The Energy Policy Act of 2005, P.L. 109-58, amended Sec. 48 to include qualified fuel cell property and qualified microturbine property on the list of property that can qualify for the energy credit. Pending the issuance of regulations, the IRS issued Notice 2008-68 to provide taxpayers with guidance on the computation and availability of the credits.
Although these technologies have been in development for years, the recent rise in oil prices and environmental concerns about "going green" have caused an increased focus on these types of alternative energy-generation technologies.
Qualified Fuel Cell PropertySec. 48(c)(1) defines a qualified fuel cell property as a fuel cell power plant that satisfies the following conditions:
- The plant must have a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process. Nameplate capacity is the maximum electrical output of a generator as rated by the manufacturer. Nameplate capacity is determined at the normal operating conditions designated by the manufacturer (Notice 2008-68, §3.01(7)).
- The plant must have an electricityonly generation efficiency greater than 30%.
A fuel cell plant is an integrated system comprising a fuel cell stack assembly and an associated balance of plant components that convert a fuel into electricity using a chemical reaction rather than combustion (burning of a fuel) (Sec. 48(c)(1)(C)).
According to the U.S. Fuel Cell Council, an industry trade association, some of the advantages of fuel cell power plants over traditional grid power systems are:
- They are a more reliable and consistent power source.
- Power output is scalable because stationary fuel cell plants can be strung together as power needs change.
- A fuel cell's waste heat can be used in cogeneration.
- Fuel cells are environmentally preferable. Some fuel cells may create only 20 grams of pollutants per megawatt hour (MWh) as compared with 11,000 grams per MWh for an average fossil fuel plant (U.S. Fuel Cell Council, www.usfcc.com/about/Fuel_Cells_for_Industrial_Applications.pdf).
Qualified Microturbine PropertySec. 48(c)(2) defines a qualified microturbine property as a stationary microturbine power plant that satisfies the following conditions:
- The plant has a nameplate capacity of less than 2,000 kilowatts. Nameplate capacity is determined at ISO conditions, which are 59° F, 60% relative humidity, and an atmospheric pressure of 14.696 pounds per square inch (Notice 2008-68, §§3.01(7), 6.04).
- The plant has an electricity-only generation efficiency of not less than 26% under the same conditions.
A stationary microturbine power plant is an integrated system comprising a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and an associated balance of plant components that convert a fuel into electricity and thermal energy. A stationary microturbine power plant also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors (Sec. 48(c)(2)(C)).
Some of the advantages of microturbine systems over reciprocating engine generators are a higher power-to-weight ratio, extremely low emissions, and fewer moving parts (Kolanowski, Guide to Microturbines (Fairmont Press 2004)).
Qualification as Energy PropertyQualified fuel cell property and qualified microturbine property are creditable energy property only if certain matters related to qualification of the property for depreciation, original use by the taxpayer, and adherence to specific quality, performance, and electricity generation standards listed in Notice 2008-68, §3.02, are satisfied.
Computation of the CreditThe credit for fuel cell property and stationary microturbine power plants is claimed on Form 3468, Investment Credit. In general, the fuel cell credit is 30% of the basis of qualified fuel cell property placed in service during the tax year; for stationary microturbine power plants it is 10% of the basis of such property placed in service during the tax year.
However, the credit for any qualified fuel cell property shall not exceed an amount equal to $500 for each 0.5 kilowatt of capacity of such property, and the credit for stationary microturbine power plants shall not exceed an amount equal to $200 for each kilowatt of capacity of such property. In addition, certain adjustments to the credit may be required if the basis of the property qualifies for credit under other provisions of the Code. Likewise, adjustment to the credit may be required if the property is acquired using certain types of financing. The credit is available for qualified fuel cell property and stationary microturbine power plants for the period after December 31, 2005, and before January 1, 2017 (Secs. 48(a)(2)(A)(i)(II) and (c)(2)(D)).
Both credits are components of the Sec. 38 general business credit. Thus, when combined with all other components of the general business credit, for any tax year the credits generally may not exceed the excess of the taxpayer's net income tax over the greater of (1) 25% of the net regular tax liability above $25,000 or (2) the tentative minimum tax (Sec. 38(c)). For credits arising in tax years beginning after December 31, 1997, an unused general business credit can be carried back one year and carried forward 20 years.
The FutureThe city of Burbank, California, installed microturbines at its landfill site that are fueled by naturally occurring landfill gases. These gases were previously "flared" or burned off. The new system is capable of generating 550 kilowatts, enough energy to provide daily power to approximately 500 homes. The city hopes to be able to provide power to 20% of its residents through renewable sources by 2017 (City of Burbank Water and Power, www.burbankwaterandpower.com/news/landfill-gas-microturbine-generators/7-news/282-landfill-gas-microturbinegenerators).
Today the major hurdle in converting to these technologies is cost. According to the Department of Energy, fuel cell technology in use today can cost $4,500 per kilowatt as compared with current diesel generators, which can cost between $800 and $1,500 per kilowatt (Dept. of Energy, http://fossil.energy.gov/programs/powersystems/fuelcells/). Burbank's landfill project was completed at a cost of approximately $1.1 million. The Department of Energy hopes to significantly reduce the cost of these alternative energy sources by the end of the decade. Through additional research and development, tax credits, and other tax incentives, businesses should be able to economically migrate to these types of energy sources in the near future.
Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.
The Tax Adviser would like to acknowledge the special
contribution to the December Tax Clinic of Singer Lewak
LLP; Mark G. Cook, tax partner in the Irvine, CA, office;
and Steve Cupingood, the partner in charge of that firm's
For additional information about these items, contact Mr. Koppel at (781) 407-0300 or email@example.com.