The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") included a number of significant changes affecting businesses engaged in the renewable energy market. One of those changes allows a taxpayer to elect to receive a cash grant in lieu of the investment tax credit under Section 48 ("ITC") of the Internal Revenue Code (the "Code"), or the production tax credit under Section 45 ("PTC") of the Code on specified renewable energy property placed in service during 2009 or 2010, or by a later credit termination date if the property is not placed in service during 2009 or 2010 but construction has begun during 2009 or 2010 ("Section 1603 Grants").
On July 9, 2009, the Treasury Department (Office of the Fiscal Assistant Secretary) issued guidance (the "Notice"), which prescribes the procedures for taxpayers to follow in order to elect to receive a Section 1603 Grant.
The renewable energy market relies on tax credits to help generate competitive returns. The primary credits available are (i) the PTC, which is principally used for wind, biomass, geothermal, landfill gas, qualified hydropower, and marine and hydrokinetic energy facilities, and (ii) the ITC, which is principally used for solar property, certain geothermal property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, small wind energy property, and geothermal heat pump property.
The PTC is claimed over a 10-year period and is based on the number of qualified kilowatt hours of electricity produced and sold during the tax year. The amount of the credit increases each year for inflation and currently equals 2.1 cents per kilowatt hour (1 cent per kilowatt hour for most biomass facilities, small irrigation, landfill gas, and qualified hydropower). The ITC for energy property equals 30 percent of the eligible cost of qualified energy property placed in service during the year (10 percent for geothermal heat pump property, combined heat and power property, and qualified geothermal property).
The Notice prescribes the procedures for taxpayers to follow in order to elect to receive a Section 1603 Grant. As described more fully in the Notice:
- Applicants interested in receiving payments under Section 1603 must submit an application on-line by going to www.treasury.gov/recovery. Although this website is not yet operational, officials have stated that electronic applications on the website will be available on or about Aug. 1, 2009. A sample application was included with the Notice so that taxpayers can prepare draft applications in advance of the launch of the web-based application.
- Applications may only be submitted after the property to which the application relates is placed in service, or under certain circumstances, 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 Oct. 1, 2011.
Required supporting documentation includes:
- Final engineering design documents, stamped by a licensed professional engineer, demonstrating that the property satisfies eligibility requirements. Additional documentation is required to demonstrate that the property satisfies any applicable requirements relating to capacity or other matters. (These requirements vary depending on the type of property involved.)
- In the case of property that has been placed in service, a report provided by the project engineer, or the equipment vendor, or an independent third party, that certifies that the equipment has been installed, tested, and is ready and capable of being used for its intended purpose. Interconnection agreements may be required as well.
- In the case of property that is under construction on Dec. 31, 2010 but has not yet been placed in service, paid invoices and/or other financial documents demonstrating that physical work of a significant nature has begun on the property. Under a safe harbor, an applicant may treat physical work of a significant nature as beginning when the applicant incurs (in the case of an accrual basis applicant) or pays (in the case of a cash basis applicant) more than 5 percent of the total cost of the property (excluding the cost of any land and preliminary activities, such as planning or designing, securing financing, exploring, or researching).
- In the case of leased property where the Section 1603 Grant is to be paid to the lessee, all documentation required to effect the lease pass-through election.
The application requires applicants to estimate the number of jobs created or retained and the amount of energy generated by the project. Applicants are required to submit a Data Universal Number System (DUNS) number from Dun & Bradstreet (these can be obtained at no cost by calling 1-866-705-5711), and must also register with the Central Contractor Registration (this can be done at www.ccr.gov/startregistration.aspx).
For property placed in service as of the time of the application, Treasury will review the applications and make payment 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.
The chart below lists the amount of the Section 1603 Grant and, in the case of property placed in service after 2010, where construction has begun during 2009 or 2010, the date prior to which the property must be placed in service (known as the Credit Termination Date).
Certain taxpayers are not eligible to receive Section 1603 Grants. These include:
- Any federal, state or local government, including any political subdivision, agency or instrumentality thereof,
- Certain foreign entities,
- Most tax exempt organizations, and
- Any partnership or other pass-through entity, any direct or indirect partner (or other holder of an equity or profits interest) 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.
If a taxpayer disposes of the property within five years from the date the property is placed in service (a "disqualifying event"), the Section 1603 Grant must be repaid to the Treasury as follows: 100 percent of the payment must be repaid if the disqualifying event takes place within one year from the date the property is placed in service; 80 percent if the disqualifying event takes place in the second year; 60 percent if the disqualifying event takes place in the third year; 40 percent if the disqualifying event takes place in the fourth year; and 20 percent if the disqualifying event takes place in the fifth year. The Notice requires annual reporting relating to recapture events, project performance and other matters.
Electing to receive a Section 1603 Grant will almost always be preferable to ITC. The determination of whether the PTC or a Section 1603 Grant is preferable will depend on a variety of factors relating to the taxpayer and the specific renewable energy project, such as the capital cost of the renewable energy project, net project capacity, the type of renewable energy and the taxpayer's expected taxable income.