On February 17, 2009, President Obama signed the $787 billion economic stimulus package, the American Recovery and Reinvestment Act of 2009 (the Act), containing $293.7 billion in tax incentives. Of particular note, the tax provisions of the Act provide for $20 billion of investment in renewable energy, including a three-year extension of the production tax credit (PTC); the option to take the PTC as an investment tax credit (ITC), which can be used immediately rather than taken into account over several years; and the option to receive a cash grant rather than use the applicable ITC. A summary of the important tax provisions relating to renewable energy follows.
The Act extends for three years the period during which qualified facilities must be placed in service in order to receive the PTC under section 45 of the Internal Revenue Code of 1986, as amended (Code). Under the Act, PTCs may be available for wind facilities if they are placed in service on or before December 31, 2012, and for other qualified facilities, such as closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy and marine renewable facilities, if they are placed in service on or before December 31, 2013.
An important new provision under Code section 48 allows a wind facility placed in service in 2009 through 2012, or other qualified facility placed in service between 2009 and 2013, to elect to receive an ITC in lieu of a PTC. As a result, any qualifying facility that is placed in service within the specified time frame would be entitled to a 30-percent ITC on the date such facility was placed in service. The benefit of receiving an ITC in lieu of a PTC is that a qualified facility would be entitled to the tax credit immediately, instead of having to take the tax credit into account over the 10-year production period that would typically be required under Code section 45.
Section 1603 of the Act supplements this election with a provision that permits certain qualified facilities to apply to receive a cash grant in lieu of the applicable ITC. Taxpayers may receive a grant with respect to eligible property placed in service in 2009, 2010 or after 2010 so long as construction begins in either 2009 or 2010 and is completed prior to 2013 (wind facility), 2017 (solar facility) or 2014 (other energy technologies). In most cases (e.g., wind and solar facilities), the grant would equal 30 percent of the total cost of the facility placed in service in 2009 or 2010. Moreover, the grant will operate similar to the ITC in that it will not be taxable upon receipt and will reduce the tax basis of the facility by 50 percent of the amount of such grant. The Act provides that the Secretary of Treasury will pay the grant within 60 days from the date of the application for such grant or, if later, the date that the property is placed in service.
The Act also extends for one year the availability of “bonus depreciation” for qualified property. Bonus depreciation permits a taxpayer to deduct 50 percent of the cost of such property on the date the property is placed in service, in addition to regular tax depreciation. From a practical perspective, this permits the taxpayer to write-off up to 60 percent of the cost of an alternative energy facility on the date it is placed into service. Additionally, the Act repeals the subsidized energy financing limitation on the ITC. This provision permits projects to be financed by subsidized energy financing and still be entitled to the full 30-percent ITC. Finally, the Act authorizes the issuance of up to $1.6 billion in additional new clean renewable energy bonds and $2.4 billion in additional qualified energy conservation bonds.