Energy Tax Law Alert: Treasury Revises Guidance Concerning "Qualified Facility"

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The U.S. Department of the Treasury has issued revised guidance, including additional frequently asked questions (FAQs), concerning the Section 1603 grant in lieu of tax credits. The guidance confirms and clarifies several significant issues for anaerobic digestion facilities and other facilities that generate electricity from gases or liquids derived from open-loop biomass or municipal solid waste. The guidance provides, among other things:

  • Open-loop biomass facilities include facilities that burn gases or liquids derived from open-loop biomass.
  • If a qualified facility burns gases or liquids derived from open-loop biomass or municipal solid waste, equipment used to convert the qualified resource into a gas or liquid (conversion equipment) qualifies for a Section 1603 grant if the conversion equipment is an integral part of the facility.
  • Conversion equipment owned by the same person and located at the same site generally will be treated as an integral part of the facility.
  • In certain circumstances, conversion equipment may be treated as an integral part of a qualified facility even if the conversion equipment is owned by different persons and is located at a different site. Relevant factors include whether the conversion equipment and the facility are placed in service simultaneously, the extent to which the gas or liquid produced is dedicated to the facility (e.g., under an exclusive long-term supply contract), and the dependence of the facility on the gas or liquid produced by the conversion equipment.
  • If conversion equipment is treated as an integral part of a qualified facility, the conversion equipment's eligible basis for purposes of the grant is equal to the percentage of its basis that equals the percentage of output dedicated to the facility.
  • The fact that a qualified facility burns fuel from a non-qualified resource will not result in a reduction of the eligible cost basis of conversion equipment that produces fuel only from qualified resources if all fuel produced by the conversion equipment is used by the qualified facility in the production of electricity.
  • Conversion equipment that is an integral part of a qualified facility may qualify for a Section 1603 grant even if the combustion equipment in the facility was placed in service before 2009. To qualify, the conversion equipment must be placed in service either (i) in 2009, 2010, or 2011 or (ii) if construction on the equipment began in 2009, 2010, or 2011, in 2012 or 2013.
  • If components of a facility are owned by different persons, each owner (including an owner of a portion of the facility that is not eligible for a Section 1603 grant) must submit a separate application for a Section 1603 grant, and all owners of the facility must agree to the terms and conditions of each separate application.

The guidance is a welcome development for facilities that generate electricity from gases or liquids derived from open-loop biomass and municipal solid waste. If you have any questions about the guidance or related issues, please contact a key contributor.

 

IRS Circular 230 notice: The information 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.

Key Contributors

Kevin T. Pearson
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