Bioenergy Law Alert: Stimulus Bill Creates Opportunities for Facilities Generating Electricity from Biomass
3/12/2009
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the "Act"), a $787 billion economic stimulus package that contains numerous tax provisions related to biomass and other renewable energy projects. These provisions present significant new opportunities for developers of, and investors in, projects generating electricity from biomass.
Extension of PTC Sunset Date
The Act extends the production tax credit ("PTC") for open-loop and closed-loop biomass projects from the end of 2010 through the end of 2013. To qualify for the PTC under the Act, a biomass project must be "placed in service" on or before December 31, 2013. This extension removes a significant portion of the uncertainty previously faced by biomass projects with long-term development and construction requirements. The Act did not, however, change the basic operation or calculation of the PTC for open-loop or closed-loop biomass projects. Thus, any qualifying closed-loop biomass project that meets the placed-in-service requirement will qualify for a credit of 1.5¢ (indexed for inflation) per kilowatt hour of electricity generated and sold to an unrelated person during each year of the 10-year period beginning on the date the project is originally placed in service. Any qualifying open-loop biomass project that meets the placed-in-service requirement generally will qualify for a credit equal to one-half of the credit allowable for a closed-loop biomass project for the same 10-year period. For 2008, the inflation-indexed credit per kilowatt hour was 2.1¢ for closed-loop biomass and 1.0¢ for open-loop biomass. The inflation-indexed rate for 2009 has not yet been released.
Election to Claim ITC Rather Than PTC
The Act also allows the owner of a qualified biomass facility to elect to claim an investment-based tax credit ("ITC") in lieu of the PTC. This election applies to open-loop and closed-loop facilities that are placed in service from January 1, 2009 to December 31, 2013. The owner of a qualifying facility making such an election generally is entitled to a credit equal to 30% of the cost of qualifying property that comprises the facility. The entire amount of the ITC is available for the year in which a qualifying facility is placed in service. Any unused portion of the credit can be carried back one tax year and carried forward up to 20 tax years. The owner of a qualifying facility can elect to claim either the ITC or the PTC, but not both, with respect to the facility. The tax basis of a project for which the ITC is claimed must be reduced for all tax purposes by one-half of the amount of the credit.
Unlike the PTC, the amount of the ITC allowable for an open-loop biomass facility is the same as the amount of the ITC allowable for a closed-loop biomass facility. This represents a significant departure from the PTC, under which the tax credits for an open-loop biomass project are half those for a closed-loop biomass project with the same production. The removal of this disparity may provide significantly increased incentives for open-loop biomass projects.
The Act also eliminates the previous ITC limitation applicable to projects receiving subsidized energy financing or tax-exempt bond financing. Under prior law, if a project received subsidized energy financing or proceeds of tax-exempt bonds, the tax basis of the project for purposes of calculating the ITC was reduced by the same ratio as the subsidized energy financing bore to the overall cost of the project. The elimination of this cut-back provides new opportunities for owners of biomass projects to obtain favorable government-supported financing without constraining the amount of available tax credits.
Election to Receive Grant Payment Rather Than ITC
In addition to the election to claim the ITC rather than the PTC, the Act allows the owner of a biomass facility that qualifies for the ITC (including by reason of an election to claim the ITC rather than the PTC) to elect to receive a cash grant payment from the U.S. Treasury Department in lieu of claiming the ITC. To qualify for this election, a project must be placed in service during 2009 or 2010 or, if construction is begun in 2009 or 2010, placed in service on or before December 31, 2013. These grants generally function in the same manner as the ITC for which the owner of a project otherwise would have been eligible. Thus, the amount of the grant generally is 30% of the cost of qualifying property. A grant payment is not included in the taxable income of the recipient, but the tax basis of the property is reduced by one-half of the amount of the grant, in the same fashion as the tax basis of property that qualifies for the ITC. The Treasury Department is required to pay a grant to a qualifying project owner within 60 days of the date the project owner's application for payment is made or the date the facility is placed in service, whichever is later. The Act contains a specific appropriation provision to help ensure that funds will be available to pay the grant to qualifying project owners.
Extension of Bonus Depreciation to 2009
The Act extends first-year bonus depreciation deductions to projects that are placed in service in 2009. Under the bonus depreciation rule, an owner of qualifying property is entitled to deduct 50% of the adjusted basis of the property in 2009. The remaining 50% of the adjusted basis of the property is depreciated over the regular tax depreciation schedule applicable to the property. Coupled with short-term MACRS depreciation deductions (e.g., five years), bonus depreciation can cause a project to generate significant tax losses in the early years that can be extremely valuable, particularly if the owner or investor can use the losses to offset other sources of taxable income.
For a summary of all the renewable energy-related provisions of the Act, see http://www.stoel.com/showalert.aspx?Show=3550. For a summary of all the tax provisions in the Act, see http://www.stoel.com/showalert.aspx?Show=3560.
Portland, Oregon
Gary Barnum at (503) 294-9114 or grbarnum@stoel.com
Pat Boylston at (503) 294-9116 or pgboylston@stoel.com
Ed Einowski at (503) 294-9235 or eeinowski@stoel.com
Chris Heuer at (503) 294-9206 or ckheuer@stoel.com
Bill Holmes at (503) 294-9207 or whholmes@stoel.com
Kevin Pearson at (503) 294-9622 or ktpearson@stoel.com
Adam Kobos at (503) 294-9246 or ackobos@stoel.com
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Elisabeth Shellan at (503) 294-9887 or esshellan@stoel.com
Minneapolis, Minnesota
Mark Hanson at (612) 373-8823 or mjhanson@stoel.com
Greg Jenner at (612) 373-8857 or gfjenner@stoel.com
Kevin Johnson at (612) 373-8803 or kdjohnson@stoel.com
Ron McFall at (612) 373-8807 or rdmcfall@stoel.com
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Joe Thompson at (612) 373-8822 or jthompson@stoel.com
Mary Sennes at (612) 373-8814 or mgsennes@stoel.com
Salt Lake City, Utah
Mark Astling at (801) 278-6983 or mlastling@stoel.com
Julia Pettit at (801) 578-6958 or jrpettit@stoel.com
Seattle, Washington
David Benson at (206) 386-7584 or dlbenson@stoel.com
Carl Lewis at (206) 386-7688 or cslewis@stoel.com
Alan Merkle at (206) 386-7636 or armerkle@stoel.com
Graham Noyes at (206) 386-7615 or jgnoyes@stoel.com
Cherise Oram at (206) 386-7622 or cmoram@stoel.com
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.