Wind Energy Production Tax Credit

A tax credit is available for producing electricity from certain renewable resources. Basically, this credit is 1.5¢ per kilowatt hour of electricity (indexed annually for inflation) (1) produced from qualified energy resources at a qualified facility originally placed in service before 2013 and (2) sold to an unrelated party during the tax year. The credit is generally available for ten years, beginning on the qualifying facility's placed-in-service date. Some additional rules may limit the credit amount.

For this purpose, wind is a qualified energy resource, and a “wind farm” (wind turbines, and their towers and supporting pads) is a qualified facility.

You may be involved as an investor in or developer of wind energy through a partnership that owns a wind farm. Questions have arisen as to how to allocate the credit among partners in these partnerships. IRS has stated that it will not issue guidance via letter rulings in this area, so partnerships and partners cannot ask IRS to rule on whether a given allocation is acceptable.

However, IRS has issued “safe harbor” rules for partnerships consisting of wind energy developers and investors. (For this purpose, “safe harbor” rules are legal provisions that, if followed, reduce or eliminate Federal tax liability, as long as good faith is demonstrated.) These rules must be met to qualify for the safe harbor, but are not intended to provide substantive rules and are not to be used as audit guidelines. If the partnership, developer and investor(s) all meet these rules, the IRS will respect a partnership's allocation of the credit to partners. Nevertheless, returns claiming Code Sec. 45 wind energy production tax credits are subject to examination by IRS. The safe-harbor rules are generally in effect for transactions entered into after Nov. 4, 2007 but, in some cases, may apply to transactions entered into before that date.

The safe-harbor rules provide strict requirements for the developer's and investor's percentage interests in the partnership. There are also rules addressing an investor's minimum unconditional investment, limits on contingent consideration, purchase rights, sale rights, and restrictions on guarantees and loans. Further, the credit must be allocated in accordance with a specific regulation.