Key points to remember:

  • In an effort to spur investment in renewable energy projects, Congress and the Biden administration are considering ‘direct payment’ options
  • The direct payment would allow project promoters to receive tax refunds regardless of their tax liability and corresponding ability to use tax credits
  • Whether direct payment is an appropriate option in the current economic climate depends on many factors, including the prospect of higher corporate tax rates and an economy poised to rebound from COVID-19.

Congress and the White House recently proposed “direct payment” options for developers of renewable energy projects in the United States – notably, the direct payment proposals are part of President Biden’s $2 trillion American plan for employment announced on March 31, 2021 and included in the Energy and Efficiency Growth Now Act (Green Law) and Section 45Q of the Carbon Capture Legislation (ACCESS 45Q). If adopted, the direct payment option can be an attractive alternative to traditional tax equity for monetizing tax credits from renewable energy projects.

Traditionally, renewable energy projects have been funded in part through tax equity financing, which attracts investment from profitable financial institutions and corporations with large tax bills that can take advantage of the tax credits generated by such projects to offset their tax liability. However, in a COVID-induced recession, these traditional sources of tax equity funding may be uncertain about their ability to use tax credits, making them cautious about the amount of capital to commit to investments. tax fairness.

The direct payment eliminates the need to find an investor who can use the tax credits, as the direct payment is not linked to tax liability. Under the new direct payment proposals, a developer would process tax credits generated by a renewable energy project, such as the Investment Tax Credit (ITC) or Production Tax Credit (PTC), as the equivalent of a tax payment on the developer’s tax return. . Therefore, the promoter would be entitled to receive a tax refund equal to the amount by which the direct payment credit available exceeds the tax payable by that promoter. Unlike the traditional tax equity structure, under which a taxpayer only realizes the value of tax credits to the extent of their tax liability, a taxpayer in the direct payment regime would realize the value of tax credits. tax regardless of the amount of tax taxpayer owes.

The new direct compensation proposals have several important differences from the Section 1603 Cash Grant Program created in 2009, which allowed developers of certain renewable energy projects to monetize tax credits by applying for and receiving a cash grant directly from the Treasury. Direct payment does not require Congress to authorize a grant program and to allocate funds to it. Additionally, administering direct payment through the IRS uses an existing process, as businesses already file tax returns each year.

A direct payment option could incentivize further development of renewable energy projects, as it would allow project developers to monetize tax credits without a tax capital investor, allowing them to finance renewable energy projects even when tax capital financing is hard to come by. It also seems to be a hot topic in Washington, as evidenced by its mention in the Biden administration’s US jobs plan and in congressional legislation. Nonetheless, with the prospect of higher corporate tax rates and additional stimulus from the federal government on top of the $5 trillion earmarked in the last 12 months alone, the fate of the direct payment route and its potential to incentivize the development of renewable energies remain uncertain.