On March 13, an amendment to the “Moving Ahead for Progress in the 21st Century Act” (which is also known as the “Surface Transportation Act”) that would have reestablished and extended several tax incentives for alternative energy, failed to garner the required 60 votes for approval. However, the amendment, which was introduced by Senator Debbie Stabenow (D-MI), did secure 49 votes, which suggests that similar measures may be introduced in the future. The Stabenow amendment would have:
- Extended the electricity production tax credit through 2013 for onshore wind facilities and through 2014 for most other qualified facilities;
- Extended the production tax credit for refined coal (which has already expired) through 2012;
- Reinstated the cash grant program under section 1603 of the American Recovery and Reinvestment Act of 2009 for qualifying facilities that are placed in service in 2012 or placed in service after 2012 if construction begins by 2012 and the application for the grant is received by October 1, 2013;
- Extended the ability to elect to receive investment tax credits instead of production tax credits through 2014, and provided an additional $2.3 billion of investment tax credit funding for qualified advanced energy products;
- Renewed the credits for biodiesel and renewable diesel fuel, as well as suspended the limitation on percentage depletion for oil and gas wells, through 2012; and
- Extended the special allowance for cellulosic biofuel plant property and continued to allow biofuel producers to use algae as a qualified feedstock to receive the cellulosic biofuel production credit.
The balance of this memorandum discusses the application of the Stabenow amendment to production tax credits, investment tax credits, and the cash grant program.
Production Tax Credits
There are two different types of tax credits available to energy producers – “production” tax credits and “investment” tax credits. Production tax credits are measured according to the amount of energy produced from “qualified energy resources” at a “qualified facility,” and their value varies depending upon which sources of energy are being utilized. 1Section 45 lists the following nine qualifying energy resources from which renewable energy can be produced and be eligible for production tax credits:
- “closed-loop biomass”;2
- “open-loop biomass”;3
- “small irrigation”;5
- “municipal solid waste;”6
- “qualified hydropower production”;7 and
- marine and hydrokinetic sources.8
In order to qualify for production tax credits, energy must also be produced from one of the following eleven qualified facilities, and the facility must be located in the United States:
- a wind facility;
- a closed-loop biomass facility;9
- an open-loop biomass facility;10
- a geothermal or solar energy facility;11
- a small irrigation power facility12
- a landfill gas facility;13
- a trash facility;14
- a refined coal production facility;15
- a qualified hydropower production;16
- an Indian coal production facility;17 and
- a marine and hydrokinetic renewable energy facility.18
Therefore, if a taxpayer produces energy from one of the nine qualifying energy resources at one of the eleven qualified facilities, the taxpayer will be eligible to receive an amount of production tax credits that varies according to the amount of energy produced and the source from which it has been produced. The production tax credit is scheduled to expire on December 31, 2012 for wind facilities and on December 31, 2013 for other facilities. The Stabenow amendment would have extended the production tax credit for wind facilities through 2013 and for other facilities through 2014.
Investment Tax Credits
A taxpayer can receive an investment tax credit based on the dollar amount invested in qualifying energy-producing equipment in the year the property is placed in service. Taxpayers can generally receive a 10% or 30% investment tax credit for specified equipment that is used to produce alternative energy if (i) the taxpayer completes the construction, reconstruction or erection of the property itself, or acquires the property and is the original user of the property,19 and (ii) the property is used in a trade or business and therefore qualifies for depreciation or amortization.20 If a taxpayer elects the investment tax credit, the tax basis of the property is reduced by 50% of the credit.21 Moreover, all or a portion of the credit is recaptured if the property is disposed of within 5 years.22
Election to Receive Investment Tax Credit In Lieu of Production Tax Credit. Taxpayers that are eligible for production tax credits may irrevocably elect to receive a 30% investment tax credit instead of a production tax credit for certain facilities.23 However, this election is only available if the taxpayer has not claimed any production tax credits. The ability to elect to receive investment tax credits in lieu of production tax credits is scheduled to expire at the end of 2012 for wind facilities and at the end of 2013 for other facilities.
The Stabenow amendment would have extended the ability of taxpayers to elect to receive investment tax credits through 2013 for wind facilities and 2014 for other facilities.
Qualifying Advanced Energy Project Tax Credit. A taxpayer may receive an investment tax credit equal to 30% of its investment to re-equip, expand or establish a manufacturing facility for production of:
- Technologies that produce energy from renewable sources such as the sun, wind, or geothermal deposits;24
- Fuel cells, microturbines or other energy storage systems used in electric or hybrid vehicles;25
- Technology that supports the transmission and storage of intermittent sources of renewable energy;26
- Property that captures and detains carbon dioxide emissions;27
- Technology that refines and blends renewable fuel;28
- Technology that conserves energy, such as energy-conserving lighting and smartgrid technologies;29
- Plug-in electric vehicles and their components;30
- Other property that reduces greenhouse gas emissions as may be determined by the IRS.31
Currently the total amount of tax credits that can be allocated under this program cannot exceed $2.3 billion. The Stabenow amendment would have provided an additional $2.3 billion of funding.
Election to Receive a Tax-Free Grant in Lieu of Investment Tax Credit or Production Tax Credit
If a taxpayer has qualified for investment tax credits for certain renewable energy resources, section 1603 of the American Recovery and Reinvestment Act of 2009 permits the taxpayer to elect to receive a tax-free grant in lieu of the investment tax credit. For wind facilities, closed and open-loop biomass facilities, solar energy facilities, qualified hydropower facilities, marine and hydrokinetic renewable energy facilities, municipal solid waste fuel cell, solar and qualified small wind projects, the cash grant is 30% of the investment. For geothermal, microturbines, combined heat and power systems, and geothermal heat pumps, the cash grant is 10% of the investment.
The cash grants program has expired for those facilities whose construction has not yet begun. The Stabenow amendment would have extended the cash grant program for specified energy facilities that are placed in service in 2012 or placed in service after that date if construction begins in 2012, the application for the grant is received by October 1, 2013, and the construction is completed prior to 2013 (in the case of wind facility property), 2014 (in the case of other renewable power facility property eligible for credit under section 45), or 2017 (for specified energy property described in section 48).