GT Alert

Bush Signs Energy Bill with $14.5 Billion in Tax Incentives

August 2005

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President Bush has signed the energy bill, containing $14.5 billion in tax incentives for renewable energy, energy infrastructure improvements, and energy conservation. The incentives span a broad range. The following is a summary of the highlights:

Faster Write-Off for Natural Gas Pipelines. The bill reduces the write-off period for natural gas gathering lines from fifteen 15 years to 7 years, and natural gas distribution lines from 20 years to 15 years, thereby encouraging gas companies to build new gathering and distribution pipelines.

Faster Write-off for Electric Transmission Facilities. The bill reduces the write-off period for electricity transmission property from 20 years to 15 years, in an effort to encourage electric transmission companies to make improvements to their energy grids.

Write-off of Refinery Expansion Costs. The bill allows an immediate write-off of 50 percent of the cost to increase the capacity of an existing refinery by at least five percent or increase the output of qualified fuels by at least 25 percent. Expires after December 31, 2011.

Expands Benefit to Small Oil Producers. The bill increases the 50,000 barrel per year limit definition of a "small refiner" eligible for percentage depletion deductions to 75,000 barrels.

Enhancement to Section 29 Tax Credit for Non-conventional Fuels. The Section 29 tax credit for producing fuel from non-conventional sources (like biomass and synthetic fuel from coal) would be able to be carried back to the prior year, or carried forward to future years if the credit can not be used in the year the credit is earned. Prior to this change, the Section 29 tax credit could only be used in the year it was earned. With this change, start-ups will be able to carry over any unused credits to offset taxes in future years when the venture becomes profitable.

Arbitrage Rules Relaxed for Bonds Sold to Finance Gas Purchases. The bill creates a safe harbor to the tax-exempt bond arbitrage rules, which will allow public utilities to finance prepayments for natural gas with tax exempt bond proceeds if the natural gas is used to supply the utility's customers, so that utilities will be able to use bond proceeds to secure natural gas supplies for their customers at favorable prices.

Extension of Alternative Energy Tax Credit. The bill extends the Section 45 tax credit for alternative energy facilities (like wind power and biomass) scheduled to expire in 2006, to facilities placed into service on or before December 31, 2007. In addition, certain hydropower facilities will be eligible for the credit, as well as Indian coal facilities. However, the credit is not extended for solar facilities, which will expire on December 31, 2005. Efforts to include fuel cell and ocean power facilities to this credit were not successful.

Clean Energy Bond Tax Credit. The bill allows exempt electrical utilities (like municipal power companies and cooperatives) to float bonds to be used to develop clean energy sources, like wind power and biomass. The federal government would pay a tax credit to the bondholder instead of interest being paid by the issuer. The Treasury Department would set the rate of the credit to allow the bond to be issued without discount and without interest cost to the issuer. While the bonds would be taxable, the bondholder could deduct the amount of the credit from total tax liability. There is a total aggregate limit of $800 million in such bonds that can be issued, to be allocated by the Treasury.

FERC Restructuring Sales. A special provision of the tax code that allows a taxpayer to spread out the gain from the sale of electrical assets because of a FERC restructuring over an 8 year period, scheduled to expire this year, is extended to cover sales through December 31, 2008.

Green Building Deduction. The bill would allow a deduction of up to $1.80 per square foot for expenditures to make commercial buildings more energy efficient.

Home Solar Energy Tax Credit. The bill would allow a 30% tax credit to homeowners (up to a maximum of $2,000) for installing solar energy equipment.

Fuel Cell Credit. The bill would allow a 30% tax credit to businesses for installing fuel cell technology (up to $500 credit for each half kilowatt of electrical capacity).

Home Energy Efficiency Tax Credit. The bill would allow a 10% tax credit for energy conservation improvements to builders of new energy efficient homes, up to $1,000 per home.

Carryback of Losses by Electric Utilities. The bill would allow an electrical utility to elect to extend the period that it can carry back losses from two years to five years.

Tax Credit for Hybrid Vehicles. The bill allows a tax credit for for buyers or leaseholders of fuel cell vehicles, alternate fuel vehicles, hybrids and other "advanced lean-burn technology" vehicles. The amount of the credit varies depending on the weight class of the vehicle and the rated fuel economy. Furthermore, the credit will phase out after the manufacturer has sold 60,000 hybrid vehicles, on the rationale that after a vehicle has reached this level of sales, tax incentives should no longer be needed as a marketing tool.

Alternative Fuel Refueling Stations. The bill allows a 30 percent credit (up to $30,000) for investments in alternative fuel refueling stations. Qualifying fuels include E-85, natural gas, hydrogen, and biodiesel, among others. The credit expires after December 31, 2007.

Small Ethanol Producers. The bill expands the small ethanol producer credit to producers with annual production capacity of 60 million gallons (up from 30 million gallons under current law). In addition, it creates an equivalent credit for producers of agri-biodiesel through December 31, 2008.

Biodiesel Tax Credit. The bill extends the income and excise tax credits for biodiesel through December 31, 2008.

This Alert was written by Marvin A. Kirsner in the Boca Raton office. Please contact Mr. Kirsner at 561.955.7600 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig

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