Four new bills recently introduced in Congress would amend or clarify tax incentives available for certain renewable energy projects and, for a subset of such projects, would extend or expand current tax incentives.
Tax Technical Corrections Act of 2009. On Dec. 2, 2009, House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) and Ranking Member Dave Camp (R-Mich.) introduced H.R. 4169, Tax Technical Corrections Act of 2009 (the “Corrections Bill”). The Corrections Bill makes technical corrections to recently enacted tax legislation, including corrections to the energy provisions of the Internal Revenue Code (the “Code”), as amended earlier this year by the American Recovery and Reinvestment Act (the “Stimulus Act”).
The Stimulus Act provided, in relevant part, that taxpayers who timely place in service certain renewable energy facilities – including wind, biomass, and municipal solid waste facilities – may elect to claim one of three tax incentives: a section 45 production tax credit (PTC), a section 48 investment tax credit (ITC), or a new federal grant generally equal to the amount of the ITC that could be claimed with respect to such facility (the “grant”). Previously, such facilities were eligible only for the PTC.
In general, the PTC is calculated based on the amount of electricity produced by the taxpayer and sold to an unrelated party over a ten-year period. Conversely, the ITC (and grant) is equal to 30 percent of the basis of qualified property that is an integral part of a qualified energy facility timely placed in service during the taxable year. The ability to elect the ITC or grant in lieu of PTC allows taxpayers to select a tax incentive that best fits their particular needs. The Stimulus Act prohibits taxpayers from claiming more than one such incentive.
The Corrections Bill clarifies congressional intent with respect to certain points that arguably were unclear in the Stimulus Act. Namely, the Corrections Bill makes the following clarifications:
- The ITC or grant in lieu of PTC is available only with respect to facilities that otherwise would be eligible for PTC under section 45 of the Code (i.e., a qualified investment credit facility) – except there is no requirement to sell the electricity generated to an unrelated third party.
- The ITC or grant in lieu of PTC is available only with respect to tangible property that is an integral part of the qualified investment credit facility. As currently drafted, the statute could be interpreted to mean that all tangible personal property qualifies, regardless of whether it is an integral part of the facility. This proposed change would be consistent with the legislative history of the Stimulus Act and applicable Treasury Department guidance, both of which clearly indicate that all tangible property must be used as an integral part of the facility.
- For ITC in lieu of PTC, the original use of the property must begin with the taxpayer. For the grant in lieu of ITC or PTC, the original use of the property must begin with the taxpayer and the property must be originally placed in service by the taxpayer. Although the applicable Treasury Guidance indicated the applicability of these requirements, a plain reading of the Code did not compel it.
- The grant in lieu of ITC or PTC is not includible in alternative minimum taxable income (including adjusted current earnings of a corporation) and excessive grants are recaptured as if they were underpayments of tax owed by the persons to whom the grant was made.
- Certain information relating to applications for the grant in lieu of ITC or PTC does not constitute return information for purposes of section 6103, which means that the information is not confidential and therefore is subject to disclosure (including the grant amount, the identity of the grant recipient, a description of the property, the fact and amount of any recapture and the content of any report filed in connection with the grant).
- The prohibition on awarding grants to certain tax-exempt organizations does not apply if, and to the extent, the grant is with respect to an unrelated trade or business property, i.e., property with respect to which substantially all the income is derived by an organization described in section 511(a)(2)(relating to organizations subject to unrelated business income tax). This is consistent with the existing rules (under section 50(b)(3)) for section 48 ITC projects.
Clean Renewable Energy Advancement Tax Extension Jobs Act of 2009. In addition to the changes set forth in the Correction Bill, on Dec. 3, 2009 Senator Chuck Grassley (R-Iowa) introduced S. 2826, the “Clean Renewable Energy Advancement Tax Extension Jobs Act of 2009” (the “Grassley Bill”), which would extend the available PTC for wind and open-loop biomass projects through Dec. 31, 2016 (which is an extension of three years under present law).
Moreover, the Grassley Bill would extend for one year the 50 percent first-year bonus depreciation deduction that is scheduled to expire at the end of this year. Under present law, taxpayers may take a bonus depreciation deduction for qualified property acquired and placed in service in calendar year 2009 (or 2010 for certain property with longer production periods and transportation property). Generally, the deduction is equal to 50 percent of the adjusted basis of certain qualified property timely placed in service. Subject to certain exceptions, qualified property means property to which the modified accelerated cost recovery system applies with a recovery period of 20 years or less, certain computer software, water utility property and qualified leasehold improvement property purchased and placed into service within the applicable time period.
American Clean Technology Manufacturing Leadership Act. On Dec. 10, 2009, Senators Jeff Bingaman (D-N.M.), Orrin G. Hatch (R-Utah), Debbie Stabenow (D-Mich.), and Richard G. Lugar (R-Ind.), introduced S. 2857, the American Clean Technology Manufacturing Leadership Act, which would amend section 45C of the Code to provide an additional $2.5 billion in tax credits for qualifying investments in any qualified advanced energy project (the “Qualifying Advanced Energy Project Credit”). On Dec. 16, 2009, the White House followed with its own proposal for expanding this program by up to $5 billion.
The Qualifying Advanced Energy Project Credit program, established earlier this year as part of the Stimulus Act, is capped at $2.3 billion and is set to run out of funding by mid-January 2010 due to an unexpectedly high level of demand. A qualifying advanced energy project includes a project which re-equips, expands, or establishes 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 with electric or hybridelectric motor vehicles;
- Electric grids to support the transmission of intermittent renewable energy, including storage of such energy;
- Property designed to capture and sequester carbon dioxide emissions;
- Property designed to refine or blend renewable fuels, or to produce energy conservation technologies;
- New plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components that are designed specifically for use with such vehicles, including electric motors, generators, and power control units; and
- Other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Internal Revenue Service.
The qualified investment for any taxable year is the basis of eligible property placed in service by the taxpayer during the taxable year which is part of the qualifying advanced energy project. Credits are available only for qualifying advanced energy projects certified by the Secretary of the Treasury. The available credits are awarded through a competitive bidding process (applications were due to the Energy Department and IRS in mid-October, but the agencies have yet to make any awards). A taxpayer that claims the Qualifying Advanced Energy Project Credit may not also claim the ITC, PTC or grant with respect to the same investment.
Renewable Energy Incentive Act. On Dec. 17, 2009, Senators Diane Feinstein (D-Calif.) and Jeff Merkley (D-Ore.) introduced S. 2899 – the Renewable Energy Incentive Act -which would, among other things, extend the federal grant program established under the Stimulus Act for renewable energy projects until 2012 (under present law, the program is set to expire in 2010). In addition, the bill would permit public power utilities to receive grants for renewable energy projects. Currently, public power utilities are prohibited from receiving grants for renewable energy projects and, accordingly, must enter into complex financial arrangements with private developers in order to build renewable energy projects that qualify for the grants. Finally, the bill would allow a 30 percent ITC for equipment that makes solar panels, and would create a 30 percent ITC for the purchase, consolidation, and use of multiple 100 acre or less blocks of high solarity, disturbed private lands for solar development.
For more information on this and related regulatory and business matters, please visit the McGuireWoods Stimulus Package section, or contact the members of our Business Tax and Energy teams.