Publish Date

Jun 03, 2021

Green Book Would Increase Green Energy Incentives and Reporting Requirements

A&M Tax Advisor Weekly

As discussed in our prior alert, the Treasury Department last Friday released its general explanation of tax proposals included in President Biden’s fiscal year 2022 budget submission to Congress (the “Green Book”). In this alert, we focus on some of the Green Book’s proposals that were not covered by our prior alert.

Specifically, the following topics are covered in this alert:

Proposals Impacting the Oil & Gas Industry
With the Administration’s focus on green energy and the President’s pledge to end all fossil fuel subsidies, it is not a surprise that the Green Book contains numerous proposals that will drastically impact the oil and gas industry. The proposals, which are estimated to generate over $35 billion in revenue over the next 10 years, cover a wide range of topics, including:

  • Repeal of the ability to expense exploration and mine development costs.
  • Repeal of the expensing of intangible drilling costs.
  • Repeal of percentage depletion with respect to oil and gas wells and hard mineral fossil fuels.
  • Repeal of the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project.
  • Repeal of the capital gain treatment of royalties on the disposition of coal or lignite.

A&M Insight: The Green Book includes 13 specific proposals designed to eliminate fossil fuel subsidies, which are generally proposed to be effective for taxable years beginning after December 31, 2021. If these proposals are enacted, they would discourage future investment and growth. On February 3, 2021, Senator Manchin, chair of the U.S. Senate Energy and Natural Resources Committee and a key Democratic vote in the Senate, stated, “Although fossil fuel consumption is dropping in the U.S. power grid, the global trends in fossil fuel use should make us all recognize that fossil fuels aren’t going anywhere anytime soon ….” Instead, he supports technological innovation to reduce or capture emissions. As a result, it is unclear to what extent any of these proposals will be enacted. If you are in the oil and gas industry and would like to discuss these proposals, or other tax incentives, including the credit for carbon oxide sequestration, please reach out to our National Tax Office.

Proposals Encouraging Green Energy

As noted above, the Administration is focused on green energy. To encourage the necessary investments in green energy, the Green Book includes numerous proposals, consisting of expansion of existing tax credits as well as new incentives. The following are highlights of some of the green energy provisions.

Expansion of Existing Credits

  • Carbon Capture Credit: Extends the existing credit under section 45Q by 5 years to projects that begin construction prior to 2032. The proposal also expands this credit to hard-to-abate industrial carbon oxide capture sectors such as cement production, steelmaking, hydrogen production, and petroleum refining, but would not include ethanol, natural gas processing, or ammonia production facilities. Direct air capture technologies would receive an enhanced credit. This credit would qualify for the direct-pay option.
  • Construction of New Energy Efficient Homes: Expands section 45L credit for an energy efficient home to $2,500 (a $500 increase) and extends applicability by 5 years (through 2026).
  • Electric Generation Tax Credit for Existing Nuclear Power Plants: Proposes up to $1 billion (annually) in credits for energy generated from existing electric plants. Plants would bid to receive the credit every two years. The credits would be targeted at facilities that are economically at risk and would continue through 2030.
  • Electric Transmission Credit: Provides a credit for investment in electricity transmission infrastructure placed in service after December 31, 2021 and before January 1, 2032. The credit would equal 30% of the investment in a given year and would qualify for the direct-pay option.
  • Investment Tax Credit: Extends the existing credit under section 48 (through 2027 with a 5-year phase-out) and expands the credit beyond solar to stand-alone energy storage technology starting in 2022. This credit would qualify for the direct-pay option.
  • Medium- and Heavy-Duty Zero-Emissions Tax Credit: Proposes a new credit for medium- and heavy-duty zero-emission vehicles (Class 3 – Class 8) that are purchased for original use predominantly in the U.S.
  • Production Tax Credit: Extends the existing credit under section 45 for qualified renewable production (i.e. wind, closed-loop biomass, geothermal and other) facilities commencing construction after December 31, 2021 and before January 1, 2027, followed by a 5-year phase-out (20% reduction each year). Credits would be disallowed for projects commencing after 2030. This credit would qualify for the direct-pay option.
  • Qualifying Advanced Energy Manufacturing: Modifies and expands section 48C by revising the definition of qualifying advanced energy project to include: industrial facilities; recycling in addition to production; and expanded eligible technologies including but not limited to energy storage and components, electric grid modernization equipment, carbon oxide sequestration, and energy conservative technologies. The proposal authorizes an additional $10 billion in tax credits, with the three-year application window opening after enactment. $5 billion of the $10 billion would be specifically allocated to projects in coal communities. This credit would qualify for direct-pay.
  • Vehicle Charging Station Credit: Modified and extends section 30C credit for charging stations to $200k on a per-device basis and extends the credit through 2026. Credit would also be extended for residential installations through 2026. This credit would qualify for direct-pay.
  • Section 179D Deduction: Expands section 179D deduction for qualifying new or renovated energy savings projects in commercial and multifamily projects by increasing the maximum deduction from $1.80 to $3.00 per square foot for property placed in service after December 31, 2021. Partial rate deductions would also increase from $0.60 to $1.00 per square foot. Further, the proposal reduces the energy efficiency reduction threshold from 50 percent to 30 percent, making the deduction more accessible. The proposal further allows businesses to benefit from the deduction for new or renovated energy savings projects.

New Green Energy Credits

  • Disaster Mitigation Credit: Proposes a new credit for homeowners and businesses that is equal to 25% of qualified disaster mitigation expenditures (capped at $5,000). The credit would be available in areas where federal disaster declarations recently occurred and would be phased out for high earning taxpayers ($170,000 adjusted gross income for married filing jointly or $5 million gross receipts for businesses).
  • Low-Carbon Hydrogen Tax Credit: Proposes a credit for low-carbon hydrogen production. Low-carbon refers to hydrogen produced using zero-carbon emissions electricity (renewables or nuclear) and water as feedstock, or hydrogen produced using natural gas as a feedstock with all carbon emitted in the production process captured and sequestered. The credit would be adjusted annually for inflation and apply to qualified low-carbon hydrogen that was produced by the taxpayer for a qualified end use application by a qualified production facility during the first six years of service.
  • Mechanical Insulation Labor Costs Credit: Proposes a new 10% credit for qualifying mechanical insulation labor costs incurred after December 31, 2021 through December 31, 2026. The systems must satisfy energy loss reduction requirements that have yet to be determined.
  • Sustainable Aviation Fuel Tax Credit: Proposes a sliding production tax credit for sustainable aviation fuel at $1.50 per gallon (for 50% reduced emissions) to $1.75 per gallon (for 100% reduced emissions). Eligible on fuel produced after December 31, 2021 and before December 31, 2028.

A&M Insight: As promised, the Administration has proposed tax reform initiatives that incentivize clean energy and energy transmission. These proposals touch on many industries – from energy producers and energy infrastructure to jet fuel producers and residential housing. Industries with large fleets of vehicles, particularly medium- or heavy-duty vehicles, could see significant benefits. The direct-pay option also presents unique benefits – such as the potential for more easily accessible financing from financial institutions. There are, of course, concerns with the direct-pay option. We will be monitoring these credits closely as they move through Congress, so as to identify areas of opportunity across these various industries.
Like-Kind Exchanges

The Green Book proposes to significantly limit the benefits of the section 1031 like-kind exchange (which after TCJA only applies to exchanges of real estate), by allowing a deferral of gain only up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year. The limit on the section 1031 benefit is proposed to be effective for exchanges completed in taxable years beginning after December 31, 2021.

Increased Reporting Requirements
As a means to close the tax gap (i.e., the amount of tax actually collected vs. the amount expected to be collected), the Administration has shifted focus to reporting obligations. Beginning for tax years beginning after December 31, 2022, the Green Book proposes several new reporting mechanisms, including new reporting obligations associated with various types of assets. For example, financial institutions would be required to report on all bank, loan, and investment accounts, with the exception of accounts below a gross flow threshold of $600 or a fair market value of $600. For each account (individual and business), that must be reported, the financial institution must report gross inflows and outflows, transfers of physical cash, transactions with foreign accounts, and transfer to and from accounts of the same owner. The proposal would also expand existing income reporting by financial institutions to include payments to certain corporations. The Green Book also proposes to impose reporting requirements on accounts similar to financial institution accounts (such as payment settlement entities) and cryptocurrency asset exchanges and custodians.
The Green Book proposes further reporting with respect to the use of cryptocurrency assets. Specifically:

  • Taxpayers who buy cryptocurrency assets from one broker and transfer them to another broker would need to report the transaction.
  • Businesses will need to report transactions in which they receive cryptocurrency assets with a fair market value of more than $10,000 in a transaction.
  • Brokers (including U.S. cryptocurrency asset exchanges and hosted wallet providers) who hold cryptocurrency assets would be required to report on certain foreign beneficial owners and gross proceeds of entities holding accounts with the broker.

Lastly, the Green Book proposes to extend the time for the IRS to assess and review listed transactions. The proposal would extend the statute of limitations on assessment in the case of listed transactions from 3 years to 6 years. The proposal would also increase the existing extension of the statute of limitations for failure to report a listed transaction to three years after the transactions is required to be reported (one year currently. The extensions would be effective on the date of enactment.

A&M Insights: In its effort to increase tax revenue, the Administration has consistently identified the tax gap as an area ripe for improvement. Further, the Administration has asserted (although not all policymakers agree) that increased reporting leads to better compliance. It will be interesting to see how the increased reporting proposals, which provide the IRS and Treasury broad regulatory authority, are drafted by Congress – particularly in light of the CIC Services decision. In CIC Services, a recent SCOTUS decision, the Court said the Anti-Injunction Act did not prohibit a taxpayer from challenging penalty regulation in a pre-enforcement suit against the IRS where the penalty was not on a tax underpayment.

A&M Tax Says:

Our two alerts have highlighted many of the significant proposals made in the Green Book. However, there may be additional proposals that may be relevant, for example providing the IRS with additional resources for enforcement against taxpayers with income in excess of $400,000. As previously noted, the Green Book does not reflect all of the proposals President Biden supported on the campaign trail. Additionally, the Green Book suggests that there may be further tax proposals from the Administration. For example, in discussing FDII, the Green Book highlights the importance of encouraging R&D activities, but other than green energy credits, there are no R&D-type credits in the Green Book. One possible proposal is the repeal of the five-year amortization of R&D expenditures that is scheduled to go into effect for tax years beginning after December 31, 2021. In the end, the Green Book is helpful in that it provides some insights into the Administration’s thinking. However, it also shows the importance of taxpayers working with their trusted advisors to evaluate proposed tax law changes. A&M will continue to monitor the latest legislative developments and will be happy to discuss your particular fact pattern and any concerns you may have.