Poultry Waste Tax Credit

The Tax Relief Extension Act of 1999 expanded the tax credit under Sec. 45 for electricity produced from certain renewable resources to include poultry waste as a qualified energy source. "Poultry waste" is defined as poultry manure and litter, including wood shavings, straw, rice hulls and other bedding material for the disposition of manure. The credit is part of the Sec. 38 general business credit, subject to normal carryforward and carryback periods with one exception. Under Sec. 39(d)(3), the credit may not be carried back to a tax year ending before 1993. The credit is 1.5 cents per kilowatt hour (KWH) of electricity produced by the taxpayer and sold to an unrelated person. Persons are considered related if they would be treated as a single employer (under common control) under Sec. 52(b). A sale to an unrelated third party by a corporation that files a consolidated return with the corporation that produces the qualifying electricity is treated as a sale to an unrelated person.

To qualify for the credit, the electricity generated from poultry waste must be produced domestically or in a U.S. possession by a taxpayer-owned facility placed in service between Dec. 31, 1999, and Jan. 1, 2002 (Sec. 45(c)(3)(C)). The credit is allowed only for electricity produced for a 10-year period beginning on the date the facility is placed in service. Generally, for a facility owned by more than one person, production is allocated among them in proportion to their respective ownership interests in the gross sales (Sec. 45(d)(3)). The credit is apportioned between estates or trusts and their beneficiaries on the basis of the estate or trust income allocable to each (Sec. 45(d)(5)). There is no special rule apportioning the credit among S shareholders. Generally, a tax credit is passed through to (and taken into account by) S shareholders in proportion to their ownership percentage. For a government-owned facility, the person eligible for the credit is the facility lessee or operator (Sec. 45(d)(6)).

Additionally, the credit is phased out over a three-cent-per-KWH range as the average price of electricity exceeds an eight-cent threshold amount. Under the phaseout rule, the credit is reduced by a percentage, determined by dividing the excess of the reference price for the calendar year of sale over eight cents per KWH by three cents. The reference price is defined as the Secretary's determination of the annual average contract price per KWH of electricity generated from poultry waste and sold in the previous year in the U.S. For example, if a taxpayer produces and sells 10 million KWH of electricity produced from chicken waste and the reference price is 11 cents, the phaseout adjustment is 100% ((11 cents 2 8 cents)/3 cents). The credit before the phaseout adjustment is $150,000. After the adjustment, the credit is reduced to zero. There is no phaseout when the reference price is below 8 cents.

The 1.5-cent credit and the eight-cent phaseout threshold are each adjusted by an inflation adjustment factor (IAF). Not later than April 1 of each calendar year, the IRS must determine and publish it in the Federal Register, along with the reference price. Fiscal-year taxpayers need to determine the credit by using a pro rata amount of the inflation adjustment factor for each calendar year in the taxpayer's fiscal year.

The 1.5-cent-per-KWH credit is multiplied by the inflation adjustment factor for the year in which the sale occurs. Any increase is added to the 1.5-cent amount and the total is then rounded to the nearest 0.1 cent. The eight-cent-per-KWH threshold amount specified is multiplied by the inflation adjustment factor for the year in which the sale occurs. Any increase is added to the eight-cent amount and the total is then rounded to the nearest 0.1 cent. The width of the three-cent-per-KWH range is not adjusted for inflation. Thus, the top of the phaseout range is three cents per KWH above the inflation-adjusted threshold level. Accordingly, no credit is available if the average price of electricity from poultry waste is three cents per KWH or more above the threshold price. For example, the 1999 IAF is 1.1269; see Notice 99-26. The 1999 credit per KWH is determined by multiplying 1.5 cents by 1.1269, which equals 1.69 (rounded to 1.7 cents). The phaseout threshold is determined by multiplying 8 cents by 1.1269, which equals 9.0152 and is rounded to 9 cents. The phaseout range begins at the inflation-adjusted phaseout threshold of 9 cents and runs through 12 cents (9 cents 1 3 cents).

The credit determined after application of the phaseout is reduced by a prescribed percentage for grants, tax-exempt bonds, subsidized-energy financing and other credits. This reduction percentage is computed as follows: The numerator is the sum, for the tax year and all prior tax years, of:

• Grants provided by the U.S., a state or a political subdivision of a state for use in connection with the project;
• Proceeds of an issue of state or local government obligations, used to provide financing for a project in which the interest is exempt from tax under Sec. 103;
• The aggregate amount of subsidized-energy financing provided (directly or indirectly) under a Federal, state or local program provided in connection with the project; and
• The amount of any other credit allowable for any property that is part of the project.

The denominator is the aggregate amount of additions to the capital account for the project for the current and all prior tax years.

The credit does not apply to electricity sold to a utility pursuant to a contract originally entered into before 1987, unless the prices for energy and capacity are established pursuant to a contract amendment. The amendment must provide that the prices set forth in the contract that exceed avoided-cost prices determined at the time of delivery apply only to annual quantities of electricity that do not exceed the greater of (1) the average annual quantity of electricity sold to the utility under the contract during calendar years 19941998 or (2) the estimate of the annual electricity production set forth in the contract (or, if there is no such estimate, the greatest annual quantity of electricity sold to the utility under the contract in any of calendar years 19961998). Energy and capacity in excess of these limits may be sold to the utility only at prices that do not exceed avoided-cost prices determined at the time of delivery, or sold to a third party subject to a mutually agreed on advance notice to the utility. Avoided-cost prices are determined under 18 CFR 292.304(d)(1) or any successor regulation.

Planning Considerations

The tax benefit for converting poultry waste to electricity is limited to owners and operators of electricity power stations using poultry litter as fuel. The credit does not benefit contract farmers or agribusiness giants such as Tyson and Perdue. It also does not benefit firms with the technology to develop power stations using poultry waste as fuel, but not the desire to continue as an owner or operator after completion of a project. The benefit of the tax credit for the conversion of poultry waste to electricity may be extended to contract farmers, agribusiness giants, power station developers and any other person through use of flowthrough entities such as partnerships and S corporations.

From Hans Sprohge, Professor of Accountancy, Wright State University, Dayton, OH (Not associated with Summit International)