2020 Deloitte Renewable Energy Seminar Renewables for a ......2020/01/01 · 1) a taxpayer (an individual) can claim an IRC section 25D residential investment tax credit (“ITC”)

2020 Deloitte Renewable Energy SeminarRenewables for a sustainable future September 24, 2020

Brian Americus, Principal, Deloitte Tax LLPGary Hecimovich, Partner, Deloitte Tax LLPDavid Stegman, Manager, Deloitte Tax LLP

Battery storage hot

topics

2020 Deloitte Renewable Energy SeminarCopyright © 2020 Deloitte Development LLC. All rights reserved. 3

ITC and PTC Landscape 5

ITC for Energy Storage 11

Notable PLRs 15

ITC Regulations 19

Common Concerns 20

Agenda


Investment Tax Credit (“ITC) and Production Tax Credit (“PTC”)Current landscape


Type of Energy Property Date Construction Begins Placed in Service Date ITC Amount

Solar

Before 1/1/2020 Before 1/1/2024 30%Calendar 2020 Before 1/1/24 26%Calendar 2021 Before 1/1/24 22%

Before 1/1/22 On or after 1/1/24 10%

On or after 1/1/22 Any 10%

Fiber-Optic Solar



On or after 1/1/22 N/A 0%

Qualified Fuel Cell




Investment Tax Credit—timing



Qualified Small Wind

Before 1/1/2020 Before 1/1/2024 30%

Calendar 2020 Before 1/1/24 26%

Calendar 2021 Before 1/1/24 22%



Qualified MicroturbineBefore 1/1/22 Any 10%


Combined Heat and Power (CHP)Before 1/1/22 Any 10%


Geothermal Heat PumpBefore 1/1/22 Any 10%

On or After 1/1/22 N/A 0%

Geothermal Any Any 10%

Investment Tax Credit—timing


Qualified Resources/FacilitiesCredit Amount

for 2020 Construction Beginning…

Phase-out (PTC Amount)

30% ITC Election

Wind 2.5 cents/kwh

Before 1/1/2017 100% 30%

Calendar 2017 80% 24%

Calendar 2018 60% 18%

Calendar 2019 40% 12%

Calendar 2020 60% 18%

Geothermal 2.5 cents/kwh Before 1/1/2021 None 30%

Closed-loop biomass 2.5 cents/kwh Before 1/1/2021 None 30%

Open-loop biomass 1.3 cent/kwh Before 1/1/2021 None 30%

Municipal solid waste (landfill gas, trash)

1.3 cent/kwh Before 1/1/2021 None 30%

Hydropower 1.3 cent/kwh Before 1/1/2021 None 30%

Marine and hydrokinetic renewables (including small irrigation power)

1.3 cent/kwh Before 1/1/2021 None 30%

Production Tax Credit and ITC in lieu of PTC


Qualified Resources/Facilities ITC rate Placed-in-Service Statutory Deadline

Solar

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Fuel cell

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Geothermal heat pump

30% Before 1/1/2020

26% Calendar 2020

22% Calendar 2021

Small wind

30% Before 1/1/2022

26% Calendar 2020

22% Calendar 2021

Residential ITC—Section 25D


Proposed Legislation for Energy Storage ITC

Energy Storage Tax Incentive and Deployment Act of 2019• Modifies the commercial and residential ITCs to include energy storage as an eligible standalone technology.• Senators Heinrich and Gardner introduced S. 1142.• Representatives Doyle, Sanchez, and Blumenauer introduced H.R. 2096.

• Add category to section 48 for:equipment which receives, stores, and delivers energy using batteries, compressed air, pumped hydropower, hydrogen storage (including hydrolysis), thermal energy storage, regenerative fuel cells, flywheels, capacitors, superconducting magnets, or other technologies identified by the Secretary in consultation with the Secretary of Energy, and which has a capacity of not less than 5 kilowatt hours

• Add category to section 25D for:an expenditure for battery storage technology which— (A) is installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and (B) has a capacity of not less than 3 kilowatt hours.

• Timing pegged to phase down of solar ITCsIncentivizing New and Valuable Energy Storage Technology (INVEST) Act of 2019• Representative Curtis introduced H.R. 5409.• The language is very similar to H.R. 2096 discussed above.



Growing Renewable Energy and Efficiency Now Act of 2020 (GREEN Act of 2020)• H.R. 7330 • Add category to section 48 for energy storage technology:

A. Equipment (other than equipment primarily used in the transportation of goods or individuals and not for the production of electricity) which

i. uses batteries, compressed air, pumped hydropower, hydrogen storage( including hydrolysis and electrolysis), thermal energy storage, regenerative fuel cells, flywheels, capacitors, superconducting magnets, or other technologies identified by the Secretary, after consultation with the Secretary of Energy, to store energy for conversion to electricity and has a capacity of not less than 5 kilowatt hours, or

ii. Stores thermal to heat or cool (or provide hot water for use in) a structure (other than for use in a swimming pool).

B. Termination – The term ‘energy storage technology’ shall not include any property the construction of which does not begin before January 1, 2028

• Add category to section 25D for: the qualified battery storage technology expendituresA. Is installed in connection with a dwelling unit located in the United States and uses a residence by the

taxpayer, andB. Has a capacity of not less than 3 kilowatt hours



Solar



On or after 1/1/2028 Any 10%

Battery





Growing Renewable Energy and Efficiency Now Act of 2020 (GREEN Act of 2020)


ITC for Energy Storage


Historical tax code treatment

• Commercial ITC can be traced as far back as 1962

• Tax regulations in 1978 included “storage devices” in the definition of qualifying energy property for solar, wind, and geothermal—but equipment that used only qualified energy

• If property used both qualified and non-qualified energy (“dual use property”), it was not considered qualifying solar, wind, orgeothermal energy property for purposes of the ITC

• In 1987, Treasury re-considered legislative intent and adopted so-called “75% Cliff”


Primary elements to dual use property rule

• Dual use property may qualify to the extent of the property's basis or cost allocable to its annual use of qualified energy so long as the use of non-qualified energy does not exceed 25 percent of the total energy input of the property in “annual measuring period” defined as the “365-day period beginning with the day it is placed in service or a 365-day period beginning the day after the last day of the immediately preceding annual measuring period.”

• Allocation may be made by comparing, on a Btu basis, energy input to dual use property from qualified sources with energy input from other sources.

• However, the Commissioner may accept any other method that, in his opinion, more accurately establishes the relative annual use of energy from qualified sources and energy from other sources.

• Recapture required for any reduction in basis or cost allocable.

Historical tax treatment


Recent evolution in tax treatment

• Little case law applying dual use rules to energy property

− Majority of analysis focuses on thermal

• More recently, rules applied to 1603 Grants

• Beginning in 2011, IRS would issue Private Letter Rulings that would show an evolution in the application of commercial ITC rules to energy storage devices

− Beginning in 2015, IRS stopped issuing rulings after Notice 2015-70

• Note that only the requesting taxpayer may rely on the ruling


Notable energy storage private letter rulings

PLR 201142005July 11, 2011

PLR 201208035 October 27, 2011

PLR 201308005 November 20, 2012

Energy property Utility-scale wind Utility-scale wind(subject to curtailment)

Rooftop solar PV(prospective for typical setup)

Storage device Li-ion battery Undisclosed battery Undisclosed battery

Use case(s) Frequency regulation - Time shifting

- Frequency regulation

- Time shifting- Frequency regulation- Ramp rate- Demand charge management- Time of use

Non-qualified input % Redacted—reportedly ~3%no methodology

Redacted—reportedly ~15%no methodology

No mention of inputs from grid or other non-qualifying sources

IRS analysisMentions dual use rules, but onlyconcludes that it is not auxiliary equipment

Mentions dual use rules, but onlyconcludes that it is not auxiliary equipment

Notes inputs from solar and grid for off-peak/peak use, as well as supplying to grid during peak hours via NEM

IRS conclusion Full cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5)

Full cost eligible for ITC in lieu of PTC election under IRC Section 48(a)(5)

- Applies dual use rules- No additional credit for subsequent increase in %


Notable private letter rulings (cont.)

PLR 201444025 May 5, 2014

PLR 201543001 July 17, 2015

Energy property DG solar PV (reportedly solar infrastructure/light poles)

No generation – Storage onlyPLR request on asset class life for depreciation purposes

Storage device Undisclosed batteries Undisclosed technology

Use case(s)

• Designed for self-consumption• Capable of exporting energy to the grid in some cases Frequency regulation only

Non-qualified input %

No mention of inputs from grid or other non-qualifying sources Only inputs from grid energy

IRS analysis

• “Single solar energy system” • Emphasizes certain components will support lights,

surveillance equipment, motion detectors, two-way transmission

Despite buying/selling electricity, transactions are "ancillary to frequency regulation service“ and effectively the cost of providing serviceFunction is not transmission and distribution

IRS conclusion

• Storage device fully eligible• Requires allocation of basis to the extent the support

components perform another function as non-energy property (no methodology)

• Storage device is deemed to be Rev. Proc. 87-56 class 57—Distributive Trades and Services

• 5-year MACRS property


Recent PLR Issued for Residential ITC

PLR 201809003

Summary of the Holding

This favorable PLR provides that:

1) a taxpayer (an individual) can claim an IRC section 25D residential investment tax credit (“ITC”) for 30% of the cost of installing a battery at its home when the battery is paired with solar property, and

2) the taxpayer can claim the credit even if the battery is installed in a later year than the year in which the solar property was installed.


1. This is the first PLR (or published IRS position) on the eligibility of a battery (electric storage) for the Section 25D tax credit.

• The IRS confirmed the eligibility of storage under 25D generally, and the eligibility of storage adding to existing solar projects.

2. The IRS position removes uncertainty for taxpayers that purchased their solar rooftop systems in prior years

• The ruling’s significance will only grow as the percentage of cash sales of solar systems increases relative to third-party ownership and more taxpayers are claiming the section 25D credit.

3. Taxpayers will have to determine whether the ruling might also have implications on the eligibility of energy storage for the section 48 commercial ITC that has similar statutory language.

PLR 201809003 takeaways


• Status of commercial ITC Regulations to address open items on storage?

• IRS Notice 2015-70

− Requested public comment for new regulations on definition of “qualifying energy property”

Notice 2015-70 Issued

October 2, 2015

Comments Due

February 16, 2016

Proposed Regulations Issued

Summer 2021 (Deloitte projection)

Final Regulations Issued

Summer 2022 (Deloitte projection)

Taxpayers submit comments

IRS/Treasury draft proposed regulations

IRS/Treasury review comments and finalize regulations

60-day comment

period

Public hearing held approximately 3 weeks after 60-day comment window

Looking ahead


• Introduce energy storage technologies and market applications

• Emphasize regulations should re-affirm positions concerning:

− Eligibility of energy storage device generally

− Storage added to existing energy property (i.e., retrofits)

− Separate ownership

− Residential energy property divided between IRC sections 48 and 25D

• Proposal for application of Primary Use standard to Dual Use Equipment

• Sizing of battery relative to generation facility

• Treatment of contracts for battery usage as service contracts versus leases

• ITC for storage on retrofit of a PTC facility not available

• Beginning of construction of the battery

Summary of issues in industry comment letters and other common concerns


• Consider submitting a Private Letter Ruling on eligibility of storage for commercial ITC when paired with a renewable energy facility

• Develop and implement strategies for ITC eligibility

• Review agreements in place

• Recordkeeping and gathering exercises

− Current dual use rules require documentation on the front-end concerning eligibility, as well as ongoing review

◦ Procedures for measuring energy usage

◦ Procedures to mitigate risk

Final thoughts


Connect with us

Brian AmericusPrincipalDeloitte Tax LLP(202) [email protected]

Gary HecimovichPartnerDeloitte Tax LLP(202) [email protected]

David StegmanManagerDeloitte Tax LLP (202) [email protected]

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Documents

2020 Deloitte Renewable Energy Seminar Renewables for a ......2020/01/01 · 1) a taxpayer (an individual) can claim an IRC section 25D residential investment tax credit (“ITC”)