The American Recovery and Reinvestment Act of 2009 (ARRA) included a number of significant benefits designed to encourage investment in renewable energy projects. The tax provisions of ARRA extended and enhanced currently available production tax credits for renewable energy projects (section 45(d), Internal Revenue Code of 1986, as amended (unless otherwise indicated, section references refer to the Internal Revenue Code of 1986 and the Treasury regulations promulgated under it); section 1101, ARRA)) as well as first year bonus depreciation (section 168(k); section 1201, ARRA).

Additionally, Congress re-introduced an incentive used over the years to encourage capital formation, the investment tax credit. The ARRA investment tax credit available for renewable energy projects is equal to 30 percent of the capital cost of a qualifying renewable project (sections 48(a)(5)(A)(ii) and 48(a)(2)(A)(i)). ARRA also created a 30% grant (section 1603, ARRA), designed to "mimic" the 30% investment credit (Joint Explanatory Statement of the Committee of Conference, H.R. 1, Division B, p. 115). The grant is a direct subsidy payable by the US Treasury. Qualifying renewable projects generally may select either the production tax credit, the investment tax credit or the grant.

Two investment structures generally suitable for third-party investments in renewable energy projects are partnerships and leases.

A partnership is not itself subject to tax, but the partners are taxed on their distributive share of the partnership's income, gain, loss, deduction and credit. Entities that are taxed as partnerships for federal income tax purposes, including general and limited partnerships and limited liability companies can be used in connection with investments using production tax credits, the investment credit or the grant (see, for example section 48(c)(5) (basis adjustments to partner's interest in partnership required upon recapture of investment credit or grant)) (IRS Rev. Proc. 2007-65, 2007-45 I.R.B. 967). The Internal Revenue Service (IRS) has issued a Revenue Procedure providing a "safe harbour" structure for wind energy partnerships (IRS Rev. Proc. 2007-65, 2007-45 I.R.B. 967).

Leasing structures can be used for projects using the new 30% investment credit or the grant but generally not the production tax credit (section 45(d) provides that the production credit is available to the owner; section 50(d)(5) provides that a lessor may make an election that permits the lessee to claim investment tax credits as though the lessee were the tax owner of the property. See also section 1603(f) of ARRA (making that rule applicable to grants)). The IRS also has outstanding a Revenue Procedure providing a safe harbour for leasing structures (IRS Rev. Proc. 2001-28, 2001-1 C.B. 1156).

The new renewables investment tax credit (and the new grant) carry many rules applicable to the "old" investment tax credit (section 50(d) (providing that certain rules in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990 apply to investment tax credits and other credits); section 1603(f), ARRA (making those rules applicable to grants)), which was generally repealed in 1986.

Many of these rules favour lease structures including rules allowing sale and leasebacks (section 50(d)(4)) and a "pass through" of the investment credit to the lessee (section 50(d)(5)).

Properly structuring transactions to use the incentives introduced in ARRA will raise many issues. Although many issues relating to the investment tax credit and leasing and partnership structures have been resolved over the years, there are also many that remain unresolved. For example, the level of economic profit required to claim the new investment credit remains an open issue. In today's highly politicised environment, investors will want answers to these open questions before committing to long-term investments the success of which depends on the availability of these newly enacted incentives.