Last Friday, the U.S. House of Representatives approved, and President Bush signed into law, financial rescue legislation providing the Treasury Department with $700 billion to purchase troubled mortgage-related assets from financial institutions. Passage of the Emergency Economic Stabilization Act of 2008 rounded out two tumultuous weeks during which Congress considered, and the House had previously rejected, the rescue package crafted by the Senate and Treasury. The legislation as finally enacted was sweetened with a number of tax credit extenders and other significant energy tax provisions—labeled the “Energy Improvement and Extension Act of 2008” (the “Act”)—including new benefits for certain alternative energy and carbon sequestration projects, alternative fuels and energy conservation.
The Act contains four titles: one relating to renewable energy incentives, carbon mitigation and coal; one on transportation and fuels; another on energy conservation and efficiency; and a fourth title containing revenue raisers mainly affecting the oil and gas industry. This advisory discusses titles one through three.
Renewable Energy Tax Credits
The Act contains numerous provisions relating to renewable energy and energy efficiency, the most significant of which are
- extension of the production tax credit by one year (through 2009) for wind and refined coal facilities;
- extension of the production tax credit through 2010 for geothermal, open- and closed-loop biomass, landfill gas/municipal solid waste, small irrigation power and qualified hydropower facilities;
- a new production tax credit for marine and hydrokinetic renewable energy facilities (defined as facilities harnessing energy from waves, tides, currents or differentials in ocean temperature, with a nameplate capacity of at least 150 kilowatts) placed in service through 2011;
- extension by eight years (through 2016) of the 30 percent energy tax credit for qualifying solar energy and fuel cell property, and an eight-year extension of the 10 percent energy tax credit for microturbine property;
- amendment of the production tax credit to cover expansions of open- and closed-loop biomass facilities, to the extent of the increased amount of electricity generated due to the expansion;
- a new 30 percent energy tax credit for qualifying small wind energy turbines (with a nameplate capacity of not more than 100 kilowatts), capped at $4000 per taxpayer;
- a new, eight-year 10 percent energy tax credit for qualifying “combined heat and power system property”;
- repeal of the rule previously denying the energy tax credit for “public utility property” (repeal is retroactively effective to February 13, 2008);
- allowance of the energy tax credit against the alternative minimum tax;
- broadening of the definition of solid waste facility processes that will qualify for the production tax credit;
- for residential homeowners, an extension of the residential solar energy tax credit by eight years (through 2016) and removal of the $2000 cap on the credit; the addition of a new small wind energy tax credit; and allowance of all the residential energy tax credits against the alternative minimum tax.
The new 10 percent tax credit for the cost of combined heat and power system property will benefit property meeting set energy efficiency thresholds using “the same energy source for the simultaneous or sequential generation” of electrical or mechanical shaft power with steam or other thermal energy (including heating and cooling).
The eight-year extension of the credit for solar energy property will enable the solar energy industry to evolve and mature in ways that were not possible in the context of the stop-and-start incentives of recent years. Removal of the limitations on utility ownership of solar property, and of the $2000 cap on the residential solar credit, may lead to big changes in the way that solar projects are typically developed and financed. Expansion of the credits to include ocean energies and small wind will spur investments and advancements in these technologies.
Coal & Carbon Mitigation
The Act creates new tax credits relating to carbon mitigation and coal and expands certain existing provisions.
Advanced Coal Project Investment Credit. The Act expands qualifying advance coal project credits by an additional $1.25 billion. Eligible taxpayers will receive a credit equal to 30 percent of their investment in qualifying advance coal projects. Qualifying projects must meet more stringent requirements: They must now be able to sequester at least 65 percent of carbon dioxide emissions. As in the past, taxpayers must apply for the advanced coal project credits. The application process will now give the highest priority to projects that sequester the greatest percentage of carbon dioxide. However, applicants that partner with eligible educational institutions for research purposes will be given some priority.
Gasification Investment Credit. The Act expands the coal gasification investment credit with an additional allocation of $250 million. The new credits are limited to investments in those projects with “equipment which separates and sequesters at least 75 percent of such project’s total carbon dioxide emissions.” The Treasury may recapture credits if the facility is unable to maintain 75 percent sequestration.
Coal Excise Taxes. The increase in the coal excise tax for underground and surface mining has been extended, potentially through 2018. Also, the Act streamlines the process of obtaining a refund on coal excise taxes paid for exports of coal outside the United States. To be eligible, the coal producer or exporter must have filed a tax return between October 1, 1990, and the enactment of the Act and must file a claim within 30 days of enactment.
New Credit for Carbon Dioxide Capture. The Act provides a new tax credit for geological carbon sequestration. The credit is $20 per metric ton of qualified carbon dioxide captured at a qualified facility and disposed in secure geological storage, plus $10 per metric ton of qualified carbon dioxide captured and used as a tertiary injectant in certain enhanced oil or natural gas recovery projects. For purposes of this credit:
- qualifying carbon dioxide is carbon dioxide that would otherwise be vented in the United States;
- a “qualified facility” is an industrial facility using carbon capture equipment and that captures at least 500,000 metric tons of carbon dioxide during the tax year;
- Treasury, in consultation with EPA, is to establish adequate security measures for geological storage of carbon dioxide; and
- the credit is subject to recapture if the carbon dioxide “ceases to be captured, disposed of, or used as a tertiary injectant.”
Publicly Traded Partnerships. The Act also allows publicly traded partnerships to treat as “good” income the income derived from the exploration, development, production, processing, refining, transportation, or marketing of industrial carbon dioxide. Partnerships listed on an exchange or otherwise treated as publicly traded are required to be taxed like corporations (with an entity-level income tax) unless at least 90 percent of their income each tax year is qualifying income.
Transportation & Fuels
Biofuels. The Act enhances the tax incentives for certain biofuels, principally
- expansion of “bonus” depreciation benefits—allowing first-year deduction for half the cost of the property in the year placed in service—to all “qualified cellulosic biomass plant property” (certain property producing liquid fuel produced from renewable lignocellulosic or hemicellulosic matter), available for property placed in service after October 3, 2008, and before January 1, 2013;
- extension of the income and excise tax credits for biodiesel, biodiesel mixing and small agri-biodiesel production, through December 31, 2009, and increase to $1 per gallon in the income tax credits for biodiesel and biodiesel mixture and the biodiesel mixture excise tax credits;
- new limitation on income and excise tax credits for alcohol and biodiesel fuels, denying the credit on fuels produced and used outside of the United States, effective retroactively to May 15, 2008;
- expansion of definition of agri-biodiesel to include oils from camelina, in addition to corn, soybeans, sunflower seeds, cottonseeds, canola and others.
The Act has also expanded the definition of renewable diesel to include all liquid fuel derived from biomass, removing the requirement that the fuel be produced through a thermal depolymerization process. Any diesel fuel created from biomass under any method will be eligible for the credit as long as it is used as home heating oil, vehicle fuel or aviation jet fuel. However, fuel derived from co-processing biomass with a feedstock that is not biomass, such as petroleum, will not qualify as renewable diesel.
Alternative Fuel Credit. The Act broadens the scope of the 50 cent per gallon excise tax credit for alternative fuels and fuel mixtures, which will now include compressed or liquefied gas derived from biomass. There is a new carbon sequestration requirement placed on alternative fuel derived from coal through the Fischer- Tropsch process. For fuel produced after September 30, 2009, such fuel must be produced at a facility that separates and sequesters at least 50 percent of the carbon dioxide emissions. For fuel produced after December 31, 2009, that percentage increases to 75 percent. The Act also extends the 30 percent alternative fuel refueling property credit through December 31, 2010, for alternative refueling property (meaning electric vehicle recharging stations and pumps for ethanol, natural gas, hydrogen and biodiesel mixtures).
New Credit for Plug-in Electric Drive Vehicles. The Act creates a new income tax credit (that may be applied against the alternative minimum tax) for plug-in electric vehicles in tax years starting in 2009 (through 2014). The credit is equal to $2,500 plus $417 per kilowatt hour of traction battery capacity in excess of four kilowatt hours. However, the total amount of credit awarded is limited, depending on the gross weight of the plug-in electric vehicle. The limits range from $7,500 for vehicles under 10,000 pounds to $15,000 for vehicles in excess of 26,000 pounds. After 250,000 plug-in electric vehicles are sold for use in the United States, the credit will be gradually phased out. Depending on the use of the plug-in electric vehicle, the credit will either be characterized as a business credit or a personal credit. Business credits may generally be carried back one year and forward 20 years.
Publicly Traded Partnerships. Income and gains from the transportation and storage of certain fuels and mixtures of alcohol, biodiesel and other alternative fuels will be treated as qualifying income of publicly traded partnerships.
Energy Conservation & Efficiency
The Act offers several new and expanded tax benefits for energy conservation and energy efficiency, including
- new allocation of $800 million in qualified energy conservation bonds for the financing of state, local and Native American tribal government programs that reduce greenhouse emissions;
- expansion of authority to issue qualified green building and sustainable design project bonds, through September 30, 2012;
- extension of effective date (through 2013) for expensing of commercial building energy efficiency property;
- allowance of depreciation over 10 years for certain long-life qualified smart electric meters and smart electric grid systems; and
- deduction of 50 percent of the cost of qualified reuse and recycling property, in the year the property is placed in service; deduction extends to machinery and equipment used exclusively to collect, distribute or recycle qualified reuse and recyclable materials.