Expanded Opportunities for Renewable Energy Tax Credits and Incentives

The American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) extended the term of the IRC Sec. 45 credit for production of energy from renewable resources, and expanded the IRC Sec. 48 investment tax credit for energy property. In addition, § 1603 of the Recovery Act created a new provision allowing developers to apply for grants from the Department of Treasury equal to the amount of the IRC Sec. 48 investment tax credit.

IRC Sec. 45 provides for a production tax credit for electricity from renewable electricity resources. It also provides a credit for production of refined coal and “Indian Coal,” which is coal mined from Indian tribe reserves. As originally enacted in 1992, the credit applied only to electricity produced from wind and “closed-loop” (dedicated crop) biomass. The credit has been greatly expanded over the years by subsequent legislation, and was most recently extended by the Recovery Act.

The IRC Sec. 45 production credit applies to...:

• Biomass Renewables: (i) open-loop biomass; (ii) landfill methane (LFG); (iii) municipal solid waste (MSW); and (iv) closed-loop biomass.
• Hydro Renewables: (i) qualified dam improvements; and (ii) marine and hydrokinetic from waves, tides, rivers, lakes, streams, canals, irrigation systems, and ocean thermal energy conversion.
• Other Renewables: (i) wind; and (ii) geothermal.
• Specified Coal Resources: (i) refined coal; (ii) steel industry fuel; and (iii) Indian coal.

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In lieu of claiming the IRC Sec. 45 production tax credit, producers have the option to claim either (1) an IRC Sec. 48 investment tax credit, or (2) a cash grant under Recovery Act § 1603 equal to the amount of the IRC Sec. 48 investment tax credit. For electing IRC Sec. 45 facilities, the amount of the investment credit or cash payment is 30% of the cost basis of qualifying energy property. The property is eligible for the investment credit or cash payment after it is placed in service. This election does not apply to IRC Sec. 45 facilities placed in service before 2009. If the producer claims the investment tax credit or cash payment, the depreciable basis is reduced by 50% of the amount of the investment credit or payment received. The credits or payments are not otherwise subject to federal income tax.

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[T]he IRC Sec. 45 production credit may not be claimed for facilities that elect to claim the IRC Sec. 48 investment credit or the Recovery Act § 1603 grant. The IRC Sec. 45 credit is also reduced under § 45(b)(3) for government grants used by the project, tax-exempt and subsidized energy financing used to finance the project, and other credits claimed on property which is part of the project. The reduction applies to grants, tax exempt and subsidized financing, and other investment credits that are provided in connection with the capital cost of project construction or acquisition. Congressional history indicates that investment credits intended to reduce § 45 are the business energy credit and the investment tax credit. State and local tax credits do not reduce IRC Sec. 45, however. See Revenue Ruling 2006-9. The IRC Sec. 45 reduction is a fraction, the numerator of which is the sum all such grants, tax exempt and subsidized financing, and investment credits used by the project, over a denominator equal to the total capitalized cost of the project. This is a cumulative calculation for each tax year that includes amounts for the current and all prior taxable years. The reduction in IRC Sec. 45 credit is capped each year, however, at one-half of the IRC Sec. 45 credit produced for the year...

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