To ensure timely and successful applications, Treasury recommends that interested applicants begin now to review the application materials.

On July 9, 2009, the U.S. Department of the Treasury and the U.S. Department of Energy issued the terms and conditions of the Section 1603 program under the American Recovery and Reinvestment Act of 2009 (ARRA). The program will allow a qualified applicant to obtain a cash grant in lieu of the investment tax credit or the production tax credit for renewable energy property. Treasury is not accepting applications as of July 22, 2009, but expects to launch its web-based application program shortly. In anticipation of a popular program, Treasury recommends that interested applicants begin now to review the application materials.


Section 1603 of ARRA will provide direct cash payments to qualified applicants that create and place in service renewable energy facilities within a designated time period. As discussed in a previous McDermott Will & Emery On the Subject entitled “Energy Tax Provisions Included in American Recovery and Reinvestment Act of 2009,” President Obama signed the $787 billion economic stimulus package hoping to create jobs and spur private sector investment in clean energy. Tax incentives available under ARRA include tax credits and the highly anticipated Section 1603 grants. A McDermott Will & Emery On the Subject entitled “IRS Provides Procedures for Election of Investment Tax Credit in Lieu of Production Tax Credit ” addressed the role of the investment tax credit (ITC) election. Under section 48 of the Internal Revenue Code, eligible taxpayers may claim an ITC in lieu of the production tax credit (PTC) available under section 45 of the code. In the past, tax credits have been widely used to incentivize investment in renewable energy projects. Financial institutions provided a significant source of tax equity funding for these projects through the purchase of PTCs and ITCs.

In the current economic climate, the tax credit market has lost some of its momentum. The Section 1603 program aims to stimulate renewable energy projects by offering a more immediate stimulus?a direct cash payment. This may be favorable for businesses seeking faster reimbursement of expenses rather than the delayed benefit of a tax credit. Those qualified to receive payments for Section 1603 property will forego the tax credits available under sections 45 or 48 of the code. The Department of Energy has estimated that approximately $3 billion in Section 1603 cash payments will be available for issuance. Successful applicants will receive grants that equal 30 percent or 10 percent of the property’s cost basis, depending on the type of property. Examples of property that may qualify for a Section 1603 grant include closed-loop and open-loop biomass property, fuel cell property, hydropower property, combined heat and power system property, small and large wind property, marine hydrokinetic property, solar property and microturbine property.

Eligibility and Application Procedures

The new guidance answers several issues regarding eligibility and application procedures. Entities that are not eligible to participate in the Section 1603 program include:

  • Federal, state or local government or any political subdivision, agency or instrumentality thereof
  • 501(c) organizations exempt from tax under section 501(a) of the code
  • 54(j)(4) entities
  • Partnerships or pass-through entities with any government, 501(c) or 54(j)(4) entity as a direct or indirect partner, unless such entity owns only an indirect interest in the applicant through a taxable C corporation
  • Foreign entities that do not qualify for the exception under section 168(h)(2)(B) of the code

Applicants must be the owners or lessees of the property and must have originally placed the property in service. The property must be used predominantly inside the United States.


All applications must be received by Treasury before the statutory deadline of October 1, 2011. Applications may soon be submitted online However, they may be submitted only after the property to which the application pertains is either placed in service or placed under construction. Applications for property placed in service between 2009 and 2010 should be submitted after the property is placed in service but before October 1, 2011. Property is considered placed in service when the property is available and ready for its intended use. If property does not satisfy the placed-in-service requirement between 2009 and 2010 but undergoes construction initiated between 2009 and 2010, applications for such property will still be allowed. Under this scenario, applicants should submit the application after construction commences but before the October 1, 2011, deadline. Construction is deemed to have commenced once physical work of a significant nature begins. A safe harbor provides that construction begins when the applicant incurs more than 5 percent of the total cost of the property.

Treasury will review and make payment to a qualified applicant within 60 days of receiving a completed application.

Tax Treatment

A Section 1603 payment generally is not includible in the recipient taxpayer’s gross income. Those receiving cash grants are required to reduce their basis in the property by an amount equal to 50 percent of the cash payment. Section 1603 grants will be subject to recapture in the event the property is subject to a disqualifying event. Such an event would include the sale of the property to a disqualified entity or a voluntary removal of the property from service. Recipients will be subject to annual certification requirements to ensure ongoing compliance and eligibility for the funds.

What You Should Do

Treasury is not accepting applications as of July 22, 2009, but expects to launch its web-based application program in the coming weeks. In the interim, interested applicants should review the items that Treasury and the Department of Energy have already made available to expedite implementation of the program. Such items include:

The departments have projected a strong response from businesses wishing to apply for the energy funds in lieu of tax credits. Thus, businesses should prepare what they can in advance to ensure timely and successful applications. This includes requesting a Data Universal Numbering System number and registering with the Central Contractor Registration as explained in the terms and conditions. Applicants should also be ready to supplement their applications with supporting documentation such as design plans, descriptions of the property and cost basis breakdowns.