American Recovery and Reinvestment Act of 2009 - Wind Energy Provisions
By: DANIEL A. YARANO & ALEXANDRA L. MERTENS
February 23, 2009
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “ARRA”) which, among other things: (a) extends the federal tax credit for the production of electricity from wind facilities (the “PTC”) through December 31, 2012; (b) allows an election to claim an investment tax credit (the “ITC”) for certain property used in wind energy facilities placed in service in 2009 - 2012; (c) allows projects placed into service in 2009 and 2010, or placed into service after 2010 but before 2013, if construction begins in 2009 or 2010, to apply for a cash grant from the Treasury Department for 30% of the cost of certain property; (d) modifies the general business credit; and (e) extends through 2009 bonus depreciation.
ITC Election
The election of the ITC in lieu of the PTC provision allows a taxpayer to make an irrevocable election to have wind energy facilities placed in service between 2009 and 2012 treated as facilities eligible for the 30% ITC. For this purpose, a wind energy facility is eligible for the ITC if it is otherwise eligible for the PTC but no PTC has been allowed for the facility. If the taxpayer makes the ITC election, the taxpayer may not also take advantage of the PTC. A determination of which credit to claim will depend on financing options available and a calculation of projected costs and revenue generated by the facility.
The ITC allows a credit for 30% of the cost of “qualified property” used in a wind energy facility (qualified property is new equipment including tangible personal property or other tangible property, but only if the property is used as an integral part of the wind energy facility, and depreciation (or amortization) is allowable), which can be claimed entirely in the year the facility is placed into service or, in some cases, as progress expenditures are made. Unlike the PTC, there is no requirement that electricity from a facility is sold, just that it generates electricity. The taxpayer’s basis in the property is reduced by 50% of the amount of the ITC claimed (i.e. any developer who chooses a 30% investment tax credit can depreciate only 85% of the property’s cost).
Effective January 1, 2009, the ARRA removes the rule that reduces the basis of the property for purposes of claiming the ITC if the property is financed by subsidized energy financing or with proceeds from private activity bonds. Subsidized energy financing means financing provided under a federal, state or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.
Cash Grant
Wind energy facilities that are eligible for the PTC or the ITC and are placed into service in 2009 or 2010, or placed into service after 2010 but before 2013 if construction begins in 2009 or 2010, may elect to apply for a cash grant from the Treasury Department for 30% of the cost of qualified property in lieu of the PTC or ITC. Upon receipt of an application for a renewable energy grant, the Treasury Department will issue a grant in an amount equal to 30% of the cost of the qualified property within sixty days of the facility being placed in service or, if later, within sixty days of receiving an application for such grant. The amount of the cash grant is not includable in gross income. However, as with the ITC, a developer who utilizes the cash grants can only depreciate 85% of the cost of the property.
Developers will find that the cash grants eliminate the need for a partner to utilize tax credits, however it may remain difficult for a developer to fully utilize depreciation benefits without a tax partner.
Business Credit and Bonus Depreciation
Under the ARRA, changes to the general business credit extend the carryback period of business credits from 2008 and 2009 from one taxable year to five taxable years for those small businesses with average annual gross receipts of $15 million or less. Additionally, bonus depreciation is extended through 2009, which, for property placed into service by December 31, 2009, would allow a depreciation deduction of 50% of the asset cost at the time the asset is placed into service in the first year, with the remainder depreciated over the regular depreciation period.
Additional Energy-Related Incentives
The ARRA provides 30% energy-related manufacturing investment credits to projects creating or retooling manufacturing facilities to make components used to generate renewable energy, storage systems for use in electric or hybrid-electric cars, power grid components supporting addition of renewable sources, and equipment for carbon capture and storage. The ARRA will allow up to $2.3 billion in credits to be awarded to projects certified through a competitive bidding process by the Secretary of Treasury in consultation with the Secretary of Energy.
The bill authorizes the addition of $1.6 billion of new clean renewable energy bonds to finance wind facilities and $2.4 billion of new qualified energy conservation bonds to finance State, municipal, and tribal government programs and initiatives designed to reduce greenhouse gas emissions, including green community programs and programs in which utilities provide ratepayers with energy-efficient property and recoup the costs of the property over time. The ARRA also authorizes an additional $6 billion for loan guarantees for renewable energy power generation technologies and transmission projects, as authorized by section 1705 of the Energy Policy Act of 2005.
The ARRA allocates $4.5 billion for expenses necessary for electricity delivery and reliability activities to modernize the electric grid, to include demand-responsive equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply, and for implementation of programs authorized under title XIII of the Energy Independence and Security Act of 2007.
Takeaway
A determination of whether and how to take advantage of development incentives or other incentives available under the ARRA requires careful consideration. If you have questions about these incentives or other provisions of the stimulus package that are not described here, please contact: Dan Yarano at 612.492.7149 or dyarano@fredlaw.com or Alex Mertens at 612.492.7297 or amertens@fredlaw.com.
This article will be updated as the Treasury Department implements the grant program and as other rules and regulations related to the ARRA are implemented. We will continue to notify you accordingly.