The U.S. Treasury Department today issued much-anticipated guidance concerning applications to receive cash grants in lieu of income tax credits for certain renewable energy projects. Although the guidance includes a sample application form, Treasury stated that it will not accept applications until August 1.
Overview of the Grants
The American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in February, permits an applicant to receive a grant from Treasury in lieu of claiming investment tax credits (ITCs) or production tax credits (PTCs). To qualify, the property must be placed in service in 2009 or 2010 or, if construction begins in 2009 or 2010, must be placed in service by the end of 2012 (for wind), 2013 (for biomass, geothermal and other resources) or 2016 (for solar).
The grant functions similarly to a refundable tax credit. The amount of a grant generally is equal to the amount of the ITC for which the owner of the project otherwise would have been eligible (i.e., generally 30% of the qualified cost of the project). Receipt of the grant is not includible in the gross income of the recipient. The tax basis of the property for depreciation purposes generally is reduced by one-half of the amount of the grant (i.e., the tax basis for depreciation generally would equal 85% of the qualifying costs of the property).
Application Procedures
An application generally must be submitted after the property has been placed in service and before October 1, 2011. ARRA directs Treasury to make payment to a qualified applicant within 60 days of receiving a completed application.
For property not placed in service in 2009 or 2010 but for which construction begins in 2009 or 2010, an application must be submitted after construction commences but before October 1, 2011. An applicant who applies before the project is placed in service must submit, within 90 days after the property is placed in service, supplemental information sufficient for Treasury to make a final determination of eligibility.
Eligible Applicants
An applicant must own or lease the property and must have originally placed the property in service. Federal, state, and local governments, tax-exempt entities, cooperative electric companies, and certain partnerships and other pass-through entities with such persons as direct or indirect partners or owners are not eligible for the grants.
NOTE: The guidance specifically endorses the use of "blocker" corporations. Therefore, a person who would otherwise not be eligible to receive the grant may set up a U.S. corporation to hold its interest and thereby qualify to receive the grant.
Eligible Property
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Timing. Qualified property generally must be originally placed in service in 2009 and 2010. Property placed in service after 2010 and on or before the applicable credit termination date, however, may qualify for a grant if construction began in 2009 or 2010. Property that satisfies this placed-in-service requirement may be qualified property even if it is an addition to or expansion of a qualified facility placed in service before 2009.
Construction generally is considered to begin when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. Pursuant to a safe harbor created in the Treasury guidance, an applicant may treat physical work of a significant nature as beginning when the applicant incurs or pays more than 5 percent of the total cost of the property excluding the cost of any land and preliminary activities.
NOTE: This 5 percent safe harbor will eliminate considerable uncertainty regarding what it means to "begin construction."
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Units of Property. For purposes of determining whether property has been placed in service or construction has begun, the owner of multiple units of property may elect to treat them as a single unit. For example, the owner of a wind farm may elect to treat multiple turbines and other equipment (e.g., control equipment) as a single unit rather than treat each turbine as a separate unit.
NOTE: This is an extremely favorable rule. It will permit an applicant to "batch" together in one application an entire facility, such as a wind farm. At the same time, it will allow an applicant who cannot complete construction on an entire facility before the placed-in-service deadline to qualify for a grant.
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Original Use. The original use of the property must begin with the applicant. For purposes of determining whether this requirement is met, Treasury will apply an "80-20" test. If the cost of the used parts contained within a facility is not more than 20 percent of the total cost of the facility, an applicant will not fail to be considered the original user of property because the facility contains used parts.
In addition, for purposes of determining whether the original use requirement is met, the special sale-leaseback rules applicable to the ITC also will apply to the grant. Pursuant to these rules, if a developer originally places property in service, sells the property, and leases back the property within three months after the date the property was originally placed in service by the developer, then the owner-lessor generally will be considered the original user of the property and the property generally will be considered to be placed in service not earlier than when it is first used pursuant to the lease.
NOTE: Sale-leaseback transactions offer certain advantages, including financing for the entire cost of the project. In addition, the price for which the facility is sold to the lessor is often higher than the cost of constructing the facility, allowing a higher grant to be claimed.
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Required Documentation. An applicant must submit supporting documentation demonstrating that the property is eligible property, has been placed in service, and, if placed in service after 2010, that construction began in 2009 or 2010. Relevant documentation includes, among other things, (i) engineering design documents stamped by a licensed professional engineer, (ii) a commissioning report provided by a third party that certifies that the equipment has been installed, tested, and is ready and capable of being used for its intended purpose, and (iii) an interconnection agreement (for properties interconnected with a utility). |
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Specified Energy Property. A grant will be paid only with respect to "specified energy property." Specified energy property includes only tangible property, not including a building, that is an integral part of the facility and for which depreciation (or amortization in lieu of depreciation) is allowable. This includes only tangible property that is both used as an integral part of the activity performed by qualified facility and located at the site of the qualified facility. Property is an integral part of a qualified facility if the property is used directly in the qualified facility, essential to the completeness of the activity performed in that facility, and located at the site of the qualified facility.
NOTE: The Treasury guidance contains a favorable interpretation of what it means to be an "integral" part of a facility.
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Eligible Basis
An applicant must submit with the application a detailed breakdown of all costs included in the basis of the qualifying property. For property with a cost basis in excess of $500,000, an applicant must submit an independent accountant's certification attesting to the accuracy of all costs claimed as part of the basis. All costs that must be capitalized into the basis of property under general tax principles will be included.
Leased Property
The owner of a project that is eligible for a grant may make an irrevocable election to have the lessee of the property receive the grant. The election is made by a written agreement with the lessee and generally will follow rules already applicable to the ITC.
Recapture
The grant must be repaid to Treasury if the applicant sells the property to a disqualified person or the property ceases to qualify as specified energy property within five years from the date the property is placed in service. The amount subject to repayment is 100 percent if the disqualifying event occurs in the first year and decreases by 20 percent each year thereafter. For this purpose, "disqualified person" generally includes a person who would not be eligible for the grant if that person had placed the property in service originally.
Selling the property to an entity other than a disqualified person does not result in recapture if the property continues to qualify as a specified energy property and the purchaser of the property agrees to be jointly liable with the applicant for any recapture. An applicant will remain jointly liable to the Treasury for the recapture amount even if the applicant no longer has control over the property.
If a lessor elects to have the lessee apply for the grant and subsequently sells the property to a disqualified person, the lessee will be liable to Treasury for the recapture amount even if the lessee maintains control over the property. If the lease is terminated and possession of the property is transferred by the lessee to the lessor or any other person, the lessee will be liable to Treasury for the recapture amount if the use of the property changes during the recapture period so that it no longer qualifies as specified energy property.
An applicant is not required to post a bond as a condition of receiving payment under the grant program, and receipt of payment does not create a lien on the property in favor of the United States. However, funds that must be repaid to Treasury under these rules are considered debts owed to the United States. These debts are not considered tax liabilities.
NOTE: Treasury has limited the situations in which recapture will be triggered. In addition, Treasury will not take a security interest in the project or in the project company. This will permit developers and their lenders to avoid complex inter-creditor agreements as well as the need to provide additional security to indemnify lenders against the possibility of recapture.
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.