BILL ANALYSIS
AB 1705
Page 1
Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1705 (V. Manuel Perez) - As Amended: March 11, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: exclusions: energy property grants.
SUMMARY : Conforms to the recently enacted American Recovery and
Reinvestment Act (ARRA) of 2009 [Public Law (P.L.) 111-5] to
create an exclusion from gross income for energy grants received
by a taxpayer, in lieu of the federal energy credits, pursuant
to Section 1603 of the ARRA. Specifically, this bill :
1)Excludes from the taxpayer's gross income and the alternative
minimum taxable income, under both the Personal Income Tax
(PIT) and the Corporation Tax (CT) laws, the amount of energy
grants provided to a taxpayer by the Secretary of the Treasury
for qualified property placed in service during either the
2009 or 2010 tax year.
2)Specifies that the grant amount must be taken into account in
determining the basis of the property for which the grant was
provided to the taxpayer.
3)Prescribes the rules for adjusting the basis of the property
by reference to Internal Revenue Code (IRC) Section 50(c) and
Section 1603(f) of the ARRA.
4)Declares that this act serves a public purpose to ensure the
fair and consistent application of California law to
recipients of grants made by the Secretary of the Treasury
under IRC Section 1603 of the ARRA.
5)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Allows an income tax credit for the production of electricity
from qualified energy resources at qualified facilities.
"Qualified energy resources" include wind, closed-loop
biomass, open-loop biomass, geothermal energy, solar energy,
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small irrigation power, municipal solid waste, qualified
hydropower production, and marine and hydrokinetic renewable
energy. "Qualified facilities" means facilities that generate
electricity using qualified energy resources. (IRC Section
45).
2)Allows an income tax energy credit for certain qualified
energy property placed in service. "Qualified energy
property" include certain fuel cell property, solar property,
geothermal power production property, small wind energy
property, combined heat and power system property, and
geothermal heat pump property. (IRC Section 48).
3)Authorizes the Secretary of the Treasury to provide a grant to
a person who places in service during the 2009 or 2010 tax
year energy property that is either a) an electricity
production facility otherwise eligible for the renewable
electricity production credit, or, b) qualifying property
otherwise eligible for the energy credit. (ARRA of 2009, P.
L. 111-5, February 17, 2009).
4)Specifies that the grant amount is 30% of the basis of the
property that would either be eligible for the energy credit
under IRC Section 48 or qualify as an electricity production
(IRC Section 45) credit eligible facility.
5)Provides that a grant application must be received by the
Treasury Department before October 1, 2011.
6)Excludes the grant amount from gross income for federal income
tax purposes.
7)Requires the basis of the qualified property to be reduced by
50% of the amount of the grant and subjects the grant amount
to recapture if the eligible property is disposed of by the
grant recipient within five years of being placed in service.
EXISTING STATE LAW does not conform to IRC Section 48 and does
not have comparable energy credit or grant provisions;
therefore, the amount of federal energy grants are includible in
gross income for purposes of the PIT and the CT laws.
FISCAL EFFECT : The Franchise Tax Board estimates that this bill
will result in a loss of $24 million in fiscal year (FY)
2009-10, $23 million in FY 2010-11, $23 million in FY 2011-12,
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and $15 million in FY 2012-13.
COMMENTS :
1)Author's Statement . The author states that, "AB 1705 ensures
that renewable energy projects are not unduly taxed on federal
grants, thereby allowing the creation of green jobs in our
state; specifically, this bill excludes from state income
taxes federal grants that are made in-lieu of renewable energy
tax credits.
"There are 38 in-state renewable projects that are currently
eligible for these grants, with a combined megawatt impact of
8,810 MWs - we can not afford to have these projects leave the
State of California. This bill will provide an exclusion from
taxation for specified ARRA Energy grants, bring California in
conformity with federal law, and help drive the immediate
creation of large-scale solar projects in our State."
2)Federal Grants for Qualified Energy Property . Federal law
allows a renewable electricity income tax credit for the
production of electricity from qualified energy resources at
qualified facilities. Qualified energy resources generally
include wind, biomass, solar energy, geothermal energy, small
irrigation power, municipal solid waste, qualified hydropower
production and marine and hydrokinetic renewable energy. To
be eligible for this credit, electricity produced from the
qualified energy resources at qualified facilities must be
sold by the taxpayer to an unrelated person. The tax credit
for electricity produced from renewable resources is generally
claimed over a 10-year period and is not refundable.
In addition to the renewable electricity production tax credit,
a taxpayer is allowed to claim a federal tax credit for the
investment in certain property. The investment tax credit
includes an energy credit for certain qualifying energy
property placed in service. The qualifying energy property
includes certain fuel cell, solar, geothermal power
production, small wind energy property, combined heat and
power system, and geothermal heat pump property. The energy
credit is generally equal to 30% of the taxpayer's basis in
qualified fuel cell property, certain solar energy property,
and wind energy property. It is 10% of the taxpayer's basis
in all other types of qualifying energy property. The
investment tax credit may be claimed entirely in the year the
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facility is placed in service.
In February of 2009, Congress enacted, and the President signed,
the ARRA which, among other things, allows taxpayers to make
an irrevocable election to treat certain qualified property
that is part of a qualified investment credit facility placed
in service in 2009 through 2013 as energy property eligible
for a 30% investment credit. The investment tax credit option
may be attractive to tax investors that are not sure of their
tax liability in the future (since the renewable energy
production tax credit is generally claimed over a 10-year
period). Furthermore, the ARRA authorizes the Secretary of
Treasury to provide a grant to each person who places in
service during 2009 or 2010 energy property that is either a)
an electricity production facility otherwise eligible for the
renewable electricity production credit, or, b) qualifying
property otherwise eligible for the energy investment tax
credit. The grant amount equals up to 30% the basis of the
qualified property. In other words, a taxpayer that elects to
receive the investment tax credit may also elect to receive a
30% grant rather than the 30% tax credit. The ability to
receive the credit or grant in the year in which property is
placed in service helps owners to finance the project.
Congress excluded the grant proceeds from a taxpayer's gross
income but required that the basis of the property be reduced
by 50% of the amount of the grant. In addition, some or all
of each grant is subject to recapture if the grant eligible
property is disposed of by the grant recipient within five
years of being placed in service. The provision also permits
taxpayers to claim the credit with respect to otherwise
eligible property that is not placed in service in 2009 and
2010 so long as construction begins in either of one of those
years and is completed prior to 2013 (in the case of wind
facility property), 2014 (in the case of other renewable power
facility property eligible for credit under IRC Section 45),
or 2017 (in the case of any specified energy property
described in IRC Section 48). Under the program, if a grant
is paid, no renewable electricity credit or energy credit may
be claimed with respect to the grant eligible property.
The grant program was created to help developers of renewable
energy projects to finance these projects. Often, developers
seek investors to whom the developers may allocate 99% of the
income, gains, losses, deductions and tax credits of the
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project. However, in the current economic environment the
potential investors may not have enough tax liability to
utilize those deductions and credits. The creation of the
grant program allows developers to receive a federal subsidy
to continue with the renewable energy projects. Committee
staff notes, however, that it is unclear how a grant paid
after the project is placed in service, i.e., after it is
completed, helps taxpayer with obtaining the financing for the
project, given the current state of the financial markets.
3)Conformity to Federal Law . In the absence of an authorized
statute, taxpayers must include the grant proceeds as income
for California tax purposes. Due to a tight credit market and
the complex financing required for renewable projects,
existing state law may cause project developers to terminate
or delay the projects, causing job losses and less renewable
power for the state. According to BrightSource Energy, one of
the proponents of this bill, California is one of three states
that have not conformed to the ARRA grant exclusion
provisions. Apparently, there are dozens of renewable
projects that will not be financed unless the federal grants
are excluded from tax in California. AB 1705 conforms to
federal law to exclude these grants from taxpayer's income,
requiring the 50% basis adjustment, and incorporating the
recapture provisions of Section 1603(f) of the ARRA.
Furthermore, this bill provides for a retroactive application
of this exclusion to cash grants that were awarded to
taxpayers in 2009.
4)Similar Legislation .
SB 401 (Wolk), introduced in the 2009-2010 Legislative Session,
is a comprehensive California-federal conformity measure that
includes the provisions of AB 1705. SB 401 was passed by both
the Assembly and the Senate and now is pending with the
Governor.
SBx8 32 (Wolk), introduced in the 2010 8th Extraordinary
Session, changes California's specified date of conformity to
federal income tax law from January 1, 2005, to January 1,
2009, and thereby, generally conforms to numerous changes made
to federal income tax law during that four-year period,
including the exclusion from gross income for specified energy
grants. SB x8 32 was passed by both houses but was vetoed by
the Governor.
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ABx6 4 (M. Perez), introduced in the 2010 6th Extraordinary
session, is similar to this bill. ABx6 4 currently has not
been referred to a committee.
SB 936 (Strickland), introduced in the 2009-2010 legislative
session, is identical to this bill. SB 936 is in the Senate
Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Bright Source Energy
California Manufacturers and Technology Association
California Taxpayers' Association
Independent Energy Producers
California Chamber of Commerce
Large-scale Solar Association
NextEra Energy Resources
NextLight Renewable Power, LLC
Southern California Edison
Terra-Gen Power
Tessera Solar
The Solar Alliance
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098