Tax Provisions in the American Recovery and Reinvestment Act Provide Relief to Taxpayers and Promote Clean Technology and Renewable Energy

As noted in prior alerts, and as expected, the United States Congress passed, and last week the President signed into law, sweeping economic recovery legislation that expands existing, and establishes new, tax incentive programs to promote clean technology, renewable energy and green jobs. The legislation also provides businesses tax relief in certain areas. Among other things, the American Recovery and Reinvestment Act (the Act) specifically:

· Extends the 50 percent first-year bonus depreciation allowed under the bailout legislation last fall through December 31, 2009.

· Provides a five-year carryback of 2008 net operating losses (NOLs) for qualified small businesses (i.e., average gross receipts of $15 million or less).

· Provides relief for cancellation of indebtedness income, under certain circumstances, by allowing taxpayers to elect to recognize such income over five years beginning in 2014.

· Shortens the built-in gains holding period from 10 years to seven years with respect to assets subject to the built-in gains tax after a C corporation elects to become an S corporation. The shortened period applies to C corporation that convert to S corporation status in 2009 and 2010.

· Expands volume for the New Markets Tax Credit program by providing an additional $1.5 billion in 2008 allocation (which is on top of the $3.5 billion already awarded for 2008) and expanding the 2009 allocation from $3.5 billion to $5 billion. This program is used primarily to provide below market rate financing to real estate development projects and other businesses that are located in qualified low-income communities. Applications for the 2009 round are due in April 2009.

· Establishes a 30 percent credit for investment in facilities that manufacture advanced energy property, which includes technology for the production of renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture or sequestration. In conference, an interesting limitation was added that provides that eligible property for purposes of the credit include 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. In any event, this promises to be a useful credit for clean technology manufacturers.

· Extends Code Section 45 renewable energy production tax credits by increasing the placed in service date for three years (generally, through 2013; through 2012 for wind) for qualified facilities producing electricity from wind, closedloop biomass, open-loop biomass, geothermal energy, municipal solid waste, and qualified hydropower).

· Allows temporary election to claim 30 percent investment credit under Code Section 48 in lieu of the Code Section 45 production tax credit. Wind facilities currently qualify only for the production tax credit which is claimed over 10 years. This provision would allow tax credit equity investors to realize tax benefits sooner as the investment tax credit is claimed over a shorter time period. The Act would also repeal the subsidized energy financing limitation on the investment tax credit, which would permit other subsidies such as industrial revenue bonds or other subsidies to be combined with tax credit equity proceeds.

· Expands the volume for Clean Renewable Energy Bonds (CREBs), which are tax credit bonds, the proceeds of which may be used to finance renewable energy projects.

· Expands the volume for Qualified Energy Conservation Bonds (QECBs), which like CREBs, are tax credit bonds, and were recently established in the bailout legislation of October 2008. The Act clarifies that proceeds of QECBs may be used for programs in which utilities provide ratepayers with energy-efficient property and recoup the costs of that property over an extended period of time. The proceeds of QECBs can be used for several other types of projects, including:

o implementing green community programs;

o rural development involving the production of electricity from renewable energy resources, or most facilities eligible for the production tax credit under Code Section 45;

o research projects related to the development of cellulosic ethanol or other nonfossil fuels, technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuel, increasing the efficiency of existing technologies for producing nonfossil fuels, automobile battery technologies, and technologies to reduce energy use in buildings;

o demonstration projects related to similar programs, but also including projects designed to promote the commercialization of green building technology;

o mass commuting facilities and related facilities that reduce the consumption of energy; and

o public education campaigns to promote energy efficiency.

The Act contains several other provisions, including those that provide tax credits related to plug-in electric vehicles and provisions that revise and expand certain tax-exempt bond programs. If you have any questions, please contact Paul Jones, a 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.