A discussion draft of the Domestic Manufacturing and Energy Jobs Act of 2010, which was recently introduced by Acting House Ways and Committee Chair Sander M. Levin, includes several significant energy-related tax provisions. The Bill provides for a potentially refundable tax payment in lieu of the production tax credit and investment tax credit and an expanded advanced manufacturing credit among other energy tax incentives.
On July 26, 2010, Acting House Ways and Committee Chair Sander M. Levin (D-MI), introduced a discussion draft of the Domestic Manufacturing and Energy Jobs Act of 2010 (hereafter “Bill”) which includes several significant energy-related provisions. The Bill does not extend the cash grant program in lieu of the production tax credit (PTC) and investment tax credit (ITC), but instead provides that the taxpayer may elect to be treated as making a potentially refundable deemed tax payment in lieu of the PTC or ITC. The Act also provides an expanded advanced manufacturing credit. Significant provisions of the Bill are summarized below.
Deemed Tax Payment In Lieu of Production Tax Credit and Investment Tax Credit
Pursuant to the American Recovery and Reinvestment Act of 2009, taxpayers are eligible for a cash grant equal to, generally, 30 percent of their costs of specified energy property in lieu of the ITC under section 48 of the Internal Revenue Code of 1986 (hereafter “Code”), or the PTC under Section 45 of the Code. The cash grant is available only for property placed in service during 2009 or 2010, or placed in service after 2010 and before the credit termination date with respect to such property, but only if the construction of such property began during 2009 or 2010. The credit termination date for solar property is January 1, 2017 and the credit termination date for wind property is January 1, 2013. Click here for additional coverage on the cash grant.
The Bill does not extend the current cash grant program, but instead provides that the taxpayer may elect to treat the credit amount as a payment of tax. The tax payment will be considered made on the later of the relevant federal tax return’s due date or when such return is filed. This election is available for property originally placed in service before January 1, 2013, or originally placed in service on or after such date, and before the credit termination date with respect to such property; but only if the construction of such property began before January 1, 2013. Although these deadlines are extended from those in the cash grant program, the credit termination dates remain the same. Thus, for example, because the credit termination date for wind property remains January 1, 2013 for the deemed tax payment, taxpayers must place wind property in service by that date, and cannot have only begun construction by that date, in order to qualify for the deemed tax payment.
Under the current cash grant program, whether the applicant will owe tax in the relevant taxable year is not a factor in determining the applicant’s eligibility for, and amount of, the cash grant. The Bill would treat the taxpayer as making a tax payment equal to the credit amount, which is generally 30 percent of the costs of the specified energy property. This procedure likely eliminates the U.S. Treasury Department application process implemented with respect to the cash grant. To the extent that all or a portion of the credit amount is deemed an overpayment of tax for the taxable year, the taxpayer would be entitled to file for a refund. In most cases, when contrasted with the cash grant procedures, this provision would extend the period of time that a taxpayer must wait to receive funds with respect to a project. Under the current program, eligible applicants receive cash grant proceeds within 60 days of the filing of an application. The Bill would require taxpayers to wait until the tax return for the current year is due, before receiving any refund. Furthermore, any refund under the Bill would be subject to a determination of whether the taxpayer has a tax liability against which the deemed payment could be applied. Interested parties should query whether banks would be willing to make a bridge loan on these refund amounts, given the time period for tax refunds and dependence on the taxpayer’s tax liability.
Extension and Expansion of Advanced Manufacturing Tax Credit
Section 48C of the Code provides a credit for 30 percent of the cost to re-equip, expand or establish a manufacturing facility for the production of property designed to produce certain renewable energy and other property designed to reduce greenhouse gas emissions (Advanced Manufacturing Credit). The credit amount was capped at $2.3 billion and allocated by the Treasury Department in a competitive application process. The program was oversubscribed 10-to-1. Click here for more information on the Advanced Manufacturing Credit.
The Bill would provide an allocation of the Advanced Manufacturing Credit of $3 billion for 2010. In addition, the Bill would modify the Advanced Manufacturing Credit to provide an uncapped 30 percent tax credit for expenditures to re-equip, expand or modify facilities that manufacture and fabricate certain properties, namely, solar energy property, fuel cell power plants and advanced energy storage systems. This uncapped credit would not apply to property placed in service after December 31, 2014.
The Bill also provides for an elective deemed tax payment in lieu of the Advanced Manufacturing Credit. However, unlike the deemed tax payment in lieu of the PTC or ITC discussed above, the deemed tax payment would be only 85 percent of the amount of the Advanced Manufacturing Credit. Furthermore, the Bill provides that the Treasury Department, in allocating Advanced Manufacturing Credits, will give the lowest priority to projects which merely assemble (rather than manufacture) components.
Extension of Energy-Efficient Appliance Tax Credit
The Bill extends the tax credit for domestic manufacturers of energy-efficient appliance credits through the end of 2013 and increases the energy-efficiency criteria for eligible appliances.
Investment Tax Credit for Certain Geothermal and Offshore Wind Energy Facilities
The Bill would permit an investment tax credit for projects involving geothermal and offshore wind energy that are placed in service prior through 2016. For prior coverage on this topic, click here.
Clean Renewable Energy Bonds
The Bill would expand the Clean Renewable Energy Bond (CREB) program by providing an additional $3.5 billion allocation for public power providers and rural electric cooperatives. 60 percent of this allocation will be awarded to public power providers and 40 percent will be awarded to rural electric cooperatives.
Private Activity Bonds for Renewable Energy and Energy Conservation Programs
The Bill would permit state and local governments to issue tax-exempt private-activity bonds to finance the installation of solar, wind and energy storage property on residential property. These bonds would be part of the property-assessed clean energy (PACE) programs pursuant to which state and local governments make improvements to private buildings in exchange for an assessment on such building that is intended to recoup the cost of the improvement.
Competitive Investment Tax Credits for Renewable Energy and Conservation Projects
The Bill creates a new program under which taxpayers may compete to be awarded $2 billion of ITCs. The program would provide the following:
- $850 million of ITCs to projects making energy efficiency improvements to manufacturing facilities (including combined heat and power equipment, waste-heat energy equipment, mechanical insulation, energy efficient motors, chillers and equipment for the distribution of natural sunlight to illuminate the interior of a building);
- $500 million of ITCs to projects consisting of energy storage systems for use in connection with electric grids or supplying electricity to one or more buildings or structures, or super conducting electrical transmission lines;
- $250 million of ITCs to projects which use municipal solid waste or municipal sewage sludge as the feedstock for producing solid, liquid, or gas fuel;
- $150 million of ITCs to projects that convert post-consumer or post-industrial waste plastics into oil, re-refine used oil or converts post-industrial waste (including waste products from paper and pulp manufacturing) into energy or alternative fuels; and
- $250 million of ITCs to projects consisting of certain systems which use anaerobic digesters.
The program application process would be similar to the one developed with respect to the Advanced Manufacturing Tax Credit program, according to the Staff Summary of the Bill. In addition, similar to the Bill’s Advanced Manufacturing Tax Credit proposal, taxpayers can elect to treat the credit as a tax payment equal to 85 percent of the amount of the awarded ITC.
Biofuels and Alternative Fuels
The per gallon tax credits and outlay payments for ethanol, pursuant to Sections 40(e) and 6426 of the Code, would be extended for one year through 2011 at a reduced rate of 36 cents per gallon.
Similar credits and outlay payments for biodiesel and renewable diesel, pursuant to Sections 40A and 6426 of the Code which had expired at the end of 2009, would be reinstated through 2011.
Per gallon tax credits and outlay payments for liquid fuels derived from biomass, biogas, natural gas and propane, pursuant to Sections 6426 and 6427 of the Code which had expired at the end of 2009, would be reinstated through 2011.
Section 6426 of the Code, which provides credits for alcohol fuel, biodiesel and alternative fuel mixtures would be modified to exclude black liquor, a substance derived from the production of paper or pulp as an alternative fuel.
New Investment Tax Credit in Lieu of Cellulosic Biofuel Producer Credit
Producers of cellulosic biofuel can currently claim a $1.01 per gallon tax credit for each gallon of cellulosic biofuel that they produce and sell for use as a fuel. The Bill would permit producers of cellulosic biofuel or algae-based biofuel (Second Generation Biofuel) to elect to receive a 30 percent ITC for property that is used exclusively to produce Second Generation Biofuel. This ITC could be also converted into a deemed tax payment, pursuant to the procedure discussed above with respect to deemed tax payments, in lieu of the ITC and PTC.