Clean Energy Gets a Tax Jolt

From fitting a home with energy-efficient windows to harnessing the power of waves and tides, activities that conserve energy or produce it from clean and renewable sources enjoy new or expanded tax credits in the American Recovery and Reinvestment Act of 2009 (ARRA). The next generation of electric vehicles gets a jump-start, as do efforts to reduce greenhouse gases by capturing and “sequestering” carbon dioxide. The available pool of a new type of bond, one redeemable as a tax credit, is expanded to finance more energy conservation measures and more research and development into obtaining electricity from greener sources.

Here are some of the act’s more notable provisions, starting with those most likely to benefit individual taxpayers:

Energy property credit. For 2009 and 2010, the act extends and increases the IRC § 25C credit for qualified energy- efficient equipment or building components installed in the taxpayer’s principal residence. The overall credit is tripled from 10% to 30% of qualifying expenditures, subject to a lifetime cap of $1,500 (formerly $500). Caps on certain heating and cooling equipment placed in service during the tax year—such as $50 for an energy-conserving furnace circulating fan, $150 for a natural gas furnace or $300 for a heat pump—are lifted, as is a lifetime cap of $200 on energy-efficient windows. Expenditures formerly ineligible for the credit because they were funded by subsidized energy financing are now eligible.

Credits for plug-in electric vehicles. The act introduces two new credits for electric vehicles and modifies, starting next year, the section 30D credit for plug-in electric cars (introduced for the 2009 tax year by the Emergency Economic Stabilization Act of 2008). The section 30D credit is changed to between $2,500 and $7,500, depending on the vehicle’s kilowatt-hour rating, for vehicles purchased after Dec. 31, 2009. Plug-ins aren’t expected to be generally available in the U.S. before then.

The ARRA also refines the definition of a qualifying plug-in vehicle: one with at least four wheels that is designed primarily for use on public streets and highways and is powered “to a significant extent”— meaning a new generation of plug-in hybrids will qualify—by an electric motor with a rechargeable battery of at least four kilowatt-hours’ capacity. A phaseout threshold based on the number of vehicles sold for use in the U.S. is lowered from 250,000 vehicles to 200,000, but the credit is made permanent in place of a prior-law sunset at the end of 2014.

The ARRA also introduced a credit of 10% up to a maximum of $2,500 of the cost of low-speed and two- and three-wheeled plug-in electric vehicles and another 10% credit, up to a maximum of $4,000, for costs of converting a non-plug-in hybrid or conventional-fuel vehicle into a plug-in electric one. These two credits are available for vehicles bought or converted between Feb. 17, 2009, and Dec. 31, 2011.

Renewable energy production credit. Previously authorized for wind facilities placed in service before 2010 and for other sources before 2011, the section 45 renewable energy production credit is extended three more years (two years for marine and hydrokinetic sources).

Advanced energy manufacturing project credit. Investment in qualified property used in a qualified advanced energy manufacturing project (section 48C) is allowed a new 30% credit. Such projects are those to establish, expand or re-equip a manufacturing facility to produce property designed to produce energy from certain alternative sources including solar and fuel cells, or to capture and sequester carbon dioxide, or to produce qualified plug-in electric vehicles.

Clean renewable energy bonds. The ARRA triples the authorized maximum issuance amount of so-called CREBs (clean renewable energy bonds) to $2.4 billion from the previous limit of $800 million. CREBs are still new, having been introduced (section 54C) by the 2008 Energy Act. Unlike more conventional tax-exempt bonds, they accrue a tax credit the bondholder may apply against income tax (and alternative minimum tax) liability. The amount of credit is determined by a rate multiplied by the face amount of the bond. State and local governments, mutual or cooperative electric companies, and not-for-profit electric utilities may issue them to finance development of electrical generation from wind, biomass, geothermal, solar, hydropower, municipal solid waste, “marine and hydrokinetic” (for example, waves and tides) and other novel energy sources.

Qualified energy conservation bonds. The qualified energy conservation bond volume limit is quadrupled, from $800 million to $3.2 billion. Like CREBs, these are tax-credit bonds. They may be issued by state and local governments to fund qualified conservation purposes including reducing energy consumption in publicly owned buildings by at least 20%, implementing “green community programs” and conducting other research, development and demonstration projects described in section 54D(f).

Carbon dioxide sequestration. A $10 per metric ton credit established by prior law for capture of carbon dioxide used as a “tertiary injectant” in a qualified enhanced oil or natural gas recovery project is modified to require “secure geological storage” of the gas (section 45Q).

Other new, expanded or extended credits. The ARRA repeals the $4,000 cap on the 30% general business credit as it pertains to “small wind energy property” (section 48), increases the alternative fuel vehicle refueling property credit (section 30C), and repeals the basis reduction rule for the general business credit as applied to certain alternative energy property financed by subsidized energy financing or private activity bonds (section 48(a)(4)(D)).

By Tax Matters Editor Paul Bonner.