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Legislation changes to the Energy Investment Tax Credit (ITC) may increase your project’s eligibility

Copy updated: 7/9/2020

The internal revenue code (IRC) Section 48 has historically provided an investment tax credit (ITC) for qualifying energy related investments. The credit is established as a percentage of the project owner’s (taxpayer) basis in the eligible property. The percentage amount is dependent upon the technology implemented. Legislation for this ITC has been updated several times over the past decade, with the most recent being an “extender” of the “Further Consolidated Appropriations Act, 2020” (H.R. 1865) in December 2019.

In response to COVID-19, an extension of the continuity safe harbor is available for projects that began construction in 2016 or 2017 (now 5 years). Also, an extension to the 3½ Month Rule for services or property paid for on or after September 16, 2019, is now extended to October 15, 2020 (Notice 2020-41).

Several technologies have benefited from the previously expired “begun construction” deadline retroactively extended from Jan. 1, 2018 to Jan. 1, 2021. Projects previously thought to have missed the deadline for related qualification activity could now be eligible for significant project capital support via a tax credit scenario. In addition, projects slated to break ground over the next several years could gain eligibility, if certain actions are taken this year.

While this legislation touches multiple energy technologies, a summary of the ITC opportunity, specific to wastewater facilities and energy production, are as follows:

  • Of the various qualifying facility types eligible for the ITC, anaerobic digestion systems producing electricity will typically qualify as a “trash” or “biomass” facility depending upon the feedstock that will be utilized
  • This type of facility is eligible for a 30% ITC that can be applied to the eligible basis of the project
  • This eligible basis can often exceed more than 85% of the total project cost and a hypothetical example is as follows:
    -A $10 million total project cost with an eligible basis of $9 million
    -This total project cost is often inclusive of design, equipment, infrastructure, and other investments that are “upstream” of the energy producing equipment, but ultimately defined as “integral to the production of the electricity”
    -The hypothetical project could qualify for an ITC of $2.7 million
    -Actual eligible basis will vary project to project depending on project specific factors
  • To preserve the potential to claim the ITC, companies must establish construction of a qualified facility began prior to the end of 2020 by using the following two methods:
    -Physical work test
    -5% safe harbor test
  • In order to retail eligibility to claim the credit and once either, or both, tests have been met, a project generally has four calendar years to be placed into service if the project began construction in 2018 or later, or five calendar years to be placed into service if the project began construction in calendar year 2016 or 2017.
  • The credit is typically claimed in the same year the project is placed in service

To take advantage of this significant ITC opportunity, contact us to further evaluate the specifics of your situation.

Joel M. Laubenstein
Cory R. Wendt
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