Energy Tax Incentives in the American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009 (the 2009 Act) contains a number of significant enhancements of prior tax incentives for investing in renewable energy sources and as well as some very significant new incentives. As described in more detail below, they include:
(a) A multi-year extension of the deadline by which property must be placed in service in order to be eligible for the renewable electricity production tax credit;
(b) A significant expansion of the type of property eligible for the 30 percent energy property investment tax credit;
(c) For 2009 and 2010, a grant of government funds equal to, and in lieu of, the 30 percent (or 10 percent, if applicable instead) energy property investment tax credit that would otherwise be available; and
(d) A program to award to selected projects a 30 percent investment tax credit, up to an aggregate of $2.3 billion of credits overall, for equipment and similar property used in a facility to manufacture certain types of energy conservation property or property to capture and sequester carbon dioxide or reduce greenhouse gas emissions.
• Extension of the Renewable Electricity Production Tax Credit.
Under pre-2009 Act law, taxpayers who produced electricity from certain types of renewable resources and sold that electricity to unrelated persons can receive a tax credit equal to a certain amount multiplied by the number of kilowatt hours of electricity produced during the year (production tax credit). The credit is available for electricity produced from wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewable energy. For facilities placed in service after August 8, 2005, the credit is available for a 10-year period beginning with the placed-in-service date. The credit rate is adjusted for inflation. For 2008, it was 2.1 cents per kwh for wind, closed-loop biomass, geothermal energy, and solar energy, and 1 cent per kwh for other sources. However, in order to be eligible for the credit, a solar facility has to have been placed in service before 2006, while wind facilities need to be placed in service before 2010. Marine and hydrokinetic facilities must be placed in service before 2012 to be eligible for the credit. Other types of facilities must be placed in service before the year 2011. A credit was also available for the production of refined coal.
The 2009 Act extended the placed-in-service dates for these facilities (except solar) by 3 years (2 years in the case of marine and hydroelectric). Thus, the credit will now be available for wind facilities that are placed in service before January 1, 2013 and for other facilities (except solar) that are placed in service before January 1, 2014. The refined coal credit was not extended.
• Expansion of 30 Percent Business Energy Credit.
Pre-2009 Act law allows taxpayers that placed in service certain types of energy property, the original use of which began with the taxpayer, a tax credit (an “investment tax credit”) with respect to such property. The tax credit is equal to 30 percent of the taxpayer’s basis with respect to: qualified fuel cell property; equipment using solar energy to generate electricity, to cool or heat a structure, or to provide solar process heat, but not including property used for the purpose of heating a swimming pool; equipment that uses solar energy to illuminate the inside of a structure using fiber optic distributed light; and qualified small wind energy property. A credit equal to 10 percent of the taxpayer’s basis is available for certain other types of energy property, such as geothermal property, microturbines, combined heat and power system property and geothermal heat pump property. The adjusted cost basis of the property is reduced by one-half of the credit claimed, and a portion of the credit is recaptured if the property is sold within 5 years after it was originally placed in service. To be eligible for the credit, the property has to be placed in service before January 1, 2017, except for geothermal property and solar property, although solar property placed in service after December 31, 2016 receives only a 10 percent credit.
Under pre-2009 Act law, the 30 percent credit for small wind energy property was limited to $4,000 per year. Also, the eligible basis of the property was reduced if the property was financed in whole or in part by subsidized energy financing or with proceeds from private activity bonds.
The 2009 Act makes the 30 percent tax credit available for new investments in depreciable tangible property (not including a building or its structural components) that produce electricity for which the production tax credit described above would otherwise be available. This includes wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal energy facilities, land-fill gas facilities, trash facilities and high qualified hydro power facilities. (The credit is not available for refined coal production facilities.) This credit would be available provided that (a) no production tax credit had been allowed for that facility, and (b) the taxpayer irrevocably elects the investment tax credit for that facility instead. In order to be eligible for this credit, the facility has to be placed in service by the same deadline that was applicable in determining the availability of the production tax credit, i.e., by December 31, 2012 for qualified wind facilities and by December 31, 2013 for the other qualified facilities.
In addition, the 2009 Act eliminated the $4,000 credit cap for qualified small wind energy property that was imposed under previous law. It also eliminated the rule that the eligible basis of the property is reduced if the property was financed in whole or in part by subsidized energy financing or with proceeds from private activity bonds.
Besides the differences in how the amount of the credit is calculated, another significant difference between the production tax credit and the investment tax credit is that the production tax credit is available only to taxpayers that both own and operate the facility. Under the investment tax credit, leasing arrangements (including sale-leasebacks of new property) can sometimes be used.
• Provision of Monetary Grants in lieu of Credit for Certain Energy Facilities.
The 2009 Act authorizes the Secretary of the Treasury to provide a grant, in lieu of the production tax credit or the investment tax credit discussed above, for facilities placed in service during 2009 or 2010 or placed in service after 2010 but before the date that a credit would otherwise not be available with respect to that facility if construction of the property began during 2009 or 2010. In very general terms, the amount of the grant would be equal to the investment tax credit that would otherwise be available with respect to that facility, i.e., either 10 percent or 30 percent depending upon the nature of the facility.
The legislative history indicates that the authority to make such grants was provided in recognition of the fact that many taxpayers are experiencing little or no income currently and that, therefore, a credit would not have the incentive effect otherwise desired. Consistently with that understanding, the 2009 Act further provides that such a grant would be treated very similarly to a credit, in that (a) the amount of the grant will not be included in income, (b) although the grant is taken into account in determining the taxpayer’s basis in the property, that basis must be reduced by the amount that the basis would have been reduced if the taxpayer had elected the investment tax credit instead, and (c) the grant will be subject to recapture rules similar to those applicable to the investment tax credit pursuant to which a portion of the grant is recaptured if the taxpayer disposes of the property within 5 years.
For certain types of property with respect to which there is a cap on the amount of credit available, the grant is subject to a similar type of cap.
• 30 Percent Credit for Investment in Qualified Property used in a Qualified Advanced Energy Manufacturing Project.
The 2009 Act adds a completely new type of credit. Unlike the energy production or investment tax credits discussed above, which are available with respect to electricity produced by certain means or with respect to certain equipment used to produce energy, this new credit is available with respect to projects the purpose of which is to manufacture certain types of energy-producing equipment. The types of projects for which such a credit is available are those which re-equip, expand or establish a manufacturing facility for the production of:
Property designed to be used to produce energy from the sun, wind, geothermal deposits or other renewable resources;
Fuel cells, microturbines, or an energy storage system for use of electric or hybrid electric motor vehicles;
Electric grids to support the transition of intermittent sources of renewable energy, including storage of that energy;
Property designed to capture and sequester carbon dioxide emissions;
Property designed to refine or blend renewable fuels, other than fossil fuels, to produce energy conservation technologies;
New qualified plug-in electric drive motor vehicles or components which are designed specifically for use with those vehicles, including electric motors, generators and power controlled units; and
Other advanced energy property to reduce greenhouse gas emissions as may be determined by the IRS.
To be eligible for the credit, such property must be tangible personal property or other tangible property (not including a building or its structural components) if that property is used as an integral part of the project with respect to which depreciation is allowable.
The credit is available for a project only to the extent the US Secretary of the Treasury allocates a credit with respect to it. The aggregate amount of credits that may be so allocated cannot exceed $2.3 billion. Taxpayers will have to apply for an allocation of such credits. The 2009 Act specifies that Treasury must take into consideration only those projects where there is a reasonable expectation of commercial viability and consider which projects will provide the greatest domestic job creation, will provide the greatest net impact in avoiding or reducing air pollutions for anthropogenic emissions of greenhouse gases, have the greatest potential for technological innovations and commercial deployment, have lowest levelized cost of generated or stored energy, or of a major reduction in energy consumption or greenhouse gas emissions, and have the shortest project time from certification to completion.
The 2009 Act provides that the Treasury Department is to establish a certification program for these credits within 180 days of enactment. It allows two years for submitting applications. Successful applicants have one year after certification to provide evidence that certification requirements have been met. They have three years after certification to place the project in service.