Renewable Energy Law Alert: House Bill Proposes Increased Incentives for Renewable Energy Projects
The American Recovery and Reinvestment Tax Act of 2009 (H.R. 598 - the Bill) was introduced in the House of Representatives on January 16, 2009 as part of an $825 billion economic stimulus plan. The Bill contains a number of incentive provisions for renewable energy projects. 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 grants in lieu of claiming the ITC for certain projects, and
- Extend bonus depreciation through 2009.
The Bill would extend the placed-in-service sunset date for wind projects from January 1, 2010 to January 1, 2013. 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 January 1, 2011 (2012 in the case of marine and hydrokinetic renewable energy facilities) to January 1, 2014.
Claiming the ITC in lieu of the PTC
The Bill would permit taxpayers 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 in 2009 or 2010. The amount of the ITC generally would be 30% of qualifying costs.
Grants in lieu of the ITC
The Bill also would permit taxpayers to receive grants from the Department of Energy (DOE) in lieu of claiming the ITC and the PTC with respect to certain projects placed in service in 2009 and 2010 that otherwise would qualify for the ITC. Owners of projects for which an election would be allowed to claim the ITC in lieu of the PTC would be eligible for the grants. Federal, state, and local governments and tax-exempt entities would not be eligible for the grants.
The grants would function similarly to a refundable tax credit. The amount of the 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 include the amount of the grant but would be reduced by one-half of the amount of the ITC that would otherwise have been allowable (i.e., the tax basis for depreciation generally would equal 85% of the qualifying costs of the property).
The Bill contains an appropriation provision to help ensure that funds would be available to the DOE to pay the grants. The DOE would be required to pay the grant to a project owner within 60 days of the submission of an application. Because the Bill does not specify whether the grant could be paid or an application could be filed before the qualifying facility has been placed in service, it is unclear precisely when an applicant can expect to receive grant funds. This will be an important issue to watch as the Bill, and potentially other proposals, makes its way through Congress in the coming weeks.
The Bill also would extend bonus depreciation to property placed in service in 2009. An owner of property qualifying for bonus depreciation would be entitled to deduct 50 percent of the adjusted basis of the property in 2009. The remaining 50 percent of the adjusted basis of the property would be depreciated over the ordinary tax depreciation schedule.
The grant provisions of the Bill may prove to be the most useful to the renewables industry in the near term. At present, the PTC and ITC are valuable as subsidies only to the extent the project developer can effectively utilize them. Because most developers lack the tax appetite to take advantage of these credits, it is necessary for the credits to be "monetized" by bringing in as project owners (or in some cases, lessees) investors who have such a tax appetite. The resulting transaction—commonly called "tax equity investments"—utilizes a partnership "flip" structure that is both complicated and expensive to implement. As a consequence, only a portion of the nominal value of the credits actually subsidizes the project, with the balance effectively consumed by transaction costs and investor yield. Furthermore, the passive activity loss rules effectively limit the available universe of tax equity investors because they prevent most individuals from effectively claiming the credits, thus ceding the investment space to large institutions that are taxed as corporations. The utility of tax equity transactions has been further confounded by the recent downturn in the financial markets and the economy in general, as the number of tax equity investors has been greatly reduced while the yields demanded by those investors still active in this market have increased dramatically. By allowing developers to elect a federally funded grant in lieu of the PTC and ITC, it may well be that some will choose to avoid the inefficiencies and limitations of the tax credit monetization transactions and instead opt for the direct federal grant. This could give rise to a resurgence of more traditional project finance in the renewables area: equity invested for the cash return and potential appreciation (as opposed to being tax driven), coupled with debt secured by the right to receive the federal grant. But even developers who opt for the grant may still desire to bring in tax investors to efficiently take advantage of the depreciation and other tax benefits associated with the project.
In addition to assessing whether or not the ITC or PTC can be effectively monetized in current market conditions, determining whether to claim the ITC in lieu of the PTC, and whether to receive the DOE grants in lieu of claiming the ITC and PTC, with respect to a project, requires a careful analysis of the particular characteristics of the project, the application of the ITC and the PTC, and other considerations. The PTC is based on the amount of electricity produced by the project and is claimed each year during the 10-year period beginning on the placed-in-service date. The ITC, on the other hand, is based on a percentage of the qualifying cost of the project and is claimed entirely in the tax year in which the project is placed in service. There are a number of other significant differences, such as differences in depreciation calculations between projects qualifying for the PTC and projects qualifying for the ITC. The decision to receive the DOE grants in lieu of claiming the ITC could affect a project owner's eligibility for other grants or for state tax benefits. Accordingly, a comparison of the economic benefits of the ITC, the PTC, and the DOE grants requires, among other considerations, careful modeling of the projected costs and output of each specific project and of the full array of potential financing implications.
The House Ways and Means Committee has announced that it will hold its markup of this bill on Thursday, January 22. We will report further developments as the Bill progresses. In the meantime, if you have further questions, please contact one of the following attorneys:
Chris Heuer at (503) 294-9206 or firstname.lastname@example.org
Kevin Pearson at (503) 294-9622 or email@example.com
Ed Einowski at (503) 294-9235 or firstname.lastname@example.org
Robert Manicke at (503) 294-9664 or email@example.com
Eric Kodesch at (503) 294-9684 or firstname.lastname@example.org
Greg Jenner at (612) 373-8857 or email@example.com
Kevin Johnson at (612) 373-8803 or firstname.lastname@example.org
Mark Hanson at (612) 373-8823 or email@example.com
Carl Lewis at (206) 386-7688 or firstname.lastname@example.org
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.