Renewable Energy Law Alert: Renewable Energy Incentives in Conference Agreement
2/12/2009

Yesterday Congressional negotiators agreed on the terms of the American Recovery and Reinvestment Tax Act of 2009 (the Bill), the $789 billion economic stimulus package. It is expected that the House and Senate will pass the Bill by the end of the week and the President will sign the Bill into law shortly thereafter. The Bill contains a number of incentive provisions applicable to renewable energy projects. Most notably the Bill would:

• Extend the production tax credit (PTC) sunset date,
• Permit taxpayers to elect to claim the investment tax credit (ITC) in lieu of the PTC for certain projects,
• Permit taxpayers to receive cash grants in lieu of claiming the ITC or PTC for certain projects, and
• Extend bonus depreciation through 2009.

These provisions and others that apply to renewable energy projects are discussed below. In addition to the energy-related provisions, the Bill contains a variety of other tax provisions, which will be described in our forthcoming Tax Law alert.

PTC EXTENSIONS

The Bill would extend the placed-in-service sunset date for wind projects from December 31, 2009 to December 31, 2012. The Bill also would extend the placed-in-service sunset dates for closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities from December 31, 2010 (2011 in the case of marine and hydrokinetic renewable energy facilities) to December 31, 2013.

CLAIMING THE ITC IN LIEU OF THE PTC

The Bill would permit a taxpayer to elect to claim the ITC in lieu of the PTC for wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities placed in service from 2009 through 2013 (2012 in the case of wind). The amount of the ITC generally would be 30% of qualifying costs.

GRANTS IN LIEU OF THE ITC

The Bill would permit a taxpayer to receive a grant from the U.S. Treasury in lieu of claiming tax credits with respect to certain property placed in service in 2009 and 2010 that otherwise would qualify for the ITC or the PTC. Federal, state, and local governments and tax-exempt entities would not be eligible for the grants. Property placed in service after 2010 and on or before the applicable credit termination date could qualify for the grants, but only if construction began in 2009 or 2010.

The grants would function similarly to refundable tax credits. The amount of a grant generally would be equal to the amount of the ITC for which the owner of the project otherwise would have been eligible (i.e., generally 30% of the qualified cost of the project). Receipt of the grant would not be includible in the gross income of the taxpayer. The tax basis of the property for depreciation purposes generally would be reduced by one-half of the amount of the grant (i.e., the tax basis for depreciation generally would equal 85% of the qualifying costs of the property).

The U.S. Treasury would be required to pay a grant to a project owner within 60 days of the later of the date of application for the grant or the date on which the applicable property is placed in service. An applicant would not qualify for a grant unless its application is received by September 30, 2011.

The Bill contains an appropriation provision to help ensure funds would be available to the U.S. Treasury to pay the grants.

BONUS DEPRECIATION

The Bill would extend first-year bonus depreciation to property placed in service in 2009. An owner of qualifying property placed in service in 2009 would be entitled to deduct 50% of the adjusted basis of the property in 2009. The remaining 50% of the adjusted basis of the property would be depreciated over the regular tax depreciation schedule.

OTHER PROVISIONS

	•	Modifications to ITC. The Bill would eliminate the reduction of the ITC for property financed by subsidized energy financing or tax-exempt private activity bonds. This provision also would apply to the election to claim the ITC in lieu of the PTC and the election to receive a grant in lieu of the ITC. The Bill also would remove the cap on the ITC for small wind property (currently $4,000 for all qualified small wind property placed in service by a taxpayer during the tax year). These provisions would apply to property placed in service after December 31, 2008, and for self-constructed property, only to the extent of the basis attributable to the period after December 31, 2008.
	•	Clean Renewable Energy Bonds (CREBs). The Bill would authorize an additional $1.6 billion of CREBs to finance facilities that generate electricity from certain renewable resources.
	•	Qualified Energy Conservation Bonds. The Bill would authorize an additional $2.4 billion of qualified energy conservation bonds. In addition, the Bill would clarify that the proceeds of qualified energy conservation bonds could be used for loans, grants, and other repayment mechanisms that implement green community programs.
	•	Nonbusiness Energy Property. The Bill would extend through December 31, 2010 the placed-in-service sunset date for the credit available to individuals for energy efficiency improvements installed and residential energy property expenditures paid or incurred during the tax year. The Bill would provide a cap of $1,500 on the aggregate amount of the credit allowed for taxable years beginning in 2009 and 2010 with respect to any taxpayer and modify the calculation of the credit and the standards for qualifying property.
	•	Residential Energy Credit. Under current law there is a 30% residential energy credit available to individuals for expenditures for qualified solar electric, solar water heating, fuel cell, small wind energy, and geothermal heat pump property. The Bill would remove the caps on the credits for all qualifying property other than fuel cell property.
	•	Carbon Capture and Sequestration. The Bill would modify the carbon dioxide capture and sequestration credit to require that carbon dioxide used as a tertiary injectant be disposed of in secure geologic storage.
	•	Alternative Fuel Vehicle Refueling Property Credit. The Bill would temporarily increase the business credit for alternative refueling property from 30% to 50% of the cost of qualifying property. The Bill also would increase the cap on the credit for depreciable property from $30,000 to $50,000 (or $200,000 in the case of hydrogen-related property) and the caps on the credit for non-depreciable property from $1,000 to $2,000. The increases would apply to property placed in service in tax years beginning in 2009 and 2010.
	•	Plug-In Electric Drive Motor Vehicles Credit. The Bill would modify the credit for new qualified plug-in electric drive motor vehicles, including by revising the cap on the credit to $7,500 for each vehicle placed in service during the taxable year. The Bill also would allow a credit for the conversion of certain motor vehicles to plug-in electric drive motor vehicles made by December 31, 2011. The credit would be 10% of the cost of conversion, subject to a cap on the credit of $4,000 per vehicle.
	•	Plug-In Electric Vehicles Credit. The Bill would provide a credit in an amount equal to 10% of the cost of any qualified plug-in electric vehicle placed in service during the taxable year. The credit would be capped at $2,500 per vehicle.
	•	Advanced Energy Property Credit. The Bill would create a new 30% credit for investment in certain property used in a "qualifying advanced energy manufacturing project." Qualifying projects would include any project that re-equips, expands or establishes a manufacturing facility for the production of: property designed to produce energy from the sun, wind, geothermal deposits, or other renewable resources; fuel cells, microturbines, or certain energy storage systems; electric grids to support the transmission of intermittent sources of renewable energy; property for carbon capture or sequestration; property designed to refine or blend fuels or to produce energy conservation technologies; or other advanced energy property designed to reduce greenhouse gases as may be determined by the U.S. Treasury. To qualify for the credit, a project would need to be certified by the U.S. Treasury. In determining which advanced energy projects to certify, the U.S. Treasury, in consultation with the Department of Energy, would consider a variety of factors including commercial viability, job creation, greatest net impact on greenhouse gas emissions, newness of technology, and fastest project time to completion.

The Bill does not include certain provisions proposed in earlier bills, including a temporary reduction in the depreciation period for qualified smart electric meters, a temporary deduction for the cost of qualified plug-in electric drive manufacturing facility property, and a temporary 20% credit for qualified energy research expenditures.

In addition to the energy-related provisions, the Bill contains a variety of other tax provisions, which will be described in our forthcoming Tax Law alert. To receive future updates on tax issues, including updates on the Bill, please subscribe to our Tax Law Mailing List.

Please feel free to forward this client alert to others you think may be interested. To receive future updates on energy issues please subscribe to our Energy Law Mailing List.

If you have further questions, please contact:

Portland, Oregon
Gary Barnum at (503) 294-9114 or grbarnum@stoel.com
Pat Boylston at (503) 294-9116 or pgboylston@stoel.com
Ed Einowski at (503) 294-9235 or eeinowski@stoel.com
Chris Heuer at (503) 294-9206 or ckheuer@stoel.com
Bill Holmes at (503) 294-9207 or whholmes@stoel.com
Kevin Pearson at (503) 294-9622 or ktpearson@stoel.com
Adam Kobos at (503) 294-9246 or ackobos@stoel.com
Eric Kodesch at (503) 294-9684 or ejkodesch@stoel.com
Elisabeth Shellan at (503) 294-9887 or esshellan@stoel.com

Minneapolis, Minnesota
Mark Hanson at (612) 373-8823 or mjhanson@stoel.com
Greg Jenner at (612) 373-8857 or gfjenner@stoel.com
Kevin Johnson at (612) 373-8803 or kdjohnson@stoel.com
Ron McFall at (612) 373-8807 or rdmcfall@stoel.com
David Quinby at (612) 373-8825 or dtquinby@stoel.com
Joe Thompson at (612) 373-8822 or jthompson@stoel.com
Mary Sennes at (612) 373-8814 or mgsennes@stoel.com

Salt Lake City, Utah
Mark Astling at (801) 278-6983 or mlastling@stoel.com
Julia Pettit at (801) 578-6958 or jrpettit@stoel.com

Seattle, Washington
David Benson at (206) 386-7584 or dlbenson@stoel.com
Carl Lewis at (206) 386-7688 or cslewis@stoel.com
Alan Merkle at (206) 386-7636 or armerkle@stoel.com
Graham Noyes at (206) 386-7615 or jgnoyes@stoel.com
Cherise Oram at (206) 386-7622 or cmoram@stoel.com

IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.