Federal

The federal Energy Policy Act of 2005 established a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings placed in service from January 1, 2006, through December 31, 2007. This deduction was subsequently extended through 2008, and then again through 2013 by Section 303 of the federal Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B), enacted in October 2008.

A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001. Energy savings must be calculated using qualified computer software approved by the IRS. Click here for the list of approved software.

Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.

The deductions are available primarily to building owners, although tenants may be eligible if they make construction expenditures. In the case of energy efficient systems installed on or in government property, tax deductions will be awarded to the person primarily responsible for the system's design. Deductions are taken in the year when construction is completed.

The IRS released interim guidance (IRS Notice 2006-52) in June 2006 to establish a process to allow taxpayers to obtain a certification that the property satisfies the energy efficiency requirements contained in the statute. IRS Notice 2008-40 was issued in March of 2008 to further clarify the rules. NREL published a report (NREL/TP-550-40228) in February 2007 which provides guidelines for the modeling and inspection of energy savings required by the statute.

Click here for answers to frequently asked questions provided by the Commercial Building Tax Deduction Coalition. For more information on this deduction, visit the Energy Star web site.

Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. A number of renewable energy technologies are classified as five-year property (26 USC § 168(e)(3)(B)(vi)) under the MACRS, which refers to 26 USC § 48(a)(3)(A), often known as the energy investment tax credit or ITC to define eligible property. Such property currently includes*:

• a variety of solar-electric and solar-thermal technologies
• fuel cells and microturbines
• geothermal electric
• direct-use geothermal and geothermal heat pumps
• small wind (100 kW or less)
• combined heat and power (CHP).
• The provision which defines ITC technologies as eligible also adds the general term "wind" as an eligible technology, extending the five-year schedule to large wind facilities as well.

In addition, for certain other biomass property, the MACRS property class life is seven years. Eligible biomass property generally includes assets used in the conversion of biomass to heat or to a solid, liquid or gaseous fuel, and to equipment and structures used to receive, handle, collect and process biomass in a waterwall, combustion system, or refuse-derived fuel system to create hot water, gas, steam and electricity.

The 5-year schedule for most types of solar, geothermal, and wind property has been in place since 1986. The federal Energy Policy Act of 2005 (EPAct 2005) classified fuel cells, microturbines and solar hybrid lighting technologies as five-year property as well by adding them to § 48(a)(3)(A). This section was further expanded in October 2008 by the addition of geothermal heat pumps, combined heat and power, and small wind under The Energy Improvement and Extension Act of 2008.

The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297).

In December 2010 the provision for bonus depreciation was amended and extended yet again by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100% to 50% of the eligible basis.

To qualify for bonus depreciation, a project must satisfy these criteria:

• the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;
• the original use of the property must commence with the taxpayer claiming the deduction;
• the property generally must have been acquired during the period from 2008 - 2012; and
• the property must have been placed in service during the period from 2008 - 2012.

If property meets these requirements, the owner is entitled to deduct a significant portion of the adjusted basis of the property during the tax year the property is first placed in service. As noted above, for property acquired and placed in service after September 8, 2010 and before January 1, 2012, the allowable first year deduction is 100% of the adjusted basis (i.e., the property is fully depreciated and additional deductions under MACRS cannot be claimed). For property placed in service from 2008 - 2012, for which the placed in service date does not fall within this window, the allowable first-year deduction is 50% of the adjusted basis. In the case of a 50% first year deduction, the remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.

For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click "GO" to receive the requested form or publication. For guidance on bonus depreciation, including information relating to the election to claim either 50% or 100% bonus depreciation, retroactive elections to claim 50% bonus depreciation for property placed in service during 2010, and eligible property, please see IRS Rev. Proc. 2011-26.


*Note that the definitions of eligible technologies included in this entry are somewhat simplified versions of those contained in tax code, which often contain additional caveats, restrictions, and modifications. Those interested in this incentive should review the relevant sections of the code in detail prior to making business decisions.

According to Section 136 of the U.S. Code, energy conservation subsidies provided (directly or indirectly) to customers by public utilities* are non-taxable. This exclusion does not apply to electricity-generating systems registered as "qualifying facilities" under the Public Utility Regulatory Policies Act of 1978 (PURPA). If a taxpayer claims federal tax credits or deductions for the energy conservation property, the investment basis for the purpose of claiming the deduction or tax credit must be reduced by the value of the energy conservation subsidy (i.e., a taxpayer may not claim a tax credit for an expense that the taxpayer ultimately did not pay).

The term "energy conservation measure" includes installations or modifications primarily designed to reduce consumption of electricity or natural gas, or to improve the management of energy demand. Eligible dwelling units include houses, apartments, condominiums, mobile homes, boats and similar properties. If a building or structure contains both dwelling units and other units, any subsidy must be properly allocated.

The definition of "energy conservation measure" implies that utility rebates for residential solar-thermal projects and photovoltaic (PV) systems may be non-taxable. However, the IRS has not ruled definitively on this issue. Taxpayers considering using this provision for a renewable energy system should discuss the details of the project with a tax professional. Other types of utility subsidies that may come in the form of credits or reduced rates might also be non-taxable, according to IRS Publication 525. 


* The term "public utility" is defined as an entity "engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers." The term includes federal, state and local government entities.

Note: The American Recovery and Reinvestment Act of 2009 allows taxpayers eligible for the federal renewable electricity production tax credit (PTC)** to take the federal business energy investment tax credit (ITC) or to receive a grant from the U.S. Treasury Department instead of taking the PTC for new installations. The new law also allows taxpayers eligible for the business ITC to receive a grant from the U.S. Treasury Department instead of taking the business ITC for new installations. The grant is only available to systems where construction begins prior to December 31, 2011. The Treasury Department issued Notice 2009-52 in June 2009, giving limited guidance on how to take the federal business ITC instead of the federal renewable electricity production tax credit.

The federal business energy investment tax credit available under 26 USC § 48 was expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008. This law extended the duration -- by eight years -- of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; allowed utilities to use the credits; and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations. The credit was further expanded by The American Recovery and Reinvestment Act of 2009, enacted in February 2009.

In general, credits are available for eligible systems placed in service on or before December 31, 2016:

• Solar. The credit is equal to 30% of expenditures, with no maximum credit. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible. Passive solar systems and solar pool-heating systems are not eligible.
• Fuel Cells. The credit is equal to 30% of expenditures, with no maximum credit. However, the credit for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity-only generation efficiency of 30% or higher. (Note that the credit for property placed in service before October 4, 2008, is capped at $500 per 0.5 kW.)
• Small Wind Turbines.* The credit is equal to 30% of expenditures, with no maximum credit for small wind turbines placed in service after December 31, 2008. Eligible small wind property includes wind turbines up to 100 kW in capacity. (In general, the maximum credit is $4,000 for eligible property placed in service after October 3, 2008, and before January 1, 2009. The American Recovery and Reinvestment Act of 2009 removed the $4,000 maximum credit limit for small wind turbines.)
• Geothermal Systems.* The credit is equal to 10% of expenditures, with no maximum credit limit stated. Eligible geothermal energy property includes geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit. For electricity produced by geothermal power, equipment qualifies only up to, but not including, the electric transmission stage. For geothermal heat pumps, this credit applies to eligible property placed in service after October 3, 2008. Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date.
• Microturbines. The credit is equal to 10% of expenditures, with no maximum credit limit stated (explicitly). The credit for microturbines is capped at $200 per kW of capacity. Eligible property includes microturbines up to two megawatts (MW) in capacity that have an electricity-only generation efficiency of 26% or higher.
• Combined Heat and Power (CHP).* The credit is equal to 10% of expenditures, with no maximum limit stated. Eligible CHP property generally includes systems up to 50 MW in capacity that exceed 60% energy efficiency, subject to certain limitations and reductions for large systems. The efficiency requirement does not apply to CHP systems that use biomass for at least 90% of the system's energy source, but the credit may be reduced for less-efficient systems. This credit applies to eligible property placed in service after October 3, 2008.

In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.

Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous restriction on the use of the credit for eligible projects also supported by "subsidized energy financing." For projects placed in service after December 31, 2008, this limitation no longer applies. Businesses that receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.


* The American Recovery and Reinvestment Act of 2009, which allows PTC-eligible facilities to use the 30% ITC, has implications for some technologies that were already potentially eligible for either incentive in some form. Certain geothermal and open- or closed- loop biomass systems (which may include certain types of biomass CHP projects) now qualify for a 30% tax credit through December 31, 2013, the in-service deadline for these technologies under the PTC. Wind-energy systems of all sizes -- not only systems of 100 kW or less -- also now qualify for the 30% ITC through the wind-energy PTC in-service deadline of December 31, 2012. Applicants should refer to the eligibility definition contained in the PTC to determine if and how their project might qualify for this treatment.

Note: The American Recovery and Reinvestment Act of 2009 (H.R. 1) allows taxpayers eligible for the federal renewable electricity production tax credit (PTC) to take the federal business energy investment tax credit (ITC) or to receive a grant from the U.S. Treasury Department instead of taking the PTC for new installations. The grant is only available to systems where construction began prior to December 31, 2011. The new law also allows taxpayers eligible for the business ITC to receive a grant from the U.S. Treasury Department instead of taking the business ITC for new installations. The Treasury Department issued Notice 2009-52 in June 2009, giving limited guidance on how to take the federal business energy investment tax credit instead of the federal renewable electricity production tax credit.

The federal renewable electricity production tax credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year. Originally enacted in 1992, the PTC has been renewed and expanded numerous times, most recently by H.R. 1424 (Div. B, Sec. 101 & 102) in October 2008 and again by H.R. 1 (Div. B, Section 1101 & 1102) in February 2009.

The October 2008 legislation extended the in-service deadlines for all qualifying renewable technologies; expanded the list of qualifying resources to include marine and hydrokinetic resources, such as wave, tidal, current and ocean thermal; and made changes to the definitions of several qualifying resources and facilities. The effective dates of these changes vary. Marine and hydrokinetic energy production is eligible as of the date the legislation was enacted (October 3, 2008), as is the incremental energy production associated with expansions of biomass facilities. A change in the definition of "trash facility" no longer requires that such facilities burn trash, and is also effective immediately. One further provision redefining the term "non-hydroelectric dam," took effect December 31, 2008.

The February 2009 legislation revised the credit by: (1) extending the in-service deadline for most eligible technologies by three years (two years for marine and hydrokinetic resources); and (2) allowing facilities that qualify for the PTC to opt instead to take the federal business energy investment credit (ITC) or an equivalent cash grant from the U.S. Department of Treasury. The ITC or grant for PTC-eligible technologies is generally equal to 30% of eligible costs.*

The tax credit amount is 1.5¢/kWh in 1993 dollars (indexed for inflation) for some technologies, and half of that amount for others. The rules governing the PTC vary by resource and facility type. The table below outlines two of the most important characteristics of the tax credit -- in-service deadline and credit amount -- as they apply to different facilities. The table includes changes made by H.R. 1, in February 2009, and the inflation-adjusted credit amounts are current for the 2012 calendar year. (See the history section below for information on prior rules.)

The duration of the credit is generally 10 years after the date the facility is placed in service, but there are two exceptions:

• Open-loop biomass, geothermal, small irrigation hydro, landfill gas and municipal solid waste combustion facilities placed into service after October 22, 2004, and before enactment of the Energy Policy Act of 2005, on August 8, 2005, are only eligible for the credit for a five-year period.
• Open-loop biomass facilities placed in service before October 22, 2004, are eligible for a five-year period beginning January 1, 2005.

In addition, the tax credit is reduced for projects that receive other federal tax credits, grants, tax-exempt financing, or subsidized energy financing. The credit is claimed by completing Form 8835, "Renewable Electricity Production Credit," and Form 3800, "General Business Credit." For more information, contact IRS Telephone Assistance for Businesses at 1-800-829-4933.

History
As originally enacted by the Energy Policy Act of 1992, the PTC expired in July 1999, and was subsequently extended through the end of 2001 by the Ticket to Work and Work Incentives Improvement Act of 1999 in December 1999. The PTC expired again at the end of 2001, but was then extended again in March 2002 as part of the Job Creation and Worker Assistance Act of 2002 (H.R. 3090). The PTC then expired yet again at the end of 2003 and was not renewed until October 2004, as part of H.R. 1308, the Working Families Tax Relief Act of 2004, which extended the credit through December 31, 2005. The Energy Policy Act of 2005 (H.R. 6) modified the credit and extended it through December 31, 2007. In December 2006, the PTC was extended for yet another year -- through December 31, 2008 -- by the Tax Relief and Health Care Act of 2006 (H.R. 6111).

The American Jobs Creation Act of 2004 (H.R. 4520), expanded the PTC to include additional eligible resources -- geothermal energy, open-loop biomass, solar energy, small irrigation power, landfill gas and municipal solid waste combustion -- in addition to the formerly eligible wind energy, closed-loop biomass, and poultry-waste energy resources. The Energy Policy Act of 2005 (EPAct 2005) further expanded the credit to certain hydropower facilities. As a result of EPAct 2005, solar facilities placed into service after December 31, 2005, are no longer eligible for this incentive. Solar facilities placed in-service during the roughly one-year window in which solar was eligible are permitted to take the full credit for five years.


*Prior to H.R. 1, geothermal facilities were already eligible for a 10% tax credit under the energy ITC (26 USC § 48). However, the new legislation permits all PTC-eligible technologies, including geothermal electric facilities, to take a 30% tax credit (or grant) in lieu of the PTC. Recent guidance from the IRS regarding the Treasury grants in lieu of tax credits indicates that geothermal facilities that qualify for the PTC are eligible for either the 30% investment tax credit or the 10% tax credit, but not both. The window for the 30% tax credit runs through 2013, the in-service deadline for the PTC, while the 10% tax credit under the section 48 ITC does not have an expiration date.

**H.R. 1424 added marine and hydrokinetic energy as eligible resources and removed "small irrigation power" as an eligible resource effective October 3, 2008. However, the definition of marine and hydrokinetic energy encompasses the resources that would have formerly been defined as small irrigation power facilities. Thus H.R. 1424 effectively extended the in-service deadline for small irrigation power facilities by 3 years, from the end of 2008 until the end of 2011 (since extended again through 2013).

NOTE: There are currently no open solicitations for renewable energy and energy efficiency projects.

The U.S. Department of Energy's (DOE) Tribal Energy Program promotes tribal energy sufficiency, economic growth and employment on tribal lands through the development of renewable energy and energy efficiency technologies. The program provides financial assistance, technical assistance, education and training to tribes for the evaluation and development of renewable energy resources and energy efficiency measures.

DOE's Tribal Energy Program consists of program management through DOE headquarters, program implementation and project management through DOE's field offices, and technical support through DOE laboratories. Program management for the Tribal Energy Program is carried out by DOE's Weatherization and Intergovernmental Program, which provides programmatic direction and funding to DOE field offices for program implementation. DOE's field offices, specifically the Golden Field Office, issue solicitations and manage resulting projects.

Program funding is awarded through a competitive process. Click here to view current program funding opportunities.

NOTE: The most recent solicitation for this program closed July 30, 2012. Please check the program website for information on future solicitations.

The U.S. Department of Agriculture (USDA) offers an ongoing grant program for the improvement of energy generation, transmission, and distribution facilities in rural communities. This program began in 2000. Eligibility is limited to projects in communities that have average home energy costs at least 275% above the national average. Individuals, non-profits, commercial entities, state and local governments (including any agency or instrumentality thereof), and tribal governments are eligible for this grant. Individuals must work on a project that will benefit the community in order to qualify. Under the most recent solicitation for projects, a total of $7 million was available for qualifying projects. Under this solicitation grants ranging from $20,000 to $3 million were available for a variety of activities, including:

• Electric generation, transmission, and distribution facilities;
• Natural gas or petroleum storage or distribution facilities;
• Renewable energy facilities used for on-grid or off-grid electric power generation, water or space heating, or process heating and power;
• Backup up or emergency power generation or energy storage equipment; and
• Weatherization of residential and community property, or other energy efficiency or conservation programs.

This grant program is not limited to renewable energy or energy conservation and efficiency measures, but these measures are eligible for this grant program.

The Repowering Assistance Program provides payments to eligible biorefineries to replace fossil fuels used to produce heat or power to operate the biorefineries with renewable biomass. Reimbursement payments are provided to offset a portion of the costs associated with the conversion of existing fossil fuel systems to renewable biomass fuel systems.

The reimbursement amounts vary and are determined by the availability of funds, the project scope, and the ability of the proposed project to meet all the scoring criteria. In particular reimbursement amounts are calculated by the percentage reduction in fossil fuel used by the biorefinery, the quantity of fossil fuels replaced by a renewable biomass system, and the cost effectiveness of the renewable biomass system. The program will provide reimbursement payments for eligible project costs of the renewable biomass system during the construction phase of the repowering project. Up to 90% of the funds can be utilized during project construction, with the remaining 10% made upon demonstration of successful completion of the project. A maximum of 50% of the total project costs can be reimbursed, as long as amount does not exceed the maximum award for the fiscal year.

Eligible technologies may include, but are not limited to, anaerobic digesters, processed steam, biomass boilers, or combined heat and power technologies (CHP). Applicants must demonstrate, at the time of application, that the proposed site has direct access to biomass or third party commitments to supply biomass for the repowering project for at least three years.

Payments are made for eligible post-application costs incurred during the construction phase of the repowering project.

Note: The U.S. Department of Agriculture's Rural Development issues periodic Notices of Solicitation of Applications for the Rural Energy for America Program (REAP). The deadline to apply for loan guarantees under the most recent solicitation was June 29, 2012, though combined grant and loan guarantee applications and grant only applications had an earlier deadline of March 30, 2012.  Grants and loan guarantees will be awarded for investments in renewable energy systems, energy efficiency improvements and renewable energy feasibility studies.

The Food, Conservation, and Energy Act of 2008 (H.R. 2419), enacted by Congress in May 2008, converted the federal Renewable Energy Systems and Energy Efficiency Improvements Program,* into the Rural Energy for America Program (REAP). Similar to its predecessor, the REAP promotes energy efficiency and renewable energy for agricultural producers and rural small businesses through the use of (1) grants and loan guarantees for energy efficiency improvements and renewable energy systems, and (2) grants for energy audits and renewable energy development assistance. Congress has allocated funding for the new program in the following amounts: $55 million for FY 2009, $60 million for FY 2010, $70 million for FY 2011, and $70 million for FY 2012. REAP is administered by the U.S. Department of Agriculture (USDA). In addition to these mandatory funding levels, there may also be discretionary funding issued each year.

Of the total REAP funding available, approximately 88% is dedicated to competitive grants and loan guarantees for energy efficiency improvements and renewable energy systems. These incentives are available to agricultural producers and rural small businesses to purchase renewable energy systems (including systems that may be used to produce and sell electricity) and to make energy efficiency improvements. Funding is also available to conduct relevant feasibility studies, with approximately 2% of total funding being available for feasibility studies. Eligible renewable energy projects include wind, solar, biomass and geothermal; and hydrogen derived from biomass or water using wind, solar or geothermal energy sources. These grants are limited to 25% of a proposed project's cost, and a loan guarantee may not exceed $25 million. The combined amount of a grant and loan guarantee may not exceed 75% of the project’s cost. In general, a minimum of 20% of the funds available for these incentives will be dedicated to grants of $20,000 or less. The USDA likely will announce the availability of funding for this component of REAP through a Notice of Funds Availability (NOFA).

The USDA will also make competitive grants to eligible entities to provide assistance to agricultural producers and rural small businesses “to become more energy efficient” and “to use renewable energy technologies and resources.” These grants are generally available to state government entities, local governments, tribal governments, land-grant colleges and universities**, rural electric cooperatives and public power entities, and other entities, as determined by the USDA. These grants may be used for conducting and promoting energy audits; and for providing recommendations and information related to energy efficiency and renewable energy. Of the total REAP funding available, approximately 9% is dedicated to competitive grants for energy technical assistance.


* The Renewable Energy Systems and Energy Efficiency Improvements Program was created by the USDA pursuant to Section 9006 of the 2002 federal Farm Security and Rural Investment Act of 2002. Funding in the amount of $23 million per year was appropriated for each fiscal year from FY 2003-2007. In March 2008, the USDA announced that it would accept $220.9 million in applications for grants, loan guarantees, and loan/grant combination packages under the Renewable Energy Systems and Energy Efficiency Improvements Program. The application deadline was June 16, 2008.

**Land grant colleges and universities are referred to above as "schools" and "institutions". It is important to note that K-12 schools are not eligible for this grant.

Note: The IRS is not currently accepting applications for New CREB bond volume. The deadline for New CREB applications from electric cooperatives under IRS Announcement 2010-54 expired November 1, 2010. Bond volume for other eligible sectors (government entities and public power providers) was fully allocated in October 2009.

Readers should also note that the terms "New" and "Old" CREBs are used in the following summary to distinguish between prior CREB allocations and the New CREB authorizations made by the U.S. Congress in 2008 and 2009. The use of the term "New CREBs" has legal significance in that New CREBs authorized under 26 USC § 54A and 54C have substantially different rules than prior CREB allocations authorized under 26 USC § 54.

Clean renewable energy bonds (CREBs) may be used by certain entities -- primarily in the public sector -- to finance renewable energy projects. The list of qualifying technologies is generally the same as that used for the federal renewable energy production tax credit (PTC). CREBs may be issued by electric cooperatives, government entities (states, cities, counties, territories, Indian tribal governments or any political subdivision thereof), and by certain lenders.  The bondholder receives federal tax credits in lieu of a portion of the traditional bond interest, resulting in a lower effective interest rate for the borrower.* The issuer remains responsible for repaying the principal on the bond.

The Energy Improvement and Extension Act of 2008 (Div. A, Sec. 107) allocated $800 million for new Clean Renewable Energy Bonds (CREBs). In February 2009, the American Recovery and Reinvestment Act of 2009 (Div. B, Sec. 1111) allocated an additional $1.6 billion for New CREBs, for a total New CREB allocation of $2.4 billion. The Energy Improvement and Extension Act of 2008 also extended the deadline for previously reserved allocations ("Old CREBs") until December 31, 2009, and addressed several provisions in the existing law that previously limited the usefulness of the program for some projects. A separate section of the law extended CREBs eligibility to marine energy and hydrokinetic power projects.

Participation in the program is limited by the volume of bonds allocated by Congress for the program. Participants must first apply to the Internal Revenue Service (IRS) for a CREBs allocation, and then issue the bonds within a specified time period. The New CREBs allocation totaling $2.4 billion does not have a defined expiration date under the law; however, the recent IRS solicitations for new applications require the bonds to be issued within 3 years after the applicant receives notification of an approved allocation (see History section below for information on previous allocations). Public power providers, governmental bodies, and electric cooperatives are each reserved an equal share (33.3%) of the New CREBs allocation. The tax credit rate is set daily by the U.S. Treasury Department. Under past allocations, the credit could be taken quarterly on a dollar-for-dollar basis to offset the tax liability of the bondholder. However, under the new CREBs allocation, the credit has been reduced to 70% of what it would have been otherwise. Other important changes are described in IRS Notice 2009-33.

CREBs differ from traditional tax-exempt bonds in that the tax credits issued through CREBs are treated as taxable income for the bondholder. The tax credit may be taken each year the bondholder has a tax liability as long as the credit amount does not exceed the limits established by the federal Energy Policy Act of 2005. Treasury rates for prior CREB allocations, or "Old" CREBs are available here, while rates for New CREBs and other qualified tax credit bonds are available here.

In April 2009, the IRS issued Notice 2009-33, which solicited applications for the New CREB allocation and provided interim guidance on certain program rules and changes from prior CREB allocations. The expiration date for New CREB applications under this solicitation was August 4, 2009. Further guidance on CREBs is available in IRS Notices 2006-7 and 2007-26 to the extent that the program rules were not modified by 2008 and 2009 legislation. In October 2009, the Department of Treasury announced the allocation of $2.2 billion in new CREBs for 805 projects across the country. A new solicitation (IRS Announcement 2010-54) was issued in September 2010 for roughly $191 million in unallocated New CREB bond volume available only to electric cooperatives. The award announcement for this allocation was made in March 2011. It remains to be seen if or when the IRS will issue new funding announcements for Old CREB allocations which were not issued by the December 31, 2009 deadline, or New CREB allocations which miss the three-year issuance period.

History
The federal Energy Policy Act of 2005 (EPAct 2005) established Clean Energy Renewable Bonds (CREBs) as a financing mechanism for public sector renewable energy projects. This legislation originally allocated $800 million of tax credit bonds to be issued between January 1, 2006, and December 31, 2007. Following the enactment of the federal Tax Relief and Health Care Act of 2006, the IRS made an additional $400 million in CREBs financing available for 2008 through Notice 2007-26.

In November 2006, the IRS announced that the original $800 million allocation had been reserved for a total of 610 projects. The additional $400 million (plus surrendered volume from the previous allocation) was allocated to 312 projects in February 2008. Of the $1.2 billion total of tax-credit bond volume cap allocated to fund renewable-energy projects, state and local government borrowers were limited to $750 million of the volume cap, with the rest reserved for qualified municipal or cooperative electric companies.

For further information on CREBs, contact Zoran Stojanovic or Timothy Jones of the IRS Office of Associate Chief Counsel at (202) 622-3980. Questions on recent IRS Notice 2009-33 can be directed to Janae Lemley at (636) 255-1202.


*In March 2010 Congress enacted H.R. 2847 (Sec. 301) permitting New CREB issuers to make an irrevocable election to receive a direct payment -- a refundable tax credit -- from the Department of Treasury equivalent to and in lieu of the amount of the non-refundable tax credit which would otherwise be provided to the bondholder. This option only applies to New CREBs issued after the March 18, 2010 enactment of the law. In April 2010 the IRS issued Notice 2010-35 providing guidance on the direct payment option.

Homeowners can take advantage of energy efficient mortgages (EEM) to either finance energy efficiency improvements to existing homes, including renewable energy technologies, or to increase their home buying power with the purchase of a new energy efficient home. The U.S. federal government supports these loans by insuring them through Federal Housing Authority (FHA) or Veterans Affairs (VA) programs. This allows borrowers who might otherwise be denied loans to pursue energy efficiency, and it secures lenders against loan default.

FHA Energy Efficient Mortgages
The FHA allows lenders to add up to 100% of energy efficiency improvements to an existing mortgage loan with certain restrictions. FHA mortgage limits vary by county, state and the number of units in a dwelling. See website for more details. These mortgages were previously limited to $8,000. In June 2009, HUD issued Mortgagee Letter 2009-18 which announced the removal of the dollar cap. The maximum amount of the portion of an energy efficient mortgage allowed for energy improvements is now the lesser of 5% of:

• The value of the property,
• 115% of the median area price of a single-family dwelling, or
• 150% of the Freddie Mac conforming loan limit

Loan amounts may not exceed the projected savings of the energy efficiency improvements. These loans may be combined with FHA 203 (h) mortgages available to victims of presidentially-declared disasters and with financing offered through the FHA 203 (k) rehabilitation program. FHA loan limits do not apply to the EEM. Homebuyers must submit a Home Energy Rating (HER), contractor bids, and a FHA B Worksheet. This process may become streamlined in 2009 as a result of the Housing and Economic Recovery Act of 2008, which requires HUD to report to congress with ways to remove the administrative barriers and increase consumer participation and awareness of these financing options.

Presently, up to $200 of the cost of the HER may be included in the mortgage, and borrowers may include closing costs and the up-front mortgage insurance premium in the total cost of the loan. The loan is available to anyone who meets the income requirements for FHA’s Section 203 (b), provided the applicant can meet the monthly mortgage payments. New and existing owner-occupied homes of up to two units qualify for this loan. Cooperative units are not eligible. Homebuyers should submit applications to their local HUD Field Office through an FHA-approved lending institution.

Department of Veterans Affairs (VA) Energy Efficient Mortgages
The VA insures EEMs to be used in conjunction with VA loans either for the purchase of existing homes or for refinancing loans secured by the dwelling. Homebuyers may borrow up to $3,000 if only documentation of improvement costs or contractor bids is submitted, or up to $6,000 if the projected energy savings are greater than the increase in mortgage payments. Loans may exceed this amount at the discretion of the VA. Applicants may not include the cost of their own labor in the total amount. No additional home appraisal is needed, but applicants must submit a HER, contractor bids and certain other documentation. The VA insures 50% of the loan if taken by itself, but it may insure less if the total value of the mortgage exceeds a certain amount.

This mortgage is available to qualified military personnel, reservists and veterans. (See www.homeloans.va.gov/elig2.htm for more details). Applicants should secure a certificate of eligibility from their local lending office and submit it to a VA-approved private lender. If the loan is approved, the VA guarantees the loan when it is closed.

Conventional EEMs
Conventional mortgages are not backed by a federal agency. Private lenders sell loans to Fannie Mae and Freddie Mac, which in turn allows homebuyers to borrow up to 15% of an existing home’s appraised value for improvements documented by a HER.

Fannie Mae also lends up to 5% for Energy Star new homes. Fannie Mae EEMs are available to single-family, owner-occupied units, and Fannie Mae provides EEMs to those whose income might otherwise disqualify them from receiving the loans by allowing approved lenders to adjust borrowers’ debt-to-income ratio by 2%. The value of the improvements is immediately added to the total appraised value of the home.

Freddie Mac offers EEMs for one- to four-unit dwellings and also helps raise the effective income of the borrower to qualifying levels by allowing lenders to increase the borrower’s income by a dollar amount equal to the estimated energy savings. Any energy efficiency improvements can qualify, and these mortgages can be combined with both fixed-rate and adjustable-rate mortgages. Borrowers should apply directly to the lender. See www.natresnet.org/resources/lender/default.htm for more details.

ENERGY STAR Partnership for Lenders
To promote EEMs and lenders who offer them, the federal ENERGY STAR program offers a partnership program for lenders who provide EEMs to borrowers. Becoming a partner allows lenders to utilize the Energy Star brand to promote themselves as Energy Star partners offering EEMs. To become a lender, partner lenders must first provide proof that they know how to write EEMs. To maintain their partnership benefits, lenders must write a certain number of EEMs per year. Energy Star does not have a lender certification program or process. Click here for more information about Energy Star's lender partnership program, and here to access the partner locator tool. As of August 2011, the federal Energy Star program lists 25 lenders who offer EEMs and/or ENERGY STAR mortgages to applicants buying homes that have earned the Energy Star label. Energy Star requires that its lender partners provide EEMs to qualified borrowers regardless of whether it is an FHA EEM, Fannie Mae EEM, or VA EEM.

The Energy Improvement and Extension Act of 2008, enacted in October 2008, authorized the issuance of Qualified Energy Conservation Bonds (QECBs) that may be used by state, local and tribal governments to finance certain types of energy projects. QECBs are qualified tax credit bonds, and in this respect are similar to new Clean Renewable Energy Bonds or CREBs. The October 2008 enabling legislation set a limit of $800 million on the volume of energy conservation tax credit bonds that may be issued by state and local governments. The American Recovery and Reinvestment Act of 2009, enacted in February 2009, expanded the allowable bond volume to $3.2 billion. In April 2009, the IRS issued Notice 2009-29 providing interim guidance on how the program will operate and how the bond volume will be allocated. Subsequently, H.R. 2847 enacted in March 2010 introduced an option allowing issuers of QECBs and New CREBs to recoup part of the interest they pay on a qualified bond through a direct subsidy from the Department of Treasury. Guidance from the IRS on this option was issued in April 2010 under Notice 2010-35.

With tax credit bonds, generally the borrower who issues the bond pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest. The tax credit may be taken quarterly to offset the tax liability of the bondholder. The tax credit rate is set daily by the U.S. Treasury Department; however, energy conservation bondholders will receive only 70% of the full rate set by the Treasury Department under 26 USC § 54A. QECB rates are available here. Credits exceeding a bondholder's tax liability may be carried forward to the succeeding tax year, but cannot be refunded. Energy conservation bonds differ from traditional tax-exempt bonds in that the tax credits issued through the program are treated as taxable income for the bondholder.

For QECBs issued after March 18, 2010, the bond issuer may make an irrevocable election to receive a direct payment from the Department of Treasury equivalent to the amount of the non-refundable tax credit described above, which would otherwise accrue to the bondholder. The direct payment comes in the form of a refundable tax credit to the issuer in lieu of a tax credit to the bondholder. This option was formerly limited to Build America Bonds (see 26 USC § 6431, H.R. 2847 and IRS Notice 2010-35 for details). The advantage of either option is that it creates a lower effective interest rate for the issuer because the federal government subsidizes a portion of the interest costs.

In contrast to CREBs, QECBs are not subject to a U.S. Department of Treasury application and approval process. Bond volume is instead allocated to each state based on the state's percentage of the U.S. population as of July 1, 2008. Each state is then required to allocate a portion of its allocation to "large local governments" within the state based on the local government's percentage of the state's population. Large local governments are defined as municipalities and counties with populations of 100,000 or more. Large local governments may reallocate their designated portion back to the state if they choose to do so. IRS Notice 2009-29 contains a list of the QECB allocations for each state and U.S. territory. Implementing allocations and reallocations most often, but not always, takes place through State Energy Offices. As of this writing some states have yet to assign implementation responsibilities to a specific state agency.

The definition of "qualified energy conservation projects" is fairly broad and contains elements relating to energy efficiency capital expenditures in public buildings that reduce energy consumption by at least 20%; green community programs (including loans and grants to implement such programs); renewable energy production; various research and development applications; mass commuting facilities that reduce energy consumption; several types of energy related demonstration projects; and public energy efficiency education campaigns. In July 2012 the IRS issued Notice 2012-44 clarifying the meaning of "capital expenditures" and "green community program", and providing guidance on meeting the 20% energy consumption reduction requirement for energy -efficiency related capital expenditures in publicly-owned buildings (see 26 USC § 54D and IRS Notice 2012-44 for additional details). Renewable energy facilities that are eligible for CREBs are also eligible for QECBs.

For more information on QECBs, contact Timothy Jones, David White, or Zoran Stojanovich of the IRS Office of Associate Chief Counsel at (202) 622-3980.

The DOE actively promotes projects in three categories: (1) manufacturing projects, (2) stand-alone projects, and (3) large-scale integration projects that may combine multiple eligible renewable energy, energy efficiency and transmission technologies in accordance with a staged development scheme. Under the original authorization, loan guarantees were intended to encourage early commercial use of new or significantly improved technologies in energy projects. The loan guarantee program generally does not support research and development projects.

The DOE periodically makes new solicitations available. Information about current and past solicitations can be found at the website above.

USDA Rural Development is offering loan guarantees for the development, construction, and retrofitting of commercial-scale biorefineries. Eligible borrowers include individuals, entities, Indian tribes, state or local governments, corporations, farm cooperatives or farm cooperative organizations, associations of agricultural producers, National Laboratories, institutions of higher education, rural electric cooperatives, public power entities, and consortium of any of these types of entities. Financed entities must provide at least 20% of the financing for eligible project costs, and applications for funding must include an independent feasibility study and technical assessment.  Eligible project costs include the purchase and installation of equipment, construction or retrofitting costs, permit and licensing fees, working capital, land acquisition, and the costs of financing.

The project must meet the following requirements:

• Must be for the development and construction or the retrofitting of a commercial-scale biorefinery using an eligible technology
• Must use an eligible feedstock for the production of advanced biofuels and biobased products
• The majority of the production must be an advanced biofuels

Eligible advanced biofuels include:

• Biofuel derived from cellulose, hemicellulose, or lignin, or other fuels derived from cellulose
• Biofuel derived from sugar, starch, excluding ethanol derived from from corn kernel starch
• Biofuel derived from waste material, including crop residue, vegetative waste material, animal waste, food waste, and yard waste
• Diesel fuel derived from renewable biomass, including vegetable oil and animal fat
• Biogas, including landfill gas and sewage waste treatment gas, produced through the conversion of organic matter from renewable biomass

Note: The U.S. Department of Agriculture's Rural Development issues periodic Notices of Solicitation of Applications for the Rural Energy for America Program (REAP). The deadline to apply for loan guarantees under the most recent solicitation was June 29, 2012, though combined grant and loan guarantee applications and grant only applications had an earlier deadline of March 30, 2012. Grants and loan guarantees will be awarded for investments in renewable energy systems, energy efficiency improvements and renewable energy feasibility studies.

The Food, Conservation, and Energy Act of 2008 (H.R. 2419), enacted by Congress in May 2008, converted the federal Renewable Energy Systems and Energy Efficiency Improvements Program,* into the Rural Energy for America Program (REAP). Similar to its predecessor, the REAP promotes energy efficiency and renewable energy for agricultural producers and rural small businesses through the use of (1) grants and loan guarantees for energy efficiency improvements and renewable energy systems, and (2) grants for energy audits and renewable energy development assistance. Congress has allocated funding for the new program in the following amounts: $55 million for FY 2009, $60 million for FY 2010, $70 million for FY 2011, and $70 million for FY 2012. REAP is administered by the U.S. Department of Agriculture (USDA). In addition to these mandatory funding levels, there may also be discretionary funding issued each year.

Of the total REAP funding available, approximately 88% is dedicated to competitive grants and loan guarantees for energy efficiency improvements and renewable energy systems. These incentives are available to agricultural producers and rural small businesses to purchase renewable energy systems (including systems that may be used to produce and sell electricity) and to make energy efficiency improvements. Funding is also available to conduct relevant feasibility studies, with approximately 2% of total funding being available for feasibility studies. Eligible renewable energy projects include wind, solar, biomass and geothermal; and hydrogen derived from biomass or water using wind, solar or geothermal energy sources. These grants are limited to 25% of a proposed project's cost, and a loan guarantee may not exceed $25 million. The combined amount of a grant and loan guarantee may not exceed 75% of the project’s cost. In general, a minimum of 20% of the funds available for these incentives will be dedicated to grants of $20,000 or less. The USDA likely will announce the availability of funding for this component of REAP through a Notice of Funds Availability (NOFA).

The USDA will also make competitive grants to eligible entities to provide assistance to agricultural producers and rural small businesses “to become more energy efficient” and “to use renewable energy technologies and resources.” These grants are generally available to state government entities, local governments, tribal governments, land-grant colleges and universities, rural electric cooperatives and public power entities, and other entities, as determined by the USDA. These grants may be used for conducting and promoting energy audits; and for providing recommendations and information related to energy efficiency and renewable energy. Of the total REAP funding available, approximately 9% is dedicated to competitive grants for energy technical assistance.


*The Renewable Energy Systems and Energy Efficiency Improvements Program was created by the USDA pursuant to Section 9006 of the 2002 federal Farm Security and Rural Investment Act of 2002. Funding in the amount of $23 million per year was appropriated for each fiscal year from FY 2003-2007. In March 2008, the USDA announced that it would accept $220.9 million in applications for grants, loan guarantees, and loan/grant combination packages under the Renewable Energy Systems and Energy Efficiency Improvements Program. The application deadline was June 16, 2008.

According to Section 136 of the U.S. Code, energy conservation subsidies provided (directly or indirectly) to customers by public utilities* are non-taxable. This exclusion does not apply to electricity-generating systems registered as "qualifying facilities" under the Public Utility Regulatory Policies Act of 1978 (PURPA). If a taxpayer claims federal tax credits or deductions for the energy conservation property, the investment basis for the purpose of claiming the deduction or tax credit must be reduced by the value of the energy conservation subsidy (i.e., a taxpayer may not claim a tax credit for an expense that the taxpayer ultimately did not pay).

The term "energy conservation measure" includes installations or modifications primarily designed to reduce consumption of electricity or natural gas, or to improve the management of energy demand. Eligible dwelling units include houses, apartments, condominiums, mobile homes, boats and similar properties. If a building or structure contains both dwelling units and other units, any subsidy must be properly allocated.

The definition of "energy conservation measure" implies that utility rebates for residential solar-thermal projects and photovoltaic (PV) systems may be non-taxable. However, the IRS has not ruled definitively on this issue. Taxpayers considering using this provision for a renewable energy system should discuss the details of the project with a tax professional. Other types of utility subsidies that may come in the form of credits or reduced rates might also be non-taxable, according to IRS Publication 525.


* The term "public utility" is defined as an entity "engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers." The term includes federal, state and local government entities.

Note: The American Recovery and Reinvestment Act of 2009 does not allow taxpayers eligible for the residential renewable energy tax credit to receive a U.S. Treasury Department grant instead of taking this credit.

Established by the Energy Policy Act of 2005, the federal tax credit for residential energy property initially applied to solar-electric systems, solar water heating systems and fuel cells. The Energy Improvement and Extension Act of 2008 (H.R. 1424) extended the tax credit to small wind-energy systems and geothermal heat pumps, effective January 1, 2008. Other key revisions included an eight-year extension of the credit to December 31, 2016; the ability to take the credit against the alternative minimum tax; and the removal of the $2,000 credit limit for solar-electric systems beginning in 2009. The credit was further enhanced in February 2009 by The American Recovery and Reinvestment Act of 2009 (H.R. 1: Div. B, Sec. 1122, p. 46), which removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after 2008.

A taxpayer may claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the United States that is owned and used as a residence by the taxpayer. Expenditures with respect to the equipment are treated as made when the installation is completed. If the installation is at a new home, the "placed in service" date is the date of occupancy by the homeowner. Expenditures include labor costs for on-site preparation, assembly or original system installation, and for piping or wiring to interconnect a system to the home. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. The excess credit may be carried forward until 2016, but it is unclear whether the unused tax credit can be carried forward after then. The maximum allowable credit, equipment requirements and other details vary by technology, as outlined below.


Solar-electric property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service before January 1, 2009.
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.
• The home served by the system does not have to be the taxpayer’s principal residence.

Solar water-heating property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service before January 1, 2009.
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.
• Equipment must be certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.
• At least half the energy used to heat the dwelling's water must be from solar in order for the solar water-heating property expenditures to be eligible.
• The tax credit does not apply to solar water-heating property for swimming pools or hot tubs.
• The home served by the system does not have to be the taxpayer’s principal residence.

Fuel cell property

• The maximum credit is $500 per half kilowatt (kW).
• Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2016.
• The fuel cell must have a nameplate capacity of at least 0.5 kW of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%.
• In case of joint occupancy, the maximum qualifying costs that can be taken into account by all occupants for figuring the credit is $1,667 per 0.5 kW. This does not apply to married individuals filing a joint return. The credit that may be claimed by each individual is proportional to the costs he or she paid.
• The home served by the system must be the taxpayer’s principal residence.

Small wind-energy property

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $500 per 0.5 kW, not to exceed $4,000, for systems placed in service in 2008.
• Systems must be placed in service on or after January 1, 2008, and on or before December 31, 2016.
• The home served by the system does not have to be the taxpayer’s principal residence.

Geothermal heat pumps

• There is no maximum credit for systems placed in service after 2008. The maximum credit is $2,000 for systems placed in service in 2008.
• Systems must be placed in service on or after January 1, 2008, and on or before December 31, 2016.
• The geothermal heat pump must meet federal Energy Star criteria.
• The home served by the system does not have to be the taxpayer’s principal residence.

Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by "subsidized energy financing." For projects placed in service after December 31, 2008, this limitation no longer applies.


History
The federal Energy Policy Act of 2005 established a 30% tax credit (up to $2,000) for the purchase and installation of residential solar electric and solar water heating property and a 30% tax credit (up to $500 per 0.5 kW) for fuel cells. Initially scheduled to expire at the end of 2007, the tax credits were extended through December 31, 2008, by the Tax Relief and Health Care Act of 2006.

In October 2008, the Energy Improvement and Extension Act of 2008 extended the tax credits once again (until December 31, 2016), and a new tax credit for small wind-energy systems and geothermal heat pump systems was created. In February 2009, The American Recovery and Reinvestment Act of 2009 removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after December 31, 2008.