The Obama Administration last week released its proposed budget for 2012 , which includes a number of revenue proposals that would have a direct impact on the financing of renewable energy projects. Some of the more significant proposals are described below.
Extension of Grant in Lieu of Tax Credits
The proposal would extend through 2012 the grant in lieu of tax credits for qualifying renewable energy projects. The grant was originally enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA). In its original form, the grant applied only to projects that were placed in service in 2009 or 2010, or projects for which construction began before the end of 2010 if they are placed in service prior to the relevant investment tax credit termination date (January 1, 2013 for large wind projects; January 1, 2014 for biomass, trash, marine, and certain other facilities; and January 1, 2017 for solar, geothermal, fuel cell, microturbine, combined heat and power, small wind, and geothermal heat pump facilities). The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the deadline for beginning construction through 2011. Under the President's proposal, a project would qualify for the grant if (i) it is placed in service before January 1, 2013 or (ii) construction begins before January 1, 2013 and the project is placed in service before the relevant credit termination date. The President's budget proposal does not extend the currently effective credit termination dates.
Additional Tax Credit for Qualified Advanced Energy Manufacturing Projects
The proposal would authorize an additional $5 billion of credits for investments in eligible property used in qualifying advanced energy manufacturing projects. ARRA authorized a total of $2.3 billion in advanced energy manufacturing credits and established a competitive application process for receiving allotments of credits. Fewer than one-third of the applicants for the original allotment received any credit. Under the proposal, there would be an additional two-year period for applying for allotments of the additional $5 billion in credits.
The amount of the credit for any qualifying project is 30% of the cost of eligible property in a qualifying advanced energy project. A qualifying advanced energy project is any project that re-equips, expands, or establishes a manufacturing facility for the production of (i) property designed to produce energy from renewable resources, (ii) fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric vehicles, (iii) electric grids to support the transmission and storage of intermittent sources of renewable energy, (iv) property designed to capture and sequester carbon dioxide emissions, (v) property designed to refine or blend renewable fuels or to produce energy conservation technologies, (vi) certain electric-drive motor vehicles and components, and (vii) other advanced energy property designed to reduce greenhouse gas emissions. Eligible property generally is depreciable tangible property that is necessary for the production of the above-listed property and that is used as an integral part of a qualifying facility.
For further discussion of the advanced energy manufacturing credit, see http://www.stoel.com/showalert.aspx?show=5812.
Replacing Deduction for Energy-Efficient Commercial Building with Tax Credit
The proposal would replace the existing deduction for energy-efficient commercial building property with a tax credit. Existing law allows a deduction for up to $1.80 per square foot for expenditures for qualified energy-efficient commercial building property. This includes property that is certified as being installed as part of a plan designed to reduce the total energy and power costs with respect to the interior lighting, heating, cooling, ventilation, and hot water systems of a building by 50% or more in comparison to a reference building that meets the minimum requirements of ASHRAE/IESNA Standard 90.1-2001. Partial deductions are allowed for certain specified property that does not achieve a 50% energy savings.
The proposal would replace the existing deduction with a credit equal to the total cost of qualifying property. The proposal also would impose a less stringent energy savings requirement. Under the proposal, property would qualify for the credit if it is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting, heating, cooling, ventilation, and hot water systems of a building by 20% or more in comparison to a reference building that meets the minimum requirements of ASHRAE/IESNA Standard 90.1-2004. The amount of the credit would be limited to (a) $0.60 per square foot in the case of energy-efficient commercial building property designed to reduce total annual energy and power costs by at least 20% but less than 30%, (b) $0.90 per square foot for qualifying property designed to reduce total annual energy and power costs by at least 30% but less than 50%, and (c) $1.80 per share foot for qualifying property designed to reduce the total annual energy and power costs by 50% or more. In addition, the proposal would treat property as meeting the 20%, 30%, and 50% energy savings requirements if certain specified prescriptive standards are satisfied. The credit also would be allowed to benefit a REIT or its shareholders. The credit would be available for property placed in service during calendar year 2012.
For additional discussion of the current deduction for energy-efficient commercial building property, see http://www.stoel.com/showalert.aspx?show=2880.
Extension and Expansion of New Markets Tax Credit (NMTC)
The NMTC for investments in low-income communities, which has been used in conjunction with tax credits for renewable energy projects in qualified locations, is set to expire at the end of 2011. The proposal would extend the NMTC for one additional year with a total allocation amount of $5 billion. The proposal also would allow NMTC amounts resulting from qualified equity investments made after December 31, 2010 to offset alternative minimum tax liability.
Expansion of Research and Experimentation (R&E) Tax Credit
The proposal would make permanent the R&E tax credit, which currently is set to expire at the end of 2011. The R&E credit generally is 20% of qualified research expenses above a base amount for taxpayers that engaged in research between 1984 and 1988. Alternatively, a taxpayer can elect to claim the "alternative simplified research credit," which is 14% of qualified research expenses that exceed 50% of the taxpayer's average qualified research expenses for the three preceding taxable years. The proposal would increase the rate of the alternative simplified research credit from 14% to 17% of qualifying expenses, effective beginning in 2012.
Qualified Plug-in Electric-Drive Motor Vehicle Credit
The proposal would allow the seller of a qualified vehicle, rather than the purchaser, to claim the qualified plug-in electric-drive motor vehicle credit. Under current law, a taxpayer who places a qualified vehicle in service is entitled to a credit of $2,500 plus $417 for each kilowatt-hour of battery power in excess of four kilowatt-hours, up to a maximum total credit of $7,500. The credit phases out for a manufacturer's vehicles over four calendar quarters beginning with the second calendar quarter following the quarter in which 200,000 of the manufacturer's credit-eligible vehicles have been sold. Under the proposal, the person selling the vehicle (or, at the election of the seller, the person financing the sale) would be entitled to the credit if the seller clearly discloses the amount of the credit to the purchaser. The change would be effective for vehicles sold after December 31, 2011.
Carried Interests in Investment Partnerships
The proposal would tax as ordinary income a partner's share of income from an "investment services partnership interest" in an investment partnership, regardless of the character of the income at the partnership level. In addition, the proposal would require the partner to pay self-employment taxes on such income and would characterize as ordinary income any gain recognized on the sale of an interest in the partnership.
An investment services partnership interest would be defined generally as any carried interest in an investment partnership that is held by a person who provides services to the partnership. A partnership would be treated as an investment partnership if a majority of its assets are investment-type assets (such as securities and real estate interests). The proposal would be effective for tax years beginning after December 31, 2011.
Although the carried interest proposal is not directly aimed at partnerships holding renewable energy projects, it may apply in a number of circumstances. For example, if a partnership is formed to make investments in one or more entities holding and operating renewable energy projects, and if the manager or sponsor of the partnership receives a carried interest, the proposal could cause the manager's or sponsor's allocable share of income from the partnership that would otherwise be characterized as capital gain to be characterized as ordinary income.
Elimination of Fossil Fuel Preferences
To raise revenue to offset the revenue that would be lost from the proposed tax incentives, the President's budget proposes to eliminate a number of oil and gas and coal tax preferences, including the following:
- Repeal the enhanced oil recovery credit for tax years beginning after December 31, 2011;
- Repeal the credit for oil and gas produced from marginal wells for production in tax years beginning after December 31, 2011;
- Repeal the deduction for intangible drilling costs for costs paid or incurred after December 31, 2011;
- Repeal the deduction for tertiary injectants for amounts paid or incurred after December 31, 2011;
- Repeal the exception to passive loss limitation rules for working interests in oil and gas properties for taxable years beginning after December 31, 2011;
- Repeal the percentage depletion for oil and natural gas wells for taxable years beginning after December 31, 2011;
- Exclude from the definition of domestic production gross receipts for purposes of the domestic manufacturing deduction all gross receipts derived from the sale, exchange, or other disposition of oil, natural gas, or a primary product thereof for taxable years beginning after December 31, 2011. A parallel proposal is made for coal and other hard mineral fossil fuels;
- Increase the amortization period from two years to seven years for geological and geophysical expenditures incurred by independent producers in connection with oil and gas exploration in the U.S., effective for amounts paid or incurred after December 31, 2011;
- Repeal the deduction, 60-month amortization, and 10-year amortization for exploration and development costs paid or incurred after December 31, 2011;
- Repeal the percentage depletion for hard mineral fossil fuels for tax years beginning after December 31, 2011; and
- Repeal capital gains treatment for coal and lignite royalties for amounts realized in taxable years beginning after December 31, 2011.