Investors Await Details on Carbon Tax Credit Before Acting by Joshua Rosenberg, Law360 Editing by John Oudens and Neil Cohen
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he Internal Revenue Service (IRS) recently released guidance on beginning-of-construction requirements and partnership allocations for the new carbon sequestration tax credit, but investors are still waiting for more guidance from the agency before moving their capital off the sidelines. The IRS’ latest guidance, released as a notice and revenue procedure on February 19, provides two avenues for meeting the carbon capture credit’s beginning-of-construction requirements and provides a safe harbor for partnership allocations. And while the guidance largely creates parity among the agency’s treatment of other alternative energy credits, by itself it doesn’t provide the certainty necessary for investors to activate their capital. That’s because the IRS has yet to articulate which sequestration activities themselves will qualify for the credit and the process by which the agency may seek to recapture credits later if projects’ capture efforts prove unsuccessful. Internal Revenue Code Section 45Q https://www.law360.com/images/lexis_
advance/kb-icon-red.png provides for a tax partnership allocation rules is not yet credit of up to $50 per metric ton of carbon actionable, Barbara de Marigny, tax partner captured in qualified facilities. The Biparti- at Baker Botts LLP. san Budget Act of 2018 expanded the scope The IRS has stated that it will release of the credit so that it can be claimed for the additional guidance on the credit soon. sequestration of “carbon oxide” rather than Investors have been clamoring for clarity merely “carbon dioxide” and required that on the provision and have been vexed by facilities begin construction before January the IRS’ somewhat measured approach 1, 2024, to qualify. toward promulgating more guidance. The Under the most recent guidance, those delay may be due to the fact that the hoping to claim the credit can demonstrate agency has committed itself to promptly that construction has begun on a carbon releasing regulations related to the 2017 Tax capture facility by either beginning signifi- Cuts and Jobs Act https://www.law360. cant, physical labor on a qualified facility or com/images/lexis_advance/kb-icon-red. by paying or incurring five percent of a png, which takes up considerable bandfacility’s total cost. Once construction has width, according to Julio Gonzalez, chief begun, both avenues require continuous executive officer of Engineered Tax Services, progress toward completion of the project an engineering and tax services firm. to qualify for the credit, the agency said. In order to encourage investors to actiOne helpful element of the recent guid- vate their capital, the IRS should answer the ance is that it provides a six-year safe harbor, question of what qualifies for sequestration, according to Amish Shah, partner at Ever- otherwise known as geological storage, by sheds Sutherland LLP. That means projects providing a simple, binary test, Shah said. will qualify for the credit as long as they’re For instance, the agency could accept the completed within that time. If not, then the Environmental Protection Agency’s permits IRS will apply a facts-and-circumstance test — which are certifications the EPA already to determine compliance. issues — as evidence that facilities have The safe harbor’s time frame is two years successfully sequestered carbon, he said. longer than in the agency’s treatment of A standard that says “If you’ve done ‘X,’ wind and solar projects, Shah said, in order then you meet that requirement” is what to account for the inherent complexity of the market would prefer, he said, instead of properly executing carbon sequestration a general set of rules that would result in activities. facts-and-circumstance analyses. However, without answering the central Although that kind of safe harbor would question of which sequestration activities “make the credit much more attractive to themselves will satisfy the credit, the guid- investors,” Gonzalez said, it may get pushance on the beginning of construction and back from those who are concerned primarily with protecting environmental resources from contamination. Another area of concern for investors is the standard the IRS may employ when seeking to recapture credits in instances of leakage, de Marigny said. One way to possibly address that concern would be for the IRS to assume the position that any investor who received a permit from the EPA would not be subject to credit recapture, Shah said. In all, while it’s difficult to quantify investors’ interest in projects that would satisfy the carbon capture credit, anecdotal evidence suggests they would be willing to deploy substantial amounts of capital if provided the right set of circumstances, Shah said.
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