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Wind projects can benefit from two aspects of the Federal tax code.
The federal production tax credit (PTC) is intended to provide wind generators with incentives similar to those received by other electricity producers. This tax credit is currently set at 2.1 cents per kWh and is adjusted for inflation over the first ten years of a project's life, for projects reaching commercial operation prior to the credit's expiration date — currently set at December 31, 2012 for wind projects. The tax credit is calculated by multiplying the then-current per kWh rate by the project's output for the applicable year. The credit is allocated to the project's owners in accordance with their ownership shares. Historically the production tax credit has been renewed only for short durations (one to two years) and often retroactively after having expired. This uncertainty has impeded the wind industry's investment in equipment production capacity, while also inducing scarcity-driven equipment and installation price increases as project developers race to beat the production tax credit expiration deadline.
The 2009 American Reinvestment and Recovery Act (ARRA) not only extended the production tax credit through December 31, 2012 for wind projects but also created two time-limited options for capturing the production tax credit's intended benefits through alternative mechanisms. First, the American Reinvestment and Recovery Act offers wind project owners the option to elect the investment tax credit (ITC) in lieu of the production tax credit. The investment tax credit is equal to 30% of eligible project capital costs (typically those eligible for 5-year MACRS depreciation, which can be 90% to 95% of a wind project's installed cost), can be fully applied against the project owner's federal income tax liability in the first quarter of project operation, and is not production-dependent. Second, the American Reinvestment and Recovery Act also offers the option to elect a Section 1603 cash grant in lieu of the production tax credit or investment tax credit. Like the investment tax credit, the cash grant is equal to 30% of eligible capital costs and is disbursed to the project 60 days after the Treasury Department deems the grant application complete or 60 days after commercial operation, whichever is later. The option to elect the investement tax credit is currently available through the production tax credit expiration date (12/31/2012); whereas the Section 1603 cash grant option is currently available only to those projects which enter construction by December 31, 2010 and are operational by December 31, 2012. Both investment tax credit and cash grant are subject to recapture if the owner receiving these benefits sells its share of the project within the first five years (e.g. a portion of the credit is lost).
Owners of wind projects who pay federal income taxes are able to take accelerated depreciation (MACRS), rather than straight-line depreciation, of their capital investments in calculating their tax liability, effectively deferring tax liabilities. Wind project owners electing the 1603 grant must reduce the project cost basis by 50% of the grant amount prior to calculating the MACRS depreciation benefit.
State Tax Incentives
The following New England states offer tax incentives to owners of large and/or small wind generation equipment.
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