November 2008
Energy Improvement and Extension Act of 2008:
Key Energy Tax Credit Provisions Affecting
Combined Heat and Power
The Energy Improvement and Extension Act of 2008, passed by Congress on October 3, 2008, signifi-
cantly expands federal energy tax incentives. The new law extends the duration of existing credits for
solar energy, fuel cells, and microturbines by eight years; increases the credit amounts for fuel cells;
establishes new credits for small wind-energy systems, geothermal systems, and combined heat and
power (CHP) systems; extends eligibility of credits to public utilities; and allows taxpayers to take the
credit against the alternative minimum tax, subject to certain limitations. Details of the CHP-related
provisions are provided below.
CHP Investment Tax Credit
The Energy Improvement and Extension Act provides for a 10-percent investment tax credit (ITC) for
the costs of the first 15 megawatts (MW) of CHP property under Section 48(a)(3)(A)(v) of the Internal
Revenue Code of 1986. To qualify for the tax credit, the CHP system specifically must:
Produce at least 20 percent of its useful energy as electricity and 20 percent in the form of useful
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thermal energy.
Be 60-percent efficient on a lower heating value basis.
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Be smaller than 50 MW.
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Be constructed by the taxpayer or have the original use of the equipment begin with the taxpayer.
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Be placed in service before January 1, 2017.
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The ITC may be used to offset the alternative minimum tax, and the CHP system must be operational in
the year in which the credit is first taken. The credit applies to eligible property placed into service after
October 3, 2008. CHP property does not include “property used to transport the energy source to the
facility or to distribute energy produced by the facility.”
Accelerated Depreciation
The definition of CHP systems as “energy property” under the act might also qualify CHP for a five-
year accelerated depreciation schedule under Section 168 of the Internal Revenue Code. S