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Stimulus Program: Energy Incentives Overview

The American Recovery and Reinvestment Act of 2009 contains numerous tax provisions that incentivizes the rapid deployment of biomass to energy projects. These provisions present significant new opportunities for developers and investors of biomass projects. The extension of the production tax credit (PTC), which was previously set to expire at the end of 2010 offers a 1.5 cent tax credit for any closed loop biomass project (use of dedicated biomass crops) and 0.75 cent credit for any open-loop biomass project for the first ten years of a renewable energy facility’s operation. This credit is specific to projects placed in service on or before December 2013. The applicable limit for open biomass projects is no less than 150kwe nameplate capacity.

Additionally, for projects placed by December 2013, The Act enables an Investment-based Tax Credit (ITC) to be claimed in lieu of the PTC. The owner of a qualifying facility (closed or open loop biomass facilities, landfill gas, trash and other RE facilities) making such an election will be entitled to a credit equal to 30% of the cost of depreciable tangible property that is used as an integral part of the facility. CHP and microturbine projects are entitled to a credit equal to 10% of the depreciable tangible property.

The entire amount of the ITC is available in 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. Unlike the PTC, the amount the act also allows the owners of certain facilities that qualify for the ITC (including by reason of an election to claim the ITC rather than the PTC) to elect to receive a cash grant payments from the US Treasury Department in lieu of claiming tax credits. The amount of the grant will be equal to the depreciable basis of the specified energy property times an applicable percentage of 30 percent for qualified facilities, qualified fuel cell property, solar property and qualified small wind energy property or 10 percent for geothermal property, qualified microturbine property, combined heat and power (CHP) systems and geothermal heat pump property. Contrary to the PTC there are no applicable limits for open loop biomass projects under the ITC. (CHP projects must generate at least 20% thermal and 20 % power; however, power can be in the form of mechanical and /or electricity). A project qualifies for this cash grant payment if it otherwise qualifies for the ITC and it is either placed in service during, or construction is begun in 2009 or 2010, but prior to the end of the credit termination date (December 2013).The deadline for applications to be submitted to the Secretary of the Treasury for the grants is October 1, 2011. 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. Procedures for submitting / processing the grant applications are under development by the Department of Treasury and are expected to be rolled out by Mid-May. Payment of the grants will be managed by the Financial Management Services (Offices of Fiscal Secretary).

For projects placed in 2009, the Act extends the first-year Bonus Depreciation deductions. Under the bonus depreciation rule, an owner of qualifying property (defined above) 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 Modified Accelerated Cost Recovery System (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.

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