Energy Related Provisions of the American Recovery and Reinvestment Act

The Act, signed into law by President Obama on February 17, 2009 includes significant changes to the Internal Revenue Code of 1986, as amended (the “Code”). This memorandum summarizes these changes, highlighting those provisions of relevance to investors and businesses in the field of clean energy technologies. Except as otherwise noted, the tax provisions of the Act are retroactive to January 1, 2009. All references to sections (e.g., “§ 45”) are to sections of the Code.

Business Energy Tax Provisions

• Changes to the Energy Investment Tax Credit. By way of background, the energy investment credit is either 30% or 10% of the basis of certain energy property placed in service during the taxable year (the “ITC”). The Act significantly modifies this credit.
  • ITC for qualified small wind energy property expanded. In 2008, the credit was expanded to include qualified small wind energy property. The credit percentage is 30% for “qualified small wind energy property,” which is property that uses a qualifying small wind turbine (a wind turbine that has a nameplate capacity of not more than 100 kilowatts) to generate electricity. Prior to the Act, this credit was limited to $4,000 per taxpayer; the Act repeals this limitation for 2009 and subsequent years.
  • New credit for manufacturing clean energy property. A new credit component is added to the investment tax credit: the “qualifying advanced energy project credit.” The 30% credit is for investment in certain property used to re-equip, expand, or establish a manufacturing facility for the production of fuel cell property, solar property, geothermal power production property, small wind energy property, and other advanced energy properties.
  • Taxpayers may elect to claim the ITC in lieu of the production tax credit (the “PTC”) for certain facilities. Prior to the Act, solar energy facilities were eligible to take a 30% ITC in the year that the facility was placed in service; however, qualified facilities that produced electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy facilities were instead eligible for a production tax credit (the “PTC”). A PTC is a per-kilowatt-hour-produced credit for the first ten years of a renewable energy facility’s operation. Thus, the PTC is credited over a 10-year period and only to the extent energy is produced from the facility. By comparison, the ITC is granted in the year the facility is placed in service. The Act provides that taxpayers that place certain qualified facilities in service in 2009 through 2013 (2012 for wind facilities) may irrevocably elect to take the 30% ITC in the year the facility is placed in service. A taxpayer electing to treat a facility as energy property (and claim the ITC) may not claim the PTC for such facility. This is effective for facilities placed in service after December 31, 2008 and before January 1, 2014 (2013 for wind facilities).
    • IRS will issue guidance on how to make the irrevocable election.
  • Energy grants in lieu of tax credits. The Act provides that taxpayers may receive grants from the Treasury Department in lieu of the ITC and/or PTC. The grants are in an amount equal to (generally) 30% of the basis of the renewable energy facility. The grant is made on before 60 days after the facility is placed in service or, if later, within 60 days after the application for such grant is received. The grant is only available with respect to property placed in service during 2009 or 2010 (or a later year, if the construction begins in 2009 or 2010 and construction is completed before the “credit termination date,” described below). Qualifying property must be depreciable or amortizable to be eligible for a grant.
    • The Treasury will provide guidance on how to elect a grant instead of a credit and will issue the forms for applying for the grant.
    • “Credit termination date” means (1) January 1, 2013, for any specified energy property that is part of a wind facility; (2) January 1, 2014, for any specified energy property that is part of a closed-loop biomass, open-loop biomass, geothermal energy, landfill gas, trash, qualified hydropower or marine and hydrokinetic renewable energy facility; and (3) January 1, 2017, for any specified energy property described in § 48.
    • For qualified microturbine, combined heat and power system, and geothermal heat pump property, the grant amount is 10% of the basis of the property, instead of 30%.
    • If a taxpayer receives a grant with respect to property, no ITC or PTC is allowed for the property.
    • If the property is disposed of, or otherwise ceases to be specified energy property, the grant will be recaptured pursuant to a yet-to-be described mechanism.
    • The grant is not includable in income.
  • Subsidized energy financing limitation repeal. Prior to the Act, the ITC had to be reduced if the property qualifying for the investment tax credit is financed with industrial development bonds or through any other Federal, State, or local subsidized financing program (“Subsidized Energy Financing”). The Act removes this rule for energy property placed in service in 2009.
    • For example, assume a taxpayer places $1 million in energy property into service in 2008, 50% financed by private activity bonds. Prior to the Act, only 50% of the basis would qualify for the ITC, resulting in a total credit amount of $150 thousand (30% x 50% x $1 million).
      Because the Act removes the reduction for Subsidized Energy Financing, the credit amount for the same property similarly financed would be $300 thousand (30% x $1 million).
• Changes to the PTC
  • Extension of the renewable energy production tax credit for wind energy.
    • Prior to the Act, a qualified facility using wind to produce electricity had to be originally placed in service before January 1, 2010 in order to be a “qualified facility” for purposes of the PTC. The Act extends the availability of the PTC to wind facilities placed in service before January 1, 2013.
  • Extension of the renewable energy production tax credit for other qualified facilities.
    • Prior to the Act, a qualified facility using either closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy technology to produce electricity had to be originally placed in service before January 1, 2011 in order to be a “qualified facility” for purposes of the PTC (January 1, 2012 in the case of marine and hydrokinetic renewable energy technology facilities). The Act extends the availability of the PTC to such facilities placed in service before January 1, 2014.
• Clean Renewable Energy Bonds (“CREBs”). The Act authorizes an additional $1.6 billion of new CREBs, issued by governmental bodies and certain qualified private issuers, to finance qualified facilities that generate electricity from wind, closed-loop biomass, pen-loop biomass, geothermal, hydropower, and municipal solid waste.
• CO2 Capture Tax Credit Modified. In 2008, a $20 per metric ton credit was available for qualified carbon dioxide captured by a taxpayer at a qualified facility and disposed of by that taxpayer in secure geological storage; a $10 per metric ton credit was available for qualified carbon dioxide captured by a taxpayer at a qualified facility and used in a qualified enhanced oil or natural gas recovery project (as a tertiary injectant). The Act modifies the latter $10 per metric ton credit for sequestered CO2 used as a tertiary injectant by adding the requirement that this sequestered CO2 must also be disposed of in secure geological storage.

Other Energy Tax Provisions

• Clean-Fuel Vehicle Refueling Property. Under current law, taxpayers can claim a 30% credit for the cost of installing qualified clean-fuel vehicle refueling property (e.g., refueling station equipment, tanks, and pumps) to be used in a trade or business of the taxpayer or installed at an individual’s principal residence. Qualified property includes refueling tanks and equipment for certain clean-burning fuels, such as certain ethanol, natural gas, hydrogen, and biodiesel fuels. Under the Act, for property placed in service in 2009 or 2010, the maximum credit is increased and the credit rate is increased to 50%, except for hydrogen refueling.
  • Prior to the Act, the credit was limited to $30,000 per taxable year per location for qualified refueling property used in a trade or business and $1,000 per taxable year for property installed at an individual’s principal residence. Under the Act, the maximum credit available for business property is increased to $200,000 for qualified hydrogen refueling property and to $50,000 for other qualified refueling property. For individuals, the maximum credit is increased from $1,000 to $2,000.
• Plug-In Electric Vehicles Credit.
  • New 4-Wheel Vehicles. Effective for 4-wheel vehicles sold after December 31, 2009, the cap on the credit for certain new electric drive motor vehicles is $7,500 per vehicle. The amount of the credit depends on the weight and characteristics of the vehicle.
  • Converting Conventional Vehicles to Electric Drive. Effective for conversions after February 17, 2009 and before 2012, taxpayers receive a credit for the conversion of certain motor vehicles to plug-in electric drive motor vehicles in the amount of 10% of the cost of conversion, capped at $4,000 per converted vehicle.
  • New 3-Wheel, 2-Wheel, and Low-Speed Electric Vehicles. The Act also creates a new credit, effective for vehicles purchased between February 17, 2009 and before January 1, 2010, in an amount equal to 10% of the cost of certain low-speed vehicles, motorcycles, and three-wheeled electric vehicles placed in service during the taxable year, capped at $2,500 per vehicle.
• Energy-Efficient Improvements to Homes and the Residential Energy Efficient Property (“REEP”) Credit.
  • Energy-Efficient Improvements. Prior to the Act, a credit was allowed for certain energy efficiency improvements installed in existing homes. The Act increases this credit from 10% of cost to 30% of cost and extends the credit through 2010. Further, the Act eliminates the $500 lifetime cap and replaces the cap with an aggregate $1,500 cap for 2009 and 2010 and modifies the efficiency standards for property qualifying for the nonbusiness energy property credit. Expenditures made from subsidized energy financing were not taken into account for purposes of this credit; the Act removes this restriction.
  • REEP Credit. Individuals are allowed a nonrefundable personal tax credit, for 30% of expenditures for qualified solar water heating, geothermal heat pump, fuel cell, small wind energy, and solar electric property made during the tax year. Expenditures made from subsidized energy financing were not taken into account for purposes of the REEP credit; the Act removes this restriction. Further, the Act eliminates the REEP credit caps for qualified solar water heating, geothermal heat pump, and small wind energy property.

Other Significant Tax Provisions

• Extension of Bonus Depreciation and AMT Depreciation Relief. Generally, businesses recover the cost of capital expenditures over a period of years as prescribed in the relevant depreciation schedule. In 2008, businesses were temporarily allowed a 50% bonus first-year depreciation for certain qualified property placed in service in 2008. The Act extends the application of this rule to qualified property acquired in 2009 (2010 for certain aircraft, certain transportation property, and long-production-period property).
  • This provision incentivizes investments by granting taxpayers additional tax benefits for certain investments made in 2009.
• Delayed Recognition of Certain Cancellation of Indebtedness Income. A taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than the issue price to the extent of such difference (cancellation of indebtedness income or “CODI”). Prior to the Act, the CODI realized on the repurchase of a debt instrument was recognized in the year of repurchase. Under the Act, a taxpayer can elect to have CODI from the repurchase of an applicable deferred until 2014 and then report the income ratably over the 2014 through 2018 tax years.
  • For example, if a taxpayer repurchases debt issued for $10 million at a discounted price of $5 million in 2009, such taxpayer has $5 million of CODI. If the relief provided under the Act is elected, instead of recognizing $5 million in 2009, the taxpayer recognizes $1 million in each of 2014-2018.
• 5-Year Carryback of Net Operating Losses (“NOLs”) for Small Businesses. Generally, NOLs may be carried back 2 years before the year that the loss arises (the “NOL Carryback Period”) and carried forward the 20 subsequent years. Under the Act, an eligible small business may elect a 3-, 4-, or 5-year carryback period for Applicable 2008 NOLs, instead of the general 2-year carryback period.
  • This provision may be useful to taxpayers in obtaining cash refunds in loss years. If, for example, a taxpayer paid taxes in 2004, and incurs a NOL in 2008, the taxpayer can carry back this NOL to create a current tax refund.

The provisions of the Act are complex, and we have only attempted to provide a very brief overview of the Act. If you would like to discuss with an attorney from our firm how to best take advantage of tax benefits under the Act, please contact us at 415.981.1400.

PLEASE NOTE: This memorandum is published by Greene Radovsky Maloney Share & Hennigh LLP for informational purposes only and does not constitute legal advice.

CIRCULAR 230 COMPLIANCE: To ensure compliance with revised Treasury Regulations under Circular 230, this is to advise you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties that may be asserted against the taxpayer. A taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is reflected in a comprehensive tax opinion that conforms to stringent requirements under federal law.