February 2009

Theodore B. Howell, Esq.

On February 17, 2009, President Barack Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), establishing an economic stimulus impacting a broad group of individuals and businesses. ARRA includes a number of substantial incentives for individual as well as business taxpayers to invest in or build renewable energy projects. The incentives for businesses include (i) an extension of production tax credits (“PTCs”) and energy tax credits (“ETCs”), (ii) the option to obtain ETCs in lieu of PTCs and, of substantial significance to many taxpayers, (iii) the option to obtain cash grants for projects in lieu of PTCs or ETCs.

PTCs and ETCs are tax credits, meaning that a taxpayer receives a credit for its activities related to production of renewable energies against its income taxes. PTCs are awarded for production of energy using certain renewable energy sources, and generally amount to 1.5 cents per kilowatt hour of electricity actually sold to third party users. ETCs are generally awarded for small scale projects not intended to generate electricity for use by third parties, and in most cases amount to 30% of the taxpayer’s basis in the property purchased to generate renewable energy (i.e. if a taxpayer purchases solar cells for $50,000, they may be entitled to an ETC of $15,000).

However, under ARRA, upon application of a taxpayer, the Department of the Treasury (“Treasury”) is required to provide cash grants for certain properties in lieu of PTCs or ETCs, including smaller scale and larger scale properties, thus giving taxpayers substantial benefits on a timely basis and, in many cases, irrespective of their tax liabilities. The provisions are contained in Section 1608 of ARRA and apply to certain properties that otherwise qualify for PTCs or ETCs.

More specifically, eligible properties which would otherwise qualify for ETCs are generally smaller and include:

1. Fuel cell properties with a capacity greater than 0.5 kilowatts
2. Solar property used to generate electricity, heat or cool a structure, or illuminate the inside of a structure using fiber-optics
3. Small wind energy property with a capacity of less than 100 kilowatts
4. Equipment used to produce, distribute or use geothermal energy
5. Microturbines with capacities of less than 2,000 kilowatts
6. Combined heat and power systems
7. Geothermal heat pump property
   
   

Eligible properties which would otherwise qualify for PTCs are generally larger and include:

1. wind facilities
2. closed-loop biomass facilities
3. open-loop biomass facilities
4. geothermal or solar facilities
5. landfill gas facilities
6. trash combustion facilities
7. hydropower facilities
8. marine and hydrokinetic facilities

As noted above, owners of the properties in items (1) through (8) were previously only eligible to receive PTCs, and such PTCs were limited to electricity sold to third parties. However, ARRA allows such owners to irrevocably elect to obtain ETCs in lieu of PTCs, as well as cash grants in lieu of PTCs or ETCs. Thus, owners of the types of properties listed above may now obtain significant tax credits or cash in lieu of tax credits even though the property is only intended to supplement individual energy needs. This is applicable whether or not such owner sells electricity to third parties.

Generally, the grant amount is 30% of the basis of the property, except for items (d) through (g) which are 10% of the basis for the property. To be eligible the property must be placed in service by the end of 2010, or construction of the property must begin by the end of 2010 and the property must be placed in service by a specified date. The specified date for most smaller projects is January 1, 2017 and for larger projects is January 1, 2013 or January 1, 2014, depending on the project. The Treasury must pay the grant within 60 days of the date the property is placed in service or, if later, the submission of the application.

No PTCs or ETCs can be claimed for properties for which a grant was made. The Treasury grants will not be taxable income to the taxpayer, but the depreciable basis of the property for which grants are received will need to be reduced in the same manner as if an ETC had been claimed; i.e., by 50% of the grant.