax credits for qualifying advanced energy manufacturing
- Establish tax credits for heavy and medium duty zero emissions vehicles
- Provide tax incentives for sustainable aviation fuel
- Provide a production tax credit for low-carbon hydrogen
- Extend and enhance energy efficiency and electrification incentives
- Provide disaster mitigation tax credit
- Expand and enhance the carbon oxide sequestration credit
- Extend and enhance the electric vehicle charging station credit
- Reinstate superfund excise taxes and modify oil spill liability trust fund financing
While the Green Book addresses all of the Administration’s proposals of reforms to the Internal Revenue Code (Code), this article will focus on the Prioritize Clean Energy section under the American Jobs Plan and how the proposals affect the Industrials sector – including manufacturing, automotive, oil and gas, renewable energy, and power and utilities. For a general explanation of the Administration’s proposals, see RSM’s June 1, 2021 Tax Alert.
Fuel Producers
The Administration has made a number of proposals that, if enacted, will affect producers of fuel – including oil, gas, coal, and renewable fuels – including upstream exploration and drilling as well as refiners of crude oil. New tax credits have been proposed for producers of sustainable aviation fuel and low-carbon hydrogen. Further, expansion of the carbon capture utilization and sequestration credit has been proposed which affect a wide range of fuel producers, including refiners of petroleum, coal facilities, natural gas processors, ammonia production facilities, and ethanol plants. Both the hydrogen and carbon capture proposals include an option to elect a cash payment in lieu of a business tax credit (direct pay option).
Proposals to Eliminate Fossil Fuel Tax Preferences
The Administration proposes to do away with tax preference items for taxpayers in the oil, gas and coal industries. Under the proposal, the following items are targeted for repeal:
- Enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project (the credit is completely phased out in 2020)
- The credit for oil and gas produced from marginal wells (the credit for oil was completely phased out in 2019)
- The expensing of intangible drilling costs
- The deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method
- The exception to passive loss limitations provided to working interests in oil and natural gas properties
- The use of percentage depletion with respect to oil and gas wells;
- Two-year amortization of independent producers’ geological and geophysical expenditures, instead allowing amortization over the seven-year period used by integrated oil and gas producers
- Expensing of exploration and development costs
- Percentage depletion for hard mineral fossil fuels
- Capital gains treatment for royalties
- The exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels
- The Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock, and
- Accelerated amortization for air pollution control facilities
Additionally, the Administration is proposing the reinstatement of Superfund excise taxes on hazardous chemicals, many of which are produced by members of this industry sector.
New tax credit for production of sustainable aviation fuel
The Administration’s proposal for a production tax credit for sustainable aviation fuel is intended to jump start production of sustainable aviation fuel over renewable diesel, which both use similar feedstock inputs. The Administration’s stated policy is to decrease the aviation industry’s dependence on fossil fuels. As it currently stands, there is no tax credit for sustainable aviation fuel production. As a result, the Administration has proposed a production tax credit of $1.50 per gallon for sustainable aviation fuel that achieves at least a 50 percent reduction in emissions relative to conventional jet fuel. This non-refundable income tax credit would be offered for fuel produced after December 31, 2021 and before January 1, 2028.
New tax credit for production of low-carbon hydrogen
Currently, the law provides a credit for taxpayers who place in service, new qualified fuel cell motor vehicles. This includes vehicles propelled by hydrogen fuel cells. Prior to 2021, the taxpayer was able to take a 30 percent credit for the cost of qualified fuel vehicle refueling property placed in service. This also included fuel where 85 percent of the volume consisted of hydrogen. However, as it currently stands, there is no tax credit for low-carbon hydrogen production.
As a result, the Administration proposes to implement a low-carbon hydrogen production tax credit. “Low-Carbon” refers to hydrogen produced using zero-carbon emissions electricity, (renewables or nuclear) water as feedstock, or hydrogen produced using a natural gas as a feedstock will all carbon emitted in the production process, captured and sequestered. The credit would apply to each kilogram of qualified low-carbon hydrogen: (1) produced by the taxpayer, (2) for an end use application in the energy, industrial, chemicals, or transportation sector; and (3) from a qualified low-carbon hydrogen production facility during the 6-year period beginning on the date the facility was originally placed in service. The proposal includes a direct pay option.
Extend and expand carbon capture and sequestration credit
Currently, the law provides a credit for the capture and utilization or sequestration of qualified carbon oxide using carbon capture equipment that is placed in service at a qualified facility on or after February 9, 2018. The amount of the credit depends on when and how the carbon oxide is sequestered. Qualified facilities must begin construction by January 1, 2026. Taxpayers may claim these credits for a 12-year period from the date the carbon capture equipment was originally placed in service.
The Administration’s proposal would extend the “commence construction” date by 5 years, such that qualified facilities must begin construction by January 1, 2031. Additionally, the proposal would provide an enhanced credit for carbon oxide captured from hard-to-abate industrial carbon oxide capture sectors such as cement production, steelmaking, hydrogen production, and petroleum refining. The proposal would also provide an enhanced credit for direct air capture projects. The proposal includes a direct pay option.
Manufacturing
The Administration has included proposals that, if enacted, will affect manufacturers. First, the proposal to extend and expand the energy investment tax credit would apply to entities placing in service certain renewable energy property at their facility, including solar, geothermal, waste energy recovery property, and combined heat and power cogeneration systems. A new category for the investment tax credit would apply for stand-alone storage technology that stores energy for conversion to electricity. Additionally, the Administration is proposing to allocate a new round of funding for the qualifying advanced energy manufacturing credit, including expanding the definition of qualifying projects. Direct pay options are proposed for both of these credits.
Extend and expand renewable energy investment credit
The investment tax credit is claimed by many manufacturers that install renewable energy property at their facilities. This property includes solar, geothermal electric property, qualified fuel cell power plants, geothermal heat pumps, small wind property, and combined heat and power property. Generally, the investment credit is 30 percent for the property that begins construction before January 1, 2020, 26 percent for property that begins construction after December 31, 2019 and before January 1, 2023, and 22 percent for property that begins construction in after December 31, 2022 and before January 1, 2024, and the energy property must be placed in service before January 1, 2026. Notably, taxpayers cannot claim both the production and investment credit for the same property. However, special rules apply where an eligible taxpayer may elect to claim the investment tax credit in lieu of the production tax credit.
The Administration’s proposal would extend the credits for investments in solar and geothermal electric energy property, qualified fuel cell power plants, geothermal heat pumps, small wind property, offshore wind property, waste energy recovery property, and combined heat and power property. Additionally starting in 2022, the investment tax credit would be expanded to include stand-alone storage technology that stores energy for conversion to electricity. The proposal also includes a direct pay option.
Modify and expand of qualifying advanced energy manufacturing tax credit
Section 48C of the Code authorized the Department of the Treasury to award $2.3 billion in tax credits to promote investment and job creation in clean energy manufacturing. The tax credit is equal to 30 percent of the eligible investment in qualifying advance energy projects. A qualifying advanced energy project is a project that re-equips, expands, or establishes a manufacturing facility for the production of: solar, wind, geothermal, or other renewable energy equipment; electric grids and storage for renewables; fuel cells and micro turbines; energy storage systems for electric or hybrid vehicles; carbon dioxide capture and sequestration equipment; equipment for refining or blending renewable fuels; equipment for energy conservation, including lighting and smart grid technologies; and other advanced energy property designed to reduce greenhouse gas emissions may also be eligible as determined by the Secretary of the Treasury or her delegate. All $2.3 billion of tax credits were allocated in 2013; Congress has not reauthorized additional section 48C tax credits.
The Administration proposes to modify and expand section 48C by expanding the definition of a qualifying advanced energy project. The definition would be revised to include industrial facilities, expanded eligible technologies, energy storage components, electric grid modernization equipment, carbon oxide sequestration, and energy conservation technologies. Additionally, the proposal would authorize an additional $10 billion of section 48C tax credits for investments in eligible property used in a qualifying advanced energy project in coal communities. The proposal also includes a direct pay option.
Extend and expand carbon capture and sequestration credit
As discussed above, the Administration’s proposal would extend and enhance the credit for carbon oxide captured from hard-to-abate industrial carbon oxide capture sectors such as cement production, steelmaking, hydrogen production, and petroleum refining. The proposal also includes a direct pay option.
Automotive
The Administration’s proposals for a new tax credit for heavy and medium duty zero emissions vehicles and for extension and enhancement of the electric vehicle charging station will indirectly affect the automotive industry. While neither are credits for manufacturers, it is expected that the industry will benefit from commercial sales of these products.
New tax credit for heavy and medium duty zero emissions vehicles
Current law provides a non-refundable tax credit for “qualified plug-in electric drive motor vehicles” including passenger vehicles and light trucks. A qualified plug-in electric motor vehicle is defined, in part, as a vehicle weighing less than 14,000 pounds that is propelled by an electric motor that uses a rechargeable battery and such vehicle is subject to and in compliance with applicable Clean Air Act Standards. Moreover, the vehicle must be acquired for use or lease and not for resale, the original use of the vehicle must commence with the taxpayer, and the vehicle must be used predominantly in the United States. This credit however, does not apply to medium- and heavy-duty vehicles.
The Administration’s proposal would provide a nonrefundable income tax credit for new medium- and heavy-duty zero emission vehicles, including battery electric vehicles and fuel cell electric vehicles. Vehicle manufacturers would submit to the Internal Revenue Service the vehicles eligible for the credit. The credit rate varies by vehicle class and will decrease over time. The initial credit amounts range from $25,000 for a class 3 vehicle to $120,000 for class 7-8 long-haul vehicles. The proposal also includes a direct pay option.
Extend and enhance the electric vehicle charging station credit
Current law provides an investment tax credit equal to 30 percent of the cost of alternative fuel vehicle refueling property. This includes electric vehicle charging stations and hydrogen refueling stations. The tax credit is capped at $1,000 for refueling property installed at a taxpayer’s residence and at $30,000 for refueling property installed for commercial use. This credit is allowed on a per-location base, not on per-device basis.
The Administration’s proposal would modify and expand the tax credit for electric vehicle charging stations. Additionally, this proposal allows taxpayers to claim the tax credits on a per-device basis, increase the tax credit limit on individual devices to $200,000, and extends the tax credit for five years through December 31, 2026. Moreover, while the $1,000 tax credit for refueling property installed at a taxpayer’s residence would not increase, it would be extended for five years. The proposal also includes a direct pay option.
Power and Utilities
The Administration has made a number of proposals that, if enacted, would affect the power and utilities industry. These include proposals to extend and expand the credit for production of electricity from renewable sources, a new credit related to energy transmission, and new round of credit allocation for nuclear power facilities. The proposals include an option for direct pay in lieu of claiming tax credits.
Extend and expand renewable energy production tax credit
Producers of electricity from certain renewable energy sources may claim a production tax credit. Current law provides a tax credit for each kilowatt hour of electricity produced from qualified energy sources, at a qualified facility. The electricity must be sold to an unrelated third party, and a taxpayer may generally claim the credit for a 10-year period beginning from the date the facility was placed in service. Qualified energy resources include wind, open and closed-loop biomass, geothermal energy, municipal solid waste, hydropower, and marine and hydrokinetic renewable energy. Construction must begin by 2021 in order to claim a production tax credit after the property is placed in service and reduced credit rates are currently in effect.
The Administration’s proposal would extend the full production tax credit for qualified facilities beginning construction after December 31, 2021 and before January 1, 2027. Beginning in 2027, the credit rate would phase down to zero over five years. The proposal also includes a direct pay option.
New tax credit for electricity transmission investment
As previously stated, the code provides production and investment credits for various types of energy property used to generate electricity. However current law provides no credit for investments in transmission infrastructure used to deliver electricity from where it is generated to where it will ultimately be used. With that in mind, the Administration proposes to provide a tax credit for the purchase of electric power transmission property. The credit would be equal to 30 percent of a taxpayer’s investment in qualifying electric transmission property placed in service in a given year. This type of property would include overhead, submarine, and underground transmission facilities meeting certain criteria. The proposal also includes a direct pay option.
Provide allocated tax credit for electricity generation from existing nuclear power facilities
Current law provides an allocated production tax credit for the first eight years of operation of new advanced nuclear power facilities. The credit is based on the amount of electricity produced and sold by the advanced nuclear power facility. No tax credit is provided for the generation of electricity from existing nuclear power facilities.
The Administration’s proposal would create an allocated production credit from electricity generation from eligible existing nuclear power facilities that bid for the credits. Eligibility to bid for these credits would depend on, among other potential requirements, demonstration of a good operation and safety record, demonstration that the facility is facing financial operating losses and that future projections include continued losses, and demonstration that emissions of various air pollutants would increase if the facility ceased operations. This solicitation of bids would be held every two years. Additionally, bidding facilities would need to identify the minimum credit amount per megawatt-hour of their generation that would be sufficient for them to maintain operations during the two-year window. Up to $1 billion in credits would be available in each year to be allocated based on an evaluation of the bids received. The proposal also includes a direct pay option.
Conclusion
Most of the Administration’s clean energy tax incentive proposals directly affect taxpayers in the industrial sector. Those taxpayers include fuel producers, automotive manufacturers, power and utility companies, and general manufactures. The Administration’s policy is focused on shifting away from fossil fuel production and towards increasing production of renewable and alternative energy. The Administration is focused on jumpstarting the funding of these projects by proposing a direct pay option such that stakeholders can finance the projects themselves rather than relying on tax equity investment partnerships.
All industrial companies should continue to monitor the activity out of Washington. Whether it is tax-focused priorities, such as the Treasury Green Book, or legislation to increase competitiveness with China, such as the United States Innovation and Competition Act of 2021 that recently passed the Senate, this Administration has a clear goal of supporting U.S. competitiveness in manufacturing. This current political atmosphere, combined with very low interest rates and RSM’s Middle Market Business Index reporting that companies are looking to increase capital investments over the next six months signals that industrial companies are poised to increase investment that may deliver additional tax benefits should the Administration’s proposals become law.
That being stated, much uncertainty remains with respect to these proposals. First and foremost is whether the proposals will be enacted into law under the current partisan Congress. Additionally, questions remain on other issues, such as how the government would administer a direct pay option and rules related to the Administration’s language regarding measures to pair the credits with strong labor standards. Nonetheless, it appears that there is much interest in both the Administration and Congress to enact new green energy tax provisions and it is certainly possible that some of the concepts provided in these proposals could be enacted into law in the coming year.
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