Tax credit details twist in the wind 

The winds of providence blew favorably in the new year on renewable tax energy credits, as Congress included them in a package extending tax benefits that had been due to expire at the end of 2012.

For wind energy, Congress also expanded eligibility requirements to receive the tax break, saying that projects only need to be under construction by the end of 2013. This is a big change from the prior rules, which required that a project be up and running.

“It will push the eligibility for these projects out a way – how much, no one knows,” said Phillip Tingle, a partner specializing in Energy Tax at McDermott, Will and Emery.

The answer is elusive, Tingle said during an online discussion the firm hosted last week, because the congressional record gives no indication of how the law defines the start of construction. He predicted that arriving at a definition will require a lot of discussion between industry and government officials.

The Internal Revenue Service is charged with developing detailed regulations from tax laws.

Rules on 2013 eligibility for the renewable energy tax credit probably will come out this spring, said Kevin Book, an analyst with ClearView Energy Partners.

“Generally, the IRS issues almost everything you need to know by April,” Book said. That will include how to claim the credit and which taxpayers are eligible.

The wind industry lobbied hard to have the eligibility for the credit changed so that it could benefit projects started by the end of 2013. Industry leaders argued it can take as long as two years to build a wind project.

Wind producers that meet the eligibility requirements this year will be able to claim the credit on electricity generated over the first 10 years of the project’s operation.

But the new law leaves many questions about how wind developers can meet the requirement.

Will it be enough to build a turbine?

Or must it be in place, or slated for a specific site, by the end of 2013 for the power it generates to receive the 2.2 cents per kilowatt-hour tax credit?

Is there a time limit for getting a project in service after construction begins?

How does it affect the tax credit eligibility if a project under construction gets new financing or a different owner?

Three possible interpretations have some precedent in tax law, Book said. The most generous would allow developers to qualify as long as a contract has been signed by the end of the year. A second interpretation would be to require “significant construction” such as laying a foundation.

The strictest interpretation would require that a certain percentage of the work be completed.

But Tingle said that even those guidelines leave uncertainty. For example, would a new road serving a site count as construction, or would tax officials characterize it as preliminary work, which doesn’t count toward eligibility?

“If these definitions linger on in uncertainty, it is bound to have a negative impact on development,” Tingle said. “The industry needs some kind of IRS publication at least preliminarily as to how this is to begin.”

The congressional Joint Committee on Taxation estimates that the credit will be worth $12 billion to the industry over 10 years.Industry advocates who lobbied for the credit are happy that it survived in the year-end tax package, even if some details are still fuzzy.

“Most of the wind companies were overjoyed to have the production tax credit extended, and they intend to build and get the projects online as quickly as possible,” said Jeff Clark, executive director of The Wind Coalition. “We will work with Congress to see how it is defined.”