Treasury Grant Program
On July 9, 2009, the U.S. Treasury Department (“Treasury”) released guidance related to the Treasury Grant program enacted under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. Generally, Section 1603 provides a 10 percent or a 30 percent cash grant in lieu of investment tax credits for certain renewable energy facilities that are (a) placed in service in 2009 or 2010 (regardless of when construction began) or (b) placed in service after 2010 but before the applicable placed-in-service deadline for such facility, but only if the construction of such property began during 2009 or 2010. The Treasury Grant is available only for property that is used in a trade or business or held for the production of income. Accordingly, nonbusiness energy property and residential energy-efficient property eligible for tax credits under Section 25C and 25D of the Internal Revenue Code (the “Code”) do not qualify for a Treasury Grant.
This article is only a summary of certain aspects of the Treasury Grant program guidance. Complete details regarding the application process and the program guidance are available at http://www.treasury.gov/recovery/1603.shtml.
Application. In addition to the program guidance, the Treasury also released an application and other related documents. Applications must be submitted online at https:// treas1603.nrel.gov/. For property placed in service in 2009 or 2010, an application cannot be submitted for a project until after the project is placed in service, and must be submitted before October 1, 2011. For projects that are under construction in 2009 or 2010, but not placed in service until after 2010, applications must be submitted after construction has begun, but before October 1, 2011.
Payment of the cash grant will be made within 60 days from the later of (a) the date of the completed application or (2) the date the property is placed in service. For projects that are not placed in service when the application is submitted, the application process may include two stages (an initial application and supplemental information).
Certain documentation must be submitted with the application to demonstrate that the property is eligible property that has been placed in service or, if placed in service after 2010, that construction began in 2009 or 2010. The types of documentation that must be submitted depend on the type of and other facts relating to the facility.
Eligible Applicants. Certain entities are not eligible for Treasury Grants, including (a) federal, state or local governments (or any political subdivision, agency or instrumentality thereof), (b) any organization described in Section 501(c) of the Code and exempt from tax under Section 501(a) of the Code, (c) any entity described in Section 54(j)(4) of the Code or (d) any partnership or other pass-thru entity that has any of the entities described in (a) through (c) above as a direct or indirect partner, unless such ineligible entity owns an indirect interest in the applicant-partnership through a taxable C corporation. The guidance clarifies that a foreign person or entity is eligible for a cash payment if at least 50 percent of the income of the person or entity (or shareholder) is subject to U.S. income tax (the exception provided under Section 168(h)(2)(B) of the Code).
Beginning of Construction. When construction begins is important for projects on which construction begins in 2009 or 2010 but the project is not placed in service until after 2010. It has no impact on projects in which construction began before 2009, if those projects are indeed placed in service in 2009 or 2010.
The guidance provides that construction begins when physical work of a significant nature begins and provides a safe harbor rule. In the case of self-constructed property (the applicant manufactures, constructs or produces property for its own use in a trade or business or for the production of income), construction begins when physical work of a significant nature begins. Physical work does not include preliminary activities (planning, designing, securing financing, exploring, researching, clearing site, test drilling, etc.). The guidance provides, for example, that construction begins when work begins on the excavation for a foundation, the setting of anchor bolts into the ground or the pouring of concrete foundations. If the energy property is assembled from modular units off-site, construction begins when physical work of a significant nature commences at the off-site location.
In the case of property that is manufactured, constructed or produced for the applicant by another person under a written binding contract, construction begins when physical work of a significant nature begins under the contract. A contract is a binding contract if it is enforceable under state law against the applicant, does not limit damages to an amount less than five percent of the total contract amount, and various other requirements.
In the case of either self-constructed property or property constructed under a written binding contract, an applicant may treat physical work of a significant nature to have begun if (a) an accrual basis applicant incurs under Section 461(h) of the Code or (b) a cash basis applicant pays more than 5 percent of the total cost of the property (excluding preliminary activities).
In the case of multiple units of property that are located at the same site and will be operated as part of a larger unit (such as series of solar panels that are able to be operated independently, but will be placed in service in a series as part of a single project), the owner may elect to treat all the units (except units placed in service prior to January 1, 2009) as a single unit of property for purposes of determining when construction commences and the date the property is placed in service. If an applicant makes this election, the total cost of the project is taken into account for purposes of the safe harbor described above, and the failure to place the entire project into service will not preclude the receipt of a cash payment. However, only the units that are placed in service prior to the applicable deadline will be eligible for a cash payment.
Original Use; Leases. The guidance provides that the original use of the property must begin with the applicant. However, the sale-leaseback rules are applicable and if property is placed in service by a person, sold to an applicant and then leased back by the applicant to the person who placed the property in service within three months of the placed-in-service date, the original use begins with the applicant/lessor and the property is considered to be placed in service when it is first used under the leaseback.
In a sale-leaseback, the lessee may receive the cash payment if the following three conditions are satisfied: (1) the lessee must be the person who originally placed the property in service; (2) the property must be sold by and leased back to the lessee within three months of the placed-in-service date; and (3) the lessee and lessor must not make an election out of the sale-leaseback rules.
The guidance also permits a lessor (who is eligible to receive a Treasury Grant) to pass through the cash payment to a lessee (who is also eligible to receive a Treasury Grant). In order to make the election, the property must be eligible to receive a Treasury grant if such property were owned by the lessee. If an election is made, the lessee will be treated as having acquired the property for an amount equal to the independently assessed fair market value of the property on the date the property is transferred to the lessee. The election will generally follow the rules in the Code and the Treasury regulations governing lessee pass-through elections. The guidance provides additional rules and requirements regarding the election.
Grant-Eligible Property. Only tangible property (not including a building) that is an “integral” part” of the facility and for which depreciation (or amortization) is allowable is eligible property for purposes of determining the cash grant. The tangible property is tangible personal property and other tangible property as defined in Sections 1.48-1(c) and (d) of the Treasury regulations.
The basis of the eligible property is determined in accordance with the general tax rules for determining the basis of property and includes all properly capitalized costs. Only the basis of property placed in service after 2008 is eligible for a cash grant. Thus, if property is placed in service in a qualified facility that was placed in service in an earlier year, only the basis of property placed in service in 2009 is eligible for a cash grant. Applicants must submit a detailed breakdown of the costs included in the basis of the property. For properties with a cost basis in excess of $500,000, an applicant must also submit an independent accountant’s certification regarding the accuracy of the claimed cost basis.
Recapture. The Treasury Grant will vest ratably over a fiveyear period in the same manner as the investment tax credit. The following events will trigger recapture: (a) disposition of the property to a disqualified person, (b) the property ceases to qualify as specified energy property (i.e., use of the property predominantly outside of the United States, permanent cessation of production, etc.) and (c) certain other events that are specific to the type of facility at issue. A property may be sold to an entity other than a disqualified person without triggering recapture provided that (a) the property continues to be specified energy property and (b) the purchaser of the property agrees to be jointly liable with the applicant for any recapture.
Required Documentation. Applicants must submit documentation that the property is eligible property and has been placed in service, including (a) final engineering design documents stamped by a professional engineer, (b) a commissioning report from the project engineer, equipment vendor or an independent third party that the equipment has been installed, tested and is ready and capable of its intended use and (c) an interconnection agreement for properties that are connected to a utility.
- Applicants may request that the payment be assigned to a third party provided that certain requirements are met.
- The requirements of the National Environmental Policy Act (NEPA) and the Davis-Bacon Act do not apply to property for which a Treasury Grant is sought.
- Treasury Grant payments must be normalized under the rules of former Code Section 46(f).
- A Treasury Grant payment is not includible in the income of the applicant, but the basis of the property is reduced by 50 percent of the amount of the Treasury Grant (unless the property is the subject of a lessee pass-through election).
- The applicant is required to provide certain reports (including a project performance report) and certifications to Treasury and must maintain certain records as set forth in a terms and conditions document that the applicant must agree to and sign.
Manufacturing Investment Tax Credit Program
On August 13, 2009, the Internal Revenue Service (the “Service”) issued Notice 2009-72 (the “Notice”) establishing the qualifying advanced energy project program under Section 48C of the Internal Revenue Code (the “Code”). The American Recovery and Reinvestment Act of 2009 enacted a 30 percent investment tax credit for certain property used in a “qualified advanced energy project” — a project that re-equips, expands or establishes a manufacturing facility for the production of certain energy-related property.
The tax credit is subject to a certification and allocation process. Thus, a taxpayer must be “awarded” an allocation of tax credits in order to claim the credit. The 73-page Notice describes in detail the application process, which is subject to tight deadlines — a preliminary application for the program was due by September 16, 2009. The Secretary of the Treasury (the “Secretary”) is authorized to allocate up to $2.3 billion in such tax credits (which represents approximately $7.7 billion of investment in qualified advanced energy projects).
This article is only a summary of certain aspects of the manufacturing investment tax credit program guidance. Complete details regarding the application process and the program guidance are available at http://www.energy.gov/ recovery/48C.htm.
Qualifying Advanced Energy Project and Eligible Property
In order to qualify for the tax credit, the project must reequip, 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. A manufacturing facility is a facility that makes, or processes raw materials into, finished products (or accomplishes any intermediate stage in that process). Accordingly, the tax credit is for facilities that manufacture certain equipment (e.g., equipment that manufactures solar panels), and not for projects that use the equipment that is manufactured (e.g., a solar system that incorporates such solar panels). In addition, manufacturing facilities for the production of certain components of specified advance energy property are also qualified for the credit. For example, a project that manufactures wind turbine blades for a wind turbine is a qualifying project. Specified advanced energy property is:
- Property designed for the 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 or hybrid-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 to sequester carbon dioxide emissions;
- Property designed to refine and blend renewable fuels (but not fossil fuels) or to produce energy conservation technologies (including energyconserving lighting technologies and smart grid technologies);
- New plug-in electric drive motor vehicles as defined in Section 30D of the Code, qualified plug-in electric vehicles as defined in Section 30(d), or components that are 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 Secretary in published guidance or in the letter notifying the taxpayer that the Service has accepted the taxpayer’s application for Section 48C certification.
Eligible property for purposes of the tax credit is property (other than a building or its structural components) that is necessary for the production of specified advanced energy property listed above. The property must also be tangible personal property or other tangible property (not including a building or its structural components) that is used as an integral part of the qualifying advanced energy project. Finally, depreciation or amortization must be allowable with respect to the property.
In order to compete for an allocation of tax credits, a taxpayer must submit (a) a preliminary application and a final application for recommendation by the Department of Energy (“DOE”) and (b) an application for certification by the Service. Separate applications must be submitted for each separate qualifying advanced energy project. If an application for DOE recommendation does not contain all the information required by the Notice, the DOE may decline to consider the application. The information required to be contained in each submission is set forth in detail in the Notice and Appendix B to the Notice. If an application for Service certification does not contain all the information required by the Notice, the Service will not consider the application. The chart below contains a table of deadlines for various submissions and requirements to qualify for the tax credit. The deadline for the Project Information Memorandum already has passed — as of September 16, 2009, and final applications will be due in less than a month, October 16, 2009.
Eligibility and Evaluation Criteria
The Service will consider a project under the program only if the DOE provides a recommendation and ranking for the project. In turn, the DOE will recommend a project only if the DOE determines that the project is an advanced energy project that has a reasonable expectation of commercial viability and merits a recommendation based on the evaluation criteria set forth below. The criteria are equally weighted:
- Greatest job creation (both direct and indirect) during the credit period (February 17, 2009 through February 17, 2013)
- Greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases
- Greatest potential for technological innovation and commercial deployment, as indicated by (a) the production of new or significantly improved technologies, (b) improvements in levelized costs and performance and (c) manufacturing significance and value
- Shortest time from certification to completion
The DOE will also take into account four program policy factors: (a) geographic diversity, (b) technology diversity, (c) project size diversity and (d) regional economic development.
The DOE will rank only the recommended projects in descending order and the #1 ranked project will receive its full allocation of tax credits. The #2 ranked project will then receive an allocation of tax credits and so on until the $2.3 billion in tax credits is exhausted. If the $2.3 billion is not completely allocated in the first allocation round, another allocation round will be held the following year. (However, it is expected that all of the tax credits will be allocated in the first round.) The Service will determine the amount of the tax credits to be allocated to a project at the time the Service accepts the application for certification (the “Acceptance Date”). Accordingly, if the Service accepts the taxpayer’s application for certification, the acceptance letter will state the amount of the tax credits allocated to the project.
If a taxpayer receives an allocation of Section 48C tax credits, it must meet certain other requirements in order to maintain its ability to claim the tax credits. First, it must enter into an agreement (similar to a closing agreement) with the Service regarding the tax credits. Second, within one year of the Acceptance Date, the taxpayer has to provide to the Service documents that establish that the taxpayer has (a) received all federal, state and local permits necessary to begin construction of the project and (b) 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 within three years of the issuance of certification. Finally, the project must be placed in service within three years of the issuance of certification.
All submissions to the DOE and the Service must be signed and dated by the taxpayer. The person signing for the taxpayer must sign under penalties of perjury and have personal knowledge of the facts contained in the document.
Click here to view the table showing the Deadlines and Timelines
Forfeiture of Tax Credits
Numerous actions or inactions can result in the forfeiture or recapture of the Section 48C tax credits, including, but not limited to:
Not placing the qualifying advanced energy project in service within three years of the date of issuance of the certification. Note that the Service does not have the discretion to extend this period; Failure to receive certification for the project as required in the Notice; or Plans for the project change that would have been relevant to the DOE in recommending or ranking the project or the Service in accepting the project application. Tax credits that are returned or forfeited may be reallocated in an additional allocation program in the future.
Section 48C provides an investment tax credit for certain types of property. Accordingly, the Notice provides that the investment tax credit-related rules such as the at-risk rules of Section 49 and the recapture and other special rules in Section 50 also apply to the Section 48C tax credit. The Notice also explains the application of the rules for claiming the Section 48C tax credits on qualified progress expenditures.
There is no conference or appeals process available with respect to decisions made by the DOE and the Service under the program. If a taxpayer does receive an allocation of tax credits, the Service will disclose the name of the taxpayer and the amount of the tax credit allocated to the project.