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Recently Enacted Legislation Exempts Federal Renewable Energy Grants from California Income Taxes

April 16, 2010

 

On April 12th, California Governor Arnold Schwarzenegger signed into law California Senate Bill 401 (“S.B. 401”), which includes provisions exempting renewable energy grant proceeds received pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Renewable Energy Grants”) from California gross income and alternative minimum taxable income.

Under the Renewable Energy Grant program, project owners may apply for grants from the federal government in lieu of claiming the production tax credit (“PTC”) or investment tax credit (“ITC”). Renewable Energy Grants are available for property (i) that is placed in service in 2009 or 2010, or (ii) with respect to which construction begins during 2009 or 2010 and property is placed in service by a specified date (before January 1, 2013, 2014 or 2017, depending on the type of property). Grant amounts generally are equal to 30% of the cost of qualifying property (10% in some cases). Applications for Renewable Energy Grants must be received by Treasury before October 1, 2011.

For U.S. federal income tax purposes, Renewable Energy Grants are not includable in taxable income, but 50% of the amount of such grants is excluded from the basis of the property (which reduces federal depreciation deductions over the life of the property). Until the enactment of S.B. 401, the California Revenue & Taxation Code did not permit the exemption of Renewable Energy Grant proceeds from California income tax and, as a result, Renewable Energy Grants would have been subject to unfavorable California state tax treatment relative to PTCs and ITCs. S.B. 401 conforms California’s tax treatment of Renewable Energy Grant proceeds to their federal treatment (i.e., exclusion of grant proceeds from taxable income and exclusion of 50% of the grant amount from the basis of the property). This change is effective on a retroactive basis, so Renewable Energy Grant proceeds disbursed during 2009 are also exempt from California taxable income. This change increases the value of Renewable Energy Grants relative to PTCs and ITCs for California-based projects and, in some cases, California-based investors and developers.

It should be noted that the tax treatment of Renewable Energy Grants by some other states remains uncertain at this time. Accordingly, developers and investors who may be subject to tax in other states should consult their tax advisors regarding their tax treatment with respect to Renewable Energy Grant proceeds in the relevant jurisdictions.