American Recovery and Reinvestment Act Provides

New Federal Income Tax Credit For Investments In Advanced Energy Facilities

 

Last week, President Obama signed the American Recovery and Reinvestment Act of 2009 (the Act), which adds a new investment tax credit to the Internal Revenue Code called the "qualifying advanced energy project credit."  The credit for any tax year generally is an amount equal to 30 percent of the qualified investment for such tax year with respect to any qualifying advanced energy project of the taxpayer.

 

Who Qualifies?

So, what types of businesses might be eligible for this credit?  Essentially, manufacturers of clean technology (including wind turbine gears, carbon sequestration property, solar panels, energy storage systems, etc.).  Specifically, the term "qualifying advanced energy project" means a project which re-equips, expands, or establishes a manufacturing facility for the production of:

·        property designed to be used to produce energy from the sun, wind, geothermal deposits or other renewable resources;

·        fuel cells, microturbines or an energy storage system for use with electric or hybridelectric motor vehicles;

·        electric grids to support the transmission of intermittent sources of renewable energy, including storage of such energy;

·        property designed to capture and sequester carbon dioxide emissions;

·        property designed to refine or blend renewable fuels or to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies);

·        new qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components which are designed specifically for use with such vehicles, including electric motors, generators, and power control units; or

·        other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Secretary of Treasury (Secretary).

 

The new law also contains a "catch-all" provision that includes any portion of a qualified

investment which is certified by the Secretary as eligible for the credit.  The law specifically

excludes, however, any portion of a project for the production of any property which is used in

the refining or blending of any transportation fuel (other than renewable fuels).

 

What Qualifies?

All that said, what expenditures by the taxpayer are eligible for the credit?  In general, the qualified investment is the taxpayer's basis in "eligible property" placed in service by the taxpayer during the tax year which is part of a qualifying advanced energy project.  The amount of investment that qualifies is subject to certain limitations, including that the amount cannot exceed the amount designated by the Secretary as eligible for the credit. The term "eligible property" generally means any property:

·        which is necessary for the production of property described above;

·        which is tangible personal property, or other tangible property (not including a building or its structural components), but only if such property is used as an integral part of the qualified investment credit facility; and

·        with respect to which depreciation (or amortization in lieu of depreciation) is allowable.

 

In conference, the definition of eligible property was limited by the drafters to "tangible personal property," which means the credit cannot be claimed with respect to costs of a building or other real property related to a qualified manufacturing facility.  However, the costs of machinery and other equipment can often constitute a significant portion of a manufacturing facility project.  In such cases, the potential credit could be substantial.  Although guidance from the Treasury Department regarding the program is required, specific language in the law raises questions of interpretation, such as what types of property will be considered "necessary" for production or what will be required to be "an integral part of" the facility?  It is not entirely clear at this point whether the Treasury Department will address those issues in its guidance on the program.  Lastly, double benefit is not allowed with respect to components of certain energy projects that are eligible for other credits under Code Sections 48 (e.g., certain energy facilities), 48A (e.g., qualifying advanced coal projects), or 48B (e.g., qualifying gasification projects).

 

How to Qualify?

Within 180 days of the Act's enactment, the Secretary, in consultation with the Secretary of Energy, is required to establish a qualifying advanced energy project program to consider and award certifications for qualified investments eligible for credits to qualifying advanced energy project sponsors.  The total amount of credits that may be allocated under the program cannot exceed $2.3 billion.  While the Treasury Department has of course not yet released any guidance on this program, general requirements of the program will include the following:

·        Applicants must submit an application containing required information during the two-year period beginning on the date the Secretary establishes the program.

·        Applicants will have one year from the date of acceptance by the Secretary of the application during which to provide to the Secretary evidence that the requirements of the certification have been met.

·        An applicant which receives a certification will have three years from the date of issuance of the certification in order to place the project in service, and if such project is not placed in service by that time period, then the certification shall no longer be valid.

·        The certification process appears to be a competitive one, in which the Treasury Department is required to consider certain factors in determining which qualifying advanced energy projects to certify, such as the extent to which:

o       there is a reasonable expectation of commercial viability; and

o       such projects

 

There are also provisions regarding the mandatory review of the program and the redistribution or reallocation of credits under certain circumstances.  Upon certification, the Secretary is required to publicly disclose the identity of the applicant and the amount of the credit with respect to such applicant.

 

We will continue to monitor and await guidance from the Treasury Department on this program, but in the meantime, taxpayers with potentially eligible projects, should prepare to reserve a place in line (and apply) for these credits.  With a limited allocation of $2.3 billion nationwide, it will be important to act swiftly once details of the program are announced.  Ice Miller's Tax Practice Group is positioned to assist taxpayer's with this process, including analysis of qualifying projects as well as application for the credits with the Treasury Department.

 

If you have any questions, please contact Paul Jones, partner in the Tax Practice Group and a member of the Firm's Green Industries Initiative.   

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.