Cadwalader Clients & Friends Memo: Sen. Stabenow's Alternative Energy Tax Incentive Measure Fails to Pass Senate

Cadwalader Clients & Friends Memo: Sen. Stabenow's Alternative Energy Tax Incentive Measure Fails to Pass Senate

 

By David S. Miller, Gregory K. Lawrence, Daniel J. Mulcahy and Harley L. Raff

On March 13, an amendment to the "Moving Ahead for Progress in the 21st Century Act" (which is also known as the "Surface Transportation Act") that would have reestablished and extended several tax incentives for alternative energy, failed to garner the required 60 votes for approval.

However, the amendment, which was introduced by Senator Debbie Stabenow (D-MI), did secure 49 votes, which suggests that similar measures may be introduced in the future. The Stabenow amendment would have:

  • Extended the electricity production tax credit through 2013 for onshore wind facilities and through 2014 for most other qualified facilities;
  • Extended the production tax credit for refined coal (which has already expired) through 2012;
  • Reinstated the cash grant program under section 1603 of the American Recovery and Reinvestment Act of 2009 for qualifying facilities that are placed in service in 2012 or placed in service after 2012 if construction begins by 2012 and the application for the grant is received by October 1, 2013;
  • Extended the ability to elect to receive investment tax credits instead of production tax credits through 2014, and provided an additional $2.3 billion of investment tax credit funding for qualified advanced energy products;
  • Renewed the credits for biodiesel and renewable diesel fuel, as well as suspended the limitation on percentage depletion for oil and gas wells, through 2012; and
  • Extended the special allowance for cellulosic biofuel plant property and continued to allow biofuel producers to use algae as a qualified feedstock to receive the cellulosic biofuel production credit.

The balance of this memorandum discusses the application of the Stabenow amendment to production tax credits, investment tax credits, and the cash grant program.

Production Tax Credits

There are two different types of tax credits available to energy producers - "production" tax credits and "investment" tax credits. Production tax credits are measured according to the amount of energy produced from "qualified energy resources" at a "qualified facility," and their value varies depending upon which sources of energy are being utilized. 1 Section 45 lists the following nine qualifying energy resources from which renewable energy can be produced and be eligible for production tax credits:

  • wind;
  • "closed-loop biomass";2
  • "open-loop biomass";3
  • geothermal;4
  • solar;
  • "small irrigation";5
  • "municipal solid waste;"6
  • "qualified hydropower production";7 and
  • marine and hydrokinetic sources.8

In order to qualify for production tax credits, energy must also be produced from one of the following eleven qualified facilities, and the facility must be located in the United States:

  • a wind facility;
  • a closed-loop biomass facility;9
  • an open-loop biomass facility;10
  • a geothermal or solar energy facility;11
  • a small irrigation power facility12
  • a landfill gas facility;13
  • a trash facility;14
  • a refined coal production facility;15
  • a qualified hydropower production;16
  • an Indian coal production facility;17 and
  • a marine and hydrokinetic renewable energy facility.18

Therefore, if a taxpayer produces energy from one of the nine qualifying energy resources at one of the eleven qualified facilities, the taxpayer will be eligible to receive an amount of production tax credits that varies according to the amount of energy produced and the source from which it has been produced. The production tax credit is scheduled to expire on December 31, 2012 for wind facilities and on December 31, 2013 for other facilities. The Stabenow amendment would have extended the production tax credit for wind facilities through 2013 and for other facilities through 2014.

Investment Tax Credits

A taxpayer can receive an investment tax credit based on the dollar amount invested in qualifying energy-producing equipment in the year the property is placed in service. Taxpayers can generally receive a 10% or 30% investment tax credit for specified equipment that is used to produce alternative energy if (i) the taxpayer completes the construction, reconstruction or erection of the property itself, or acquires the property and is the original user of the property,19 and (ii) the property is used in a trade or business and therefore qualifies for depreciation or amortization.20 If a taxpayer elects the investment tax credit, the tax basis of the property is reduced by 50% of the credit.21 Moreover, all or a portion of the credit is recaptured if the property is disposed of within 5 years.22

Election to Receive Investment Tax Credit In Lieu of Production Tax Credit. Taxpayers that are eligible for production tax credits may irrevocably elect to receive a 30% investment tax credit instead of a production tax credit for certain facilities.23 However, this election is only available if the taxpayer has not claimed any production tax credits. The ability to elect to receive investment tax credits in lieu of production tax credits is scheduled to expire at the end of 2012 for wind facilities and at the end of 2013 for other facilities.

The Stabenow amendment would have extended the ability of taxpayers to elect to receive investment tax credits through 2013 for wind facilities and 2014 for other facilities.

Qualifying Advanced Energy Project Tax Credit. A taxpayer may receive an investment tax credit equal to 30% of its investment to re-equip, expand or establish a manufacturing facility for production of:

  • Technologies that produce energy from renewable sources such as the sun, wind, or geothermal deposits;24
  • Fuel cells, microturbines or other energy storage systems used in electric or hybrid vehicles;25
  • Technology that supports the transmission and storage of intermittent sources of renewable energy;26
  • Property that captures and detains carbon dioxide emissions;27
  • Technology that refines and blends renewable fuel;28
  • Technology that conserves energy, such as energy-conserving lighting and smartgrid technologies;29
  • Plug-in electric vehicles and their components;30
  • Other property that reduces greenhouse gas emissions as may be determined by the IRS.31

Currently the total amount of tax credits that can be allocated under this program cannot exceed $2.3 billion. The Stabenow amendment would have provided an additional $2.3 billion of funding.

Election to Receive a Tax-Free Grant in Lieu of Investment Tax Credit or Production Tax Credit

If a taxpayer has qualified for investment tax credits for certain renewable energy resources, section 1603 of the American Recovery and Reinvestment Act of 2009 permits the taxpayer to elect to receive a tax-free grant in lieu of the investment tax credit. For wind facilities, closed and open-loop biomass facilities, solar energy facilities, qualified hydropower facilities, marine and hydrokinetic renewable energy facilities, municipal solid waste fuel cell, solar and qualified small wind projects, the cash grant is 30% of the investment. For geothermal, microturbines, combined heat and power systems, and geothermal heat pumps, the cash grant is 10% of the investment.

The cash grants program has expired for those facilities whose construction has not yet begun.

The Stabenow amendment would have extended the cash grant program for specified energy facilities that are placed in service in 2012 or placed in service after that date if construction begins in 2012, the application for the grant is received by October 1, 2013, and the construction is completed prior to 2013 (in the case of wind facility property), 2014 (in the case of other renewable power facility property eligible for credit under section 45), or 2017 (for specified energy property described in section 48).

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Please feel free to contact any member of our Energy & Commodities or Tax Departments or any of the following Cadwalader attorneys if you have any questions about this memorandum.

David S. Miller +1 212 504 6318 david.miller@cwt.com

Gregory K. Lawrence +1 212 504 6171 greg.lawrence@cwt.com

Daniel J. Mulcahy +1 202 862 2311 daniel.mulcahy@cwt.com

Harley L. Raff +1 212 504 6041 harley.raff@cwt.com

1 Section 45(a)(2)(A). All references to section numbers are to the Internal Revenue Code of 1986.

2 Closed-loop biomass is any organic material from a plant that is planted exclusively for use at a facility to produce electricity. Section 45(c)(2).

3 Open-loop biomass includes certain agricultural livestock manure and litter, certain mill and harvesting waste material, and certain other crop by-products or residues. Open-loop biomass does not generally include closed-loop biomass or biomass burned in conjunction with fossil fuel. Section 45(c)(3).

4 Geothermal energy is energy derived from a geothermal deposit. Section 45(c)(4).

5 Small irrigation power is power generated without any dam or impoundment of water through an irrigation system canal or ditch and whose "nameplate capacity rating" is between 150 kilowatts and 5 megawatts. Section 45(c)(5).

6 Municipal solid waste is "solid waste" as defined under section 2(27) of the Solid Waste Disposal Act (23 U.S.C. § 6903). Section 45(c)(6).

7 Qualified hydropower production is generally limited to incremental hydropower production from hydroelectric dams and hydropower production from nonhydroelectric dams placed in service on or before August 8, 2005. Section 45(c)(8).

8 The tax credit is available for marine and hydrokinetic renewable energy derived from waves, tides, and currents in oceans, estuaries, and tidal areas, free flowing water in rivers, lakes, and streams or in an irrigation system, canal, or other man-made channel. Section 45(c)(10). Marine and hydrokinetic renewable energy does not include energy derived from a source that uses a dam, other diversionary structure, or impoundment for electric power production purposes. Section 45(c)(10). 

9 An closed-loop biomass facility is a facility that uses closed-loop biomass to produce electricity. A closed-loop biomass facility generally must be placed into service before January 1, 2014. Section 45(d)(2).

10 An open-loop biomass facility is a facility that uses open-loop biomass to produce electricity. An open-loop biomass facility generally must be placed into service before January 1, 2014. Section 45(d)(3).

11 A geothermal or solar energy facility is a facility that uses geothermal or solar energy to produce electricity. A geothermal facility must be placed into service before January 1, 2014. A solar energy facility must have been placed into service before January 1, 2006. Section 45(d)(4).

12 A small irrigation power facility is a facility that uses small irrigation power to produce electricity. A small irrigation power facility must have been placed into service before October 3, 2008. Section 45(d)(5).

13 A landfill gas facility is a facility that produces electricity from gas derived from the natural biological breakdown of municipal solid waste. A landfill gas facility must be placed into service before January 1, 2014. Section 45(d)(6).

14 A trash facility is a facility (other than a landfill gas facility) that uses municipal solid waste to produce electricity. A trash facility must be placed into service before January 1, 2014. Section 45(d)(7).

15 A refined coal production facility is a facility that produces refined coal. A refined coal production facility must be placed into service before December 31, 2011. Section 45(d)(8).

16 A qualified hydropower facility is a facility that produces qualified hydropower production. A qualified hydropower facility must be placed into service before January 1, 2014. Section 45(d)(9).

17 An Indian coal production facility is a facility that produces Indian coal. It must have been placed into service before January 1, 2009. Section 45(d)(10).

18 A marine and hydrokinetic renewable energy facility is a facility that produces electricity from marine and hydrokinetic renewable energy. A marine and hydrokinetic renewable energy facility must be placed into service before January 1, 2014 and have a nameplate capacity rating of at least 150 kilowatts. Section 45(d)(11).

19 Section 48(a)(3)(B).

20 Section 48(a)(3)(C). Certain other limitations apply. In addition, the Treasury Department may impose performance and quality standards. These standards are conditions for the investment tax credit only if they are in effect at the time the property is acquired. Section 48(a)(3)(D).

21 Section 50(c).

22 Section 50(a)(1).

23 Section 48(a)(5).

24 Section 48C(c)(1)(A)(i)(I).

25 Section 48C(c)(1)(A)(i)(II).

26 Section 48C(c)(1)(A)(i)(III).

27 Section 48C(c)(1)(A)(i)(IV).

28 Section 48C(c)(1)(A)(i)(V).

29 Section 48C(c)(1)(A)(i)(V).

30 Section 48C(c)(1)(A)(i)(VI).

31 Section 48C(c)(1)(A)(i)(VII).

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This memorandum has been prepared by Cadwalader, Wickersham & Taft LLP for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Cadwalader, Wickersham & Taft LLP without first communicating directly with a member of the Firm about establishing an attorney-client relationship.

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