Substantial portions of the funds available under Division A of the American Recovery and Reinvestment Act of 2009 (the "Stimulus Package Act") are earmarked for investments in energy infrastructure and efficiency improvements. Significant energy-related tax incentives are also included under Division B of the Stimulus Package Act. The Stimulus Package Act provides over $34 billion in funding for improving national systems of energy production, distribution, and transmission, including investments in electric transmission infrastructure.
Funds Distributed via Immediate Agency Action
Various government agencies are charged with quickly distributing the funds allocated to them under the Stimulus Package Act. At least 50 percent of the funds are expected to be distributed for projects that can be initiated in less than four months. "Formula grants" will be awarded within 30 days and competitive grants will be awarded within 90 days of enactment. Since most of the funds are not earmarked for particular projects, federal agencies will decide which projects to finance. Agencies are directed to give preference to projects that can be started and completed expeditiously, and to distribute funds in a manner that maximizes job creation and economic benefit.
The Stimulus Package Act requires that immediately following the Act's enactment, the Department of Energy ("DOE") and other federal agencies must post to www.recovery.gov their plans for distributing the funds available to them, including grant competitions, allocations of formula grants, and awards of competitive grants.
- Summary of Energy Investments
The majority of energy investments will be allocated to the DOE for distribution. Energy investments under the stimulus package include (in billions): see table
To expedite the distribution of these funds, most are allocated to existing federal energy initiatives. Funds allocated to the Smart Grid Investment Program will be used to implement smart grid technology research, development, and demonstration authorized under Title XIII of the Energy Independence and Security Act of 2007.
Investments in the Renewable Energy and Transmission Loan Guarantee Program will fund commercial technology projects authorized under Section 1705 of the Energy Policy Act of 2005, involving renewable energy systems, electric power transmission systems, and leading edge biofuel projects. Construction on these projects must begin no later than September 30, 2011, and when determining to which projects to make guarantees, the DOE is instructed to consider the viability of the project without guarantees, the availability of other federal and state incentives, the importance of the project in meeting reliability needs, and the effect of the project in meeting a state's or region's environmental and energy goals. Section 1705 is a new section of the Energy Policy Act created by this legislation. Additional details will be forthcoming in regulations to be published by the DOE.
Investments in Energy Efficiency and Conservation Block Grants will be distributed via programs authorized under Subtitle E, Title V of the Energy Independence and Security Act of 2007, aimed at reducing fossil fuel emissions and energy use, and improving energy efficiency in the transportation and building sectors. Of the $3.2 billion investment, $2.8 billion will be formula grants, allocated to state and local governments based on population, and the remaining $400 million will be awarded on a competitive basis.
State Energy Program investments will fund programs authorized under Part D of Title III of the Energy Policy and Conservation Act, promoting energy conservation and demand reduction among states and state institutions. Funding for Advanced Battery Manufacturing will be awarded to manufacturers of advanced battery systems and vehicle batteries, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software design. The Weatherization Assistance Program, authorized under Part A of Title IV of the Energy Conservation and Production Act, helps subsidize the weatherization of low and middle-income homes.
Of the $1.6 billion investment in science, $400 million will go to the Advanced Research Projects Agency - Energy, as authorized under Section 5012 of the America COMPETES Act, with the goals of reducing foreign energy imports and energy related emissions, improving energy efficiency, and maintaining the United States' lead in developing and deploying advanced energy technologies.
- Energy Tax Incentives
Energy-related tax incentives included in the legislation are available to both individuals and businesses. The tax incentives are found in Title I of Division B of the Stimulus Package Act. New and extended tax provisions designed for businesses encourage the development and production of renewable energy sources by creating new tax incentives and expanding the scope of existing incentives. This section summarizes significant energy-related tax incentives of the Stimulus Package Act.
Renewable Electricity Production Tax Credit and Investment Credit Option
Extension of Time Period for Utilizing PTC.
The Stimulus Package Act extends the production tax credit ("PTC") available to taxpayers generating electricity from renewable sources. Taxpayers currently receive credit for electricity produced from renewable sources. The credit generally must be claimed during the 10-year period beginning with the date the qualified facility is placed in service. The Stimulus Package Act extends the placed in service date:
- By three years for qualified wind facilities (from January 1, 2010 through January 1, 2013);
- By three years for the majority of other qualified facilities, such as open-loop and closed-loop biomass, geothermal, landfill gas, municipal solid waste, and qualified hydropower projects (from January 1, 2011 through January 1, 2014); and
- By two years for qualified marine and hydrokinetic projects (from January 1, 2012 through January 1, 2014).
These amendments are effective for property placed in service after the date of enactment.
Investment Credit Alternative to PTC.
The Stimulus Package Act also creates a new election permitting a taxpayer to claim an investment tax credit ("ITC") equal to 30 percent of qualifying project costs in lieu of the PTC for qualified wind projects placed in service in any year from 2009 through 2012, and for other qualified projects placed in service in any year from 2009 through 2013. The new ITC is available for facilities placed in service after December 31, 2008.
Other Investment Tax Credit Refinements
In addition to permitting a taxpayer to substitute the ITC for qualifying PTCs, the Stimulus Package Act includes the following changes to the ITC provisions:
ITCs Exchangeable for Grant.
The Stimulus Package Act allows a taxpayer to exchange unclaimed ITCs for a DOE grant equal in amount to those ITCs, in effect making the ITC refundable to that extent, for any project placed in service in 2009 or 2010, and in some cases for the construction costs incurred in 2009 and 2010 where the property is placed in service at a later date, but before the credit termination date. Taxpayers claiming ITCs in lieu of PTCs are also eligible to exchange their ITCs for a grant. The amount of the DOE grant received is not taxable income to the recipient for federal income tax purposes, but will reduce the depreciation basis of the project by an amount equal to one-half of the ITC that was allowable before the conversion. The DOE grant does not, however, apply to federal, state, and local governments and Section 501(c) tax-exempt entities. The legislation does not specify how soon after making qualifying expenditures a taxpayer may file a grant application. The new statute contains provisions to coordinate the grant and ITC/PTC provisions to ensure that there is no double dipping.
Small Wind ITC Credit Cap Eliminated.
The Stimulus Package Act removes the $4,000 cap on energy investment credit currently in effect for qualified small wind energy property. A 30 percent credit is currently available for qualified small wind energy property expenses made by the taxpayer during the tax year.
Credit Reduction Removed.
The Stimulus Package Act removes the provision that currently reduces the credit available for taxpayers financing their qualified facilities with subsidized energy financing or private activity bond proceeds for periods after December 31, 2008.
Clean Renewable Energy Bonds
The Stimulus Package Act authorizes an additional $1.6 billion of Clean Renewable Energy Bonds ("CREBs") to finance facilities producing energy from renewable sources and authorizes local governments, public power providers, nonprofit utilities, cooperative electric companies, and certain lenders to issue CREBs. The Stimulus Package Act also authorizes $3.2 billion of qualified energy conservation bonds.
Alternative Fuel Vehicle Refueling Property Tax Credit
The Stimulus Package Act increases tax credits for alternative fuel vehicle refueling property for businesses, such as commercial or retail refueling stations. Currently, a taxpayer may receive a credit equal to 30 percent of the cost of property placed in service during that tax year, with a $30,000 cap. The Stimulus Package Act increases the credit rate to 50 percent, and the cap to $50,000 for property placed in service by a business in 2009.
Tax Breaks Generally Applicable to Business
The Stimulus Package Act includes several tax breaks generally applicable to business activities that could be useful for energy companies, including the provisions discussed below. Several of these provisions are designed for smaller businesses.
The Stimulus Package Act extends through 2009 the bonus depreciation rules of Section 168(k) of the Internal Revenue Code of 1986, as amended, including the current provision that allows businesses to monetize alternative minimum tax and research credits in lieu of bonus depreciation. This provision applies to all property qualifying for bonus depreciation placed in service in 2009.
Delayed Recognition of Cancellation of Indebtedness Income.
The Stimulus Package Act allows certain businesses to recognize cancellation of indebtedness income over five years beginning in 2011, for specified types of business debt repurchased by the business for cash after December 31, 2008 and before January 1, 2011.
The Stimulus Package Act permits small business taxpayers to carryback net operating losses ("NOLs") for five years starting with the 2008 tax year.
Small Business Capital Gains.
The Stimulus Package Act permits individuals to exclude 75 percent of gains from the sale of certain small business stock held for five years and acquired after the date this legislation is enacted and before January 1, 2011. Currently, individuals may exclude 50 percent of gains from the sale of certain small business stock.
S-Corp Built-In Gain Period.
The Stimulus Package Act temporarily shortens from 10 years to seven years, the holding period for assets subject to the built-in gains tax imposed after a C-corp elects to become an S-corp beginning in tax years 2009 and 2010.