NVCA Today

President Barack Obama signed, on February 17th, an economic stimulus package, the American Recovery and Reinvestment Act (ARRA), providing a total of $789.5 billion in spending and tax cuts.  The passage of this legislation represents a victory for the new Administration, albeit not with the bipartisan support initially envisioned.  Significant pieces for the venture industry that are included are:

Energy Incentives

The President campaigned for office on themes of reducing our dependence on foreign oil, creating a new energy economy and with it, new "green jobs."  Those concepts were implemented in a very tangible way by the energy provisions of the ARRA.  With a total of over $37 billion in funding for energy grants, loans and tax credits, the ARRA represents a significant expansion in federal funding for renewable energy, energy conservation, R&D and energy efficiency. The energy portion of the bill remained largely intact as it moved from the House to the Senate to the conference committee.  In fact, the Senate increased several line items and added key provisions to the measure.

Key Energy Tax Incentives

Advanced Energy Investment Credit - this credit allows for a new 30% investment tax credit for manufacturing energy facilities that make components for renewable energy, energy storage, advanced battery technology, carbon capture and sequestration and other energy technologies.  The program has funding of $2.3 billion and the credits will be made available through a competitive bidding process for projects certified by the Department of Treasury.  Note: NVCA member firms worked with lawmakers beginning last December on conceptualizing this provision and those firms helped craft the measure that was included in the final bill.

Extension of the Production Tax Credit - the PTC for wind projects is extended for 3 years, to December 2012.  The PTC for other renewable energy technologies, such as open-loop and closed-loop biomass, waste-to-energy, geothermal and small hydropower is extended until 2013. This is the most expensive tax credit in the economic stimulus bill and costs $13.1 billion over 10 years.

Election to Claim ITC in lieu of the PTC - facilities that normally utilize the PTC, like wind, biomass and geothermal facilities, have a one-time opportunity to select to use the Investment Tax Credit rather than the Production Tax Credit.  Facilities cannot use both the ITC and the PTC.

Clean Renewable Energy Bonds (New CREBs) - the bill provides for an additional $1.6 billion in new clean renewable energy bonds to finance facilities that generate electricity from renewable energy sources, including solar, wind, biomass, geothermal and others.

Consumer Vehicle Incentives - a tax credit of $2500 is provided for the purchase of plug-in hybrid vehicles and an additional $417 can be claimed if the vehicle has battery capacity of at least 5 kilowatt hours.

Key Energy Spending Provisions

Energy Transmission Programs - the bill allows for $11 billion to be spent on energy transmission projects, including $4.5 billion for "smart grid" projects, with an emphasis on geographical diversity for these projects.  The White House believes that this will result in more than 3000 miles of new and modernized transmission lines.  This too was an area in which NVCA member input helped influence the outcome of authorizing language in the bill.  The law requires that utilities use open protocols and standards so that consumers receive the best and newest grid updates at the lowest price points.  Portfolio companies engaged in smart grid should enjoy a more level playing field and cost reductions due to competition.

State Energy Efficiency Programs - $3.1 billion in new money is included for states to implement updated efficiency building codes and make utility-sponsored energy efficiency improvements.

Renewable Energy and Energy Efficiency Research - $2.5 billion will be allocated to the DOE Office of EE/RE to perform research.  Of this, $800 million is dedicated for biomass, $400 million for geothermal and $50 million for efficiency.

Water Infrastructure - The Clean Water State Revolving Fund (SRF) will receive $4 billion and the Safe Drinking Water SRF will receive $2 billion.

Federal Fleet Vehicles - the bill calls for spending $300 million to replace vehicles in the federal government fleet with higher fuel efficiency vehicles, hybrid vehicles and electric vehicles.

Health Care Initiatives:

Congress provided over $22 billion to help jumpstart the new Obama Administration's priorities on healthcare reform efforts.  Funding was provided for the creation of a national plan for a Healthcare Information Technology (HIT) system, for conducting research to compare the effectiveness of different treatments for the same illness, and for infection prevention programs.

Health Information Technology: Health Information Technology (HIT) accounts for the largest chunk of healthcare spending, capturing $19 billion to accelerate the adoption of HIT programs by doctors and hospitals and to create a national office, the Office of the National Coordinator of Health Information Technology (ONCHIT), where almost all HIT activity will flow.  Several committees will be created under ONCHIT to help advise and provide updates on the development and implementation of HIT, including a Standards Committee comprised of public and private stakeholders that will recommend standards and implement specifications and certification criteria for secure electronic exchange.

The new law also creates grants for infrastructure investments and establishes several programs to help providers adopt and use HIT.  The Secretary of HHS will have the authority to award grants to states to implement and expand HIT usage. It will also provide incentive payments to providers who adopt and utilize electronic health record technology that have met certification standards developed by the National Office.  Specifically, Medicare providers who are using electronic health records programs are eligible to receive incentive payments that in 2011 would be capped at $15,000 and phase down.  Incentives for hospitals, providers in an HMO or Medicare Advantage will also apply.

Finally, the law has detailed requirements pertaining to improving privacy and security provisions and HIPAA's applicability.

Comparative Effectiveness Research: One of the more controversial provisions in the new law is the $1.1 billion allocated for the creation of a Federal Coordinating Council (FCC) to do comparative effectiveness research (CER) on different treatments for the same illness.  $400 million of the total amount appropriated will be administered by the Agency for Healthcare Research and Quality, $300 million will be transferred to the National Institute of Health, and $400 million will be allocated at the discretion of the Secretary of Health and Human Services for CER.  The FCC will consist of 15 senior Federal officers and will be chaired by the Secretary of HHS.  Unfortunately, there will not be any private citizens advising the committee.

The funds are intended to be used to conduct or support research to evaluate and compare the clinical outcomes, effectiveness, risk, and benefits of two or more medical treatments and services that address a particular medical condition.  The new law recognizes that a "one-size-fits-all" approach to patient treatment is not the most medically appropriate solution to treating various conditions and included language to ensure that subpopulations, like gender and race, are considered when research is conducted or supported with the funds.

This new program was created by the growing concern that doctors have very little or no solid evidence of the value of many medical treatments and believe that the research will eventually save money for the healthcare system by discouraging the use of costly, ineffective medical treatments.  Most health care experts, and NVCA, generally agree that the U.S. needs to reevaluate the effectiveness of current treatments and support CER to help generate effectiveness data.  The current debate is centered on whether to include the cost of the technology or therapy in the research, and how to evaluate that cost.

Prevention and Wellness Fund:  The new law also provides $1 billion for a new Prevention and Wellness Fund administered through HHS.   Of the $1 billion, $650 million will be used for evidence-based clinical and community-based prevention and wellness strategies that deliver specific, measurable health outcomes that address chronic disease rates.  The CDC will receive $300 million for its immunization program and $50 million for healthcare-associated infections reduction strategies.

General Tax Provisions:

Alternative Minimum Tax (AMT):

By including another one-year patch for the AMT in the economic stimulus agreement, Congress eliminated one of the most significant sources of tax pressure and controversy for the remainder of 2009.  Although many Members argued that including the patch was not a stimulus, enough Members pushed for the opportunity to take this issue off the table for the year that the language remained in the final compromise.

Small Business Capital Gains:  Current law under Internal Revenue Code Section 1202, dealing with Qualified Small Business Stock (QSBS), provides for a 50% exclusion from tax of gain from the sale of qualified small business stock held more than 5 years.  Unfortunately, the rules in place, particularly those defining a qualifying small business, have been too cumbersome for many VCs to use, and so have not provided the incentive for long-term investment in small businesses anticipated by Congress.  The stimulus agreement increases the exclusion from tax to 75% of the gain, for QSBS stock held more than 5 years and issued after the date of enactment of the legislation (February 17, 2009) and before January 1, 2011.  The agreement does not address problems VCs have encountered in the aggregate gross asset limit that defines a qualified company as having only $50 million in aggregate gross assets.  Equally important, the measure does not remove the exclusion as a preference item for calculating the AMT.  Senator John Kerry (D-MA) has introduced a measure that does make these changes and we are hopeful that his bill will be included in further tax relief packages being contemplated.

Extension of Small Business Expensing:  Small business taxpayers currently may elect to write off the cost of certain capital expenses rather than depreciating those costs over time.  In 2008, Congress temporarily increased the expensing limit to $250,000.  The stimulus agreement extends the increased expensing limit for businesses making investments in plants and equipment in 2009.

Net Operating Loss Carryback Provisions for Small Business:  Currently companies can carry back net operating losses for two years to offset income in those two prior years.  The stimulus allows companies with less than $15 million in gross receipts to carry back losses for 5 years.  While this only helps if the company had income to absorb those losses back 5 years (from 2 yrs), the provision does allow companies to use the NOL deductions to offset all income under the AMT rules (rather than only 90% of AMT income as current rules dictate.)

R&D Funding

The economic stimulus package contains bold investments in science research and development (R&D) that will help both stimulate our economy and provide for the long-term competitiveness of the American workforce.  The provisions included in the ARRA  recapture much of the funding that was authorized, but never appropriated, under the bipartisan America COMPETES Act of 2007 and would correct several years of flat and occasionally declining Federal funds for the nation's research and economic development communities.  A number of provisions in the proposed ARRA demonstrate a strong commitment to strengthening our nation's workforce and R&D capabilities, including:

$3 billion in additional funding for the National Science Foundation (NSF), including $2.5 billion for research on social, economic, and environmental issues as authorized by the America COMPETES Act, $400 million to build major research facilities that perform cutting edge science and research, and $100 million for education and human resources programs.

$1.6 billion for the Department of Energy's Office of Science for basic research into the physical sciences including high-energy physics, nuclear physics, and fusion energy sciences, and improvements to DOE laboratories and scientific facilities. $400 million would be for the Advanced Research Project Agency - Energy (ARPA-E) to support high-risk, high-payoff research into energy sources and energy efficiency, as authorized in the America COMPETES Act.

The agreement appropriates $600 million for the National Institute of Standards & Technology (NIST), which works with the private sector in an effort to advance U.S. competitiveness in science and technology fields.  $360 million would be for research and development facility construction grants, of which $180 million is directed towards competitive construction grants for research science buildings, and $220 million for science and technical research.

The measure provides $1 billion for the National Aeronautics and Space Administration (NASA). Of that total, $400 million would be set aside for climate change research, with at least $250 million of that to be used to conduct NASA's Earth science and climate research missions. Of the $1 billion total, $150 million would be for aeronautics research and development, and $400 million would be for exploration.

The National Institutes of Health (NIH) received $8.2 billion, to support scientific research and expanding good jobs in the biomedical field to study diseases such as Alzheimer's, Parkinson's, cancer, and heart disease.  It provides $1.3 billion for the National Center for Research Resources, of which $1 billion is directed towards grants and contracts to construct or renovate university research facilities.

The ARRA also includes substantial additional funding at NOAA and the US Geological Survey that will help modernize facilities across the nation, increase their research capacity, and therefore assure the next generation of well-prepared educators, scientists, and engineers in the STEM fields.

We will continue to monitor the status of R&D funding for FY 2009 (nearly six months into the fiscal year) and of course, FY 2010.