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Green energy credits and excise tax proposals in Build Back Better Act
ARTICLE | September 27, 2021
Authored by RSM US LLP
On September 15, 2021, the House and Ways Committee (the “Committee”) successfully reported out of committee the tax provisions of the Build Back Better Act (the “bill”). This bill advances many of the Democratic representatives’ priorities. It does not have bipartisan support; thus the Democratic representatives are using the budget reconciliation process in an effort to enact the legislation.
President Biden has committed the U.S. to reducing carbon emissions by 50% below 2005 levels by 2030. In advancing the priorities of President Biden and his party related to climate change (discussed here and here), Subtitle G – Green Energy – of the bill includes nearly 250 pages of proposals to incentivize investment in renewable energy.
If enacted, companies across all industries – including energy, manufacturing and consumer products – will be incentivized to invest in renewable technologies and green energy projects. Additionally, the proposals include increased incentives for individuals to invest in renewable energy property in homes and vehicles.
What’s in Subtitle G of the bill?
At a high level, Subtitle G of the bill contains the following categories:
- Renewable electricity and reducing carbon emissions
- Renewable fuels
- Green energy and energy efficiency incentives for individuals
- Greening the fleet and alternative vehicles
- Investment in the green workforce
- Environmental justice
- Superfund excise tax
- Appropriations
The provisions in the bill can be broken into the following types of proposals: extension of existing credits, modifications and expansions to existing credits, and creation of new credits to promote investment in new technologies and resources. Most of the credits are proposed to be extended through 2031. Additionally, the bill proposes to essentially make some of the credits refundable through a direct pay election mechanism.
For a number of the provisions, the bill proposes additional qualifications:
- Apprenticeship requirements. The apprenticeship requirements would require the taxpayer to guarantee that an increasing percentage of labor hours are performed by “qualified apprentices.”
- Prevailing wage requirements. In circumstances where the bill proposes “bonus rates,” to claim this additional rate with respect to a project, the taxpayer must ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of the project.
- Domestic content requirements. This requires taxpayers to ensure the facility qualifying for the credit was produced with steel, iron, or products manufactured in the United States.
Along with many other revenue raisers, the bill proposes to reinstate the superfund excise tax imposed on crude oil, petroleum products and chemicals as well as increase the tax rates on tobacco products.
New green energy tax credits proposed
| 36C | Refundable qualified plug-in electric drive motor vehicle credit | New refundable income tax credit for qualified plug-in electric drive motor vehicles of up to $12,500 per vehicle. For maximum credit, vehicle must be assembled in U.S. union facility and meet domestic content component parts requirement with U.S. manufactured battery cells. No credit for vehicles with MSRP exceeding certain thresholds. Credit is phased out depending on taxpayer’s AGI. |
| 36D | Credit for previously owned electric vehicles | New credit of up to $2,500 for buyers of used qualified plug-in electric drive vehicles. Credit is phased out depending on taxpayer’s AGI. |
| 36E | Electric bicycle credit | New refundable income tax credit of up to $750 for qualified electric bicycles. Credit is phased out depending on taxpayer’s AGI. |
| 40B; | Sustainable aviation fuel credit | New refundable income and excise tax credit of up to $1.75 per gallon for producers of sustainable aviation fuel mixtures. |
| 45W | Zero-emission nuclear power production credit | New tax credit for production of electricity from a qualified nuclear power facility at base and bonus rates. To qualify for bonus credit rate, taxpayers must satisfy prevailing wage and apprenticeship requirements. Direct pay election allowed. Proposed effective for electricity produced and sold from 2022-2026. |
| 45X | Clean hydrogen production credit | New general business credit for production of clean hydrogen at a qualified facility over 10-year period. Proposed effective beginning in 2022. Election to claim ITC in lieu of PTC. |
| 45Y | Credit for qualified commercial electric vehicles | New general business credit for qualified commercial electric vehicles placed in service by the taxpayer. Credit amount proposed at 30% of cost of vehicle. Proposed effective for vehicles acquired before 2032. |
| 48C | Advanced energy project credit | Allocate new funding for construction, re-equipping or expanding manufacturing facility for production of renewable energy property. Project must meet prevailing wage and apprenticeship requirements. Allocated funding of $2.5B each year through 2031. Direct pay election allowed. |
| 48D | Electric transmission property credit | New investment tax credit of 6% or increased rate to 30% of basis of qualified electric transmission property if prevailing wage and apprenticeship requirements are met. Proposed effective for property placed in service in 2022-2031. |
| 48E | Zero emissions facilities credit | New investment tax credit of 30% for qualified investment with respect to zero emissions facilities. To qualify project must satisfy prevailing wage and apprenticeship requirements. Subject to annual credit limit and placed in service deadline. Proposed effective from 2022-2026. |
Proposed modifications / extensions to existing green energy tax credits
|
| Proposal | Extension | Modifications |
| 45 | Production tax credit (PTC) | Extend through at least 2031 for qualifying facilities including wind, solar, hydropower and geothermal | Change in credit rate to base credit and bonus rate if apprenticeship and prevailing wage requirements met. Increased credit if domestic content requirements met. Credit phases down beginning in 2032 through 2033. |
| 48 | Energy investment tax credit (ITC) | Extend for most property where constructions begins by the end of 2032; | Change in credit rate to base and bonus rate if apprenticeship and prevailing wage requirements met. Increased credit rate if domestic content requirement met. Expanded to include credit for new technologies:
Change in credit rate to base and bonus rate if apprenticeship and prevailing wage requirements met. |
| 45Q | Carbon capture and sequestration | Extend for facilities where construction begins by the end of 2031; | Change in credit rate to base and bonus rate with increased rates for direct air capture facilities. Bonus rate would require satisfaction of prevailing wage and apprenticeship requirements. Direct pay election allowable. Reductions to minimum threshold capture requirements. |
| 40, | Alternative fuels and biofuels credits | Extend through 2031 | Extension of credits for biodiesel, biodiesel mixtures, small agri-biodiesel producer, alternative fuel, alternative fuel mixture, and second generation biofuel producers. |
| 25C | Nonbusiness energy property credit | Extend through 2031 | Increase credit rate to 30%. Replaces lifetime cap with annual limitation of $1,200. Expands credit to cover costs of home energy audits to maximum of $150. |
| 25D | Increase credit rate to 30%. Replaces lifetime cap with annual limitation of $1,200. Expands credit to cover costs of home energy audits to maximum of $150. | Extend full 30% rate through 2031 | Increase credit rate to 30%. Expand to include qualified battery storage technology. Credit phases down beginning in 2032 to 2033. |
| 30B | Qualified fuel cell motor vehicles credit | Extend through 2031 | Applicable only for vehicles that do not meet the new credit for qualified commercial electric vehicles. |
| 30C | Alternative fuel refueling property credit | Extend through 2031 | Increased credit per location; additional credit for property intended for general public use or government or commercial vehicle fleets if conditions met, including prevailing wage and apprenticeship requirements. Direct payment election allowed. |
| 179D | Energy efficient commercial building deduction | Extend through 2031 | Expand and update deduction; to claim bonus deduction amount, must satisfy prevailing wage and apprenticeship requirements. |
| 45L | New energy efficient home credit | Extend through 2031 | Expand and update credit; to claim bonus deduction amount, must satisfy prevailing wage and apprenticeship requirements. |
Proposed direct payment / refundable credits
The bill proposes a direct pay election (new sec. 6417) which would make a number of green energy tax credits refundable. This direct pay option would be applicable for the following:
- Production tax credit
- Energy investment tax credit
- Carbon capture and sequestration credit
- Alternative fuel vehicle refueling property credit
- Advanced energy property credit
- Investment credit for transmission property
- Zero emissions facility credit
- Zero-emissions nuclear power production credit
- Clean hydrogen production credit
For the ITC, PTC, and investment credit for transmission property, the direct pay would be reduced/limited if the domestic content requirement is not met. Elections for direct pay by a partnership would be made at the entity level.
Additionally, the sustainable aviation fuel is proposed to be claimed as an excise tax credit or payment or as a refundable income tax credit.
Proposed excise tax provisions
The bill proposes a number of excise tax provisions, including reinstatement of superfund taxes and increased rates to the tobacco excise tax.
| 4611; | Reinstate superfund excise tax | Reinstate the superfund excise tax imposed on crude oil, petroleum products and chemicals at a rate of 16.4 cents per gallon, indexed to inflation. While not in the legislative text, it is expected the bill will also reinstate the tax on sale of chemicals at twice the rate enacted in prior law. Proposed effective 2022 –2031. |
| 5701 | Increase tax on certain tobacco products | Significantly increase rate of tobacco excise tax for taxable articles such as cigarettes, small cigars, roll-your-own tobacco, snuff, chewing tobacco, and pipe tobacco. Modify taxation of large cigars. Addition of floor stocks tax. Eliminate “double drawbacks” on tobacco products. Proposed effective 180 days after enactment. |
| 5701 | New excise tax on nicotine (vaping) | New excise tax on nicotine extracted, concentrated, or synthesized. Proposed effective 180 days after enactment. |
| 6433 | Changes to dyed fuel tax rules | New fuel excise tax refund for dyed fuel removed from a terminal if taxpayer establishes tax has already been imposed on the fuel. |
| 4121 | Coal excise tax | Extends tax for black lung disability trust fund through 2025. |
Washington National Tax Takeaways
If enacted, the provisions outlined above would be a major expansion to existing green energy incentives in the tax code. It is important to remember that these proposed changes must still proceed through several additional steps before becoming law, all the while subject to a highly politicized and unpredictable process. Based on the current state of politics in Washington, it is expected that there will be additional modifications and changes to the bill and not all these provisions will be enacted into law. Nevertheless, it is likely that some of these changes may survive intraparty politics in the House and negotiations with the Senate. As the reconciliation bill is likely the most significant opportunity for Democratic representatives to enact their tax priorities before the next election cycle, it is likely that an agreement will be reached to enact portions of this bill into law.
Washington National Tax is closely monitoring the progress of this legislation.
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This article was written by Eugene Boakye, Trina Pinneau and originally appeared on Sep 27, 2021.
2022 RSM US LLP. All rights reserved.
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