Income Tax Incentives on Renewable Energy Investments

There are significant income tax incentives or benefits that were created for taxpayers/investors in the American Recovery and Reinvestment Act ("ARRA").  ARRA was also extended by the 2010 Tax Act to December 31, 2011 and is widely expected to be extended again for 2012.  

• 100% Bonus Depreciation, if placed in service prior to December 31, 2011; 
• MACRS Depreciation; 
• Production Tax Credits ("PTC"); 
• Electricity sold to third parties; 
• Investment Tax Credit ("ITC") equal to 30% of the cost basis (amount paid for the asset) which is available only if the owner foregoes the PTC;
• Direct Treasury Department grants under Section 1603, equal to the 30% investment tax credit.

Bonus Depreciation

Bonus Depreciation is a first year income tax deduction that is equal to 100% of the tax cost basis in the completed project.  There is no one-half year or mid-quarter year convention applicable and the Bonus Depreciation is not reduced for a short income tax year. 

Bonus Depreciation applies to completed projects placed in service betwen September 9, 2010 and December 31, 2011.  It is widely anticipated that ARRA will be extended again through December 31, 2012, so check with your tax advisor to determine if ARRA has in fact been extended.  

The investor/owner of the project or the partners of pass-through entities can take advantage of the Bonus Depreciation deductions.  Lessors can claim Bonus Depreciation if their sale/leaseback transaction occurs within three months of the original date that the completed project was placed in service.

MACRS Depreciation

Property that is generally not eligible for Bonus Depreciation can take advantage of a five-year MACRS income tax deduction for domestic renewable energy properties.  MACRS depreciation uses the double declining balance ("DDB") depreciation method with a half-year convention.  Investors may forego both Bonus Depreciation and MACRS depreciation and elect the alternative depreciation system if they so choose.  This would mean 12-year straight line depreciation for most Renewable Energy Investments.

Production Tax Credit ("PTC") 

The Production Tax Credit or "PTC" is a credit based on the sale of energy to third parties.  The credit is paid for electricity produced by qualified facilities and sold to unrelated parties during the first five or ten years of the production facility's operation, depending on the resource. 

The credit starts at 1.51 cents per kilowatt, adjusted for inflation.  It is generally only available to the investor who is also the owner and operator of the production facility.  Leasing is allowed only for open loop biomass and certain closed loop biomass expansions. 

Qualifying energy resources include the following:  (1) wind; (2) close loop biomass; (3) open loop biomass; (4) geothermal; (5) solar; (6) landfill gas; (7) municipal solid waste; (8) qualified hydropower; (9) marine and hydro kinetic. 

The required placed in service date is 2012 for wind and 2013 for most other property. 

Investment Tax Credit ("ITC") 

The Investment Tax Credit or "ITC" is a credit equal to 30% of the investment available to the tax owner who is the original user.  The lessor is treated as the original user if the sale/leaseback occurs within three months of the original use.  ITC may be passed through to the lessee.  The credit is 30% of the cost of qualifying property which must be tangible personal property or other tangible property used as an integral part of a facility but does not include buildings or structural components.  The basis of the property is reduced by 50% of the credit or 15%.  The credit carries back when year end carries forward 20 years.  The project must be domestic and may not be used by governmental, 501(c) entities or foreign persons.  Generally, the property must be placed in service before January 1, 2013 for wind projects or January 1, 2014 for other projects.

Direct Grants

The Department of the Treasury provides a 30% grant in lieu of a 30% investment tax credit available for property placed in service before 2013 for wind, or 2014 for other renewables.  Construction must commence no later than December 31, 2011, unless extended again.  Grant applications must be received before October 1, 2011.  The depreciable cost basis is reduced by 50% of the grant or 15%.  The grant is not included in taxable income. 

Both the ITC and grants are subject to recapture. If the facility ceases to operate, or is sold or exchanged within five (5) years of the date that the facility was placed in service.  100% is subject to recapture if the disposition occurs in the first year of the facility's operation, 80% in the second year, 60% in the third year, 40% in the fourth year and 20% in the fifth year.  Recapture is treated by a reduction in the partner’s interest in the profits derived from the facility if it falls below two-thirds of what that interest was when the facility was placed in service.