On June 5, 2009, the Internal Revenue Service (IRS) released guidance setting forth the procedures taxpayers need to follow in order to elect to take the investment tax credit (ITC) for renewable energy projects that previously only qualified for the production tax credit (PTC).
Specifically, this guidance follows up on changes effected under the recently enacted American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), which provided, in relevant part, that taxpayers who timely place in service certain qualified facilities – including wind, biomass, and municipal solid waste facilities – may elect to claim one of three tax incentives: the PTC, ITC, or a new federal grant generally equal to the amount of ITC that could be claimed with respect to the facility. 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 new federal grant) is equal to 30% 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 ITC or the new federal grant in lieu of PTC allows taxpayers to select a tax incentive that best fits their particular needs.
In Notice 2009-52, the IRS provided detailed requirements taxpayers must follow to elect ITC in lieu of PTC. Specifically, a taxpayer must file Form 3468 with the taxpayer’s timely filed (including extensions) income tax return for the year in which the qualified facility is placed in service.
Notably, the Notice provides that a separate election must be made for each qualified facility. The IRS has not yet released any guidance as to how it will define a qualified facility for these purposes. Thus, for example, if each turbine is considered a qualified facility for a wind farm, the taxpayer will have to make an election (pursuant to these instructions) for each turbine placed in service.
In addition, the taxpayer must attach to the Form 3468 a statement containing specific information on each facility, including:
- A detailed technical description of the facility, including generating capacity;
- A detailed technical description of the energy property placed in service during the taxable year as an integral part of the facility;
- The date that the energy property was placed in service; and
- An accounting of the taxpayer’s basis in the energy property with a depreciation schedule reflecting the taxpayer’s remaining basis in the energy property after the energy credit is claimed.
Taxpayers must retain adequate books and records, including the statement referenced above as well as all supporting documentation relevant to the election and the taxpayer’s ITC claim. The purpose of this record keeping requirement is to allow the IRS to verify that the property for which the credit is claimed satisfies the applicable requirements for the ITC.
Although the Notice contains the procedures taxpayers need to take in order to elect the ITC in lieu of PTC, it does not offer any guidance as to some of the more substantive issues left unanswered by the Stimulus Act, such as what kinds of property – and what specific types of expenditures – are considered an integral part of a qualified energy facility eligible for ITC. Presumably, additional guidance will be forthcoming on this issue.
Finally, this Notice does not offer any details on the federal grant program. It is expected that Treasury will issue this much needed guidance on the procedures and requirements for the federal grant program sometime before August.