The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") included a number of significant changes affecting businesses engaged in the renewable energy market. One of those changes allows a taxpayer to make an irrevocable election to claim the investment tax credit (the "ITC") under Section 48 of the Internal Revenue Code (the "Code") in lieu of the production tax credit (the "PTC") under Section 45 of the Code with respect to certain renewable energy facilities (the "ITC Election"). The ITC Election is available with respect to a wide range of renewable energy facilities ("qualified facilities"), including wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities. The ITC Election permits a taxpayer to choose between claiming (1) a 30 percent ITC for the taxable year in which the qualified property is placed in service (in which case, the taxpayer must reduce its basis in such property by 50 percent of the ITC claimed) and (2) a PTC over a ten-year period equal to 2.1 cents per kilowatt hour of electricity (1 cent with respect to certain facilities) sold to unrelated third parties (in which case, the taxpayer is not required to reduce its basis in such property). The ITC Election generally applies to qualified facilities placed in service after Dec. 31, 2008 and before Jan. 1, 2014 (Jan. 1, 2013 in the case of wind facilities).
On June 5, 2009, the Internal Revenue Service (the "IRS") issued Notice 2009-52 (the "Notice"), which describes the procedures for taxpayers to follow in order to make the ITC Election with respect to a qualified facility. The Notice generally provides that to make the ITC Election, a taxpayer must claim the ITC with respect to qualified property that is an integral part of the qualified facility on a completed IRS Form 3468, and file such form with the taxpayer's timely filed income tax return (including extensions) for the year in which the qualified property is placed in service. In addition, the taxpayer must attach a statement to the IRS Form 3468 that includes the following information:
- The name, address, taxpayer identification number, and telephone number of the taxpayer;
- A detailed technical description of the facility, including generating capacity;
- A detailed technical description of the energy property placed in service during the taxable year as an integral part of the facility, including a statement that the property is an integral part of such facility;
- The date that the energy property was placed in service;
- An accounting of the taxpayer's basis in the energy property;
- A depreciation schedule reflecting the taxpayer's remaining basis in the energy property after the ITC is claimed;
- A statement that the taxpayer has not and will not claim a Section 1603 Grant (defined below) with respect to property for which the taxpayer is claiming the ITC; and
- A declaration, signed under penalties of perjury, that, to the best of the taxpayer's knowledge and belief, the facts in support of the attached statement are true, correct, and complete.
A taxpayer must make a separate ITC Election for each qualified facility for which the election is made. The Notice further requires that a taxpayer making the ITC Election retain adequate books and records, including the information required to be provided by the Notice and all supporting documentation relevant to the ITC Election.
The determination of whether the PTC or the ITC is preferable will depend on a variety of factors relating to the taxpayer and the specific renewable energy project, such as the capital cost of the renewable energy project, net project capacity, the type of renewable energy and the taxpayer's expected taxable income. In general, the ITC is better for biomass. The ITC also tends to be preferable for wind and solar projects, although the PTC may be better if the project is highly efficient. In cases where the ITC is preferred, taxpayers generally will want to elect to receive a Section 1603 Grant (subject to yet-to-be-issued guidance with respect to such grants, as described below).
In addition to the ITC Election, the Recovery Act permits a taxpayer to elect to receive a cash grant in lieu of the ITC or PTC on specified energy property placed in service during 2009 or 2010 (although later placed-in-service dates apply if construction begins during 2009 or 2010) ("Section 1603 Grants"). The Notice does not provide guidance with respect to the procedures taxpayers must follow to apply for Section 1603 Grants. However, Treasury Department officials have informally stated that such guidance is expected to be issued in July, and that the procedures to receive a Section 1603 Grant are not expected to be administratively cumbersome. Reed Smith will further update its clients as soon as the Treasury Department issues guidance with respect to Section 1603 Grants.