Tax Law Alert: Guidance Issued for Qualifying Advanced Energy Project Tax Credits

The Treasury Department and the Department of Energy (DOE) yesterday jointly issued guidance detailing the requirements for qualifying for the new Qualifying Advanced Energy Project (QAEP) credit. This program, which was created by the American Recovery and Reinvestment Act effective as of February 17, 2009, provides a 30 percent federal income tax credit for investment in property which "re-equips, expands, or establishes a manufacturing facility" that produces renewable energy property. Unlike most other renewable energy tax credits, a taxpayer wishing to claim the QAEP credit must be allocated an amount of credit by the Treasury Department, acting in consultation with DOE. The total amount of QAEP credit available for allocation is limited to $2.3 billion. The first round of allocations begins August 14, 2009 for 2009-2010. If less than $2.3 billion of credits are issued in the first round of allocations, an additional round of allocations will be made for 2010-2011. As described below, to qualify for an allocation of QAEP credit in the first round, an application must be submitted to DOE by September 16, 2009. Once DOE approves and assigns a rank to the project, an application must be submitted to the Internal Revenue Service (IRS) by December 16, 2009. The first round of allocations will be made by January 15, 2010.

Investment Credit Overview The QAEP credit is an investment-based credit. The credit equals 30 percent of the taxpayer's basis in the property certified as eligible for the credit. There is no tax credit cap per project. The credit is not refundable and taxpayers may not elect to receive a cash grant in lieu of the credit. The credit may be claimed in the tax year in which the qualified property is placed in service. In general, property is considered placed in service when it is placed in a condition or state of readiness and availability for a specifically assigned function. If the taxpayer does not have sufficient tax liability to utilize the full amount of available credit in the year the project is placed in service, any remaining credit may be carried forward up to 20 years or back one year. While a project need not be in any particular stage of development to apply for a QAEP credit, a taxpayer has three years from the date the certification for the QAEP credit is issued to place the project in service. Any certification is void if the project is not placed in service by the deadline. As an investment-based credit, the QAEP credit is subject to recapture if, within five years of being placed in service, the taxpayer disposes of the property (or an interest in the property) or the property ceases to be used for a qualified purpose.

Eligibility To qualify for an allocation of QAEP credit, property must be used to re-equip, expand or establish a manufacturing facility for the production of specified advanced energy property or property that, after further manufacture, will become specified advanced energy property. Components may be specified advanced energy property, but the relative value of the components to the finished product will be taken into consideration in the DOE ranking process described below. Specified energy property is:

• Property designed for use in the production of energy from the sun, wind,geothermal deposits or other renewable resources;
• Fuel cells, microturbines, or an energy storage system for use with electric orhybrid-electric motor vehicles;
• Electric grids to support the transmission of intermittent sources of renewable energy, including property for the storage of such energy;
• Property designed to capture and sequester carbon dioxide and sequester carbon dioxide emissions;
• Property designed to refine or blend renewable fuels (but not fossil fuels) or to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies);
• New plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components designed specifically for use with such vehicles, including electric motors, generators, and power control units or;
• Other property designed to reduce greenhouse gas emissions as may be determined by the IRS.

The property must be tangible property (other than a building or its structural components) subject to the allowance for depreciation or amortization, and must be an integral part of the qualifying project. A manufacturing facility is defined as a facility that makes or processes raw materials into finished products (or accomplishes any intermediate stage in that process).

DOE Recommendation and Ranking The IRS will not consider an application for a credit allocation unless DOE has provided a recommendation and ranking for the project. Accordingly, a taxpayer seeking an allocation of credit for a project must first submit to DOE a two-part application for recommendation. DOE will provide a ranking (in descending order) of all projects for which it provides a recommendation. Credits will be fully allocated to a higher ranked project before any credits are allocated to the next project on the list. For the first round of credit allocations, preliminary applications must be submitted to DOE by September 16, 2009 and final applications must be submitted by October 16, 2009. The application must contain a "project information memorandum" that addresses eligibility and evaluation criteria. The memorandum may not exceed 30 pages. Elaborate art work and graphics are strongly discouraged. In addition to the eligibility criteria discussed above, DOE will consider the following four evaluation criteria, equally weighted, in making recommendation and ranking determinations:

• Projects that provide the greatest domestic job creation (both direct and indirect) during the credit period (February 17, 2009, through February 17, 2013);
• Projects that provide the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases;
• Projects that have the greatest potential for technological innovation and commercial deployment, as indicated by (i) the production of new or significantly improved technologies, (ii) improvements in levelized costs and performance, and (iii) manufacturing significance and value; and
• Projects that have the shortest projected time from certification to completion.

In addition, DOE will consider the following four overall program policy factors:

• Geographic diversity;
• Technology diversity;
• Project size diversity; and
• Regional economic development.

DOE will also assess the commercial viability of the project. To describe the project economics and present evidence of commercial viability, the applicant should provide as appendices:

• A business plan which provides a description of the proposed project; and
• A financial plan for the proposed project.

Participation in DOE loan guarantee programs generally will not be considered a negative factor for the commercial viability of the project.

IRS Certification and Allocation A separate application must be made to the IRS for certification of the project and allocation of the credit. The deadline for submission of this application is December 16, 2009. The IRS application is available here. If an application for certification is accepted, the taxpayer will be notified by letter (the date of which is considered the "acceptance date"). The taxpayer will be required to execute an agreement with the IRS (by March 15, 2010 for credits allocated in the first allocation round). The IRS will execute and return the agreement by April 16, 2010. Any successor in interest to the applicant will be required to execute a new agreement. Taxpayers whose applications for certification are accepted will have one year from the acceptance date to provide documentation establishing that the following requirements for certification have been met:

• The taxpayer has received all federal, state, and local permits, including environmental authorization or reviews necessary to commence construction of the project; and
• The taxpayer has completed all steps that must be accomplished during the one-year period beginning on the acceptance date if the project is to be placed in service before the end of the three-year period beginning on the date of issuance of the certification (assuming such certification will be issued on the one-year anniversary of the acceptance date).

If these requirements are satisfied, the IRS will then decide whether to certify the project. The date of the IRS letter certifying the project is considered the date of certification, which begins the three-year period for placing the project in service.

Summary of Critical Dates

The guidance issued by DOE and Treasury is extremely complex and detailed. Clients interested in making application to Treasury and DOE for allocations of the credit should contact their Stoel Rives attorney for additional information and guidance.

IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.