News + Events
Treasury and DOE Release Guidance on Applying for Grants in Lieu of Tax Credits
July 10, 2009
Howard A. Cooper
Philip H. Spector
Overview
The Department of the Treasury and the Department of Energy have issued guidance regarding the rules for obtaining a grant from Treasury (“section 1603 program”) in lieu of a production tax credit under section 45 of the Internal Revenue Code (“Code”) or an investment tax credit under Code section 48. Under this program, which was enacted as part of the American Recovery and Reinvestment Act, the Department of the Treasury makes payments to eligible persons who place in service specified energy property and apply for such payments. The purpose of the payment is to reimburse eligible applicants for a portion of the expense of such property. Eligible property under this program includes only property used in a trade or business or held for the production of income.
By receiving payments for property under section 1603, applicants are electing to forego tax credits under Code sections 45 and 48 with respect to such property for the taxable year in which the payment is made or any subsequent taxable year. Applicants must agree to the terms and conditions applicable to the section 1603 program. The guidance establishes the procedures for applying for payments under the section 1603 program and is intended to clarify the eligibility requirements under the program.
Qualified Property
In general, to qualify to obtain a grant under the section 1603 program, property must be originally placed in service between January 1, 2009, and December 31, 2010 (regardless of when construction begins), or placed in service after 2010 and before the credit termination date if construction of the property begins between January 1, 2009, and December 31, 2010. Qualified property includes expansions of an existing property that is qualified property under Code section 45 or 48. The credit termination date and the grant rate for different types of property are set forth in the table below:
|
Specified Energy Property |
Credit Termination Date |
Applicable Percentage of Eligible Cost Basis |
|
Large Wind |
Jan 1, 2013 |
30% |
|
Closed-Loop Biomass Facility |
Jan 1, 2014 |
30% |
|
Open-loop Biomass Facility |
Jan 1, 2014 |
30% |
|
Geothermal under IRC sec. 45 |
Jan 1, 2014 |
30% |
|
Landfill Gas Facility |
Jan 1, 2014 |
30% |
|
Trash Facility |
Jan 1, 2014 |
30% |
|
Qualified Hydropower Facility |
Jan 1, 2014 |
30% |
|
Marine & Hydrokinetic |
Jan 1, 2014 |
30% |
|
Solar |
Jan 1, 2017 |
30% |
|
Geothermal under IRC sec. 48 |
Jan 1, 2017 |
10% |
|
Fuel Cells |
Jan 1, 2017 |
30% |
|
Microturbines |
Jan 1, 2017 |
10% |
|
Combined Heat & Power |
Jan 1, 2017 |
10% |
|
Small Wind |
Jan 1, 2017 |
30% |
|
Geothermal Heat Pumps |
Jan 1, 2017 |
10% |
Applications
Under the guidance, applications may only be submitted after the property to which the application relates is placed in service, or is under construction. A completed application will include the signed and complete application form; supporting documentation; signed Terms and Conditions; and complete payment information. All applications must be received before the statutory deadline of October 1, 2011. Final applications will be available from Treasury on or about August 1, 2009. At that point, taxpayers will be able to begin submitting applications to Treasury. To assist taxpayers who wish to begin work on an application now, Treasury and DOE included with the guidance a “near final” application.
For property placed in service in 2009 or 2010, applications must be submitted after the property has been placed in service and before October 1, 2011. Treasury will review the applications and make payment to qualified applicants within 60 days from the date the completed application is received by Treasury.
For property not placed in service in 2009 or 2010 but for which construction began in 2009 or 2010, applications must be submitted after construction commences but before October 1, 2011. If the property has been placed in service at the time of the application, Treasury will make payments to qualified applicants within 60 days from the date the completed application is received. For property not yet placed in service at the time of the application, Treasury will review such applications and notify the applicant if all eligibility requirements that can be determined prior to the property being placed in service have been met. If so notified, applicants must then submit, within 90 days after the date the property is placed in service, supplemental information sufficient for Treasury to make a final determination. Treasury will conduct a final review of the application at that time and make payment to qualified applicants within 60 days after the supplemental information is received by Treasury.
For these purposes construction begins when physical work of a significant nature begins. The guidance provides examples for property constructed by the applicant, and for property constructed under a contract. Under a safe harbor, the test is deemed met where the applicant has incurred more than five percent of the total cost of the property.
If an applicant is applying for section 1603 payments for multiple units of property that are treated as a single, larger unit of property, all such units may be included in a single application. Each wind turbine, its tower and its supporting pad are treated as a single unit of property. The owner of multiple units located on the same site that will be operated as a larger unit can elect to treat the group as a single unit for purposes of determining the beginning of construction and the placed in service date.
When Treasury determines that an application is approved, it will send a notice to the applicant. The notice informs the applicant that the payment will be made and incorporates the information contained in the applicant’s completed application form and the Terms and Conditions. Treasury makes payment to the applicant no later than five days from the date of the notice. In cases where an applicant has not submitted sufficient information upon which a determination can be based, the applicant will be so notified and given 21 days from the date of the notice to submit additional information. If additional information is not received within the 21 day period, the application will be denied.
Qualifying Basis
When Treasury determines that the application does not qualify for payment, the applicant will be so notified. Such notification will include the reasons for the determination and will be considered the final agency action on the application.
The guidance describes the types of property eligible for payments and costs included in basis. For properties with a cost basis in excess of $500,000, applicants will be required to back up cost data with an independent accountant’s certification.
The program guidance confirms the availability of the election for a lessor of property to pass through the payment to the lessee. The guidance also allows the lessee to claim the payment directly (without any election) in certain sale-leaseback transactions.
Disqualified Persons and Recapture
Certain persons (“disqualified persons”) are not eligible to receive payments. These include:
- any Federal, state or local government, including any political subdivision, agency or instrumentality thereof
- any charitable organization that is described in Code section 501(c)
- cooperative electric companies or
- any partnership or other pass-thru entity, any direct or indirect partner of which is an organization or entity described above unless this person only owns an indirect interest in the applicant through a taxable C corporation.
Under the recapture provisions, certain dispositions cause a recapture of (and an obligation to repay) the payment. These “disqualifying events” include any sale to a disqualified person of any interest in the property, the applicant, or in any partnership or pass-thru entity that owns an interest in the applicant. Selling or otherwise disposing of the property to an entity other than a disqualified person generally does not result in recapture.
Miscellaneous Rules
Receipt of a grant under this program does not make the property subject to the requirements of NEPA and similar laws or to the requirements of the Davis-Bacon Act.
In general, the grant is not includible in the gross income of the applicant. The depreciable basis of the property is reduced by an amount equal to 50 percent of the grant.
Payments received under the section 1603 program must be normalized by regulated utilities.
Copies of the Program Guidance, the Terms and Conditions and of the draft application can be found at http://www.treasury.gov/recovery/1603.shtml
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) that may be addressed herein.