The American Recovery and Reinvestment Act of 2009, commonly referred to as the Stimulus Bill, signed into law on February 17, 2009, contains renewable energy tax incentives, defers realization of certain cancellation of debt income, suspends certain restrictions on the deductibility of original issue discount, and limits S corporation built-in gain recognition.
This update summarizes key energy and business tax provisions of the Stimulus Bill and provides general background information on the tax sections.
Stimulus Bill Provides New Renewable and Clean Energy Incentives
Taxpayers Have a New Investment Credit Option for Renewable Energy Facilities. A new subsection to Section 48 of the Internal Revenue Code allows taxpayers to elect to forgo the production credit under Section 45 of the Internal Revenue Code and instead take an investment credit on certain renewable energy facilities, equal to 30 percent of certain depreciable or amortizable tangible property (other than a building or its structural components) if the property is used as an integral part of the facility. Taxpayers may take the investment credit on any wind facility placed in service in 2009 through 2012 or any biomass, geothermal, solar, landfill gas, waste-to-energy, hydropower and marine facility placed in service in 2009 through 2013.
Stimulus Bill Repeals Certain Limitations on Renewable Energy Property Credit. The Stimulus Bill repeals the $4,000 cap on the energy credit for small wind energy property, and relaxes the credit limitations related to property financed by subsidized energy financing (that is, through a federal, state or local program with the principal purpose of providing subsidized financing for projects designed to conserve or produce energy).
Investment and Production Credits Are Coordinated With Grants. If property is eligible for a credit under Section 45 (production credit) or Section 48 (investment credit) of the Internal Revenue Code and also receives a grant under another portion of the Stimulus Bill, the owner may not take a credit, and prior credits will be recaptured by increased taxes, adjustment of carryforwards or a reduction in the grant amount.
New Clean Renewable Energy Bond and Qualified Energy Conservation Bond Allocations Are Increased. The Stimulus Bill provides for an increase in the national new clean renewable energy bond limitation by $1.6 billion. It also increases the limitation in the issuance of qualified energy conservation bonds by $2.4 billion.
Stimulus Bill Also Includes Provisions Affecting Business Taxes
Taxpayers May Elect to Defer Cancellation of Indebtedness Income. When certain taxpayers repurchase their debt (or satisfy their debt with newly issued debt) at a discount, they are generally required to recognize cancellation of debt income in an amount equal to the difference between the purchase price paid (or the new debt's issue price) and the debt's principal amount. Qualifying debtors who would not otherwise qualify for an exemption from cancellation of debt income incurred during calendar year 2009 or 2010 can elect to defer that income until 2014. After the deferral period, qualifying debtors must recognize the cancellation of debt income ratably over a five-year period. Qualifying debtors are C corporations and any other person who issued debt in connection with a trade or business.
If a qualifying debtor elects to defer cancellation of debt income, the debtor may deduct the original issue discount on those debt instruments used to repurchase debt only when the corresponding cancellation of debt income is taken into income, subject to certain limitations. If the taxpayer liquidates or otherwise ceases business, it must recognize the deferred income at that time.
For debt issued by partnerships, the partnership may defer debt cancellation income at the partnership level and then the income will be allocated to the partners during the five-year period described above.
Restrictions for Deduction of Original Issue Discount on High-Yield Obligations Are Suspended. Debt instruments issued with significant original issue discount and high yields normally result in the deferral of a deduction of the original issue discount until paid or a denial of the original issue discount deduction. The Stimulus Bill suspends these restrictions for certain new high-yield instruments issued after August 31, 2008 and before January 1, 2010 in exchange for a debt instrument of the same issuer which is not a high-yield debt instrument with original issue discount.
S Corporation Built-In Gain Tax Is Relaxed. Normally, when a C corporation converts to an S corporation the built-in gain at the date of the conversion is subject to double tax if the assets are sold within 10 years of the date of the conversion. The Stimulus Bill has reduced the 10-year period to seven years for assets sold in calendar years 2009 and 2010. In other words, a corporation (previously treated as a C corporation) that converted to S corporation status more than seven years ago can sell built-in gain assets without a double tax in 2009 and 2010.
This update is only intended to provide a general summary of certain tax provisions of the Stimulus Bill. For a further discussion of the Stimulus Bill including its energy, infrastructure and stimulus spending provisions. You can find discussions of other laws, regulations and rule proposals of interest on our website.