IRS Determination Opens Up Possibility of New Renewable Transactions
The Internal Revenue Service has issued Notice 2008-60, which provides significant new guidance regarding a key tax incentive for renewable energy that could facilitate additional transactions.
Published by the tax agency last week, the document defines sales to an "unrelated person." Under the tax laws, to claim Section 45 production tax credits on alternative energy facilities, a taxpayer must sell electricity to unrelated persons. In the new guidance, the IRS has allowed taxpayers to make sales to a "related person," if the power is then re-sold to an unrelated person.
In the language of the IRS document, which also applies to sales of refined coal and coal produced from Indian lands:
"Electricity or coal will be treated as sold to an unrelated person for these purposes if the ultimate purchaser of the electricity or coal is not related to the person that produces the electricity or coal. The requirement of a sale to an unrelated person will be treated as satisfied in these circumstances if the producer sells the electricity or coal to a related person for resale by the related person to a person that is not related to the producer."
The determination could be particularly important for utilities that must comply with renewables portfolio standards, such as those in California, where there's serious consideration being given to greatly boosting the requirements as part of the state's plan to fight greenhouse gas emissions. Those companies, who will be faced with the construction of a large number of new alternate energy facilities, may get to the point where limitations on the credits will limit their usefulness to the utilities.
Now, the facility can be owned by a partnership in which the utility is a partner, and the partnership can sell electricity to the utility for re-sale to the utility's customers. Sales by the partnership would qualify for the credit.
The credits to which the guidance applies range in value from 1-cent per kilowatt hour to 2.1 cents, depending on the type of facility. But they could be short-lived. Congress still has not broken an impasse that has kept the incentives from being extended beyond their expiration date at the end of this year, a subject that Climate Law Update has covered frequently, including this recent story.
(Photo of IRS headquarters, Washington, D.C.; Wikipedia)
