Client Alert GEORGIA AND FEDERAL ENERGY TAX CREDITS, GRANTS AND FINANCING Contact Attorneys Regarding August 2009 This Matter: In a very short time period, the Federal Government and the State of Georgia John L. Brown have adopted or expanded a number of income tax credits, grants and sub- 404.873.8788 - direct sidized fjnancing programs that are available for renewable energy projects. 404.873.8789 - fax The following is a brief overview of the new federal and Georgia tools avail- john.brown@agg.com able to assist and encourage renewable energy projects in Georgia. John L. Gornall, Jr. I. Federal Tax Credits 404.873.8650 - direct 404.873.8651 - fax The Investment Tax Credit (the “Investment Energy Credit”) authorized by john.gornall@agg.com Section 48 of the Internal Revenue Code (the “Code”) and the Production Tax Credit (the “Production Credit”) authorized by Section 45 of the Code have Mark A. Gould, Jr. been the federal income tax credit incentives for the installation and opera- 404.873.8782 - direct tion of renewable energy projects. The American Recovery and Reinvest- 404.873.8783 - fax ment Act of 2009 (“ARRA”) has made both types of credits (but particularly mark.gould@agg.com the Investment Energy Credit) even more attractive to use, because taxpay- ers developing and investing in renewable energy facilities can realize more James T. Rauschenberger value from the credits and also now have more options in structuring these 404.873.8738 - direct transactions. Following on the favorable amendments set forth in last Oc- 404.873.8739 - fax tober’s Energy Improvement and Extension Act of 2008 (“EIEA”), the federal james.rauschenberger@agg.com government is providing additional incentives for the rapid development of renewable energy facilities such as solar photovoltaic panels, solar thermal Andrew J. Schutt heating, photovoltaic generation facilities, wind farms, geothermal and other 404.873.8778 - direct alternative energy technologies. 404.873.8779 - fax andrew.schutt@agg.com The Investment Energy Credit historically has been available primarily to taxpayers owning or investing in solar electric and heating equipment. The amount of the Investment Energy Credit is generally 30 percent of the “Eli- gible Cost Basis” of the subject facilities, with no maximum limit on the dollar amount of the credits. The basis consists of the aggregate cost of the invest- ment to the taxpayer, regardless of how much electricity is actually pro- duced or sold from the facility – if any. The requirement is simply that funds be invested in a facility that is “placed in service” and generates electricity for heating, cooling or lighting. Typical ancillary installations or equipment such as transmission lines or substations are not included when calculating Arnall Golden Gregory LLP the eligible basis; however, a reasonable development fee can be included. Attorneys at Law Although the full amount of the Investment Energy Credit is available in the year in which the facility is actually placed in service, this credit vests at 20% 171 17th Street NW per year, so recapture of the credits received is possible if the facility is sold or Suite 2100 otherwise disposed of during the fjrst fjve years after it is placed in service. Atlanta, GA 30363-1031 404.873.8500 For many other renewable energy sources, such as large-scale wind, geother- www.agg.com mal, biomass and other non-solar energy production facilities, the Production Page 1 Arnall Golden Gregory LLP
Client Alert Credit has been the traditional primary incentive available to the developer. A potential negative aspect of the Production Credit is that, as its name implies, the amount of credit is a function of the amount of elec- tricity produced by the facility. ARRA, however, now permits the owner of a facility otherwise eligible for the Production Credit to elect to use the Investment Energy Credit instead, thereby permitting the amount of the credit to be determined solely by reference to the cost basis of the facility as opposed to its actual electricity production. Before the EIEA, it was necessary for a facility to be placed in service before January 1, 2009 in order to be eligible for the Investment Energy Credit, and Production Credits were only available for projects placed in service before 2011 or earlier, depending upon the type of facility involved. Last fall, the EIEA extended the placed in service deadline for purposes of the Investment Energy Credit to December 31, 2016. ARRA has also extended the placed in service deadline for projects claiming Production Credits to 2012 for wind facili- ties and 2013 for other projects eligible for Production Credits. Another signifjcant improvement under ARRA is the elimination of the so-called “subsidized fjnancing pen- alty” for purposes of the Investment Energy Credit. Previously, the use of state bonds, grants, below market loans, various forms of other “subsidized fjnancing” or other types of tax credits would reduce the eligible basis of the property (and thus, the allowable credits) pro rata, based on the percentage of the facility using or benefjtting from the installations funded with the deemed subsidy. This has now been repealed under ARRA for purposes of the Investment Energy Credit. Taxpayers can now calculate the credit by reference to the full Eligible Cost Basis of the facility, regardless of the existence and type of other fjnancing sources including state and local grants. This has the potential of increasing the economic value of these credits by 30-50% and makes them useable in a much wider range of projects already receiving favorable government fjnancing through tax-exempt bonds (such as Recovery Zone Facility Bonds) or certain HUD programs. It should be noted, however, that the amount of Eligible Cost Basis of property for the Production Credit con- tinues to be subject to reduction as a result of grants and other subsidies that are fjnancing sources for such projects. ARRA did not modify these subsidy rules as they relate to the Production Credit. Although the Owner of the facility is typically the party that claims the Investment Energy Credit or the Production Credit, the parties who actually develop and operate a facility often do not have suffjcient tax- able income to benefjt from claiming the credits. Also, because ARRA did not change the passive loss rules for individual taxpayers with respect to the credits, the value of the credits to individuals remains limited. The ownership of renewable energy facilities can be structured, however, so that they are owned and oper- ated through a master lease structure or by one or more entities that are treated as a partnership for federal income tax purposes. An investor or a fund composed of a group of investors can be admitted as a partner that contributes a signifjcant portion of the capital used to pay for the construction of the facility (and the payment of an appropriate developer fee to the developer). The contributing investor partner then receives an allocation of substantially all of the tax credits for which the project is eligible. The amount of the capital contribution from the investor partner generally corresponds to the amount of credits being allocated. There are myriad tax and business issues, and accompanying documentation costs, associated with struc- turing transactions so as to deliver the maximum amount of credits to the investor. One primary concern is that the credits must be allocated in accordance with the “profjts interest” of the partners in a partnership, meaning that for an investor to receive 99% or more of the credits allocated to that investor, the investor must own a 99% or more profjts interest. A variety of subsidiary issues also arise in the context of structur- Page 2 Arnall Golden Gregory LLP
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