This morning, the U.S. Treasury Department issued Program Guidance for Payments for Specified Energy Property in Lieu of Tax Credits (Section 1603 payments) under the American Recovery and Reinvestment Act of 2009. Section 1603 payments will be made to eligible persons placing qualified renewable energy facilities in service, in lieu of both the Energy Credit (Investment Tax Credit) and the Production Tax Credit. The guidance was released together with the Application and additional Terms and Conditions. Key features of the guidance are highlighted in this alert. A more detailed analysis of the guidance will be contained in a future alert.
All applications for Section 1603 payments will be made online. For property placed in service in 2009 or 2010, an application can only be submitted after the property is placed in service. For property not placed in service in 2009 or 2010, but for which construction begins in 2009 or 2010, an application can be submitted only when the property is under construction. The Treasury Department expects to begin receiving applications on Aug. 1. An estimated $3 billion will be awarded under the program, but there is no cap on the total amount of Section 1603 payments that can be made.
During a conference call this afternoon, conducted by the Treasury Department and the Department of Energy with stakeholder groups, Treasury Department officials emphasized that this is not a competitive program (i.e., every applicant/property that qualifies will receive a Section 1603 payment).
Federal, state or local governments (including any political subdivision, agency or instrumentality thereof), tax-exempt Code Section 501(c) organizations, Code Section 54(j)(4) entities and any partnership or other pass-thru entity in which any such entity is a direct or indirect equity owner (disqualified persons) are not eligible to receive Section 1603 payments. The guidance contains a limited exception to this rule: disqualified persons may own interests in applicants that are partnerships or other pass-thru entities indirectly through taxable C corporations without affecting the eligibility of the partnership or other pass-thru entity for a Section 1603 payment. Neither a REIT nor a subchapter T cooperative is a pass-thru entity for this purpose.
Placed in service
Qualified property must be either (1) originally placed in service between Jan. 1, 2009, and Dec. 31, 2010 (regardless of when construction begins), or (2) placed in service after 2010 and before the credit termination date if construction of the property begins between Jan. 1, 2009, and Dec. 31, 2010. Expansions of existing facilities can constitute qualified property.
Beginning of construction
Construction begins when physical work of a significant nature begins. Separate guidance is provided for “self construction” and “construction by contract.” In addition, a safe harbor provides that an applicant may treat physical work of a significant nature as beginning when it incurs or pays more than 5 percent of the total cost of the property (excluding the cost of land and preliminary activities).
Qualified property includes only tangible property that is both used as an integral part of the activity performed by the qualified facility and located at the site of the qualified facility. Property is an integral part of a qualified facility if it is used directly in the qualified facility, is essential to the completeness of the activity performed in the facility and is located at the site of the qualified facility.
Thus, for example, roadways and paved parking areas at the qualified facility used for transport of material to be processed at the facility or equipment to be used in maintaining and operating the facility are integral, but roadways and parking lots for employees or visitors are not. Qualified property includes storage devices, power conditioning equipment and transfer equipment, but not electrical transmission equipment or any equipment beyond the electrical transmission stage. Certain modifications to property installed on an existing facility qualify as specified energy property even if the facility was placed in service before 2009.
Units of property
For purposes of determining the beginning of construction of property or the date property is placed in service, all components of a larger property are a single unit of property if the components are functionally interdependent. The owner of multiple units of property that are located at the same site and that will be operated as a larger unit may elect to treat the units as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service, but cannot include within this larger unit any property that was placed in service before Jan. 1, 2009. Furthermore, failure to complete the entire planned unit will not preclude receipt of a Section 1603 payment for the units actually placed in service by the applicable deadline.
The basis of qualified property is determined in accordance with the general rules for determining the basis of property for federal income tax purposes (i.e., generally its “cost”). Costs that will be deducted for federal income tax purposes in the year in which they are paid or incurred, however, are not includible in the basis on which the Section 1603 payment is determined (e.g., Section 179 deductions).
A lessor who is eligible to receive a Section 1603 payment may irrevocably elect to pass through the payment to a lessee, but only if the property would be eligible for a Section 1603 payment if owned by the lessee (i.e., cannot elect to pass through the payment to a disqualified person). If this election is made, the lessee is treated as having acquired the property for an amount equal to the independently assessed fair market value of the property on the date it is transferred to the lessee. Guidance is also provided for sale-leaseback transactions.
If an applicant disposes of qualified property to a disqualified person or the property ceases to qualify as specified energy property within five years from the date it is placed in service, a prorated amount of the Section 1603 payment must be repaid; applicants must certify annually for the first five years after a facility is placed in service that a recapture event has not occurred.
During the stakeholder conference call, Treasury Department officials confirmed that a sale of qualified property to a person that is not a disqualified person will not trigger recapture so long as the property continues to qualify as specified energy property and the buyer and applicant agree to be jointly liable for any subsequent recapture. If a lessor elects to pass through the Section 1603 payment to a lessee and the lessor sells the property to a disqualified person, the lessee is liable for the entire recapture amount.
A Section 1603 payment does not make the property subject to the requirements of the National Environmental Policy Act and similar laws or the requirements of the Davis-Bacon Act.
Applicants must submit supporting documentation demonstrating that the property is eligible property that has been placed in service, and, if applicable, on which construction began before Dec. 31, 2010. This documentation includes final engineering design documents, commissioning reports, interconnection agreements, paid invoices and binding contracts and leases. In addition, documentation supporting the basis of qualified property must be submitted; for property with a basis in excess of $500,000, applicants must submit an independent accountant’s certification attesting to the accuracy of all costs claimed as part of the basis.
Applicants will be required to provide reports, as required by the Treasury Department, including an annual project performance report for each of the first five years after the facility is placed in service.