Last Friday, the Senate Finance Committee Chairman released his version (the Chairman’s Mark) of Title I of H.R. 598 (the “American Recovery and Reinvestment Tax Act of 2009”), part of an $825 billion economic stimulus package. Title I of the bill is intended to stimulate economic recovery through tax cuts and federal government investment in infrastructure, particularly “shovel-ready” renewable energy projects. The Senate bill incorporates many of the same renewable energy tax measures proposed in the House earlier this month. The two bills differ in significant respects, however, particularly in regard to the refundability of tax credits that incentivize the development of wind, solar, biomass and other renewable energy power plants within the United States.
H.R. 598 will be considered on the House floor tomorrow, January 28. Sometime today, the Senate Finance and Appropriation Committees are expected to mark up their portions of the bill, and Democratic leaders intend to move the measure onto the Senate floor by the end of this week. Reconciliation of the two bills may proceed quickly, with a view toward passing stimulus legislation by mid-February. President Obama has asked Congress to send him the bill by February 13.
This advisory describes the main renewable energy tax provisions of the House and Senate bills as currently proposed.
Production Tax Credit
The House bill would extend, and increase the utility of, the production tax credit (PTC) available to taxpayers that generate electricity from renewable energy resources:
- The PTC for wind projects is extended through December 31, 2012 (currently due to expire December 31, 2009);
- The PTC for most other types of power projects (open-loop and closed-loop biomass, geothermal, landfill gas, municipal solid waste, qualified hydropower) is also extended by three years, through December 31, 2013;
- The PTC for marine and hydrokinetic projects is extended by two years, through December 31, 2013; and
- The bill creates a new election to claim the investment tax credit (ITC)—equal to 30 percent of qualifying project costs—in lieu of the PTC for projects placed in service in 2009 or 2010.
Tax Credit Exchangeable for Grant
The House bill would allow a taxpayer to exchange unclaimed ITCs for a Department of Energy (DOE) grant equal in amount to the foregone tax credits.
Under current law, ITCs are generated with respect to investments in certain qualifying energy property, including solar energy property, fuel cells and small wind energy property. As mentioned above, under the House bill taxpayers would be allowed to exchange PTCs generated with respect to other renewable energy resources (wind, biomass, geothermal, etc.) for ITCs. The DOE grant would be available to all taxpayers exchanging ITCs, including those taxpayers that previously exchanged PTCs for ITCs under the new law.
The DOE cash grant program would effectively convert the renewable energy PTCs and ITCs into refundable business tax credits with respect to projects placed in service in 2009 or 2010. This aspect of the stimulus bill appears to be the most significant for the renewable energy industry, at least in the short term. Although Congress granted extensions of the tax credits for renewable energy in its October 2008 stimulus package, the utility of those credits has been vastly negated in the current economic climate wherein few banks or other potential project investors are anticipating a profit (and a tax liability against which tax credits may be used) for 2009 or 2010.
The DOE grant would be nontaxable for federal tax purposes and would not decrease the depreciation basis of the project; however, one half of the ITC that would have otherwise been allowable would reduce depreciation basis. Federal, state and local governments and section 501(c) tax-exempt entities are not eligible for the grant. The bill does not specify when a grant application may be filed; thus, it is not clear how soon after making qualifying expenditures the taxpayer could recover part of its capital cost from DOE.
Other ITC Changes
The bill would make two other changes to the ITC: it would eliminate the tax credit cap of $4,000 currently applicable to a taxpayer’s qualified small wind energy property, and would remove the rule that reduces the creditable basis of energy property if the property has been financed by “subsidized energy financing” or the proceeds of “private activity bonds.”
In 2008, business taxpayers benefitted from “bonus” depreciation that allowed taxpayers to elect to depreciate an additional 50 percent of the basis of qualifying new business property that was put into service in 2008. To qualify, property must be eligible for depreciation under the modified accelerated cost recovery system and have a recovery period of 20 years or less (or fall into certain other narrow property categories).
The House bill would extend bonus depreciation to new property placed in service during 2009 (or through 2010 for certain transportation property and other property with a longer useful life).
Five-Year Loss Carryback
Under current law, net operating losses (NOLs) of business taxpayers may generally be carried back two years and forward 20 years. The alternative minimum tax (AMT) rules provide that NOLs cannot reduce a taxpayer’s AMT liability by more than 90 percent of the taxpayer’s alternative minimum taxable income. Thus, NOLs cannot reduce AMT to zero.
The bill would increase the general NOL carryback period from two years to five years, for tax years ending during 2008 or 2009, and would lift the 90 percent limitation on use of AMT NOLs (i) in tax years ending in 2008 and 2009, or (ii) where the NOL is attributable to carrybacks from tax years 2008 and 2009. The fiveyear carryback period and related NOL rules of the bill would not apply to any taxpayer in which the federal government acquired an equity interest or warrant under the Emergency Economic Stabilization Act of 2008 or any member of that taxpayer’s affiliated group.
Energy Research Credit
In general, current law provides a research credit equal to 20 percent of the amount by which the taxpayer’s qualified research expenses for the tax year exceed certain prior years’ expenditures. The bill would create a new 20 percent tax credit for all qualified energy research expenses paid or incurred in 2009 or 2010, without regard to whether current expenses exceed expenses in prior years. Qualifying energy research expenses include research expenses related to fuel cells and battery technology, renewable energy, energy conservation technology, efficient transmission/distribution, and carbon capture and sequestration.
The House bill authorizes an additional $1.6 billion in new clean renewable energy bonds (“New CREBs”). New CREBs may be issued by local governments, public power providers, nonprofit utilities, cooperative electric companies and certain lenders to finance renewable energy facilities. New CREBs provide a return to holders in the form of tax credits. Under current law, the amount of New CREBs is subject to a national limitation of $800 million.
The Senate bill offers the same PTC extension periods for renewable energy projects that are included in the House bill and would, like the House version, allow the taxpayer to exchange its qualifying PTCs for a 30 percent ITC.
The Senate bill also follows the House version by
- eliminating the $4,000 ITC credit cap for qualified small wind energy property;
- eliminating the ITC reduction for energy property benefitting from subsidized energy financing or private activity bonds;
- extending bonus depreciation on qualifying property through 2009;
- increasing the NOL carryback period from two years to five years for NOLs arising in tax years ending in 2008 and 2009, and removing the 90 percent limitation on NOLs usable against AMT;
- creating a new 20 percent energy research credit for expenses incurred in 2009 and 2010; and
- authorizing an additional $1.6 billion in New CREBs.
Significantly, however, the Senate bill does not currently provide for the exchange of the taxpayer’s unused ITCs for a DOE cash grant. Under the Senate version, tax credits arising with respect to renewable energy projects coming online in 2009 or 2010 are only usable against current or future federal tax liability, or the taxpayer’s liability in the five prior tax years (under the Senate’s proposed five-year credit carryback rule, discussed below). Thus, developers and potential investors that do not project current or short-term profits and are unable to carry back the credits to prior years will not be incentivized by the legislation to invest in new projects.
The Senate bill creates a new renewable energy manufacturing tax credit not proposed in the House version. The bill would create a credit equal to 30 percent of the taxpayer’s investment in certain property used domestically in an advanced energy manufacturing project. A qualifying project is one that re-equips, expands or establishes a manufacturing facility for production of renewable energy property, energy storage systems for use with electric or hybrid electric vehicles, electric grids to support transmission or carbon capture or sequestration equipment. The basis of qualified property must be reduced by the amount of the tax credit. Qualified projects must be pre-certified by the Secretary of Treasury in consultation with the Secretary of Energy. The Senate bill authorizes up to $2 billion in these tax credits.
Unlike the House version, the Senate bill also extends the carryback period of general business tax credits from one year to five years, for credits from 2008 and 2009. Both the PTC and ITC are general business credits that would benefit from this change. The Senate bill also proposes that business credits carried to tax years ending in 2008 and 2009 be capable of offsetting 100 percent of the taxpayer’s entire net income tax without regard to certain current AMT limitations.