Tax News E-Alert

Volume 2, Issue 3, February, 2009

Energy Tax Incentives in the New Tax Law

On February 17, 2009, President Obama signed the "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act).  The bill extends tax credits for improvement to renewable energy projects or more efficient technologies.  Below is an overview of the tax provisions.

Tax Credits for Energy-Efficient Improvements to Existing Homes

Under existing law, a taxpayer could claim a lifetime nonrefundable 10% credit for energy saving improvements made to his home during 2009; the overall credit was limited to $500 and capped at $200 for qualifying expenses for windows. The individual's expenditures from subsidized energy financing were not taken into account when computing the credit which was a lifetime credit. Under the new law, the credit is raised to 30%, the $200 and $500 caps are eliminated and replaced with a $1,500 aggregate cap for property placed in service during 2009 and 2010, the limitation on subsidized energy financing is eliminated, and the standards for energy efficient property (heat pumps, air conditioning, etc.) have been revised.

Residential Energy Property

Under existing law, an individual was allowed a 30% credit for the purchase of qualified residential energy efficient property, such as solar energy property, fuel cell property, solar water heating property, small wind energy property, and geothermal heat pump property. There were dollar limitations on the credits that could be taken, and the treatment of expenditures from subsidized energy financing was not taken into account. The new law removes the credit caps for solar hot water, geothermal, and wind property, and it eliminates the reduction in credits for property that was obtained with subsidized energy financing.

Plug-In Electric Drive Vehicle Credit

Under existing law, taxpayers may claim a credit for new qualified plug-in electric drive motor vehicles purchased from 2009 through 2014. The credit amount cannot exceed limits based on the gross vehicle weight rating, and ranges from $7,500 to $15,000. The credit phases out when the manufacturer has sold 250,000 electric drive motor vehicles for use in the United States. The new legislation modifies the credit for vehicles purchased after 2009; the revised credit is limited to $5,000 and phases out when the manufacturer has sold 200,000 vehicles. In addition, the new law creates a 10% nonrefundable personal credit for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles purchased between February 17, 2009, and the end of 2011; this credit is limited to $2,500. Finally, the new legislation creates a 10% credit for the cost of converting any motor vehicle to a qualified plug-in electric motor drive vehicle; this credit is capped at $4,000. 

Tax Credits for Alternative Fuel Pumps

Qualified alternative fuel vehicle refueling property (QAFVR) is property that is used for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle that is propelled by fuel or electricity. Under existing law, a taxpayer could elect to claim a credit equal to 30% of the cost of QAFVR placed in service before the end of 2010; the credit was available for hydrogen-related QAFVR that was placed in service before the end of 2014. The credit was limited to $30,000 per year for property used in a trade or business and $1,000 per year for QAFVR installed on property that was used as a principal residence. The new legislation increases the maximum credit for hydrogen-related business property placed in service by the end of 2010 to $200,000, for other business QAFVR to $50,000, and for non-business property to $2,000 per year.

Business Energy Credit

Under existing rules, a 30% business energy credit is allowed on fuel cell property, solar property, small wind energy property, and geothermal heat pump property, and a 10% credit is allowed for geothermal power production property, combined heat and power system property, micro turbine property, and (after 2016) solar energy property. If the property was financed by subsidized energy financing or with proceeds from private activity bonds, the basis of the property was reduced for purposes of claiming the credit. In addition, the credit for the small wind energy property could not exceed $4,000 per year. The new legislation repeals the basis reduction requirement for subsidized energy financing and eliminates the cap on the credit for small wind energy property.

Long-Term Extension and Modification of Renewable Energy Production Tax Credit

Under existing law, a renewable electricity production credit is allowed for certain facilities that produce electricity. New legislation extends the placed-in-service dates for qualifying facilities, thus making the credit available for an additional three years in most instances. Under the new rules, wind facilities must be placed in service on or before December 31, 2012, rather than the end of 2009. Qualifying facilities for closed-loop biomass (primarily non-timber organic plants), open-loop biomass (agricultural livestock waste), geothermal energy, and municipal solid waste (from landfill gas or trash combustion facilities) must now be placed in service on or before December 31, 2013, rather than the end of 2010. Qualifying facilities for marine and hydrokinetic energy (waves and tides) must now be placed in service on or before December 31, 2013, rather than the end of 2011. Finally, qualifying hydropower facilities must now add improvements or equipment on or before December 31, 2013, rather than the end of 2010.

Temporary Election to Claim the Investment Tax Credit in Lieu of the Production Tax Credit

Under existing law, the electricity production credit is available for electricity produced from qualified renewable energy resources.  Qualified renewable energy resources include wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, marine and hydrokinetic. The credit is available for a ten-year period, beginning on the date the qualifying facility is placed in service. Under the new legislation, the taxpayer may make an irrevocable election to treat the property as energy property eligible for a 30% investment tax credit that is taken in the year the property is placed in service; the investment tax credit is in lieu of the production credit. The election is available for facilities that were otherwise eligible for the electricity production credit and for which no credit has been allowed. Qualifying property is depreciable tangible property (not including buildings) that is an integral part of the facility, and is placed in service from 2009 through 2012 for wind facilities and from 2009 through 2013 for the other renewable energy resource facilities.

Under existing rules, a 30% business energy credit is allowed for certain solar property. The new legislation allows facilities that produce electricity from solar facilities to elect to take a 30% investment tax credit in the year the facility is placed in service. The investment credit is in lieu of the business energy credit, and the property must be placed in service between 2009 and the end of 2012. 

Credit for Investment in Advanced Energy Facilities

The new law creates a 30% credit for investment in property used in a qualified advanced energy manufacturing project. Such projects re-equip, expand, or establish a manufacturing facility for the production of renewable energy, advanced battery technology, and other innovative "green" technologies. There are extensive rules related to the certification of projects, which must be done by the Secretary of the Treasury. The certification program has not yet been placed in service. 

More Funding for Bonds

Under existing law, new clean renewable energy bonds can be issued to finance qualified renewable energy facilities that qualify for tax credits and are owned by a public power company, governmental body, or cooperative electric company. The national limitation on these bonds was originally $800 million. Under the new legislation, the bond limitation is increased by $1.6 billion.

I hope this information is helpful.  Please feel free to contact me at 310-697-1501 or rwelling@rwac.com if you would like more details about this or any other aspect of the new law. 

Best regards,

Richard Welling

Richard Welling & Co., LLP

3625 Del Amo Blvd., Suite 290

Torrance, CA 90503

(310) 697-1500

www.rwac.com

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