Biden's clean energy proposals and the consumer products industry

ARTICLE | July 18, 2021

Authored by RSM US LLP

President Biden’s recently released General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals document prepared by the Department of Treasury provides detailed descriptions of the Administration’s tax proposals. This document, commonly referred to as the Green Book is setting the course for Congressional action.

The Prioritize Clean Energy section of the Green Book proposes the following energy tax reforms:

• Eliminate fossil fuel tax preferences
• Extend and enhance renewable and alternative energy incentives
• Provide tax credit for electricity transmission investments
• Provide allocated credit for electricity generation from existing nuclear power facilities
• Establish new tax credits for qualifying advanced energy manufacturing
• Establish tax credits for heavy and medium duty zero emissions vehicles
• Provide tax incentives for sustainable aviation fuel
• Provide a production tax credit for low-carbon hydrogen
• Extend and enhance energy efficiency and electrification incentives
• Provide disaster mitigation tax credits
• Expand and enhance the carbon oxide sequestration credit
• Extend and enhance the electric vehicle charging station credit
• Reinstate superfund excise taxes and modify oil spill liability trust fund financing

While the Green Book addresses all of the Administration’s proposals of reforms to the Internal Revenue Code (Code), this article will focus on the Prioritize Clean Energy section under the American Jobs Plan and how the proposals affect the Consumer Products industry. For a general explanation of the Administration’s proposals, see RSM’s June 1, 2021 Tax Alert.

The Administration has made the following clean energy proposals related to consumer products.

New tax credit for heavy and medium duty zero emissions vehicles

Current law provides a non-refundable tax credit for “qualified plug-in electric drive motor vehicles” including passenger vehicles and light trucks. A qualified plug-in electric motor vehicle is defined, in part, as a vehicle weighing less than 14,000 pounds that is propelled by an electric motor that uses a rechargeable battery and such vehicle is subject to and in compliance with applicable Clean Air Act Standards. Moreover, the vehicle must be acquired for use or lease and not for resale, the original use of the vehicle must commence with the taxpayer, and the vehicle must be used predominantly in the United States. This credit however, does not apply to medium- and heavy-duty vehicles.

The Administration’s proposal would provide a nonrefundable income tax credit for new medium- and heavy-duty zero emission vehicles, including battery electric vehicles and fuel cell electric vehicles. Vehicle manufacturers would submit to the Internal Revenue Service the vehicles eligible for the credit. The credit rate varies by vehicle class and will decrease over time. The initial credit amounts range from $25,000 for a class 3 vehicle to $120,000 for class 7-8 long-haul vehicles. The proposal also includes a direct pay option.

Extend and enhance electric vehicle charging station credit

Current law provides an investment tax credit equal to 30 percent of the cost of alternative fuel vehicle refueling property. This includes electric vehicle charging stations and hydrogen refueling stations. The tax credit is capped at $1,000 for refueling property installed at a taxpayer’s residence and at $30,000 for refueling property installed for commercial use. This credit is allowed on a per-location base, not on per-device basis.

The Administration’s proposal would modify and expand the tax credit for electric vehicle charging stations. Additionally, this proposal allows taxpayers to claim the tax credits on a per-device basis, increase the tax credit limit on individual devices to $200,000, and extends the tax credit for five years through December 31, 2026. Moreover, while the $1,000 tax credit for refueling property installed at a taxpayer’s residence would not increase, it would be extended for five years. The proposal also includes a direct pay option.

Extend and enhance energy efficiency and electrification incentives

Current law provides deductions and tax credits for investments in energy efficiency property and improvements for their homes or businesses. The following incentives are described below.

A. Nonbusiness energy property

Current law provides a credit for certain expenditures to improve the energy efficiency of a taxpayer’s principal U.S. residence. Two types of property qualify for the credit: “qualified energy efficiency improvements” and “residential energy property expenditures.” The tax credit is equal to the sum of ten percent of the cost of qualified energy efficiency improvements and eligible costs for residential energy property expenditures, subject to a limit of a $500 nonrefundable tax credit for the taxpayer’s lifetime. Qualified energy efficiency improvements are defined, in part, as energy efficient building components, including insulation, windows, exterior doors, and certain metal or asphalt roofs that satisfy energy savings. Residential energy property expenditures must meet energy efficiency standards include certain types of property, such as natural gas, propane, or oil furnace or hot water boiler; an advanced main air circulating fan; and “energy-efficient building property.” The credit expires on December 31, 2021.

The Administration’s proposal would extend the tax credit five years and increase the lifetime limit to $1,200 for property placed in service after December 31, 2021 and before January 1, 2027. Moreover, the proposal would modify the definitions of eligible qualified energy efficiency improvements and residential energy property expenditures and update the required energy efficiency standards for such property. Notably, property such as roofs, advanced circulating fans, and certain equipment, such as water heaters and furnaces, powered by fossil fuels, would no longer be eligible for the tax credit; however, certain geothermal and load center equipment would qualify.

The proposal would be effective after December 31, 2021.

B. Construction of new energy efficient homes

Current law provides a tax credit for the construction of new energy efficient homes that are purchased on or before December 31, 2021. A new energy efficient home is a dwelling unit, located in the United States that meets specified energy saving requirements. The tax credit for a new energy efficient home is $2,000 per dwelling unit. For manufactured homes, the tax credit is $1,000 per dwelling unit and manufactured homes are subject to different energy savings requirements. The credit expires December 31, 2021.

The Administration’s proposal would increase the tax credit for an energy efficient home from $2,000 to $2,500 and extend the tax credit five years to December 31, 2026. The proposal would also expand the dwelling units eligible for the credit. Additionally for new energy efficient homes, the required energy savings percentage would increase from 50 percent to 60 percent. Energy Star homes would also be eligible for the tax credit as well as dwelling units with annual heating and cooling consumption at least 15 percent below the annual energy consumption level.

The proposal would be effective after December 31, 2021.

C. Energy efficient commercial buildings

Current law provides a tax deduction for energy efficient commercial building property placed in service. An energy efficient commercial building property is defined as property to which depreciation or amortization is allowable and meets certain building energy efficiency standards established by the American Society of Heating, 51 General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America.

The Administration’s proposal would increase the maximum deduction per square foot from $1.80 to $3.00 for qualifying property placed in service after December 31, 2021. Moreover, the partial deduction rate would be increased from $0.60 to $1.00 per square foot for qualifying property placed in service after December 31, 2021. The required efficiency standard pertaining to the reference building’s total annual energy reduction would be adjusted from 50 percent to 30 percent.

The proposal would be effective after December 31, 2021.

D. Mechanical insulation labor costs

Currently, there is no tax credit solely for the labor costs related to mechanical insulation. However, the Administration’s proposal would create a new general business tax credit for qualifying mechanical insulation labor costs. The tax credit would be equal to 10 percent of the mechanical insulation labor costs paid or incurred by the taxpayer during such taxable year. These labor costs would include the labor cost of installing mechanical insulation property, including insulation materials, and facings and accessory products, for a depreciable mechanical system that is placed in service in the United States and that satisfies certain energy loss reductions.

This credit would be available for labor costs incurred after December 31, 2021 through December 31, 2026 and would take effect after December 31, 2021.

Extend and expand renewable energy production tax credit

Current law provides an investment tax credit for businesses that install renewable energy property at their facilities. This property includes solar, geothermal electric property, qualified fuel cell power plants, geothermal heat pumps, small wind property, and combined heat and power property. Generally, the investment credit is 30% for the property that begins construction before January 1, 2020, 26 percent for property that begins construction after December 31, 2019 and before January 1, 2023, and 22 percent for property that begins construction in after December 31, 2022 and before January 1, 2024, and the energy property must be placed in service before January 1, 2026. Notably, taxpayers cannot claim both the production and investment credit for the same property. However, there are special rules apply where a taxpayer that is eligible for the production tax credit may elect to claim the investment tax credit in lieu of the production tax credit.

The Administration’s proposal would extend the credits for investments in solar and geothermal electric energy property, qualified fuel cell power plants, geothermal heat pumps, small wind property, offshore wind property, waste energy recovery property, and combined heat and power property. Additionally starting in 2022, the investment tax credit would be expanded to include stand-alone storage technology that stores energy for conversion to electricity. The proposal also includes a direct pay option.

New disaster mitigation tax credit

The Administration proposes to provide a nonrefundable tax credit for homeowners and businesses that install disaster mitigation measures prior to the occurrence of a disaster. The policy for this credit is that for every dollar spent on disaster mitigation, four dollars are saved in rehabilitation costs after a disaster. The credit would be equal to 25 percent of qualified disaster mitigation expenditures capped at $5,000. For individual taxpayers, the credit would begin to phase out at an adjusted gross income of approximately $85,000 for single tax filers and approximately $170,000 for joint filers. However for businesses, the credit will begin to phase out when the business has gross receipts above $5 million. Notably, the credit would be available only to homeowners and businesses in areas where a Federal disaster declaration has been made within the preceding 10-year period or in areas adjacent to where a Federal disaster declaration has been made.

This credit would be available for taxable years beginning after the date of enactment.

Residential energy efficiency credit

Currently, the law provides a nonrefundable credit for the purchase of certain residential energy efficient property, including solar electric property, solar water heaters, fuel cell property, geothermal heat pumps, small wind turbines, and biomass fuel property installed in a taxpayer’s U.S. residence. The credit is equal to 30 percent of the cost of qualified property placed in service after December 31, 2016, and before January 1, 2020, 26 percent for property placed in service after December 31, 2019, and before January 1, 2023, and 22 percent for qualified property placed in service after December 31, 2022, and before January 1, 2024. The credit will not apply to property placed in service after December 31, 2023.

The Administration’s proposal would extend the Residential Energy Efficiency Credit and expand residential energy efficient property to include qualified battery storage technology of at least three kilowatt hours of capacity installed in a residence. The credit would ultimately be phased out over the next five years. This proposal would be effective after December 31, 2021.

Conclusion

While many of the Administration’s clean energy proposals directly affect taxpayers in the industrial and manufacturer’s sector, the underlying policy behind the proposals is to change consumer behavior towards purchase and use of renewable energy and technologies and away from fossil fuels. The proposed credits would stimulate the demand for clean energy products and parts. If passed as proposed, we would expect to see growth opportunities in the sales, parts, and service of many new clean energy products. In addition there could be additional opportunities when putting new warehouses or retail facilities into service through the use of energy efficient materials and construction techniques. There is even the potential to reduce the cost (or assist with cash flow management) of new or retrofitted warehouses or retail facilities by using energy efficient or disaster mitigation products. If Congress enacts the proposal for heavy and medium vehicles the need for charging stations will increase and may be a staple at warehouses.

While there are many opportunities in the proposals, there is also much uncertainty with respect to these proposals. First and foremost is whether the proposals will be enacted into law under the current partisan Congress. Additionally, questions remain on other issues, such as how the government would administer a direct pay option and rules related to the Administration’s language regarding measures to pair the credits with strong labor standards. Nonetheless, it appears that there is much interest in both the Administration and Congress to enact new green energy tax provisions and it is certainly possible that some of the concepts in these proposals could be enacted into law in the coming year.