The American Recovery and Reinvestment Act of 2009 (ARRA), signed into law on February 17, 2009, expands tax incentives and appropriates billions of dollars for energy efficiency and alternative or renewable energy. Although most of the funding will flow through existing programs, this represents a major and much anticipated policy shift by the federal government. For example, ARRA appropriates nearly $17 billion for the U.S. Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy, ten-times its 2008 budget. Some of these new subsidies and tax credits could provide gap financing for energy efficiency and alternative or renewable energy projects that have not been feasible to date. This alert summarizes the incentives most relevant to property owners and developers. Additionally, energy service companies (ESCO’s) might seek some of these incentives to fund their retrofit work.
ARRA allocates $4.5 billion in matching grants from DOE’s Office of Electricity Delivery and Energy Reliability for modernization of the electrical grid nationwide, including implementation of so-called smart grid technologies. In older urban areas this could enable property owners to interconnect on-site power facilities with local utilities.
Loan Guarantee Program
$6 billion is allocated to DOE’s Loan Guarantee Program, which is expected to support over $60 billion in loans for alternative or renewable energy and electric transmission technologies. The program aims to foster early commercial use of new technologies, including as part of stand-alone real estate projects. The loan guarantees are available to projects that start construction by September 30, 2011. The program dates from 2005, but has not performed as hoped. DOE Secretary Steven Chu recently announced that paperwork to apply for the program has been streamlined.
Assistance to Low-Income Housing and Households
The Department of Housing and Urban Development (HUD) will receive $4 billion to help public housing authorities retrofit units, including for energy efficiency. Another $250 million is appropriated to HUD to provide grants, loans, and other financial incentives to property owners to increase the energy efficiency of HUD-sponsored low-income housing. ARRA also authorizes $5 billion for DOE’s Weatherization Assistance Program, which focuses on single-family homes, and increases both the eligible income level and the level of assistance per home under the program. For more detail, including to understand how these provisions evolved in Congress, please refer to our Client Alert entitled “Federal Stimulus Incentivizes the Greening of Affordable Housing.”
Retrofitting Federal Facilities
The U.S. General Services Administration (GSA) will receive up to $4.5 billion to convert GSA facilities (including many GSA-leased facilities) into high-performance green buildings, and the Department of Veterans Affairs (VA) will receive another $1 billion for non-recurring maintenance, including energy projects, of VA medical facilities. Several billion dollars more go to the Department of Defense to modernize its real property, including improved energy efficiency.
Energy Efficiency and Conservation Block Grants
$3.2 billion is available for DOE-administered Energy Efficiency and Conservation Block Grants. These were established but not funded under the Energy Independence and Security Act of 2007. The grants go to state, local and tribal governments to develop energy-efficiency and conservation strategies and programs, including building energy audits, financial incentives for energy-efficiency improvements, grants to nonprofit organizations and governmental agencies to perform energy efficiency retrofits, development of building codes and inspection services to promote building energy efficiency, and on-site power installation.
State Energy Program
DOE’s State Energy Program receives $3.1 billion for additional grants to states that intend to adopt strict building energy codes and to “decouple” electric utility rates from kilowatts sold in order to incentivize energy efficiency measures. Certain states, such as Massachusetts, which has revised its building code and is working on regulations to implement decoupling, should be able to qualify quickly.
Federal Treasury Benefits
ARRA strengthens and extends several tax incentives to install energy-efficiency measures and alternative or renewable energy production equipment, such as solar, wind, geothermal and combined heat and power systems.
Business Tax Credits and Depreciation. The placed-inservice date to qualify alternative or renewable energy facilities for the Internal Revenue Code (IRC) Section 45 production tax credit (PTC) has been extended by two to three years depending upon the type of technology.
As a general matter, taxpayers are not permitted to take both the PTC and the IRC Section 48 investment tax credit (ITC). ARRA allows taxpayers to make an irrevocable election to claim the ITC in lieu of the PTC on certain qualifying facilities, which allows an immediate tax benefit rather than over a 10- year period based on the cost and price of production.
Both the PTC and the ITC may now be exchanged for a direct government grant for qualified alternative or renewable energy facilities placed in service during 2009 or 2010, provided that the taxpayer files an application with the Treasury before October 1, 2011. The receipt of a grant under this program should not give rise to any current taxable income, but will result in an adjustment to the basis of the property that gave rise to the credit.
ARRA has eliminated the requirement that credits for qualified alternative or renewable energy facilities receiving public subsidies be reduced to eliminate the double benefit arising from both the credit and the subsidy. ARRA also eliminates the $4,000 cap on the ITC for small wind energy systems, and extends the additional 50-percent bonus depreciation enacted in October 2008 for certain business tax credits.
Qualifying Advanced Energy Projects. ARRA creates a new 30-percent investment tax credit under IRC Section 48C for qualifying alternative or renewable energy projects that reequip, expand or establish a facility for the manufacture of certain green technologies. The potential availability of this credit may make manufacturers more interested in including such projects in buildings constructed to their order.
Bonds. ARRA authorizes up to $1.6 billion in new Clean Renewable Energy Bonds to finance certain alternative or renewable energy facilities owned by government agencies, public power providers and electric cooperatives. ARRA authorizes another $2.4 billion in Qualified Energy Conservation Bonds for energy efficiency and “green community” programs sponsored by government or Indian tribes. Bondholders under both programs receive a credit against their income tax, and regulated investment companies may pass credits through to their shareholders. These credits may be stripped from the bonds and sold to third parties.
D. Hara Sherman is an associate in the Green Business Group and can be reached at email@example.com.
For questions about the information contained in this alert, please contact the following members of our Real Estate and Green Business Groups:
Jack A. Eiferman
John R. Grumbacher
Matthew J. Kiefer
This client advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
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