New Financial Rescue Package Contains Tax Credit, Bond Provisions

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The financial rescue bill signed by President Bush on 10/3/08 contained provisions that extend the federal new markets tax credits and various federal renewable energy tax credits, and provide additional low-income housing tax credits and tax-exempt bond authority for areas hit by major natural disasters.

These “extenders” and tax incentives were added by the U.S. Senate to the financial rescue bill it approved on 10/1/08. The House of Representative passed it two days later and sent it to the president.

The heart of the Emergency Economic Stabilization Act of 2008 (H.R. 1424, Public Law 110-343) is a new program that authorizes the U.S. Treasury to spend up to $700 billion to buy troubled assets from financial institutions. The aim is to spur U.S. financial institutions to resume lending by freeing them of problem home mortgages and securities, and to try to help homeowners in or at risk of foreclosure to stay in their homes.

The measure also includes some protections for renters whose landlords are foreclosed upon, or where the renters live in properties secured by mortgages purchased by Treasury.

New Markets Extension

In a victory for proponents of community development, H.R. 1424 extends the new markets tax credit (NMTC) program by one year, through calendar 2009, and provides an additional $3.5 billion in NMTC investment authority for one more funding round, in 2009. The Community Development Financial Institutions (CDFI) Fund, which administers the program with the IRS, announced $3.5 billion in allocation awards in the most recent – sixth – funding round (see article on p. 1).

Under the NMTC program, specialized organizations called community development entities raise capital from investors and deploy it in businesses and projects in low-income communities.

Energy Tax Incentives

H.R. 1424 extended the sunset date for various federal renewable energy tax credits and tax incentives.

H.R. 1424 extends by eight years, through 2016, the 30% investment tax credit for investment in qualified solar energy equipment and fuel cells (and triples the fuel cell annual credit cap), and the 10% investment tax credit for micro turbines, available under Section 48 of the Internal Revenue Code. The placed-in-service deadline for qualifying property is extended through 2016. The law also makes small commercial wind turbines eligible for the 30% tax credit, and combined heat and power systems and geothermal heat pumps eligible for the 10% tax credit. The law also allows the preceding energy tax credits to offset the federal alternative minimum tax (AMT).

Qualifying solar equipment includes property that uses solar energy to generate electricity (i.e. solar photovoltaic panels), to heat or cool, to provide solar process heat (i.e. to heat water), or to power fiber optic lighting distribution systems.

H.R. 1424 also extends the placed-in-service deadline for facilities that generate electricity from certain renewable energy sources to qualify for the Section 45 “production” energy tax credit. This extension is for one year, through calendar 2009, for facilities that produce power from wind and refined coal, and for two years, through calendar 2010, for solar, geothermal, hydropower, and certain other sources. The Act extends eligibility for this tax credit to new biomass facilities and to facilities that generate electricity from marine renewable sources (e.g., waves, tides).

The Act also:

  • Extends by five years, through 2013, the current federal tax deduction for the cost of qualified energy-efficiency improvements installed in commercial buildings. The deduction, equal to up to $1.80 per square foot of building floor area, is restricted to the cost for improvements made pursuant to a plan to reduce by 50% the annual energy and power costs with respect to the building’s heating, cooling, ventilation, hot water, and interior lighting systems. Qualifying are installed improvements to these systems or to the building’s envelope.
  • Halves, to 10 years, the depreci- ation period for smart electric meters and smart electric grid equipment.
  • Extends through 2009 the federal tax credit available to contractors for the construction of energy-efficient new homes.
  • Provides tax incentives to homeowners for installation of solar and certain other renewable energy equipment on their homes, and for home energy-efficiency improvements.

Rehab Credit Provisions

The Act contains two provisions authorizing higher credit rates for the federal historic rehabilitation tax credits for projects in certain geographic areas.

One provision extends by one year the increased credit percentages for rehabilitation costs for qualified buildings located in the Gulf Opportunity (GO) Zone, to rehabilitation expenditures paid or incurred through 12/31/09. These higher rates are 26% rather than the standard 20% for rehab expenditures for certified historic buildings, and 13% rather than the standard 10% for rehab expenditures for eligible non-historic structures.

The second provision makes these same higher credit rates available for rehabilitation expenditures for eligible buildings damaged or destroyed by certain recent natural disasters in the Midwest. The buildings must be located in counties – in 10 particular states – that are within areas that were declared by the president (i.e. Federal Emergency Management Agency) after 5/19/08 but before 8/1/08 as major disaster areas eligible for individual and/or public assistance for victims, as the result of floods, severe storms, or tornadoes. The 10 states are Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin.

Additional Disaster Relief Incentives

The Act provides additional tax incentives for individuals and businesses in the previously cited Midwestern disaster areas in the 10 states, and some incentives for other disaster areas.

The Act provides each of the 10 preceding states with additional per capita low-income housing tax credit authority for each of calendar years 2008, 2009, and 2010, equal to $8 per year for each resident of a county within a Midwestern disaster area.

Novogradac & Company, LLP has compiled a list of the specific counties in the 10 states believed to be covered, based on information from FEMA. This list is posted at http://www.novoco.com/low_income_housing/legislation/2008/ midwestern_area_list.pdf.

Other incentives for counties in the Midwestern disaster areas include:

  • Authority for 9 of the 10 states (Nebraska is excluded) to issue, through 2010, a new class of tax-exempt private activity bonds, called “Midwestern Disaster Area Bonds,” which won’t count against these states’ regular annual private activity bond volume caps. This maximum extra bond authority for each state is $1,000 times the portion of the state’s population within its Midwestern disaster areas. The bonds can be issued by states and municipalities to fund the acquisition, construction, or renovation of low-income rental housing, nonresidential real estate, and public utility property. Low-income housing targeting rules are relaxed for low-income rental projects financed by these bonds.
  • First-year bonus depreciation for certain qualified expenditures by businesses, including real estate, with these depreciation deductions exempted from the AMT.
  • More generous provisions for expensing of expenditures, including for site demolition/ clean-up and brownfield environmental clean-up costs necessitated by a disaster.

The Act also provides separate tax relief for areas of Texas and Louisiana damaged by recent Hurricane Ike. The legislation provides additional per capita housing credit authority for each of 2008, 2009, and 2010 equal to $16 per year per resident of Brazoria, Chambers, Galveston, Jefferson, and Orange Counties in Texas, and per resident of Calcasieu and Cameron Parishes in Louisiana.

The law also provides Texas and Louisiana with additional tax-exempt bond authority, similar to that for the nine Midwestern states, to finance eligible activities including low-income rental housing. This extra authority, which can also be issued through 2010, is limited to no more than $2,000 times the population of the five previously cited counties in Texas and the two parishes in Louisiana.

Finally, the Act contains broader disaster relief tax incentives, available for victims of all federally declared disasters occurring during 2008-2009. These don’t include any additional housing credit or tax-exempt bond authority, but instead deal with certain expenses, net operating losses, bonus depreciation, expensing, and other areas.

Other Provisions

H.R. 1424 also:

  • Extends through 2009 the ability to expense environmental remediation costs for brownfields.
  • Relaxes certain single-family mortgage bond requirements for Midwestern and national disaster areas.
  • Extends through 8/28/09 the federal work opportunity tax credit for persons employed within the Hurricane Katrina core disaster area.
  • Provides for a one-year “patch” of the AMT for individual taxpayers.
  • Extends through 2009 various special tax incentives for businesses and residents within a designated enterprise zone in the District of Columbia.
  • Extends the research and development tax credit.