Federal (Energy) Tax Incentives: Production Tax Credit IRC §45

Background: Renewable Electricity, Refined Coal, and Indian Coal Production Credits

Section 45 Production Tax Credit (PTC) & Section 48 Investment Tax Credit (ITC)

The IRC Section 45 PTC allows taxpayers to claim a credit for certain renewable electricity produced at a qualified facility. The IRC Section 48 ITC allows taxpayers a credit on the basis of certain energy property placed in service during the tax year. Taxpayers may elect to treat certain qualified facilities under IRC Section 45(d) as energy property and claim the ITC rather than the PTC with respect to the facility.

The American Recovery and Reinvestment Act of 2009 (ARRA) expanded the ITC to allow the owners of renewable energy projects that qualify for the production tax credit (PTC) to instead make an irrevocable election to claim the ITC. Because of this expansion, the ITC became available for projects that were not originally eligible (such as biomass and wind projects larger than 100 kW).


Whether a project owner will claim the PTC or the ITC depends on several factors including:

  • The capital costs of the project.

    • The higher the project costs, the more desirable the ITC may be.

  • The amount of electricity the project is expected to actually generate (taking into account the risk of curtailment and the existence and duration of a firm power purchase agreement).

    • The lower the amount of electricity produced, the lower the amount of PTC the project may be entitled to claim.

  • Whether the project is expected to be sold within five years of being placed in service (i.e. credit recapture).

The Consolidated Appropriations Act of 2016 (the CAA), signed into law on December 18, 2015, extended, among other provisions, the PTC and ITC. Specifically, the CAA extended the PTC for certain facilities whose construction began before January 1, 2017, and further extended the PTC for wind facilities whose construction begins before January 1, 2020. The CAA also modified the PTC for wind facilities so it phases out over four years and extended the election to claim the ITC in lieu of the PTC for certain renewable energy facilities if the facility's construction began before January 1, 2017 (or January 1, 2020, for wind facilities).

The Bipartisan Budget Act of 2018 (2018 BBA), signed into law on February 9, 2018, harmonized the energy credit expiration dates and phase-out schedules for different types of property. The 2018 BBA modified the ITC by replacing the requirement to place energy property in service by a certain date with a requirement to begin construction by a certain later date.

Prodution Tax Credit

The PTC was first enacted in 1992 as part of the Energy Policy Act of 1992 (EPACT92; P.L. 102-486). Since 1999, the PTC has been extended 11 times. However, the renewable electricity production tax credit (PTC) expired on January 1, 2018, for nonwind facilities. Thus, under current law, the credit is not available for nonwind projects that begin construction after December 31, 2017.

 

Wind facilities that begin construction before the end of 2019 may qualify for the PTC. However, the PTC for wind started phasing down in 2017. Legislation enacted pursuant to the Consolidated Appropriations Act, 2016 (P.L. 114-113), extended the PTC for wind for five years (with a phase down starting in 2017). Legislation enacted during the second session of the 115th Congress, the Bipartisan Budget Agreement of 2018 (BBA18; P.L. 115-123), retroactively extended the PTC for nonwind technologies for tax year 2017.

Calculation Summary Background

The renewable electricity PTC is a per-kilowatt-hour tax (kWh) credit for electricity generated using qualified energy resources. See IRC §45. To qualify for the credit, the electricity must be sold by the taxpayer to an unrelated person. The credit can be claimed for a 10-year period once a qualifying facility is placed in service. The maximum credit amount for 2013, 2014, 2015, and 2016 was 2.3 cents per kWh. The maximum credit amount for 2017 and 2018 is 2.4 cents per kWh. The maximum credit rate, set at 1.5 cents per kWh in statute, is adjusted annually for inflation based on the gross domestic product (GDP) implicit price deflator, where the 1992 GDP implicit price deflator is the base year.

Wind (before applying the 2017-2019 phaseout rates), closed-loop biomass, and geothermal energy technologies qualify for the maximum credit amount. From 2012 through 2014, the half-credit amount was 1.1 cents per kWh. The half-credit amount increased to 1.2 cents per kWh for 2015, 2016, 2017, and 2018. Other technologies, including open-loop biomass, small irrigation power, municipal solid waste, qualified hydropower, and marine and hydrokinetic energy facilities, qualify for a reduced credit amount, where the amount of the credit is reduced by one-half.

Under current law, nonwind facilities for which construction began before January 1, 2018, may qualify for the PTC. See IRS Safe Harbor, IRS Notice 2016-31. For wind facilities, the credit is available for facilities for which construction begins before January 1, 2020. However, for facilities that begin construction during 2017, the credit is reduced by 20%. The credit is reduced by 40% for facilities that begin construction in 2018, and reduced by 60% for facilities that begin construction in 2019. Before 2013, the PTC expiration date was a placed-in-service deadline, meaning that the electricity producing property had to be ready and available for use before the credit’s expiration date.

The amount that may be claimed for the PTC is set to phase out once the market price of electricity exceeds threshold levels. Since being enacted, market prices of electricity have never exceeded the threshold level and the PTC has not been phased out, nor is the PTC likely to be phased out under current law. For example, the threshold amount above which the PTC begins to phase out is 8 cents in statute, adjusted for inflation. Thus, the adjusted threshold amount for phaseout in 2018 is 12.86 cents per kWh. The reference price for the purposes of the PTC phaseout is the annual average contract price per kWh of electricity generated from the same qualified energy resource and sold in the prior year. The reference price for wind in 2018 is 4.85 cents. Because the reference price (4.85 cents) did not exceed the threshold amount (12.86 cents), there was no PTC phaseout.

From 2009 through 2017, PTC-eligible taxpayers had the option of claiming the 30% energy investment tax credit (ITC) in lieu of the PTC. Property that was placed in service during 2009, 2010, or 2011, or which was placed under construction in one of these years, also had the option of claiming an American Recovery and Reinvestment Act (ARRA) Section 1603 grant in lieu of tax benefits.


There are also production tax credits for Indian coal and refined coal. Indian coal production facilities must have been placed in service before January 1, 2009, for coal produced before January 1, 2016, to receive credits. There is no placed-in-service limitation for coal produced and sold after December 31, 2015. Under current law, credits are not available for coal produced after 2017. 

See IRS Link for additional background:

  • About Form 8835, Renewable Electricity, Refined Coal, and Indian Coal Production Credit

  •  Notice 2019-43

    • IRS has modified guidance under the IRC Section 45 renewable electricity production tax credit (PTC) and the IRC Section 48 energy investment tax credit (ITC) to provide that the "Continuity Safe Harbor" for construction of facilities may be tolled and extended in certain limited circumstances involving national security concerns raised by the Department of Defense (DOD).

  • Notice 2018-59

    • Describes guidance on the ITC to reflect the extension and modification of the credit by the CAA and 2018 BBA, including guidance for determining when construction begins on energy property. As under the prior notices, Notice 2018-59 includes a Continuity Safe Harbor, under which the Continuity Requirement is satisfied for both the Physical Work Test and the 5% Safe Harbor if the energy property is placed in service by the end of the calendar year that is four calendar years after the calendar year in which construction began. Excusable disruptions do not extend the safe harbor. If the safe harbor is not met, satisfaction of the Continuity Requirement depends on the relevant facts and circumstances.

  • Notice 2017-04

    • Extended the Continuity Safe Harbor for facilities placed in service between December 31, 2016, and December 31, 2018.

  • Notice 2016-31

    • Places a four-year limit on construction. If a taxpayer places a facility in service during a calendar year that is no more than four calendar years after the calendar year during which the facility's construction began, the facility will satisfy the Continuity Safe Harbor under the Notice.

  • Notice 2015-25

    • Described a one-year extension of the credit.

  • Notice 2014-46

    • Clarifies that no statute requires the taxpayer placing a facility in service to be the taxpayer that began construction, explaining that a partially or fully developed facility generally may be transferred to unrelated taxpayers without losing its qualification under the Physical Work Test or the 5% Safe Harbor.

  • Notice 2013-60

    • Provides that a facility placed in service before January 1, 2016, will satisfy the Continuous Construction Test and the Continuous Efforts Test (the Continuity Safe Harbor).

  • Notice 2013-29

    • Permits taxpayers to establish that construction has begun by either: (1) starting "physical work of a significant nature" (the Physical Work Test) or (2) meeting a safe harbor by paying or incurring 5% or more of the total cost of the facility (the 5% Safe Harbor). Notice 2013-29 also establishes the Continuous Construction Test, stating that the IRS may determine that the Physical Work Test is not satisfied if the taxpayer fails to maintain a continuous program of construction. The safe harbor provided in Notice 2013-29 also is only available if the taxpayer maintains continuous efforts to advance completion of construction (the Continuous Efforts Test).​​​​​​

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