On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the "Act"). While the Act is primarily designed to resolve issues relating to the so-called "U.S. Fiscal Cliff," the Act also contains several provisions that affect tax benefits provided to certain renewable and alternative energy projects under the Internal Revenue Code of 1986, as amended (the "Code").

Limited Extension of the Production Tax Credit and Option to Elect the Investment Tax Credit. The Act includes a one-year extension of the production tax credit (PTC) for wind energy facilities, which was scheduled to expire on December 31, 2012. The Act also includes a one-year extension of the option to claim the investment tax credit (ITC) in lieu of PTCs for most types of renewable energy facilities eligible for PTCs, including wind, open-loop biomass, closed-loop biomass, geothermal, landfill gas, trash, marine, hydrokinetic, and certain hydropower facilities.

Significantly, the Act also amends the standard for determining whether a project is eligible for PTCs (or the ITC in lieu of PTCs). Under the Act, a qualified facility will be eligible for PTCs if construction begins before January 1, 2014. Under prior law, a facility was not eligible for PTCs unless it was placed in service by the applicable deadline, which was generally interpreted to require the facility to achieve commercial operations. The wind industry, in particular, was concerned that a one-year extension of the credit would be insufficient to bring new wind projects to completion.

Although the Act does not define when construction begins, Treasury Regulations under other Code provisions generally treat construction as beginning when "physical work," such as excavating foundations, begins. Preliminary activity such as planning, designing, permitting, and site preparation is not generally considered physical work. Definitions of "beginning construction" under the bonus depreciation rules, as well as Treasury Department (Treasury) guidance for the cash grants in lieu of PTCs provided under the American Recovery and Reinvestment Act, also include "safe harbor" rules under which a taxpayer may treat construction as having begun if it has paid or incurred a certain percentage (ranging from 5 percent to 10 percent) of the facility's total cost. No indication has yet been forthcoming from Congress or Treasury on whether a similar safe harbor will be provided for PTCs.

The Act also amended the PTC for municipal solid waste facilities to exclude paper that is commonly recycled and that has been segregated from common waste and extended the PTC for Indian coal production facilities by one year. The Act also provides technical corrections to the option to elect to claim the ITC or obtain a cash grant from Treasury, clarifying that the original use of the property must begin with the taxpayer.

No changes were made to credit provisions for other types of alternative energy property, including the ITC for solar, geothermal, qualified fuel cell, small wind, microturbine and combined heat and power property.

Extension of Bonus Depreciation. In addition to the tax credit extensions, the additional 50 percent first-year bonus depreciation deduction available for investment in "qualified property" is extended by one year for property placed in service prior to January 1, 2014. A further extension is available for certain long production period property and certain aircraft placed in service prior to January 1, 2015. The election to accelerate the alternative minimum tax credit in lieu of bonus depreciation has also been extended.

Extension of Biodiesel, Renewable Diesel, and Alternative Fuel Incentives. The Act extends the termination date of the income tax credit for qualified biodiesel and renewable diesel sold or used as fuel from December 31, 2011, to December 31, 2013. In addition, the excise tax credit for biodiesel mixtures and the excise tax credit for alternative fuels are each extended to fuels sold or used on or before December 31, 2013.

Changes Affecting Cellulosic Biofuel Producers. The Act extends the tax credit for producers of certain cellulosic biofuels by one year to January 1, 2014. The Act also expands the definition of "cellulosic biofuel" to include algae-based fuels derived from cultivated algae, cyanobacteria, or lemna, provided the resulting fuel meets the existing registration requirements for cellulosic biofuels established by the Environmental Protection Agency. The amendment is applicable to fuels sold or used on or after January 2, 2013, the date of enactment of the Act. Further, the special 50 percent additional first-year depreciation deduction available for cellulosic biofuel plant property is amended to include algae as a qualified feedstock and extended to January 1, 2014.

Other Changes. Finally, the Act also contains modifications or extensions of the following: (i) the energy-efficient existing homes credit; (ii) the credits for energy-efficient new homes and appliances; (iii) the credit for two-or-three wheeled plug-in electric vehicles; (iv) the alternative fuel vehicle refueling property credit; and (v) the special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities.

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