American Recovery and Reinvestment Act Includes Renewable Energy and Green Infrastructure Investments

The American Recovery and Reinvestment Act of 2009—commonly known as the economic stimulus package—provides considerable investment in renewable energy and green technologies. This legislation also creates incentives for improving the energy efficiency of our nation's homes, businesses and electric grid.

ARRA highlights in the area of renewable energy and green infrastructure investments include $2.3 billion in tax credits to support and expand the renewable energy sector. The ARRA also extends renewable energy production tax credits, allows investment tax credits to be claimed in lieu of production tax credits, and provides grants in lieu of investment tax credits.

The act makes available an additional $1.6 billion in clean renewable energy bonds for the construction of renewable energy facilities and $2.4 billion in qualified energy conservation bonds. Other provisions include establishing a renewable energy and electric power transmission loan guarantee program, making tax credits available for alternative refueling property and modifying the carbon dioxide capture tax credit.

Advanced Energy Project Credit

While income tax credits for production of energy from renewable sources have existed for several years, no previous tax credits specifically encouraged development of a domestic manufacturing base to support the renewable energy industry.

The ARRA sets aside $2.3 billion for advanced energy project credits available to businesses engaged in "qualifying advanced energy projects." These projects re-equip, expand, or establish manufacturing facilities used in the production of : (i) property designed to be used in the production of renewable energy (solar, wind or geothermal); (ii) advanced energy storage systems (fuel cells, microturbines or other storage systems for use in electric or hybrid motor vehicles); (iii) efficient electricity transmission and distribution systems (smart grids and grids able to support (and store) intermittent sources of renewable energy); and (iv) carbon capture and sequestration systems. The advanced energy credit is valued at 30 percent of the investment in the qualifying advanced energy project for each taxable year.

The advanced energy credit is only available for projects that are certified by the secretary of Energy. The secretary will be required to take a number of factors into account, including but not limited to: (i) commercial viability; (ii) number of jobs created during credit period; (iii) net impact in reducing air pollutants and greenhouse gas emissions; (iv) potential for technological innovation and commercial deployment; and (v) time to complete project.

Extension of Production Tax Credit

An income tax credit is allowed for the production of electricity from qualified energy resources at "qualified facilities." For 2008, the production tax credit was 2.1 cents per kilowatt hour. Depending on the type of energy resource, the production tax credit was set to expire in either 2009 or 2010.

The ARRA extends the production tax credit for electricity derived from wind through December 31, 2012. The production tax credit for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy and marine facilities is extended through December 31, 2013. This extension will give energy producers and project developers greater certainty regarding the state of this vital tax credit.

Investment Tax Credit in Lieu of Production Tax Credit

While the extension of the production tax credit will certainly provide assistance to those already producing fuel and electricity from renewable sources, it is of little immediate value for businesses with renewable energy projects in a pre-production stage. To provide economic assistance for such businesses, ARRA allows businesses to claim an investment tax credit in lieu of receiving the production tax credit. The investment tax credit is generally equal to 30 percent of the cost of building qualified facilities in the year such facility is placed into service in lieu of the production tax credit.

Energy Grants in Lieu of Tax Credits.

The ARRA also provides another option that, in some cases, may be of more value than tax credits given the current financing climate. Taxpayers can receive a grant from the U.S. Treasury in lieu of receiving the investment tax credit.

Properties placed in service in 2009 and 2010 are eligible for the grants. Projects placed in service after 2010, but prior to the applicable credit termination date (January 1, 2013, 2014 or 2017, depending on the property type), will still be eligible for the energy grants—but only if construction on such projects begins during 2009 or 2010.

The energy grants effectively make the investment tax credit a refundable credit, since the energy grant amount will generally be equal to the amount of the investment tax credit for which the taxpayer would have otherwise been eligible. While the energy grant will not be includable in gross income of the taxpayer, the tax basis of the property will be reduced by one-half of the amount of the grant so that the tax basis for depreciation purposes will generally equal 85 percent of the qualifying costs of the property. Federal, state and local governments and tax-exempt entities are not eligible for energy grants.

Deadline. Applications for the U.S. Treasury energy grants described above must be received by the Treasury by September 30, 2011. The Treasury is required to pay the grant to a project owner within 60 days of the later of: (i) the date of the application; or (ii) the date on which the applicable property is placed in service.

Repeal of Limitation on the Investment Tax Credit for Projects Receiving Other Subsidies.

Previously, the amount of the investment tax credit was reduced if the property qualifying for the investment tax credit was also financed with industrial development bonds or through any other federal, state, or local subsidized financing program. ARRA repeals that rule, permitting taxpayers to qualify for the full amount of the investment tax credit even if such property is financed with industrial development bonds or through any other subsidized energy financing.

Renewable Energy and Electric Power Transmission Loan Guarantee Program

ARRA permits the secretary of the Treasury to make guarantees for renewable energy projects, electric power transmission systems and leading edge biofuel projects commencing construction on or before September 30, 2011. Funding for leading edge biofuel projects is capped at $500,000.

Clean Renewable Energy Bonds

ARRA authorizes $1.6 billion in bonds to finance the construction of renewable energy facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewable and trash combustion facilities. Of the $1.6 billion, one-third is reserved for qualifying projects of state, local or tribal governments; one-third is reserved for qualifying projects of public power providers; and one-third is reserved for qualifying projects of electric cooperatives.

Qualified Energy Conservation Bonds

ARRA authorizes an additional $2.4 billion of qualified energy conservation bonds. The proceeds of these bonds may be used to finance qualified conservation purposes. Qualified purposes include, among other things: (i) reduction in energy consumption in public buildings; (ii) implementation of green community programs; (iii) rural development involving renewable energy; (iv) research into biofuels, carbon dioxide capture and sequestration advanced batteries and other technologies; and (v) mass transit.

Tax Credits for Alternative Refueling Property

Lack of infrastructure is one of the most significant hurdles to widespread adoption of alternative forms of motor vehicle fuel. ARRA increases the alternative refueling property credit for businesses and individuals that install clean-fuel vehicle refueling property. Prior to enactment of the ARRA, taxpayers could claim a 30 percent tax credit for the cost of installing clean-fuel property.

For clean-fuel property used in a trade or business, the refueling property credit was capped at $30,000 per taxable year per location and the refueling property credit was capped at $1,000 per taxable year per location for clean-fuel property installed at a principal residence. For clean-fuel property used in a trade or business, ARRA increases the refueling property credit to 50 percent of the cost of installing clean-fuel property in an amount of up to $50,000 for non-hydrogen clean-fuel property. The refueling property credit for hydrogen-based clean-fuel property remains at 30 percent, but the dollar cap was increased to $200,000 per taxable year per location. For non-business clean-fuel property, the refueling property credit is also increased to 50 percent and the cap was doubled to $2,000 per taxable year per location.

Miscellaneous Provisions

Modification of Carbon Dioxide Capture Tax Credit. Last year, Congress enacted a carbon dioxide tax credit of $10 per ton for the first 75 million metric tons of carbon dioxide captured and transported from an industrial source for use in enhanced oil recovery. The credit was $20 per ton for carbon dioxide captured and transported from an industrial source for permanent storage in a geologic formation. To qualify, facilities were required to capture at least 500,000 metric tons of carbon dioxide per year. The ARRA modifies the existing carbon dioxide tax credit to require that carbon dioxide captured and transported for use in enhanced oil recovery also be stored in a secure geologic formation.

Repeal of Dollar Caps on Specified Energy Tax Credits. Previously, businesses were allowed to claim energy credits for qualified small wind energy property in an amount capped at $4,000. Credits for individuals were capped at $2,000 for qualified solar water heating property, $500 per kilowatt of capacity (not to exceed $4,000) for qualified small wind energy property, and $2,000 for qualified geothermal heat pumps. The ARRA repealed the dollar caps for businesses and individuals in all the property categories described above.

Tax Credits for Energy-Efficient Improvements to Existing Homes. ARRA extends and modifies existing tax credits for energy-efficient improvements to existing homes. Previously, taxpayers could claim a tax credit equal to 10 percent of the amount paid or incurred by the taxpayer for qualified energy-efficient improvements installed during the taxable year. The tax credit was capped at $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane, oil furnace or hot water boiler, and $300 for any item of energy-efficient property. Under the ARRA, the credit is increased to 30 percent and, except with respect to fuel cells, the property-by-property caps are eliminated in favor of an aggregate cap of $1,500. The tax credit for fuel cells is capped at $500 per half-kilowatt.

Plug-in Electric Drive Vehicle Credit. ARRA modifies the existing tax credit for new, qualified plug-in electric drive motor vehicles, providing taxpayers that purchase or lease plug-in hybrid vehicles a tax credit of up to $7,500. ARRA also includes a 10 percent tax credit for up to $40,000 of the cost of converting a vehicle to a plug-in electric drive motor vehicle.

Parity for Transit Benefits. Historically, the dollar amounts of parking and transit fringe benefits employers could provide to their employees on a tax-free basis has been unequal. ARRA equalizes these benefits and sets the parking and transit benefits at $230 for 2009 and indexes the benefits equally for 2010. Employer-provided transit benefits were previously only excludable from income in an amount of up to $120.

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