The American Recovery and Reinvestment Act of 2009 (the act) includes several provisions that may affect the manufacturing and distribution industry.  This alert highlights several key items.

Qualified Advanced Energy Manufacturing Property Credit

The act provides that a qualifying energy project tax credit be included in the credits making up the investment credit.  The qualifying advanced energy project credit for any tax year is an amount equal to 30% of the qualified investment for that tax year with respect to any qualifying advanced energy project of the taxpayer.  A qualifying advanced energy project is a project which re-equips, expands, or establishes a manufacturing facility for the production of:

• Property designed to be used to produce energy from the sun, wind, geothermal deposits, or other renewable resources
• Fuel cells, microturbines, or an energy storage system for use with electric or hybrid electric motor vehicles
• Electric grids to support the transmission of intermittent sources of renewable energy, including storage of that energy
• Property designed to capture and sequester carbon dioxide emissions
• Property designed to refine or blend renewable fuels, other than fossil fuels, to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies)
• New qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles or components which are designed specifically for use with those vehicles, including electric motors, generators, and power control units
• Other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Internal Revenue Service (IRS)

A facility built to produce, refine or blend any transportation fuel (other than renewable fuels) does not qualify as an advanced energy project.

The IRS, with help from the Secretary of Energy, is to set up a qualifying advanced energy project program.  This program will certify investments eligible for credits as qualifying advanced energy project sponsors.  The total credits allocated under the program cannot exceed $2.3 billion.

Each applicant must submit an application containing whatever information IRS may require during the 2-year period beginning on the date IRS establishes the qualifying advanced energy project program.  Each applicant will have one year from the date IRS accepts the application to provide the IRS evidence the applicant has met the requirements of the certification.  A successful applicant has three years from the certification’s issue date to put the project in service.  If the project is in service by that time period, the certification is no longer valid.

Renewable Electricity Credit Extended

For purposes of the electricity production credit, the act extends the placed-in-service end date to January 1, 2014, for the following qualified energy facilities:

• Closed-loop biomass
• Open-loop biomass
• Geothermal energy
• Landfill gas
• Trash
• Qualified hydropower

The credit is based on a specified amount per kilowatt hour of electricity produced (for 2008 the credit was 2.1 cents/kilowatt-hour or 1.0 cent/kilowatt hour, depending on the type of facility).  The credit is phased out as the market price of electricity exceeds certain threshold levels.

Alternative Refueling Property Credit

The act modifies the qualified alternative fuel vehicle (QAFV) refueling property credit for property placed in service in tax years beginning after December 31, 2008, and before January 1, 2011.  QAFV refueling property (not including a building or its structural components) is used for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle that runs on that fuel or electricity—but only if it is stored or dispensed directly into the vehicle’s fuel tank or battery.

The use of QAFV refueling property must begin with the taxpayer.  The amount of the tax credit for any QAFV refueling property not relating to hydrogen is 50% of the cost of the property up to a maximum credit of $50,000 for depreciable QAFV refueling property and a maximum credit of $2,000 for nondepreciable QAFV refueling property installed on property used as a principal residence.  If the QAFV refueling property is related to hydrogen, the credit is 30% of the cost of the QAFV refueling property, capped at $200,000.

Plug-In Electric Motor Vehicle Credit

The act modifies the tax credit for the purchase of new, qualified plug-in electric drive motor vehicles placed in service after December 31, 2009.  The amount of the credit for each qualified vehicle will be equal to the sum of the following:

$2,500 plus

For a vehicle which draws propulsion energy from a battery with not less than five kilowatt hours of capacity, $417 for each kilowatt hour of capacity in excess of five kilowatt hours, but not in excess of $5,000.  For this purpose, battery capacity, with respect to any battery, is the quantity of electricity that the battery is capable of storing, expressed in kilowatt hours, as measured from a 100% state of charge to a 0% state of charge

The availability of the credit phases out once at least 200,000 qualified vehicles are sold for use in the United States. after December 31, 2009.

For purposes of the above rules, a “new qualified plug-in electric drive motor vehicle” is a vehicle that satisfies the requirements listed below:

The original use of the vehicle begins with the taxpayer

The vehicle is acquired for use or lease by the taxpayer and not for resale

The vehicle is made by a “manufacturer” (as defined in title II of the Clean Air Act)

The vehicle is treated as a motor vehicle for purposes of title II of the Clean Air Act

The vehicle has a gross vehicle weight rating of fewer than 14,000 pounds

The vehicle is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of at least four kilowatt hours and is capable of being recharged from an external source of electricity

The act also allows for a credit of 10% of the cost (up to $2,500) for certain “low speed vehicles” and vehicles with two or three wheels that meet the definition of “Qualified Plug-in Electric Vehicle.”  This credit applies only to vehicles acquired after February 17, 2009, and before January 1, 2012.

Modification to COBRA Coverage Rules

Pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), employees and dependents covered under an employer’s group health insurance plan may elect to continue coverage under the plan at their own expense (plus a 2% administrative fee).  Coverage may last for up to 18 months after the date the employee is terminated.  Under this recovery act, certain individuals covered under COBRA are required to pay only 35% of the premium for a period of up to 9 months.  The remaining 65% is subsidized by the government.  To be eligible, the individual must meet the following requirements:

• Qualifies for COBRA coverage as a result of involuntary termination (other than for gross misconduct) at any time from September 1, 2008, through December 31, 2009
• The individual elects COBRA continuation coverage
• The individual is not eligible to be covered under another group health plan or Medicare

Certain high-income individuals can still receive the subsidy, but will be required to repay (subject to a graduated phaseout) all or a portion of the subsidized amount once their adjusted gross income (AGI) in the tax year the subsidy is received exceeds $125,000 ($250,000 joint filers).  The recaptured subsidy is paid back by adding it to the individual’s income tax liability.  An individual’s receipt of the subsidy for COBRA continuation coverage is not treated as taxable income for federal tax purposes.  An individual must notify the group health plan providing the subsidized coverage once the individual is no longer eligible for COBRA coverage due to eligibility under another group health plan or Medicare.  Failure to notify will result in a penalty equal to 110% of the subsidized premium amount after the date the individual no longer qualifies for COBRA.

Employers will need to act quickly in order to comply with the changes to the COBRA rules.  Additional notification about the availability of the premium reduction subsidy under COBRA must be provided along with the general COBRA notification requirements.  Additionally, any employees terminated involuntarily on or after September 1, 2008, who are eligible for COBRA as of February 17, 2009, must be notified of the ability to elect the subsidized coverage.

Various Spending Provisions

In addition to the tax provisions, the act also contained several spending provisions.  The following may interest the manufacturing and distribution industries:

• $19 billion for Healthcare Information Technology (HIT) to computerize medical records
• $11 billion to the Department of Energy for research and development, pilot projects and federal matching funds for the Smart Grid Investment Program to modernize the electricity grid and build new power lines to transmit clean, renewable energy
• $8.7 billion to the National Institutes of Health to support biomedical research
• $5 billion to the Weatherization Assistance Program to help low-income families reduce their energy costs by weatherizing their homes
• $4.7 billion to the National Telecommunications and Information Administration’s Broadband Technology Opportunity Program.  Grants from this program are to accelerate broadband deployment in unserved and underserved areas
• $4 billion to the Department of Housing and Urban Development to assist in rehabilitating and improving energy efficiency of public housing units
• $4 billion to the Clean Water State Revolving Funds to help communities upgrade wastewater treatment systems.
• $3.4 billi­on for carbon capture and sequestration technology
• $2 billion to the Department of Energy for grants for the manufacturing of advanced batteries and components
• $1 billion to the Transportation Security Administration for the purchase and installation of explosive detection systems and checkpoint screening systems in the nation’s airports
• $750 million to the Department of Transportation for capital projects to modernize or improve existing fixed guideway systems, including purchase and rehabilitation of rolling stock, track, equipment and facilities
• $300 million to the General Service Administration to replace older government vehicles with alternative fuel and plug-in automobiles

To learn more about how this act may affect you and your business, contact your BKD advisor.