“According to the American Wind Energy Association, more than 15,000 MW of new wind is currently under construction or in advanced stages of development. Under the IRS’ loose rules, the number of MWs eligible for the full subsidy could easily double that. Yet, this change was not subject to public input or any type of budget scoring.”
“In 2013 and again in 2015, Windaction sent letters to the IRS calling on the Service to do just that. Each time we were ignored. This latest overreach by the IRS runs afoul of the Administrative Procedure Act and is ripe for court action.”
Remember the wind PTC/ITC phase-out enacted by Congress under the Protecting American from Tax Hikes Act of 2015 (PATH Act)? Under that law, the wind PTC would be reduced by 20% in each of the years 2017, 2018, and 2019 for projects that start construction. [1] So in 2017, 80 percent; 2018, 60 percent, and 2019, forty percent of the full credit would be received. Then in 2020, the PTC would expire entirely.
Well, the phase-out has been nullified by the IRS, paving the way for tens of thousands of new wind megawatts to be built between now and 2020 under the full subsidy.
How can this happen, you might ask? It’s easy when you have a clueless Congress and an out-of-control IRS that’s beholden to big wind as part of President Obama’s war on natural gas, coal, and oil.
The Specifics
Understanding the mechanics requires a look-back to the 2012 American Taxpayer Relief Act (ATRA). Under ATRA, Congress amended the eligibility standard for wind by allowing projects that “start construction” before January 1, 2014, to qualify for the PTC. In the two decades leading up to ATRA, the law required eligible projects be placed in service by that date to earn the credit. Since the new language didn’t specify what it meant to ‘begin construction,’ responsibility fell to the IRS for definition.
After months of intense closed-door negotiations with Treasury and taxpayers (aka wind developers), the IRS issued its first of three guidance notices (April 2013).
Under the guidance, developers could show they started construction by beginning physical work of a significant nature,[2] by the deadline, or in the alternative, by incurring at least five percent of the facility’s total cost. In either case, developers were also required to show “continuous progress” towards completion once construction began as a backstop to ensure projects were not delayed for indefinite periods and still claim the PTC.
The guidance did not go far enough for big wind and angst soon followed over how the IRS might enforce continuous progress.
In a clarifying notice issued five months later (September 2013) the Service stated it would not closely scrutinize development schedules or monetary outlays to confirm the continuous test so long as projects were placed in-service by January 1, 2016, two years after the PTC would expire. When the PTC was extended for another year at the end of 2014, [3] the deadline was changed to January 1, 2017.
Under this scheme, facilities would earn the PTC regardless of the amount of physical work performed or the amount of costs paid/incurred as long as construction started before December 31, 2013 (or 2014 with the extension), and ended before January 1, two years later. The IRS also provided for a slew of excused delays relating to events outside a developer’s control including weather conditions, natural disasters, and delays in obtaining permits or licenses from federal, state, local, or Indian tribal governments.
According to IRS attorneys who spoke with us in 2013, the two-year clock was based on industry assurances at the time that two years was sufficient to get a project built and online.
PATH to Phase-out
With enactment of PATH, the PTC phase-out handed big wind a golden opportunity to lobby the IRS again to further relax the rules. And that’s exactly what happened based on the latest guidance issued by the Service last week.
Rather than retain the two-year clock, the IRS expanded it to four years starting at the end of the year in which construction starts. Now developers who begin construction in 2016, have four years to complete their projects before the IRS asks for details on whether development advanced in a continuous way. If a developer can’t meet the four year timeframe, no worries. The IRS will still grant the full PTC for portions of the project that were completed.
Sounds reasonable, right? After all, development times are apt to expand as projects get bigger and face transmission constraints, escalating community opposition and a diminishing appetite for costly wind contracts compared to cheap natural gas,
But the true significance of the IRS’ action may not be obvious. In effect, the IRS has all but nullified the phase-out enacted by Congress and extended full-PTC eligibility to thousands of wind megawatts that would otherwise have earned a much reduced credit.
Since there is no threshold or minimum amount (or cost) of work required to satisfy the physical work test, meeting that threshold in 2016 should be easy. A single worker equipped with a hand shovel digging in the vicinity of a proposed wind turbine foundation ought to do it. Developers can also begin construction at a project site in 2016, and later choose to transfer equipment and other components to an entirely different site, complete construction and claim the PTC for the new site.
Working within a four-year clock grants developers countless ways in which developers can secure the full PTC and never experience the phased-down PTC in 2017, 2018, and 2019.
The Cost
The race is on for big wind to get as many megawatts started in 2016 as possible. According to the American Wind Energy Association, more than 15,000 MW of new wind is currently under construction or in advanced stages of development. Under the IRS’ loose rules, the number of MWs eligible for the full subsidy could easily double that.
Last December, the Joint Committee on Taxation put the cost of the phase-out at $15.8 billion. We have no idea what the cost will now be, but it will almost certainly exceed the JCT’s estimate.
Hold the IRS Accountable
The IRS’ rules governing “begin construction” are not a mere interpretation of the law but amount to legislative action that provides a broader foundation for conferral of PTC benefits than that specified in the statute. Yet, this change was not subject to public input or any type of budget scoring.
To our knowledge, the Service has never bothered to seek public comment on this issue under the Administrative Procedure Act (APA), the federal statute that requires federal agencies provide notice and an opportunity to comment before promulgating rules.
In 2013 and again in 2015, Windaction sent letters to the IRS calling on the Service to do just that. Each time we were ignored. This latest overreach by the IRS runs afoul of the APA and is ripe for court action.
It’s time to finally hold the IRS accountable!
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[1] Under the law, facilities that begin construction before January 1, 2017 are eligible to receive 100% of the PTC. After that, projects that start construction in 2017, 2018 and 2019 could receive 80%, 60% and 40% of the wind PTC respectively after which the PTC is eliminated.
[2] Both on-site and off-site work (performed either by the taxpayer or by another person under a binding written contract).
[3] On December 19, 2014, the Tax Increase Prevention Act of 2014 (TIPA) extended by one year, to January 1, 2015, the date by which construction of a qualified facility must begin.